ARSENAL HOLDINGS PLC - Half-yearly Report

CHAIRMAN’S STATEMENT

The end of season run-in is going to be an exciting one and I am confident we will be very much at the centre of the action over the coming months.

As we all know, this has been an unpredictable Premier League season thus far. What is important is that we are in contention and I am sure we have the resources and ability within the squad to sustain a strong challenge.  In addition, we continue our unbeaten run in the FA Cup, which now stretches back to February 2013, and, at the time of writing, are in the middle of a Champions League encounter with Barcelona.

Turning to our interim financial results, you will see the Group reported an overall loss of £3.4 million for the half year (2014 – profit of £6.2 million). This is considered in more detail in the financial section of this report but in summary this figure is primarily driven by a drop of £26.4 million in profits from player sales, partially offset by increased broadcasting and commercial revenues. The reduction in transfer profits reflects the overall stability we have within the squad which, in my view, is a positive factor for the Club and under-rated in the modern game.

We continue to see robust growth in our commercial revenues, with our number of partners around the world now numbering 33. Recent partnerships have been announced in Africa, China, Australia, the US and Europe, including companies such as DraftKings, Dashen Breweries, SportPesa and Destination New South Wales. We remain an attractive partner for brands to align with and we can expect further growth in this area as we move forwards. Strong progress is also being made within our retail business, where demand for merchandise continues to be very strong. We continue to maximise our efforts to build our support globally through our marketing and media channels; and in addition to this we have confirmed summer tours which will take the team to California and Australia over the next 18 months.

Turning back to the football, we know we will have to find greater consistency to maintain our challenge. The recent acquisition of Mohamed Elneny from Basel added to our strength in depth and we are seeing a number of potentially important players returning from injury. This bodes well for the final months of the season.

Substantial redevelopment works continue at our London Colney training centre and our Youth Academy at Hale End.  This involves significant investment which we view as central to supporting the Club’s long term success. We need to ensure our first team squad have the best possible environment in which to develop whilst the Academy remains a critical part of our strategy to identify, recruit and develop the best young players for the future. With this in mind, it has been very rewarding to see Alex Iwobi emerge into the first team squad from the Academy this season. This follows last year’s breakthroughs by Francis Coquelin and Hector Bellerin and is further evidence of the excellent work being done by all our Academy coaches and staff. As a result of the work at London Colney the Arsenal Ladies will also benefit from improvements in their training facilities.

The Arsenal Foundation continues to play an important role raising funds and making grants to organisations here in Islington and further afield. Once again players, staff and supporters showed their generosity through our dedicated match-day in December, raising some £250,250. We are hugely grateful for everyone’s contribution. It allows us to make a difference to many people’s lives in special ways and remains an important part of where we stand as a football club at the heart of our community.

Financial Review

The financial results for the six months ended 30 November 2015 show further growth in the Group’s football revenues.

The total turnover from football was £158.1 million compared with £148.5 million for the same period last year.  The increase was mainly attributable to higher Champions League distributions in the first year of a new three year UEFA revenue cycle and commercial growth, mainly from our partnerships portfolio.

There were two less home games compared to the prior year (one Champions League and one Capital One Cup) and this meant match day revenue was lower at £41.2 million (2014 - £42.9 million).  Match day revenue remains weighted to the second half of the financial year and at 30 November we had played 9 (2014 – 11) of the 26 home fixtures we are so far certain of playing for the full season.

Our football operating costs were slightly decreased at £123.9 million as compared to £125.8 million this time last year.  As mentioned in the last Annual Report, the players’ bonus relating to qualification for this season’s Champions League group stage was earned as a result of last season’s third place finish and accordingly accounted for in the 2014/15 results.  Consequently, there is no qualification bonus in the wage costs for the first half of 2015/16.  This has been offset by increases in the underlying wage bill arising from certain contract extensions within the squad.

The impact of these changes is that operating profits from football have increased by some £10.6 million to £33.0 million (2014 - £22.4 million).

There was limited activity in the Group’s property business, with the only transaction of note being recognition of the final instalment of the Queensland Road overage payment consequent to the developer’s sale of the remaining units.  The operating profit from property was £1.6 million (2014 - £0.1 million).

The most significant year to year change is in the figures for player trading (the profits on sale or loan of players less the amortisation charge on the cost of player registrations held).  The significant investment in the squad in recent years means that the amortisation component of player trading has further increased to £29.2 million (2014 – £25.6 million).  However, profits on sale of players were significantly reduced at just £0.3 million in contrast to £26.7 million for the comparative period.  There were no major sales in the period as the Club retained all of its key players going into the current campaign.

This is the first reporting period where our results have been compiled under the newly introduced Financial Reporting Standard 102 (FRS 102).  The impact on the current period is relatively minor – pre-tax losses would have been some £0.2 million higher under the previous UK accounting rules.

The most significant change on adoption of FRS 102 is that the interest rate swap, used to fix the interest rate on our floating rate stadium finance bonds, has to be included on the balance sheet at fair value (market value) with changes in fair value reported in the profit and loss of each period.  As is normal on adoption of a new set of accounting rules, the comparative numbers have been restated in order to maintain comparability.

For the swap there was a significant increase in negative fair value last year as the financial markets anticipated that UK interest rates would remain lower and for longer than previously expected.  As a consequence, net finance costs appear reduced against the restated comparative period at £6.6 million (2014 - £11.7 million).  The volatility introduced by fair value accounting for the swap is not particularly helpful in understanding our results.  The fair value represents, in our case, the potential cost at the balance sheet date of settling the swap, however, in reality, we continue to pay and account for the underlying stadium bonds at the same fixed interest rate as last year.  If the stadium debt runs to its full maturity, this will continue to be the case.  The value of the swap will vary with market rates; however, at maturity, its fair value will be zero such that all the negative fair value of £24.0 million accounted for at this half year end will have reversed with no cash flow impact.

Despite the increased revenues and operating profit from football, the change in the player trading result and, in particular, the lack of transfer profits means that the overall outcome for this half year is a loss before tax of £6.2 million (2014 – profit of £6.2 million).

There is a tax credit against this loss.  This is mainly as a result of the UK’s lower future rates of corporation tax which mean that the Group’s deferred tax balances have been revalued to the lower tax rates expected to apply when the underlying liabilities fall due to be taxed.

The Group has maintained a strong cash position with balances as at 30 November 2015 of £159.4 million (2014 - £161.5 million), inclusive of debt service reserves, which are not available for football purposes, of £23.5 million (2014 - £22.8 million). The cash balance is some £68.7 million lower than the 31 May 2015 figure. This reflects net cash outflows for the period on player transfers, of £39.4 million, and capital expenditure, of £10.5 million.

We also paid corporation tax of £4.8 million being the balance of the tax bill on our 2014/15 profits. The contribution that football makes to the economy as a whole is sometimes overlooked and it is worth noting that during the first half of the financial year the Group paid across to the Exchequer £77.6 million of taxation being corporation tax, PAYE, national insurance and VAT.

The cash outflow on transfers reflects mainly the settlement of instalments due on past transfers and means that the net outstanding liability on transfers has reduced from £65.6 million at 31 May 2015 to £45.4 million at 30 November 2015. The capital expenditure for the period is comparatively high and reflects the important development projects underway at the London Colney and Hale End training grounds, as well as enhancements at the Emirates, such as the new LED floodlights.

The Group enters into a number of transactions, relating mainly to its participation in European competition (UEFA Champions League distributions are paid in €) and player transfers, which create exposure to movements or volatility in foreign exchange, including €. The Group monitors this foreign exchange exposure on a continuous basis and will usually hedge any significant exposure in its currency receivables and payables.

Summary

The after tax result for the period is a loss of £3.4 million (2014 – profit of £6.2 million).

As always, the actual outcome for the second half will be strongly influenced by the extent of progress in the knock-out competitions and final Premier League position. We fully expect the overall result for the year to be compliant with all of the requirements of both the Premier League and UEFA financial regulatory regimes.

Looking ahead to next season we have already confirmed that there will be no general increase in ticket prices. Significantly 2016/17 will be the first year of the new Premier League broadcasting deals but the increased revenues will also very likely bring with them inflationary pressure in terms of both the wage bill and the transfer market.

In closing I should thank everyone for their support so far this season. The support at every game, home and away, has been top class. The closing chapters of the season will surely be exciting – let’s keep backing the team and enjoy them!

Sir Chips Keswick

Chairman

26 February 2016

Arsenal Holdings Plc

Consolidated profit and loss account

For the six months ended 30 November 2015

All trading resulted from continuing operations.

The accompanying notes are an integral part of these statements.

Arsenal Holdings PLC

Consolidated Statement of Comprehensive Income

For the six months ended 30 November 2015

Arsenal Holdings Plc

Consolidated balance sheet

At 30 November 2015

The accompanying notes are an integral part of this consolidated balance sheet.

Arsenal Holdings PLC

Consolidated Statement of Changes in Equity

For the six months ended 30 November 2015

Arsenal Holdings Plc

Consolidated cash flow statement

For the six months ended 30 November 2015

Arsenal Holdings Plc

Notes to the cash flow statement

b)  Analysis of changes in net debt

Non cash changes represent £277,000 in respect of the amortisation of costs of raising finance, £194,000 in respect of rolled up, unpaid debenture interest and £215,000 in respect of the change in fair value of the Group’s interest rate swaps.

Arsenal Holdings Plc

Notes to the interim accounts

30 November 2015

1   Basis of preparation of Group financial statements

The Group financial statements consolidate the assets, liabilities and results of the company and its subsidiary undertakings made up to 30 November 2015. The accounts are prepared under the historical cost convention, modified to include certain items at fair value in accordance with Financial Reporting Standard 102 (FRS102) issued by the Financial Reporting Council, effective from 1 January 2015.

The prior period financial statements have been restated for material adjustments on adoption of FRS102 in the current period.  For more information see note 9.

These interim financial statements do not include all of the notes and disclosures required to comply with FRS102, as they have been prepared in accordance with the ISDX Growth Market Rules for Issuers.

The Group has two classes of business – the principal activity of operating a professional football club and property development.

The interim financial statements do not constitute statutory financial statements within the meaning of Section 435 of the Companies Act 2006.

2   Going concern

The Board has undertaken a full and thorough review of the Group’s forecasts and associated risks and sensitivities.  The extent of this review reflects the current economic climate as well as the specific financial circumstances of the Group.  The status of the Group’s financing arrangements is summarised in the Chairman’s Statement.  The directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and the financial statements continue to be prepared on the going concern basis.

3   Significant accounting policies

Income recognition

Gate and other match day revenue is recognised over the period of the football season as games are played and events are staged. Sponsorship and similar commercial income is recognised over the duration of the respective contracts. The fixed element of broadcasting revenues is recognised over the duration of the football season whilst facility fees for live coverage or highlights are taken when earned at the point of broadcast. Merit awards are accounted for only when known at the end of the financial period. UEFA pool distributions relating to participation in the Champions League are spread over the matches played in the competition whilst distributions relating to match performance are taken when earned; these distributions are classified as broadcasting revenues.  Fees receivable in respect of the loan of players are included in turnover over the period of the loan.  Income from the sale of development properties is recognised on legal completion of the relevant sale contract.

Player registrations

The costs associated with acquiring players’ registrations or extending their contracts, including agents’ fees, are capitalised and amortised, in equal instalments, over the period of the respective players’ contracts.  Where a contract life is renegotiated the unamortised costs, together with the new costs relating to the contract extension, are amortised over the term of the new contract.  Where the acquisition of a player registration involves a non-cash consideration, such as an exchange for another player registration, the transaction is accounted for using an estimate of market value for the non-cash consideration. Under the conditions of certain transfer agreements or contract renegotiations, further fees will be payable in the event of the players concerned making a certain number of First Team appearances or on the occurrence of certain other specified future events.  Liabilities in respect of these additional fees are accounted for, as provisions, when it becomes probable that the number of appearances will be achieved or the specified future events will occur.  The additional costs are capitalised and amortised as set out above.

4   Segmental analysis

5   Turnover

6   Earnings per share

The calculation of earnings per share is based on the profit for the period divided by the weighted average number of ordinary shares in issue being 62,217 (period to 30 November 2014 – 62,217 shares and year to 31 May 2015 – 62,217 shares).

7   Intangible fixed assets

8   Cash at bank and in hand

The Group is required under the terms of its fixed and floating rate bonds to maintain specified amounts on bank deposit as security against future payments of interest and principal.  Accordingly the use of these debt service reserve accounts is restricted to that purpose.

The Group uses short-term bank treasury deposits (cash equivalents) as a means of maximising the interest earned on its cash balances.

9   Explanation of transition to FRS 102

This is the first reporting period that the Group has presented its financial statements under Financial Reporting Standard 102 (FRS 102) issued by the Financial Reporting Council.  The following disclosures are required in the year of transition.  The last financial statements under previous UK GAAP were for the year ended 31 May 2015 and the date of transition to FRS 102 was therefore 1 June 2014.  As a consequence of adopting FRS 102, a number of accounting policies have changed to comply with that standard.  The key accounting policy changes are noted below, all other accounting policies are consistent with those set out in the last set of audited annual financial statements.

Financial assets and liabilities

Basic financial instruments (including the stadium finance bonds and the C and D debentures) are measured at amortised cost, using the effective interest method.  The effective interest rate is the rate which exactly discounts the estimated future payments of receipts over the life of the instrument to its carrying amount at initial recognition, re-estimated periodically to reflect changes in the market rate of interest.

Non basic financial instruments (including the A and B debentures) are recognised at fair value, and measured at the present value of the future payments, discounted at a market rate of interest.  Any periodic changes in fair value are recognised in the profit and loss.  These debentures were previously accounted for at their undiscounted historic cost.

Derivative financial instruments (including forward foreign exchange contracts and the Group’s interest rate swap) are recognised at fair value. The swap was previously accounted for at historic cost less amortisation over the term of the swap.

Deferred tax

Deferred tax is recognised in respect of all timing differences that may result in an obligation at the reporting date to pay more tax, or a right to pay less tax, at a future date.  The transition to FRS 102 has resulted in a requirement to recognise certain additional deferred tax assets and liabilities, in particular where the taxation of opening FRS 102 adjustments is subject to a ten year transitional rule for tax purposes.

Holiday pay

An accrual is made for the holiday pay entitlement of the Group’s employees which has not been taken as holiday at the financial period end.  Prior to the introduction of FRS 102 no provision was made.

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