00 01 02 03 04 05 06 07 08 09 Mosaic Fashions hf. Annual Report and Accounts M o s a i c F a s h i o n s h f . A n n u a l R e p o r t a n d A c c o u n t s 2 0 0 5 - 0 6
Mosaic Fashions hf. 69-77 Paul Street London EC2A 4PN United Kingdom contents
Overview 1 Chairman’s statement 4 CEO’s statement 6
Oasis 8 Karen Millen 10 Coast 12 Whistles 14
Future growth 16
Finance Director’s report 20 Board of directors 22 Corporate responsibility 23 Corporate governance 24
Financial statements 26
Designed and produced by Loewy Group +44 (0)20 7798 2000 our vision Our vision is to develop a portfolio of differentiated, upmarket womenswear brands through a combination of organic growth and strategic acquisitions, utilising our extensive knowledge and experience in this sector of the market. We will also optimise the economies of scale and greater efficiencies deriving from our common infrastructure, as well as leverage shared skills across the group.
We aim to realise the potential of the business through carefully considered international expansion and brand extensions, and invest in our people to create a culture of innovation and mutual growth. The strength and depth of our management team and the success that we have already achieved is a testament to our ability to take Mosaic Fashions’ brands to the top of the sector.
Our goal is to deliver high quality, design-led products for our customers, rewarding partnerships for both our staff and suppliers, and solid returns for our investors.
EBITDA Sales Trading profit
For the year ended January 28, 2006 £m
Mosaic Group 2005-06 1 7
the story so far 6 Whistles founded by husband and wife Richard and Lucille Lewin 8
1 Karen Millen and Kevin Stanford commence trading 9
1 Oasis stores founded by Michael and Maurice Bennet 9
5 Oasis stores listed on the London Stock Exchange 9
6 Coast founded as a fashion clubwear brand 9
8 Oasis acquires Coast 9
9 Derek Lovelock, appointed as CEO 0
0 Richard Glanville and Meg Lustman appointed as CFO and Business Development Director 0
1 Oasis Stores taken private through a management buyout 0
3 Management buyout supported by Baugur Group and investor group led by Kaupthing 0
4 Karen Millen and Whistles acquired. Company name changed to Mosaic Fashions 0 Mosaic Fashions hf listed 5 on ICEX Oasis 9 our global presence Oasis is an aspirational fashion brand, Mosaic has a clearly defined strategy for
0 targeting fashion-aware 18–30 year old entry into new markets according to the independent women, offering a range of size of the market and its degree of 4
: individual clothing and accessories. similarity with the UK. s i Currently trading from over 800
s outlets, each brand has demonstrated its potential to develop successfully a internationally. O Future international growth will mainly
9 Karen Millen be driven by the two largest brands, Karen Millen brings “designer-wear” to the Karen Millen and Oasis. Growth will
2 high street with a bold range of fashion and derive from developing opportunities
1 accessories targeting the 18–40 year old with our existing partners and through
: body-conscious woman. exploring opportunities in new markets as they arise. n e l l i M n e r a K
8 Coast Coast is a premium brand providing 9 contemporary occasionwear for
1 stylish women. : t s a o C
2 Whistles Whistles appeals to women of all ages
7 who are confident at mixing and exploring : colour, textures and accessories. s e l t s i h W : e
d Stores worldwide i USA 3 Lithuania 3 Australia 2 Belgium 1 Malta 1 China 70 w Cyprus 7 Middle East 40 Indonesia 3
d Denmark 7 Monaco 1 Russia 4 l Eire 44 Norway 12 Singapore 3 France 3 Spain 2 Taiwan 4 r Germany 24 Sweden 9 o Greece 6 Switzerland 1 Holland 1 Turkey 1 Iceland 6 United Kingdom 550 w s e r o t S Mosaic Group 2005-06 3 chairman’s statement As this is the first Annual Report and The company also made striking Accounts of Mosaic Fashions hf since progress in its efforts to become a global its public and private offering of shares retailer, utilising its joint venture in China in the company and their listing on the to open thirty six new Oasis outlets in ICEX in June 2005, it is particularly that burgeoning market, including its first gratifying to report financial results in Beijing, and expanding the number wholly consistent with the demanding of Karen Millen stores in leading forecasts given at that time. European cities and more recently in the United States. The purpose of the refinancing was to reduce the level and cost of the Board and management team company’s borrowing following the There were a number of organisational acquisition of Karen Millen and Whistles, changes over the course of the year, and to facilitate the raising of new driven by the need to integrate the equity as required. This was accomplished Karen Millen and Whistles businesses, successfully through the issue of shares to accommodate an increasing number to institutional and individual investors, of branches worldwide, and to create a and the issue of a £52 million bond. platform for the addition of further specialist brands should appropriate Financial results for 2005 candidates become available. All of which, In a challenging UK retail market, the though time consuming and potentially company’s sales grew to £410 million, disruptive, were implemented successfully. a 15 % increase over the pro forma numbers for 2004-05 published in the The boards of the group were reorganised company’s prospectus. Trading profit at the time of the listing on the ICEX to was up 17% to £47.1 million and the create a holdings board for Mosaic Fashions company’s EBITDA of £59.2 million hf, which meets monthly in London. It is represented 14% of net sales. Profits proposed to add at least one further after tax for the year, excluding non- independent director to the board so as to recurring costs, were £12.6 million, reflect more closely the recommendations resulting in earnings per share of 0.49p of the ICEX on corporate governance. or 0.83p, excluding non-recurring costs. Outlook Strategy implementation Though the UK retail climate remains The company made great progress challenging in respect of both sales in 2005 in positioning, developing growth and cost management, the and growing its portfolio of retail company is confident of achieving a womenswear brands both within and further year of low double digit earnings outside the UK and the management growth through the introduction of team, at all levels in the company, can strong and differentiated ranges, a justifiably be proud of everything that vigorous branch opening programme, was achieved in that regard. the tight control of operating costs and further overseas expansion. Oasis, the largest of the four, experienced double digit growth, the first half of the year being particularly robust, and added a further thirty branches and The company made great department store concessions to its estate. Coast continued the outstanding progress in 2005 in performance of recent years, consolidating Stewart Binnie positioning, developing its position as the high street’s principal Chairman occasionwear brand and opening a and growing its portfolio further twenty one outlets. of retail womenswear Karen Millen and Whistles, acquired in 2004, were successfully integrated into brands both within and the business, moving on to the group central systems platform and joining outside the UK. Coast in a new purpose-built distribution centre towards the end of the year. The company’s new lingerie brand, Odille, was “ well received by UK department store groups and its US customers. ”
4 Mosaic Group 2005-06 quality CEO’s statement I am pleased to report a strong year for Mosaic despite a difficult trading environment in the UK. Sales in the UK increased by 15% on the previous year with 67 new outlets opening. Our international business experienced even stronger growth with sales increasing by 41% on 2004-05 following the opening of a further 82 outlets in both existing and new markets. Our successful listing on the ICEX in June has given us the balance sheet to continue to support this growth and deliver value to our shareholders.
Within our overall performance, we had a good first quarter followed by a very strong second quarter. This was driven by the broad appeal of the ‘boho’ fashion trend which each of the brands interpreted in its own way. Whistles in particular had a very strong ‘boho’ offer which saw them achieve sales of +17% to the first half in the previous year.
Performance in the second half was tougher with a particularly difficult third quarter. The fashion trends in the autumn moved away from ‘boho’ to a much cleaner, sleeker silhouette of shorts, pencil skirts and stripes. Brands that anticipated these looks such as Oasis had a good season, whereas brands such as Whistles that were strongly associated with the ‘boho’ look, struggled to compete. A challenging third quarter was followed by a reasonable Christmas for the Group with Coast performing very strongly, as their occasionwear dresses were perfectly on trend for the season.
The varied performance of the brands through the year highlighted the benefits of having a portfolio. With separate creative teams for each business, all of the collections are developed individually. This helps to mitigate the risk inherent in running a fashion business. As a result, if one business misinterprets the demand for a certain look, the same mistake will usually be avoided by the other brands, permitting the Group to absorb the underperformance of any single business.
The success of our brands has resulted in them each being awarded at least one industry award in 2005. Coast won ‘Smaller Fashion Multiple of the Year’ at the Drapers Awards, sponsored by Drapers Record, the leading fashion industry publication. Oasis was voted ‘Best Place to spend £150 on the High Street’ and Karen Millen ‘Best Place to Spend £250 on the High Street’ by customers in the Company magazine awards. In October, Whistles won ‘Best Designer Boutique in London’, voted for by the readers of Instyle. Three of these awards are voted for by the public and are therefore a true reflection of how customers regard the brands. Mosaic itself was also recognised, winning the ‘Pioneer of the Year’ award at the Iceland Business Weekly’s tenth annual Business Awards.
6 Mosaic Group 2005-06 During the year we have worked to has an experienced, dedicated production While we have strong further develop and clarify our team. As a result we have seen real brands and excellent international strategy. The opening of 82 improvements in our supply chain and international outlets in the last year is are now focused on improving quality. products, our real testament to the global appeal of our brands and shows great potential for While we have strong brands and strength lies in the the future. We carefully evaluate the excellent products, our real strength lies opportunity in each market, and consider in the quality of the people behind them. quality of the people its size and its similarity to the UK market Our culture encourages innovation at before selecting a business model that is all levels and empowers people to take behind them. appropriate for both the brand and the decisions and be bold whilst ensuring the market. This is reflected in our mixture of level of experimentation and research company owned stores, franchisees and needed to minimise risks. The breadth and joint venture partnerships. The growth in international dimension of the business international sales of 41% on last year allows it to recruit and retain highly skilled “ gives us great confidence for the future. retail professionals and we continue to invest in developing and training our staff. We will also continue to deliver growth through brand extensions such as lingerie. We believe that the UK market will Odille, originally launched as a sub-brand continue to be challenging and we will of Oasis, is now established as a brand continue our overseas expansion in order in its own right having launched on the to mitigate this. We also believe that a Victoria’s Secret website, catalogue and focus on design is the way to gain a in selected stores last year. competitive edge in both the UK and ” abroad, as the market will continue to One of the other ways in which we have respond to special products when less strengthened the Group in the past year ubiquitous fashion looks prevail. We are has been to continue the integration of confident that the supply chain problems Karen Millen and Whistles and to develop experienced last year are largely behind the core infrastructure of the business to us and that going forward we will improve the extent needed to support its growth. both the quality of our products and Last year we completed the construction their profitability. We continue to strive of a new 22,000 sq metre Distribution to improve our relationship with our Centre so that all of our brands now shareholders and our understanding of operate from the same site. We have also their concerns and expectations and are moved Karen Millen and Whistles on to confident that we will continue to deliver the central systems platform used by the strong returns. other brands, building on the knowledge and skills we have already developed in this area. Later this year we intend to upgrade the store systems in Oasis and Coast and to move Karen Millen and Whistles to the same provider, gaining significant cost savings and efficiencies. Derek Lovelock Chief Executive Officer The benefits of being a Group extend beyond a shared infrastructure, allowing us to share the best practice and skills across all areas of the company. This has been exemplified by the work we have done on our supply chain in the past year. Following the loss of a number of key Karen Millen and Whistles personnel, we restructured our Home Production department. We have extended proven systems and processes into the newer brands whilst ensuring that each brand
Mosaic Group 2005-06 7 brand study: Oasis Oasis is well established on the high Management team street as an aspirational fashion brand. The blend of youth and experience is The brand is well developed in Targeted at fashion aware 18-30 year old at the core of the Oasis management independent women, it offers a broad team’s strength, combining innovation the domestic market and there spectrum of products comprising clothing with commercial pragmatism. Having is significant potential to grow and accessories including footwear, worked together without change since jewellery, bags and belts. 2000, the team has dealt with the many further with opportunities to challenges arising from the business’ Brand proposition growth and is well-equipped to lead the extend the brand’s reach into Oasis offers fashionable clothing for all business in the future. end uses, from smart suiting, clothes for new markets. going out to a strong range of denim for Growth every day. The collections are fashionable, Over the last year, Oasis has opened 27 wearable and colourful. Innovation, new stores and concessions in the UK quality and differentiation are the key and Eire. The brand is well developed success factors for the Oasis brand. This in the domestic market and there is “ differentiation is achieved by an in-house significant potential to grow further with design team creating clothing that is opportunities to extend the brand’s reach unique to Oasis whilst offering an into new product areas. Sub-brands have interpretation of the latest fashion. been launched to broaden Oasis’ appeal. This enables Oasis to remain These include New Vintage, a range of aspirational yet affordable. clothing inspired by beautiful pieces from previous fashion eras; and Odille, Positioning a range of very feminine lingerie and Operating at the upper end of the middle sleepwear. Product extensions include market, Oasis differentiates itself from watches and spectacles. ” the mainstream high street brands by its superior quality, innovation and design, International development both in product, store environment, brand Oasis currently trades out of 409 outlets communication and customer service. across 18 countries. 21 new stores are planned in the existing markets of Russia, Middle East, Scandinavia, Indonesia, Cyprus and Taiwan, as well as further expansion into new markets in the Mediterranean. Each market opportunity is assessed and the appropriate business model applied. For example in 2002 Oasis entered into a joint venture to license the product range for sale in China. At the end of 2005-6, it was trading from 70 concessions throughout mainland China, having opened its first in Beijing this year.
8 Mosaic Group 2005-06 vibrant luxurious brand study: Karen Millen Established in 1981 with the first Positioning Karen Millen brings ‘designer- dedicated store opening in 1983, Karen The brand is positioned as an entry level Millen’s unique appeal has enabled the designer brand that brings true design wear’ to the high street with a brand to trade successfully in the global appeal to the high street. Its target bold approach to clothing for marketplace where its greatest future customer is confident and aspires to a potential lies. It is a luxury brand delivering high level of luxury and glamour with the body-conscious high quality, beautifully designed clothing, clothes that fit and flatter the contours cosmopolitan woman. footwear and accessories. of her body. Brand proposition Management team Karen Millen brings ‘designer-wear’ to the Subsequent to the acquisition of high street with a bold approach to clothing Karen Millen by Mosaic in 2004 and for the body-conscious cosmopolitan the relocation of the Head Office teams woman. Karen Millen customers are from Maidstone to London, a number of united by their confident sense of style management changes have taken place. “ rather than by age. An impressive store The team now in place combines environment with strong architectural extensive Karen Millen experience with features and luxurious materials, as the challenge and perspective of broader exemplified by the flagship store on fashion industry expertise. All share a London’s Regent Street, supports this deep commitment to and enthusiasm positioning. The clothes are highly for the brand and are aligned on the individual, beautifully structured and strategy, goals and routes to achieve ” tailored from quality fabrics. future growth and success.
Growth Karen Millen has grown from 107 to 129 outlets in 2005-06, including 11 international openings. There remains opportunity for domestic expansion through the opening of a number of solus stores and concessions in selected department stores.
International development Karen Millen currently comprises 129 outlets operating in 26 countries. The greatest opportunity for growth is through targeted expansion in Europe, the USA, Russia and the Middle East, with 24 outlets planned to open this year.
Mosaic Group 2005-06 11 brand study: Coast Coast has enjoyed remarkable success Growth since 2002 and has received several During 2005-06, Coast has opened 21 new Having delivered unparallelled prestigious industry awards. Founded in outlets. Previously Coast’s growth was 1996 and acquired by Oasis Stores Ltd in driven by department store concessions; growth in recent years, the 1998, its rapid growth has established however 10 solus stores have opened team is clear about the future Coast as one of the UK’s most successful this year and this area of growth is set occasionwear brands. The business has to continue with 9 solus store openings and how to achieve the expanded at a rate rarely experienced planned for 2006-07. The management in the UK. are currently focusing on a number of business goals. opportunities which will drive future Brand proposition growth. This strategy includes the further Coast is a premium brand and stands out development of special daywear ranges, in the market by offering style-conscious accessories and jewellery. women of all ages a beautiful range of design-led, contemporary and well made International development occasionwear. Coast’s product, fabrication There are currently 13 outlets operating “ and styling allows its customer to look in 9 countries. Future expansion overseas and feel fabulous at a competitive price. will include new franchised stores in All garments are designed in-house and existing markets as well as new demonstrate attention to detail with relationships in Scandinavia, Central a distinct point of difference. Europe and the Mediterranean.
Positioning Uniquely positioned above the middle ” market but below the designer brands, Coast offers all elements of occasionwear and smart clothing in a luxurious environment.
Management team The Coast team has an excellent blend of the core retail skills of merchandise planning, retail operations, buying and strong visionary design. Having delivered unparallelled growth in recent years without allowing costs and complexity to overwhelm the business, the team is clear about the future and how to achieve the business goals.
12 Mosaic Group 2005-06 elegant confident brand study: Whistles Whistles is Mosaic Fashions’ longest Positioning The Whistles brand heritage established brand. The company was Whistles is positioned as an accessible is predicated on good founded in 1976 and had grown to some designer brand, competing with designers’ 40 stores by 2002 when it was acquired bridge brands. It has expanded its own design, quality fabrications by Karen Millen. Over the past three brand range and this growth has increased years the business has almost doubled in margins for the business as well as and beautiful, desirable size with significant incremental growth strengthening the Whistles brand identity. in 2005. The brand appeals to women This has helped Whistles to re-establish clothes and accessories. who are confident at mixing and exploring its unique heritage as a desirable, colours, textures and accessories which contemporary, aspirational ‘label’. help to draw out their individual fashion tastes and personal style. Management team Two highly talented and experienced Brand proposition individuals form the core of the Whistles The Whistles brand heritage is predicated team, supported by a strong group of “ on good design, quality fabrications industry specialists. These combined and beautiful, desirable clothes and talents give the team a focused and accessories. The customer’s expectation dynamic approach. is that Whistles will capture the spirit of the fashion moment whilst staying Growth true to the brand’s heritage. Sales growth will come from building on the strengths of Whistles design ” exclusivity and brand desirability. Expansion of the product range within accessories will aid the growth of the business. The acquisition of unique sites in desirable locations is key to future growth through the location strategy in the UK.
International development Whistles currently trades from 6 stores in the Middle East and the Nordic region. As the Brand establishes itself better in its home market, the international opportunity will become clearer. nt
Mosaic Group 2005-06 15 future growth Mosaic has clear plans for growth taking into account the opportunities that exist for each brand as well as learning from the experience of other businesses.
Domestic growth Each brand has a clearly defined location strategy that considers the brand’s market positioning and subsequently identifies the towns and locations in the UK and Ireland in which it will trade successfully. A summary of the strategies suggests that:
4 for Oasis, future development will be dependent on property and department store opportunities and will focus more on extending space to accommodate the full brand experience rather than growing store numbers;
4 for Karen Millen, there are limited opportunities for growth in the UK and then only when exceptional property or department store opportunities emerge;
4 for Coast there is ample opportunity to develop its base of stand alone stores to complement the concession space from which it emerged;
4 for Whistles, there remains selected growth in stand alone and department store concessions to reach a broader audience beyond London and the South East.
International development Each brand has demonstrated its potential to develop successfully internationally. Karen Millen and Oasis have the broadest global appeal and their development internationally is more advanced. There is considerable opportunity for Coast and Whistles to grow throughout the world + in the future.
Dedicated teams manage the international franchise company owned businesses thereby allowing the brand management teams to concentrate on – market opportunity +
developing the core proposition in the y t i r a l competitive UK market. i licensing m i s
t e k r a
Mosaic has a clearly defined strategy for m entry into new markets according to the size of the market and its degree of – similarity with the UK. These variables will dictate the operating model, a choice that spans franchising, licensing and company owned stores. franchise company owned y t i r a l i m i
Currently all brands trade in the Middle s
t e k Eastern and Nordic markets. Karen Millen r a and Oasis also operate throughout m no market similarity mainland Europe, the Mediterranean and licensing no market Asia Pacific. Additionally, Karen Millen opportunity trades in Australia and the USA and
Coast in Singapore. market opportunity
16 Mosaic Group 2005-06 Meg Lustman Strategy and Development Director
Oasis Brand extensions As an upper middle market fashion brand There are considerable opportunities for that has traded internationally since each brand to extend its appeal into 1992, Oasis’ portfolio of 148 international associated product ranges that will be stores spans 18 countries. In 2005, attractive to its customers. In some 14 new franchise stores were opened circumstances, the licensing route is including 3 in new markets, and a further an attractive method as it leverages 6 concessions were opened in Germany. on the specialist skills of the partner. This rate and profile of expansion will continue in 2006 and beyond. Oasis The product range in Oasis is broad and offers the customer the opportunity Oasis has been trading in China since 2004 to buy product for many different moments under a joint venture that licenses and in her life such as going to work, casual, re-produces the Oasis range specifically partying and special occasions. The brand for the Chinese market. Currently present has developed the New Vintage sub-brand in 70 department store concessions for its flagship stores; this range is inspired throughout mainland China, the business by vintage design and styling and has has far-reaching potential for the future. allowed Oasis to extend its pricing.
Karen Millen Oasis also licenses its brand into watches The brand’s global appeal as a well- and spectacles which are sold in other executed entry level luxury brand distribution channels. with true international fashion appeal allows Karen Millen to trade extremely Karen Millen Karen Millen has successfully internationally and creates successfully licensed the brand into strong demand from partners around the cosmetics and body care as well as world. Currently trading from 15 company spectacles and sunglasses. A licensed watch owned stores and concessions in the USA range will be launched in 2006. These and Europe and 31 franchised stores in ranges are sold in selected Karen Millen 17 markets, there are well-developed stores as well as other distribution channels plans to expand the brand aggressively such as department stores. There will be throughout the world. scope to leverage its brand equity further as the appropriate opportunities arise. Coast Since opening its first international store Coast Coast is successfully developing in Dubai in 2004, Coast’s success has new ranges of special day wear, jewellery encouraged the franchisee to accelerate and accessories that complement the the brand’s expansion throughout the Gulf brand positioning. As the brand becomes region. Subsequent successful openings in better known, there will be further 2005 in Singapore, Iceland and Norway opportunities to leverage the brand have proved that Coast’s unique appeal of equity through licensing. a focused, beautiful occasionwear brand has true global attraction. Whistles The Whistles “own label” strategy has transformed the potential Whistles of the brand and blends perfectly with The strategic changes to Whistles’ focus the ranges that it buys in from other have transformed the potential of the designers to create a balanced fashion brand both in the UK and internationally. offer. Currently selling clothing, shoes Currently trading from 6 franchised and accessories, the brand will have stores in the Middle East and Iceland and opportunities to further diversify its concessions in Denmark, management product offer and become the “chain are confident that there is room for store independent”. international growth over time.
Mosaic Group 2005-06 17 future growth Intimates Infrastructure Mosaic launched Odille in 2004. In 2006, the full integration of all brands Initially a sub-brand of Oasis, Odille is into the new Distribution Centre in a beautifully crafted range of lingerie, Oxfordshire will be completed. This sleepwear and associated products that will deliver significant efficiencies and is well-priced and well-constructed and productivity improvements as a result has been sold in selected Oasis stores in of single site operations and a larger, the UK and internationally. more responsive and efficient automated operation able to support business growth. Odille’s commercial success in Oasis has led to new distribution opportunities in During 2005, the migration of Karen lingerie specialists: Odille has traded in Millen and Whistles IT systems on to the Victoria’s Secret since November 2005 Mosaic platform was initiated successfully and will launch in UK department stores with the introduction of core stock from July 2006. control and reporting systems. In 2006, the transformation will be complete with There is a significant and exciting the move to a common retail systems opportunity to leverage the design, platform and the implementation of sourcing and brand skills that support stock planning systems. Odille into other related product areas and other brands. These steps will complete the full integration of Karen Millen and Whistles E-commerce on to the Mosaic infrastructure, a project Each brand has its own website which that will have been achieved to plan and focuses on customer communication. within budget. A common platform for In August 2006, the Oasis website will systems, warehousing, distribution and become transactional and provide the finance allows the Group to leverage the brand with a powerful new channel full benefit of best practice, efficiency to market. and cost savings.
The Mosaic principle to extend learning The development of ‘best of breed’ and infrastructure throughout the Group infrastructure is one of the advantages will apply so that the other brands will a group this size can bring to each of Sourcing mix use the Oasis platform to transform the brands as they benefit from services their websites into e-commerce sites that they would not be able to afford whilst maintaining front end design individually. As a Group, Mosaic has differentiation. become an attractive prospect as a CMT 25% CMT 25% CMT 25% CMT 25% business partner. In relationships with Hong Kong MHK 40% Hong Kong Hong Kong Supply chain external parties such as suppliers, 40% 40% 40% An important factor in the Group’s success franchisees, department stores and is that the product range for each Mosaic property developers, the Group has been Other 35% Other 35% Other 35% Other 35% brand is designed and sourced separately able to leverage its combined strength in by each brand team. These teams work improved terms for the entire business. Oasis closely with their chosen supply base to maintain control over quality, optimise People production lead times, meet the critical The strength of Mosaic’s brands means path requirements and ensure that the that collectively and individually the cost price delivers the required gross business is an attractive employer CMT 45% CMT 45% CMT 45% CMT 45% margin. The sourcing mix is driven by offering exciting career development
individual brand requirements and fashion prospects for employees. The shared MHK 55% MHK 55% MHK 55% MHK 55% trends and is split across three areas: services teams are world class and therefore also destination employers. 4 Mosaic’s Hong Kong office manages Karen Millen the majority of China-sourced product The Group invests heavily in development with teams dedicated to each brand. for all staff and management ensuring that natural talent and enthusiasm is developed 4 The Home Production teams manage and nurtured to allow career progression. the ‘Cut, Make and Trim’ product for CMT 40% CMT 40% CMT 40% CMT 40% each brand’s design teams including Recruitment, induction, motivation and the sourcing of all components. performance management of staff is MHK 60% MHK 60% MHK 60% MHK 60% conducted by line managers according to 4 ‘Bought-in’ or ‘fully factored’ product the individual brand’s needs and culture. is sourced directly by the individual Development takes place both at a brand Coast brand creative teams working with level as well as at a Group level supported third party suppliers. by best practice developed by each business and shared across all brands. Each brand has a specific sourcing strategy that is designed to deliver its The strength of Mosaic is predicated on CMT strategic goals. During 2005, the first year the quality of the people who work CMT 30% CMT 30% CMT 30% 30% following their acquisition, there were within the business. The Group will MHK 70% MHK 70% MHK 70% MHK transitional issues in Karen Millen and continue to nurture talent and develop 70% Whistles that caused problems with the the skills of the teams in all departments timely deliveries of stock. However, the and disciplines, both in the brands and in Whistles experience and leverage that the Group the shared services. can wield has been exercised and the MHK: Mosaic Hong Kong situation in 2006 is much improved. CMT: Cut, Make and Trim
18 Mosaic Group 2005-06 excitingMosaic Group 2005-06 19 finance director’s report Financial Highlights integration of the new businesses. Depreciation and amortization is £13.0m, Cash Flows 4 The group delivered EBITDA of £59.2m The full benefit of the integration of shared up only 5% on last year, despite recent Operating profit before financing and in FY 2006, up 14% on last year services will start to flow through this year. expansion, as some older assets become joint ventures was up £7.8m at £43.7m (FY 2005: £51.9m) and representing fully written off. This figure includes (FY 2005 £35.9m). However, the increase 14% of sales. Trading Profit was up 18% for the year £0.5m relating to the amortization of the in stock at Karen Millen and Whistles and at £47.1m. intangible asset relating to Karen Millen’s higher trade debtors, due to the increase 4 Total group sales increased by 15% in franchise agreements, which is being in department store concession and the year, to £410.0m (FY 2005: Acquisition, integration and IPO costs written off over 10 years. franchise sales, result in an increase of £355.6m). of £3.4m (FY2005 £4.2m) include £13.1m in working capital. This outflow – All brands delivered sales growth, £1.2million relating to the write down of EBITDA of £59.2m for the year is £7.3m is mainly due to the one-off restocking Coast was particularly strong the former Oasis and Coast distribution (14%) higher than last year, representing following the supply chain problems at +41%. centre and £0.2million in respect of the 14.4% of sales. which had affected the FY 2005 year end – International sales1, across all closure of the Karen Millen distribution due to abnormally low stocks of Spring brands, were up 41%, and now centre. There were £1.1m of professional Balance Sheet 2005 merchandise. represent 16% of group turnover fees and other costs of flotation, and In accordance with IFRS 3, the reverse (FY 2005: 13%) £0.9m of other integration costs, including acquisition method has been used in Cash Generated by operations was redundancies. Write-offs relating to the preparing the balance sheet of Mosaic consequently £2.9m lower at £44.2m 4 Trading Profit was up 17% in the year replacement of Karen Millen and Whistles Fashions hf. (FY 2005 £47.1m). to £47.1m (FY 2005: £40.1m). store systems are the only further charges we expect to see in this category. Within non-current assets, intangible Interest paid of £24.2m was distorted 4 Profit after tax for the year was assets dropped by £1.1m from FY 2005 by the refinancing prior to flotation. £12.6m; excluding non-recurring costs2 Losses at the Chinese joint venture were due to a £0.6m adjustment in fair-value £5.6m of interest on the mezzanine this increases to £18.8m. £0.9m.We plan to achieve breakeven within adjustments and a £0.5m amortization loan, £5.3m of preference dividends and 2 years, and move into profit thereafter. of the Franchise intangible asset created £1.7m of interest on unsecured loan 4 Earnings per share3 were 0.49p, rising on the acquisition of Karen Millen. notes5 was paid during the year, to 0.83p excluding non-recurring costs. Financing costs have been split between substantial parts of which relate to prior those relating to the servicing of long- Property, plant and equipment rose by years. £7.8m was paid on ordinary bank Preparation of accounts term debt and those arising from the early £1.7m. Capital additions totaled £21.2m, and bond interest, and this will rise to Mosaic Fashions hf acquired Mosaic repayment of the mezzanine debt and the offset by write-offs and disposals of £10.5m this year, there were payments Fashions Ltd in May 2005, and Mosaic issue of bonds on the Icelandic market. £7.1m and depreciation of £12.4m. of £2.3m relating to the refinancing, Fashions Ltd acquired Karen Millen and with the balance of £1.5m due to bank Whistles in June 2004. The figures for FY The debt structure of the business went Inventories increased by £14.8m mainly charges and sundry items. 2006 cover the whole group for the entire through significant changes in the year. due to the reversal of last year’s stock period, in accordance with the Consolidated Ordinary interest and bank charges were shortages in Karen Millen and Whistles Net cash from operating activities was Financial Statements. In order to provide £14.8m, there was £1.2m amortization of following the correction of supply £23.9m lower at £13.6m (FY 2005 37.5m). meaningful comparisons, all of the FY 2005 loan costs and there was a £1.6m charge chain issues. numbers shown in the annual report, other relating to foreign exchange and interest There was £6.7m cash received from than the Financial Statements themselves, rate hedging instruments. The exceptional Trade and other receivables rose by the sale and leaseback of the new have been prepared on a proforma basis, as interest costs include the write-off of £7.3m, mainly due to the increase in distribution centre, £0.7m had been if all four businesses had been part of the costs relating to the mezzanine finance department store concession and received in FY2005. group for the whole of the period. following its early repayment and franchise sales. associated break fees, as well as costs Capital expenditure of £21.2m includes Income Statement associated with the issue of the £52m The increase in equity of £65.2m is £3.7m relating to the construction of The Group showed good growth against of bonds on the Icelandic market. mainly due to the £40m of new shares, the new distribution centre, and a further last year, in line with our projections. the conversion of loan notes to equity £3.7m had been incurred in FY 2005. Oasis performed very satisfactorily The tax charge for the year represents an and this year’s post-tax profit of £12.6m. £8.7m was spent on new stores and against a strong comparative, but Karen effective rate of 33%. This is higher than It is explained in detail on page 7 of the concessions, £3.4m on refitting existing Millen suffered from a lack of stock for the nominal 30% rate because some of Financial Statements. At the end of the outlets, £3.1m on fitting out the new most of the year, caused by problems in the costs within the income statement are period, the equity of Mosaic Fashions distribution centre, £1.1m on computer the supply chain. Coast performed disallowable for tax purposes. The principle totaled £129.6m and the equity ratio systems and £1.2m on other non- exceptionally strongly against last year, disallowable items are depreciation on was little changed from the end of the retail projects. achieving 41% growth for the full year, ineligible assets (£3.7m) and the half at 37% compared to 19% at the whilst Whistles had a satisfactory year preference dividend of £1.1m which, beginning of the financial year. There was a further £1.0m invested in following a very strong first half. whilst shown under financing costs, is our Chinese joint venture. non-deductible for UK tax purposes. Non-current Liabilities decreased by Karen Millen’s supply problems were £53.6m. £16.6m of unsecured loan notes The net impact of the refinancing was corrected by the end of the 4th Quarter The average number of shares in issue for were exchanged for shares, and the a £5.3m outflow. and the brand ended the year with a the period have been calculated in balance redeemed for cash. Bank loans healthy stock position. Both Karen Millen accordance with the reverse acquisition were reduced by utilizing part of the In total there was a £7.2m outflow in the and Whistles are much better placed method, which broadly assumes that the monies received from a combination of year, reducing the year end cash balance following the creation of a new Group number of shares exchanged in the new shares issued for £40.0m and the from £21.9m in FY 2005 to £14.7m at production department and improved acquisition of Mosaic Fashions Ltd by issue of ISK 6.0 billion of quoted Icelandic the year end. supply chain management. Mosaic Fashions hf were in issue for the Bonds, which have been converted to whole of the period, but adjusts for any £52m of LIBOR based borrowings. 1 International sales comprise all own store, Gross margins were up from 60.6% to movements in the underlying share capital concession, franchise and joint venture outlets outside of the UK. 4 61.0% in the year; intake margins were of the UK company pre-acquisition, and Within current liabilities, there was 2 Non recurring costs are costs relating to the up in all brands but the main benefit the issue of new shares in the Icelandic a £1.4m increase in tax payable, and acquisition and integration of Karen Millen came from lower markdowns in Karen parent post acquisition. On this basis, a £1.9m decrease in the short term and Whistles, IPO costs and refinancing costs. Millen and Whistles. earnings per share for the FY were 0.83p component of long-term liabilities. Trade 3 This is only the third quarter for Mosaic hf, excluding non-recurring items, there is no and other payables increased by £4.5m. so no comparatives are shown. 4 Distribution and administration costs comparable figure. Intake margin is the margin at original selling moved broadly in line with sales, increasing At the end of FY 2006 the share capital price, i.e. before markdowns. 5 Unsecured loan note interest payable was in total by 16% to £203.0m, which includes of Mosaic Fashions hf amounted to ISK £2.8m, of which £1.1m was converted to the impact of certain double running costs 2,900,461,613. ordinary shares, and the balance paid in that are being incurred during the the year.
20 Mosaic Group 2005-06 Proforma Income Statement for the year ended January 28, 2006 FY 2006 FY 2005 £’m Full Year Full Year Turnover 410.0 355.6 Cost of Sale (159.9) (140.2) Gross profit 250.1 215.4 Distribution costs (160.8) (140.8) Administrative expenses (42.2) (34.5) Trading Profit before acquisition, integration & IPO costs 47.1 40.1
Acquisition, integration & IPO costs (3.4) (4.2) Share of loss in continuing joint ventures (0.9) (0.6) Operating profit 42.8 35.3 Financing costs before refinancing (18.5) Refinancing (5.4) Profit before tax 18.9 Income tax expense (6.3) Profit after tax 12.6 Proforma earnings per share 0.49p – excluding acquisition, integration, IPO & refinancing costs 0.83p
Operating profit 42.8 35.3 Acquisition, integration & IPO costs 3.4 4.2 Depreciation and Amortisation 13.0 12.4 EBITDA 59.2 51.9 Sales growth 15.3% Trading profit growth 17.5% EBITDA growth 14.1% Gross margin 61.0% 60.6% EBITDA margin 14.4% 14.6%
Proforma Balance Sheet January 28, 2006 FY 2006 FY 2005 £’m Full Year Full Year Assets: Non-Current Assets 267.2 265.7 Current Assets 87.5 72.6 Total Assets 354.7 338.3 Equity and Libilities: Equity 129.6 64.2 Non-Current Liabilities 145.9 199.0 Current Liabilities 79.2 75.1 Total Equity and Liabilities 354.7 338.3 Equity ratio 36.5% 19.0% Current ratio 1.10 0.97
Proforma Statement of Cash Flows for the year ended January 28, 2006 2006 2005 30.01-28.01 01.02-29.01 Cash flows from operating activities: Operating profit before net financing cost 43.7 35.9 Difference between operating profit and cash from operations: Depreciation of property, plant and equipment 12.4 11.5 Amortisation of intangible assets 0.5 0.0 Loss on disposal of property, plant and equipment 1.6 1.9 Share of loss of associates (0.9) (0.6) Net changes in working capital (19.7) (1.6) Cash generated by operations 37.6 47.1 Interest income received 0.2 0.3 Interest expense paid (18.2) (5.7) Income taxes paid (6.0) (4.2) Net cash provided by operating activities 13.6 37.5 Cash flows from investing activities: Proceeds from sale of property 6.7 0.0 Acquisition of property, plant and equipment (21.2) (18.9) Acquisition of subsidiaries, net of cash acquired 0.0 (43.4) Investment in associate (1.0) (0.6) Net cash used in investing activities (15.5) (62.9) Cash flows from financing activities: Proceeds from the issue of share capital 44.5 0.0 Purchase of own shares (1.3) 0.0 Payment of deal costs (3.8) 0.0 Proceeds from non-current borrowing 0.0 52.7 Repayment of borrowings (44.7) 0.0 Net cash provided by financing activities (5.3) 52.7 Effect of exchange rate fluctuations on cash held 0.0 0.0 Cash and cash equivalents at 29 January 2005 21.9 (5.4) Cash and cash equivalents at 28 January 2006 14.7 21.9
Mosaic Group 2005-06 21 board of directors
1 Stewart Binnie 4 Thordís Sigurdardóttir Chairman of the Board, elected Member of the Board, elected to to Sierra Holdings Ltd.’s Board in Mosaic Fashions hf.’s Board in May November 2002. Occupations: 2005. Occupation: General Manager Financial adviser with a strong Nordic Investments, Baugur Group hf. background in retail and investment Holdings in Mosaic Fashions hf.: 0. banking. Holdings in Mosaic Fashions Holdings of financially related parties: hf.: 5,747,513 shares. Holdings of 90,324 shares held by Hid íslenska financially related parties: 0. rádgjafarhús ehf and 1,066,831,128 shares held by BG Holding ehf, 2 Derek Lovelock a subsidiary of Baugur Group hf. Member of the Board, elected to Oasis Stores Plc’s Board in November 5 Gunnar Sigurdsson 1999. Occupations: CEO of Mosaic Member of the Board, elected to Fashions hf. and Chairman of the board Mosaic Fashions Ltd.’s Board in March of Jacques Vert plc. Holdings in Mosaic 2004. Occupations: Managing Director Fashions hf.: 231,421,693 shares. of Baugur Group Investments in UK. Holdings of financially related parties: 0. Holdings in Mosaic Fashions hf.:1.145.455 shares. Related party: 3 Richard Glanville Baugur Group hf. is through its Member of the Board, elected to subsidiary BG Holding ehf. the largest Oasis Stores Plc’s Board in December shareholder in Mosaic Fashions hf. 2000. Occupation: Finance Director of with 1,066,831,128 shares. Mosaic Fashions hf. Holdings in Mosaic Fashions hf.: 117,876,513 shares. Holdings of financially related parties: 0.
22 Mosaic Group 2005-06 corporate responsibility What does ‘Corporate Responsibility’ Our Customers Our Environment mean for Mosaic? For our business it Our aim is to deliver customer Our Head Office and Distribution Centre is about the way we conduct our satisfaction through the products we recycle a variety of materials, particularly relationships with our staff, our suppliers, offer, the communication and service paper, a process in which all employees are our partners and our customers, and the received from all people in the business, encouraged to participate. The majority impact that our activities have on them and the environment that our employees of our deliveries to stores are done in re- and on the environment. We believe that and customers experience. usable plastic totes that are then returned the best way to deliver long term value to the DC which reduces the amount of to our shareholders is through behaving Customer Complaints cardboard we use. All hangers are recycled ethically in all that we do. For us, this We are continuously striving to improve within stores to reduce the amount of means acting honestly and fairly towards our levels of service and therefore plastic waste we generate. The recent everyone we come into contact with. investigate any feedback that we receive. integration of the two distribution facilities Our customer service department deals to one location has enabled us to combine Within our business, the Board takes with all enquiries including complaints distribution operations for the four brands, overall responsibility for ‘Corporate and compliments. Each management reducing the number of vehicles required Responsibility’; however, it is part of the team reviews the analysis each month to make deliveries and therefore reducing remit of all our senior managers and their and takes appropriate measures. carbon dioxide emissions. teams and informs the values that feed our culture. Customers with Disabilities Charity and Community We aim to provide a high level of service As a business we have a nominated Our People to all of our customers, including those charity, the Richard House Children’s In order to attract and retain good calibre with disabilities. In line with changes Hospice, that we support with donations personnel, we offer a competitive pay to the Disability Discrimination Act in and events throughout the year. In and benefits package that is regularly 2004, we are committed to ensuring addition we support other charity events benchmarked against other businesses that all of our stores have a clear on an annual basis, particularly local in the industry. Our culture encourages a compliance procedure. events and those nominated by our balance between work and home life and employees. We support BDF New Life as employers we take people’s personal Our Product Responsibility by providing them with our old stock. circumstances into account, with many All of our garments are designed and employees enjoying flexible working manufactured to be ‘fit for purpose’. In All of these areas remain a key focus for terms and a high proportion of employees order to achieve this we have teams of the Group and all of its employees. returning after maternity leave. As a brand specific garment technologists who business we treat people fairly, as we have specialise in testing the fit and quality of shown through the process of integrating our products. We ensure that all of our Karen Millen and Whistles into the Group, garments have clear care labelling in order including moving both head office and to sustain the quality of our garments. distribution centres. Through treating people fairly we believe we will remain Our Suppliers a respected and competitive employer. Mosaic source from a number of different suppliers and factories across People development the world. There are two main methods We look to promote people from within of sourcing our products, either through the business where appropriate, blending our office in Hong Kong for most of this with varied industry experience to our China-sourced product, or by our create a balance of knowledge within the Home Production team who source our teams. To facilitate career progression ‘Cut Make and Trim’ product through internally, the Group offers a varied a selection of factories, mainly in Eastern programme of learning and training Europe. Before receipt of any orders, opportunities for both professional and suppliers confirm in writing their personal development. acceptance of the terms included within our Supplier Manual. This includes the Equal Opportunities Ethical Sourcing Policy which adopts Mosaic is committed to increasing the the core principles of the International profitability and efficiency of the company Labour Standards as set out by the by attracting and recruiting the people Convention of the International Labour who are best suited to meet the standards Organisations. Supplier visits and factory for the job without regard to race, creed, accreditations are the formal tools colour, sexual orientation, nationality, used to monitor our supply base and ethnic or social origins, religion or similar if required, action plans are agreed in belief, political or other belief, age, writing and formally reviewed with the language, gender, marital status, trade brand product teams. These policies are union membership, gender re-assignment well established in Oasis and Coast and or disability. are being implemented in Karen Millen and Whistles. These will be in place with Health and Safety all of our suppliers by the end of 2006. The Mosaic brands operate an extensive Health and Safety policy which is Our Partners regularly reviewed and updated. Specific We partner with a number of different resource is dedicated to monitoring this organisations, such as franchise partners and continually improving standards and department store chains, to leverage within the business to make the Mosaic their skills and expertise to our mutual environment as safe as possible for our benefit. In all of our relationships we staff and our customers. endeavour to ensure that our brands do not profit at the expense of our partners’ businesses. Where we prosper, they prosper and vice versa.
Mosaic Group 2005-06 23 corporate governance Corporate governance in Mosaic Fashions Board of Directors Stewart Binnie, London, United Board Committees hf. is regarded as the framework by which The Board of Mosaic Fashions hf. Kingdom. Chairman of the Board, The Board of Mosaic Fashions hf. the Company is directed and controlled manages the Company’s general affairs elected to Sierra Holdings Ltd.’s Board in operates both an Audit Committee and and the means by which relationships and endeavours to keep the organization November 2002. Occupations: A private a Remuneration Committee. between the Company’s management, and its operations on course. The equity investor with a background in its Board, its shareholders and other Company’s Board of Directors directs retailing, media and financial services Each Committee consists of the stakeholders are conducted. company affairs and strives to ensure who serves on the board of a number Chairman and Directors of the Board that the Company’s organisation and of UK public and private companies. of Mosaic Fashions hf. who are The aim of the corporate governance activities are in good order at all times Own holding and holding of spouse and competent to deal with the Company’s programme in Mosaic Fashions hf. is and that the accounting for and the children under 18 years of age in Mosaic financial issues or remuneration, as the to ensure disclosure and transparency, handling of the Company’s funds are Fashions hf. 5,747,513. Stewart Binnie is case may be. The independence of a define the responsibilities of the Board sufficiently supervised. not related to other parties that own Board member is evaluated as specified and the management, define the rights shares in Mosaic Fashions hf. under 2.6. of the Corporate Governance and obligations of shareholders and The Board of Directors appoints the CEO guidelines published by the Iceland stakeholders, ensure the equitable of Mosaic Fashions hf. and decides on the Richard Glanville, Essex, United Chamber of Commerce, the Iceland Stock treatment of shareholders and avoid terms of his employment. Kingdom. Member of the Board, elected Exchange and the SA-Confederation conflicts of interests between the parties. to Oasis Stores Plc’s Board in December of Icelandic Employers. Mosaic Fashions hf. plans to assess the 2000. Occupations: CFO of Mosaic The Board is ultimately responsible for activity, work practices and procedures Fashions hf. Own holding and holding of The Audit Committee’s role is to ensure the Group’s system of internal controls of the Board annually in light of the spouse and children under 18 years of the integrity of the financial information and for reviewing their effectiveness. Company’s progress, with the assistance age in Mosaic Fashions hf.: 117,876,513. reported to shareholders, control the However, such a system is designed to of outside parties, when appropriate. The Richard Glanville is not related to other Company’s internal auditing and manage rather than eliminate the risk Working Procedures of the Board of parties that own shares in Mosaic accounting system, evaluate the work of of failure to achieve business objectives, Directors state that Board Members Fashions hf. the Company’s financial management and can only provide reasonable assurance should familiarise themselves with the and the Company’s elected Auditor. against material mistatement or loss. The provisions of law, the Company’s Articles Derek Lovelock, Buckinghamshire, Board has adopted a Code of Business of Association, the general securities United Kingdom. Member of the Board, The Remuneration Committee’s role is conduct, which provides practical regulations, the special regulations of elected to Oasis Stores Plc’s Board in to ensure that the CEO’s remuneration guidance for all staff and which helps the Company on the handling of inside November 1999. Occupations: CEO of reflects the long-term performance of identify and evaluate the significant risks information and insider trading and other Mosaic Fashions hf. and Chairman of the the Group, his personal performance and affecting the business and the policies relevant rules. board of Jacques Vert plc. Own holding the interests of the shareholders. The and procedures by which these risks and holding of spouse and children under CEO is responsible for the remuneration are managed. The Board of Mosaic Fashions hf. has 18 years of age in Mosaic Fashions hf.: of other employees and for ensuring that a majority of Board Members that are 231,421,693. Derek Lovelock is not it remains in line with the policy of the In 2004, the Iceland Chamber of independent of the Company and had related to other parties that own shares Remuneration Committee. The Commerce, ICEX and the Confederation two Members that were independent in Mosaic Fashions hf. Remuneration Committee’s policy is to of Icelandic Employers issued Guidelines of major shareholders throughout 2005. ensure that the Company can attract on Corporate Governance. Mosaic The company is actively seeking to recruit Thordís Sigurdardóttir, and retain high calibre executives. For Fashions hf. has studied these, believes an additional, independent board member. ID-No: 020268-5229, Hvassaleiti 113, these purposes the committee consults it complies with them and intends to 103 Reykjavík, Iceland. with external advisers on levels of follow them with respect to its future The following section lists the current Member of the Board, elected to Mosaic remuneration in comparable companies structure and management. members of the Board of Directors and Fashions hf.’s Board in May 2005. where appropriate, the remuneration their activities. It is not intended to be Occupation: General Manager Nordic package for executive directors consists Statutory bodies exhaustive, but details the main Investments, Baugur Group. Own holding of basic salary, annual bonus, pension Shareholders’ Meetings occupations and/or other occupations and holding of spouse and children under arrangements and other taxable benefits. The supreme authority in the affairs of that are linked to the ownership or 18 years of age in Mosaic Fashions hf.: 0. Mosaic Fashions hf., within the limits operations of Mosaic Fashions hf. Related party: 90,324 shares held by The Remuneration Committee also established by its Articles of Association Hid islenska radgjafarhus ehf and determines the policy of the Company and statutory provisions, is the Company’s Thordis Sigurdardóttir was voted on to 1,066,831,128 shares held by BG Holding regarding employee stock options. Future shareholders’ meeting. Shareholders’ the board of Mosaic Fashions hf. on ehf, a subsidiary of Baugur Group hf. changes to the stock option policy will be meetings may be attended by 18 May 2005. Stewart Binnie, Derek submitted to the Annual General Meeting shareholders, their representatives Lovelock, Richard Glanville and Gunnar Gunnar Sigurdsson, ID-No: 091169- for approval. The existing stock option and advisors. Shareholders’ meetings Sigurdsson were voted on to the board of 3559, London, United Kingdom. scheme is through the Employee Benefit are open to representatives of the Mosaic Fashions hf. on 28 April 2005. Member of the Board, elected to Mosaic Trust described under the Employees press and the ICEX. Apart from Thordís Sigurdardóttir, all Fashions Ltd.´s Board in March 2004. section later in this chapter. board members have been involved as Occupation: Managing Director of Baugur The Annual General Meeting of Mosaic directors of the Mosaic Fashions’ Group Group Investments in the UK. Own The CEO is responsible for the Fashions hf. will be held before the end of companies for the past twelve months holding and holding of spouse and Company’s strategy, operations and of May each year. or more. In references made to the children under 18 years of age in Mosaic finance and represents the Company in “related parties” that hold shares in Fashions hf.:1.145.455 shares. Related all matters regarding normal operations. At shareholders’ meetings each share Mosaic Fashions hf., related parties are party: Baugur Group hf. is through its He is in charge of accounting, management carries one vote. Decisions at shareholders’ linked to Board Members, where the subsidiary BG Holding ehf. the largest and HR. The CEO is obliged to provide meetings are made by majority vote Board Members have extensive influence shareholder in Mosaic Fashions hf. with the Board of Directors and the Auditors unless otherwise provided for in the over the investment activity of the 1,066,831,128 shares. with all information on the Company’s Articles of Association or prescribed related party. There were no extraordinary operations that they may request and is by law. transactions between the Board of required to be provided according to law. Directors and the Company. The Board of Directors has not received any loans or stock options from the Company.
24 Mosaic Group 2005-06 The Head Office of the Company is Derek Lovelock, CEO, (1950), joined Employee Benefit Trust 69-77 Paul Street, EC2A 4PN London, UK. Oasis Stores Plc as Chief Executive in The intention of the Employee Benefit However, the Registered Office of Mosaic October 1999. Previously, he was the Trust (EBT) scheme is to allow dedicated Fashions hf. is Sudurlandsbraut 4, IS-108 Chief Executive of the Clothing division senior managers to participate in the Reykjavik, Iceland and the Registered and a Board Director of Sears plc, where Group’s development. The Oasis Office of Mosaic Fashions Ltd. is The he had responsibility for its Clothing Employee Benefit Trust was established in Triangle, Stanton Harcourt Industrial Division encompassing Wallis, Warehouse, November 2003 with a £2.3m investment Estate, Stanton Harcourt, Witney, Miss Selfridge, Richards, Adams and the from the company in preference shares Oxfordshire, OX29 5UT as this is Outfit. Prior to joining Sears plc in 1992, and loan notes. In January 2005, the first where the majority of the accounting he spent eight years with Storehouse plc payments, totalling £0.6m were made team is located. where, having spearheaded the creation to 85 employees. In March 2005, the of a fashion division that included brands scheme was transferred to a Mosaic Auditors such as Blazer, Jacadi and Anonymous, Fashions EBT and the Company injected A state authorised public accountant or he was promoted to the board and given a further £1.3m. These additional funds accounting firm is elected as the auditor responsibility for Mothercare. Derek have been used to bring Karen Millen at each Annual General Meeting of Lovelock is the non-executive chairman and Whistles’ senior managers into the Mosaic Fashions hf. for a term of one of Jacques Vert plc and member of its scheme and to extend the long-term year. The Auditor examines the remuneration and audit committees. incentives for the existing and new Company’s accounts and all relevant Jacques Vert plc is a clothing company members. In January 2006, the EBT sold accounts documents for each year of that is listed on the Alternative 3,833,648 shares in order to fund payments operation, and has access to all the Investment Market (AIM) of the totalling £757,500 to 87 employees. Company’s books and documents for this London Stock Exchange. purpose. Auditors are not elected from among the Members of the Board of the Richard Glanville, CFO, (1955), joined Company or employees. The qualifications Oasis Stores Plc as Finance Director, and eligibility of the Auditor at elections responsible for Finance, IT, Distribution, are in other respects governed by law. and Company Secretary in 2000. Previously, he was the IT Director of The Chartered Accountants and Hays Information Management. He is Registered Auditor of Mosaic Fashions hf. a qualified accountant and has relevant are KPMG Endurskodun hf. ID-no. retail industry experience including roles 590975-0449, Borgartún 27, IS-105 as CFO at Richards Ltd., Commercial Reykjavik, Iceland. Director at Sears Clothing Ltd., IT director at Comet Ltd. and Commercial Director Compliance Officer at Mothercare Ltd.. A Compliance Officer is employed within the Company. The Compliance Meg Lustman, Strategy and Officer is directly responsible to the CEO Development Director, (1962), joined and is independent in his or her duties. Oasis Stores Plc as Business Development The Compliance Officer monitors the Director in January 2000. Prior to joining implementation of insider rules adopted Oasis, she worked for over nine years in by the Company, including rules regarding a number of strategic and international securities trading by employees and development roles within Sears plc. primary insiders. The Compliance Officer With 15 years’ experience in UK and is responsible for interpreting the rules, international retailing, she combines and takes decisions based on the rules. strategic planning, coaching and project The Compliance Officer makes proposals management skills at a senior level. for improved working procedures for various positions within the Company, Employees and helps develop and maintain the At the end of FY2006 the total number compliance monitoring system. of employees was 6,637, of which 5,872 were in the retail teams and 318 were in In accordance with applicable regulation the shared services teams based in the and recommendations of the Icelandic distribution centres near Oxford. The Financial Supervisory Authority (FSA) the head office teams are based in Paul Street, Company has established rules on the London and comprise 450 employees. handling of inside information and insider In FY2006, the average number of trading which have been confirmed by employees of Mosaic Fashions was 6,236. the FSA. There are bonus schemes to motivate and incentivise employees across the Group Key Management and Employees and reward them if business targets are Senior Management achieved. In addition, an Employee Benefit The senior management team under the Trust (EBT) was established in November leadership of the CEO Derek Lovelock 2003 to tie senior managers into the comprises three directors at Group Group’s development. level. All have significant management experience in fashion retailing. There were no extraordinary transactions between the Group and the senior management team.
Mosaic Group 2005-06 25 financial statements Endorsement of the Board of As fully explained in Note b (i) (under Directors and CEO the basis of consolidation) the Group’s Mosaic Fashions hf. was incorporated on Financial Statements have been prepared 12 April 2005. The object of the using reverse acquisition accounting for Company, according to Article 3 of its the 52 week period ended 28 January Articles of Association, is to own and run 2006. As a consequence, the results for businesses involved in the production, the 52 week period ended 28 January sale and distribution of fashion goods 2006 comprise those of Mosaic Fashions and other related activities, the Limited, plus those of Mosaic Fashions hf. management of real estate and any other from 23 May 2005. Comparative group activities which the Company may figures are those of Mosaic Fashions reasonably be expected to be involved in. Limited for the 52 week period ended The operating year of the Company is 29 January 2005. from 1 February to 31 January, with the financial year end falling on the last According to the Income Statement net Saturday of the year. profit for the 52 week period ended 28 January 2006 amounted to GBP 12.4 With effect from 23 May 2005, Mosaic million. The Group’s revenue from the Fashions hf. (“the Group”) became the sale of goods and services amounted to legal parent company of Mosaic Fashions GBP 410.0 million during the period. Limited and its subsidiaries in a share for According to the Balance Sheet, Equity at share transaction. Due to the relative the end of the period amounted to GBP values of the companies, the former 129.4 million. Reference is made to the shareholders of Mosaic Fashions Limited Consolidated Statement of Changes in became the majority shareholders with Equity during the period. 100% of the enlarged share capital of Mosaic Fashions hf., prior to the placing The Company’s total issued share capital and open offer in May / June 2005. amounted to GBP 23.5 million at 28 Further, Mosaic Fashions hf.’s continuing January 2006. The Company held own operations and executive management shares in the nominal amount of GBP were those of Mosaic Fashions Limited. 2.4 million. Share capital at 28 January Accordingly, the substance of the 2006 is divided among 1,370 combination was that Mosaic Fashions shareholders. One shareholder held over Limited acquired Mosaic Fashions hf. 10% of outstanding shares, they are: in a reverse acquisition. BG Holding ehf., Reykjavík 36.8% Dealings in the Group’s shares commenced on 21 June 2005 on the The Board of Directors and the CEO Icelandic Stock Exchange. Also, on 23 of Mosaic Fashions hf. hereby confirm May 2005 and 10 June 2005, the Group the Consolidated Financial Statements raised approximately GBP 40 million of the Company for the 52 week period (before expenses) through the issue of ended 28 January 2006, by means of 363,131,115 new ordinary shares at ISK their signatures. 13.6 per share to meet the cost of the reverse acquisition and repay debt. London, 26 April 2006
Board of Directors: Stewart Binnie Richard Glanville Thórdís Sigurdardóttir Gunnar Sigurdsson Chief Executive Officer: Derek Lovelock
26 Mosaic Group 2005-06 financial statements Auditors Report Board of Directors and Shareholders of Mosaic Fashions hf.
We have audited the accompanying consolidated balance sheet of Mosaic Fashions hf. and its subsidiaries (“the Group”) as of 28 January 2006 and the related consolidated income statement, changes in equity and cash flows for the 52 week period then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as of 28 January 2006, and of the results of its operations and its cash flows for the 52 week period then ended in accordance with International Financial Reporting Standards as adopted by the EU.
Reykjavík, 26 April 2006
KPMG Endurskodun hf.
Mosaic Group 2005-06 27 consolidated income statement For the 52 week period ended 28 January 2006
Note 2006 2005 30.01-28.01 01.02-29.01
Sales 1 410.0 309.6 Cost of sales -159.9 -123.7
Gross profit 250.1 185.9 Distribution costs 3 -160.8 -122.4 Administrative expenses before acquisition, integration and professional charges relating to flotation -42.2 -29.8 Acquisition, integration and professional charges relating to flotation -3.4 -4.2 Total administrative expenses 3 -45.6 -34.0
Operating profit before financing costs 2 43.7 29.5 Share of operating loss in associate -0.9 -0.6
42.8 28.9 Interest receivable and similar income 0.2 0.3 Financing costs before refinancing -18.7 -19.9 Cost resulting from refinancing -5.4 – Total financing costs 7 -24.1 -19.9
Profit before tax 18.9 9.3 Income tax expense 8 -6.3 -3.5
Profit after tax 12.6 5.8 Preference dividends declared – -3.4
Profit for the period 12.6 2.4
All profits are solely attributable to the equity holders of the Parent.
Earnings per share: Basic earnings per share (pence) 9 0.491 0.139
Amounts are in GBP million 28 Mosaic Group 2005-06 consolidated balance sheet 28 January 2006
Assets Note 28 Jan 2006 29 Jan 2005
Non-current assets: Property, plant and equipment 10 50.9 49.2 Intangible assets 11 211.8 212.9 Investments in associates 13 0.3 0.2 Prepayments 3.4 3.4 Trade and other receivables 0.8 –
Total non-current assets 267.2 265.7
Current assets: Inventories 14 43.1 28.3 Trade and other receivables 15 29.7 22.4 Cash and cash equivalents 14.7 21.9
Total current assets 87.5 72.6
Total assets 354.7 338.3
Equity and liabilities
Equity: Share capital 16 -23.5 -37.1 Share premium -93.9 -23.0 Retained earnings -12.2 -4.1
Total equity -129.6 -64.2
Non-current liabilities: Long term borrowings 17 -124.9 -180.6 Deferred income 19 -5.7 -2.8 Deferred tax liabilities 20 -15.3 -15.6
Total non-current liabilities -145.9 -199.0
Current liabilities: Short term borrowings 17 -15.5 -17.4 Trade and other payables 21 -59.2 -55.1 Deferred income 19 -2.6 -1.8 Income tax payable -1.9 -0.8
Total current liabilities -79.2 -75.1
Total liabilities -225.1 -274.1
Total equity and liabilities -354.7 -338.3
Amounts are in GBP million Mosaic Group 2005-06 29 consolidated statement of changes in equity 28 January 2006
Own Profit Issued Share shares Hedging and loss capital premium held reserves reserves Total
Equity 1 Feb 2004 31.3 – -2.3 – – 29.0 Shares issued 5.8 23.0 – – – 28.8 Preference dividend added back as insufficient reserves under UK GAAP – – – – 3.4 3.4 Own shares sold – – 0.6 – – 0.6 Net profit for the period – – – – 2.4 2.4
Equity 29 Jan 2005 37.1 23.0 -1.7 – 5.8 64.2
Equity 29 Jan 2005 37.1 23.0 -1.7 – 5.8 64.2 Prior period adjustment relating to adoption of IAS 32/39 (note 25) – – – -0.4 -3.4 -3.8
Revised equity 30 Jan2005 37.1 23.0 -1.7 -0.4 2.4 60.4 Shares issued in Mosaic Fashions Limited 0.1 4.5 – – – 4.6 Own shares purchased – – -0.7 – – -0.7 Conversion of existing Mosaic Fashions Limited shares to Mosaic Fashions hf. shares -37.2 -27.5 – – – -64.7 Mosaic Fashions hf. shares issued to Mosaic Fashions Limited shareholders 19.3 242.1 – – – 261.4 Conversion of Mosaic Fashions Limited loan notes to Mosaic Fashions hf. shares 1.3 15.3 – – – 16.6 Shares issued in Mosaic Fashions hf. 2.9 37.1 – – – 40.0 Reverse acquisition reserve – -200.6 – – – -200.6 Net profit for the period – – – – 12.6 12.6
Equity 28 Jan 2006 23.5 93.9 -2.4 -0.4 15.0 129.6
Equity is solely attributable to equity holders of the Parent. Profit and loss reserve, own shares held and the hedging reserve are shown within retained earnings on the face of the balance sheet.
Amounts are in GBP million 30 Mosaic Group 2005-06 consolidated statement of cash flows For the 52 week period ended 28 January 2006
2006 2005 30.01-28.01 01.02-29.01
Cash flows from operating activities: Operating profit before net financing cost 43.7 29.5 Adjustments for: Depreciation of property, plant and equipment 12.4 9.9 Amortisation of intangible assets 0.5 – Loss on disposal of property, plant and equipment 1.6 1.9 Share of loss of associates -0.9 -0.6
Operating profit before changes in working capital and provisions 57.3 40.7 (Increase)/decrease in inventories -14.8 4.5 Increase in trade and other receivables -8.1 -0.5 Increase in trade and other payables 5.5 2.3 Increase in deferred income 4.3 0.4
Cash generated by operations 44.2 47.4 Interest income received 0.2 0.3 Financing costs paid -24.4 -5.2 Income taxes paid -6.4 -3.1
Net cash provided by operating activities 13.6 39.4
Cash flows from investing activities: Proceeds from sale of property 6.7 – Acquisition of property, plant and equipment -21.2 -17.8 Acquisition of subsidiaries, net of cash acquired – -60.4 Investment in associate -1.0 -0.6
Net cash used in investing activities -15.5 -78.8
Cash flows from financing activities: Proceeds from the issue of share capital 44.5 – Purchase of own shares -1.3 – Payment of deal costs -3.8 – Proceeds from non-current borrowing – 52.7 Repayment of borrowings -44.7 –
Net cash provided by financing activities -5.3 –
Net increase/(decrease) in cash and cash equivalents -7.2 13.3 Cash and cash equivalents at 29 January 2005 21.9 8.6
Cash and cash equivalents at 28 January 2006 14.7 21.9
Amounts are in GBP million Mosaic Group 2005-06 31 notes
Significant accounting policies
a. (i) Basis of preparation Mosaic Fashions hf.'s legal residence is at Sudurlandsbraut 4, Reykjavík, Iceland.
The consolidated Financial Statements of the Company for the 52 week period ended 28 January 2006 comprise the Company and its subsidiaries and the Group’s interest in associates. The Financial Statements were authorised for issue by the Directors on 26 April 2006.
The consolidated financial statements are presented in Pounds Sterling, rounded to the nearest one hundred thousand. They are prepared on the historical cost basis except that derivative financial instruments and securities are stated at their fair value. Assets classified as held for sale are stated at the lower of cost or fair value.
The consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and their interpretations adopted by the International Accounting Standards Board (IASB).
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements and in preparing an opening IFRS balance sheet at 1 February 2004 for the purposes of the transition to IFRSs.
The principal exception is that, as more fully explained in note 25, financial instruments accounting is determined on different bases in current year and comparative year due to the transitional provisions of IAS 32 and IAS 39
Judgements made by the directors in the application of these accounting policies that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year, as discussed in note v, are not readily apparent from other sources. Actual results may differ from these estimates.
(ii) Transition to IFRSs The Group is preparing its financial statements in accordance with IFRSs for the first time and has applied IFRS 1 for the 52 week period ended 29 January 2005.
IFRS 1 grants certain exemptions from the full requirements of IFRSs in the transition period. The following exemptions have been taken in these financial statements:
Financial instruments – IAS32/39 have not been applied retrospectively in the comparative period. In accordance with the provisions of IFRS 1, the change in policy has instead been adopted on the first day of the current period.
Business combinations – Business combinations that took place prior to transition date have not been restated.
An explanation of how the transition to IFRSs has affected the reported financial position, financial performance and cash flows of the Group is provided in note 25.
b. Basis of consolidation (i) Reverse acquisition Mosaic Fashions hf. (the Company) was incorporated on 12 April 2005. With effect from the 23 May 2005, the Company became the legal parent company of Mosaic Fashions Limited and its subsidiary undertakings in a share for share transaction. Due to the relative values of the companies, the former shareholders of Mosaic Fashions Limited became the majority shareholders with 100% of the share capital of the enlarged share capital of Mosaic Fashions hf., prior to the placing and open offer in May/June 2005. Accordingly, the substance of the combination was that Mosaic Fashions hf. acquired Mosaic Fashions Limited in a reverse acquisition.
As a consequence of applying reverse acquisition accounting, the results for the 52 week period ended 28 January 2006 comprise the results of Mosaic Fashions Limited, plus those of Mosaic Fashions hf. from 23 May 2005.
(ii) Comparatives The results for the comparative period are those of Mosaic Fashions Limited and its subsidiaries. The comparative period ended 29 January 2005 included only seven months' trading for Karen Millen and Whistles following the acquisition in June 2004.
(iii) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The results of subsidiaries are included in the consolidated Financial Statements from the date that control commences until the date that control ceases.
Amounts areare in GBP million 32 Mosaic Group 2005-06 (iv) Associates Associates are those entities over which the Group has significant influence, but not control, over the financial and operating policies. The consolidated Financial Statements include the Group’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds its interest in an associate, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an associate.
(v) Transactions eliminated on consolidation Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated Financial Statements. Unrealised gains arising from transactions with associates and jointly controlled entities are eliminated to the extent of the Group’s interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. c. Foreign currency Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the Balance Sheet date are translated to Sterling at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the Income Statement.
The assets and liabilities of overseas subsidiary undertakings are translated at the closing exchange rate. Profit and Loss accounts of such undertakings are consolidated at their average rates of exchange during the year, where this rate approximates to the foreign exchange rates ruling at the dates of the transactions. Gains and losses arising on these translations are taken to reserves, net of exchange differences arising on related foreign currency borrowings. d. Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational and financing activities. The Company has entered into forward agreements to limit its exposure to foreign exchange risk in relation to transactions in foreign currency. The Company has also entered into option agreements which limit its exposure to foreign exchange risk arising from its financing in foreign currency.
The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price.
Derivative financial instruments are recognised initially at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the Income Statement.
The fair value of forward contracts is their quoted market price at the Balance Sheet date, being the present value of the quoted forward price. e. Hedging (i) Hedge of monetary assets and liabilities When a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecasted transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in the hedging reserve. Any ineffective portion of the hedge is recognised immediately in the Income Statement. When the forecasted transaction subsequently results in the recognition of a non-financial asset or non-financial liability, or the forecast transaction for a non-financial asset or non-financial liability the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset or liability. If a hedge of a forecasted transaction subsequently results in the recognition of a financial asset or a financial liability, then the associated gains and losses that were recognised directly in equity are reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss (i.e. when interest income or expense is recognised).
For cash flow hedges, other than those covered by the preceding two policy statements, the associated cumulative gain or loss is removed from equity and recognised in the Income Statement in the same period or periods during which the hedged forecast transaction affects profit or loss. The ineffective part of any gain or loss is recognised immediately in the Income Statement.
Amounts areare in GBP million Mosaic Group 2005-06 33 notes
(i) Hedge of monetary assets and liabilities continued When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship, but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, then the cumulative unrealised gain or loss recognised in equity is recognised immediately in the Income Statement.
f. Property, plant and equipment (i) Owned assets Property, plant and equipment are stated at cost less accumulated depreciation.
(ii) Depreciation Depreciation is charged to the Income Statement over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows:
On a straight line basis: Useful life
Short leasehold property Over period of lease Fixtures and fittings 5-10 years Computer hardware and software 3-5 years Motor vehicles 4 years
g. Intangible assets (i) Goodwill All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries and associates. In respect of business acquisitions that have occurred since 31 January 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment.
In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents the amount recorded under previous UK GAAP, less amortisation until 31 January 2004. The classification and accounting treatment of business combinations that occurred prior to 31 January 2004 has not been reconsidered in preparing the Group’s opening IFRS Balance Sheet at 31 January 2004.
Negative goodwill arising on an acquisition is recognised directly in the Income Statement.
(ii) Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation. Amortisation is charged to the Income Statement on a straight line basis over the estimated useful life of the relevant asset. Franchise agreements have an estimated useful life of 10 years.
Expenditure on internally generated goodwill and brands is recognised in the Income Statement as an expense as incurred.
All other intangible assets are deemed to have indefinite lives and are subject to annual impairment testing.
h. Trade and other receivables Trade and other receivables are stated at their cost less impairment losses.
i. Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
The cost of inventories is based on the weighted average basis and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition.
j. Cash and cash equivalents Cash and cash equivalents comprises cash balances and call deposits.
k. Impairment The carrying amounts of the Group’s assets, other than deferred tax assets, inventories and financial assets, are reviewed at each Balance Sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated.
Amounts are in GBP million 34 Mosaic Group 2005-06 k. Impairment continued For goodwill, the recoverable amount is estimated at each balance sheet date and whenever there is an indication of impairment.
An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the Income Statement.
(i) Calculation of recoverable amount The recoverable amount of the Group’s receivables is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate. Receivables with a short duration are not discounted.
(ii) Reversals of impairment An impairment loss in respect of goodwill is not reversed.
In respect of other assets, an impairment loss is reversed where there is an indication that the impairment loss may no longer exist and if there has been a change in the estimates used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss has been recognised. l. Trade and other payables Trade and other payables are stated at nominal amount. m. Share capital (i) Preference share capital If preference share capital is non-redeemable and any dividends are discretionary, or is redeemable but only at the Company's option, it is classified as equity. Dividends on preference share capital classified as equity are recognised through the Income Statement.
Preference share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders or if dividend payments are not discretionary. Dividends on preference share capital classified as liabilities are recognised in the Income Statement as interest expense (see note 7 for further details).
(ii) Repurchase of share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognised as a change in equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity.
(iii) Dividends Dividends on preference shares classified as a liability are recognised as a liability and expensed on an accrual basis. Other dividends are recognised as a liability in the period in which they are authorised. n. Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. o. Sales Sales represents the net value of goods sold, services provided or royalties received, excluding value added tax. Sales are recognised only when all significant risks and rewards of ownership of goods have been transferred to the purchaser. p. Expenses (i) Cost of sales and other expenses Cost of sales consists of direct costs attributable to sales.
Distribution and administrative costs cover the running costs of the store locations, distribution centre and head office.
Amounts are in GBP million Mosaic Group 2005-06 35 notes
(ii) Operating lease payments Payments made under operating leases are recognised in the Income Statement on a straight-line basis over the term of the lease.
Any benefits received as an incentive to sign a lease, specifically rent free periods and reverse premiums, are initially capitalised in deferred income and then released to the Income Statement on a straight line basis over the lease term.
(iii) Financing costs Financing costs comprise interest payable on borrowings calculated using the effective interest rate method, interest receivable on funds invested, dividend income, foreign exchange gains and losses, and gains and losses on hedging instruments that are recognised in the Income Statement.
Interest income is recognised in the Income Statement as it accrues, using the effective interest method. Dividend income is recognised in the Income Statement on the date the entity’s right to receive payments is established.
q. Income tax Income tax on the profit or loss for the period comprises current and deferred tax.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the Balance Sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for; goodwill not deductible for tax purposes, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted at the Balance Sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.
r. Post retirement benefits The Group provides access to a stakeholder pension for all UK employees. In addition, contributions are made to specific employees' personal pension plans. The assets and liabilities of the schemes are held separately from those of the group in independently administered funds. Obligations for contributions to these plans are recognised as an expense in the Income Statement as incurred.
s. Employee Benefit Trust The group operates an Employee Benefit Trust. In accordance with SIC 12, Special Purpose Entities, the assets and liabilities of this Trust have been consolidated within these Financial Statements. In particular, the trust's purchases of shares in the Parent are debited directly to reserves.
t. Finance costs Cost associated with raising loan finance and equity shares are recorded against the loan principal and share premium account respectively. Loan finance costs are amortised to the Income Statement over the life of the relevant loan at a constant rate of return on the carrying amount.
u. Adopted IFRS not yet applied The following Adopted IFRS were available for early application, but have not been applied by the Group in these financial statements: IFRS 7 'Financial instruments: Disclosure' applicable for years commencing on or after January 2007
The application of IFRS 7 in the 52 week period ended 28 January 2006 would not have affected the Income Statement or Balance Sheet as the standard is concerned only with disclosure. The Group plans to adopt in the 52 week period ended 26 January 2008.
v. Key sources of estimation and uncertainty Key estimations and uncertainty are in relation to the valuation of goodwill and inventories;
– Note 10 contains information about the assumptions relating to the impairment of goodwill. – The valuation of inventory is based on a comparison of cost to net realisable value. Provisions are made using the best estimates to cover risks including inventory which will be sold at less than cost.
Amounts are in GBP million 36 Mosaic Group 2005-06 Segmental analysis 1. Sales arise entirely from fashion retailing and may be analysed as follows: 2006 2005 30.01-28.01 01.02-29.01
Retailing 393.9 301.8 Overseas licensing 16.1 7.8
410.0 309.6
All assets relate to the retailing segment, with the exception of franchise agreements of GBP 4.5 million within Intangible Assets. All costs relate to the retailing segment, with the exception of amortisation of franchise agreements of GBP 0.5 million.
Summary of the Group's sales for the period by geographical segments:
2006 2005 30.01-28.01 01.02-29.01
United Kingdom 344.0 272.4 Ireland 37.3 22.2 Germany 4.8 4.0 Rest of Europe, Middle and Far East 21.6 10.1 USA 2.3 0.9
410.0 309.6
Sales by country of destination is not materially different from sales by country of operation. The operation is subject to the seasonality changes that affect the fashion industry.
Quarterly statements 2. Summary of the Group's operating results by quarters: 52 week period ended 28 January 2006 Q1 Q2 Q3 Q4 30.01-30.04 01.05-30.07 31.07-29.10 30.10-28.01 Total
Sales 89.0 105.6 98.1 117.3 410.0 Cost of sales -32.9 -42.5 -37.9 -46.6 -159.9
Gross profit 56.1 63.1 60.2 70.7 250.1 Distribution costs -37.3 -39.5 -39.1 -44.9 -160.8 Administrative expenses before acquisition, integration & professional charges relating to flotation -10.1 -10.3 -9.3 -12.5 -42.2 Acquisition, integration & professional charges relating to flotation -0.1 -1.0 -0.7 -1.6 -3.4 Total administrative expenses -10.2 -11.3 -10.0 -14.1 -45.6
Operating profit before financing costs 8.6 12.3 11.1 11.7 43.7 Share of operating loss in associate -0.3 -0.2 -0.2 -0.2 -0.9
8.3 12.1 10.9 11.5 42.8 Interest receivable and similar income – 0.1 0.1 – 0.2 Financing costs before refinancing -7.0 -3.9 -4.1 -3.7 -18.7 Cost resulting from refinancing – -5.4 – – -5.4 Total financing costs -7.0 -9.3 -4.1 -3.7 -24.1
Profit before tax 1.3 2.9 6.9 7.8 18.9 Income tax expense -0.7 -0.8 -2.4 -2.4 -6.3
Profit after tax 0.6 2.1 4.5 5.4 12.6 Preference dividends declared – – –––
Profit for the period 0.6 2.1 4.5 5.4 12.6
All profits are solely attributable to the equity holders of the Parent.
Amounts are in GBP million Mosaic Group 2005-06 37 notes
2. Summary of the Group's operating results by quarters: Continued 52 week period ended 29 January 2005 Q1 Q2 Q3 Q4 31.01-01.05 02.05-31.07 01.08-30.10 31.10-29.01 Total
Sales 52.3 68.8 85.3 103.2 309.6 Cost of sales -20.0 -29.6 -31.3 -42.8 -123.7
Gross profit 32.3 39.2 54.0 60.4 185.9
Distribution costs -21.3 -26.7 -34.0 -40.4 -122.4 Administrative expenses before acquisition, integration & professional charges relating to flotation -5.8 -6.1 -8.7 -9.2 -29.8 Acquisition, integration & professional charges relating to flotation – -0.7 -0.4 -3.1 -4.2 Total administrative expenses -5.8 -6.8 -9.1 -12.3 -34.0
Operating profit before financing costs 5.2 5.7 10.9 7.7 29.5 Share of operating loss in associate -0.1 -0.2 -0.3 – -0.6
5.1 5.5 10.6 7.7 28.9
Interest receivable and similar income – – 0.1 0.2 0.3
Financing costs before refinancing -3.6 -5.4 -4.1 -6.8 -19.9 Cost resulting from refinancing – – – – –
Total financing costs -3.6 -5.4 -4.1 -6.8 -19.9
Profit before tax 1.5 0.1 6.6 1.1 9.3 Income tax expense -0.6 0.8 -1.5 -2.2 -3.5
Profit after tax 0.9 0.9 5.1 -1.1 5.8 Preference dividends declared -0.8 -1.1 -0.9 -0.6 -3.4
Profit for the period 0.1 -0.2 4.2 -1.7 2.4
All profits are solely attributable to the equity holders of the Parent. Administrative expenses of GBP 11.9 million for the 52 week period ended 29 January 2005 have been reclassified, with a consequential adjustment in cost of sales. The comparative period ended 29 January 2005 included only seven months' trading for Karen Millen and Whistles following the acquisition in June 2004 (see note b).
Distribution costs and administrative expenses 3. Distribution costs and administrative expenses are specified as follows: 2006 2005 30.01-28.01 01.02-29.01
Salaries and salary related expenses 70.3 53.3 Other distribution costs and administrative expenses 123.7 92.7 Depreciation of operating assets and amortisation of intangible assets 12.4 10.4
Total distribution costs and administrative expenses 206.4 156.4
4. Salaries and salary related expenses are specified as follows: 2006 2005 30.01-28.01 01.02-29.01
Salaries 64.8 49.2 Social security costs 5.3 3.9 Pension costs 0.2 0.2
Total salaries and salary related expenses 70.3 53.3
Average number of employees 6,236 5,394
Amounts are in GBP million 38 Mosaic Group 2005-06 5. Salaries and salary related expenses paid to the Board of Directors for their work for companies within the Group and their ownership in the Company are specified as follows: Nominal share value ownership at the Salaries period end
Stewart Binnie, Chairman of the Board 0.1 0.1 Derek Lovelock, CEO 0.4 1.9 Richard Glanville, Finance Director 0.2 1.0 Gunnar Sigurdsson, Board Member –– Thórdís Sigurdardóttir, Board Member ––
Auditors' Fees 6. Auditors' fees are specified as follows: 2006 2005 30.01-28.01 01.02-29.01
Audit of the financial statements 0.2 0.2 Review of interim financial statements 0.1 – Other services 0.7 0.8
Total auditors' fees 1.0 1.0
Financing costs 7. Finance costs are specified as follows: 2006 2005 30.01-28.01 01.02-29.01
Amortisation of loan costs 1.2 1.5 Interest payable on bank loans and overdrafts 14.0 17.8 Finance charges on bank loans and overdrafts 0.8 0.6 Fair value adjustment of derivatives 1.6 – Preference dividends paid 1.1 –
Finance cost before impact of refinancing 18.7 19.9
Accelerated amortisation of costs 3.1 – Other costs of refinancing 2.3 –
Finance costs arising from refinancing 5.4 –
Total finance costs 24.1 19.9
As stated in note 25, the exemption has been taken to not apply IAS 32/39 to the comparative numbers. For the comparitive period preference share dividends are shown under dividends in accordance with UK GAAP, whereas in the current period they are shown under interest costs in accordance with IFRS.
2006 2005 30.01-28.01 01.02-29.01
Finance costs before preference share dividends and refinancing costs 17.6 19.9 Preference share dividends – equity – 3.4 Preference share dividends – liability 1.1 – Refinancing costs 5.4 –
Finance costs after preference share dividends and refinancing costs 24.1 23.3
Amounts are in GBP million Mosaic Group 2005-06 39 notes
Income tax expense 8. Recognised in the Income Statement 2006 2005 30.01-28.01 01.02-29.01 Current tax expense: Current year 7.1 3.5 Adjustment in respect of prior years -0.3 –
6.8 3.5
Deferred tax expense: Origination and reversal of temporary differences -0.5 – Total income tax in income statement 6.3 3.5
Reconciliation of effective tax rate Profit before tax 18.9 9.3
Income tax according to current UK tax rate 30% (2005: 30%) 5.7 2.8 Non deductible expenditure 0.6 1.0 Depreciation on ineligible assets 1.1 0.5 Tax on overseas income -0.8 -0.8 Under provided in prior periods -0.3 –
Effective tax rate 6.3 3.5
Earnings per share 9. Basic earnings per share is calculated by dividing the net profit attributable to equity holders of the Company by the weighted average outstanding number of shares during the period and shows the earnings per each share. 2006 2005 30.01-28.01 01.02-29.01 Basic earnings per share Profit for the period attributable to the equity holders of the Company 12.6 2.4 Profit for the period attributable to the equity holders of the Company under UK GAAP for the comparative period 3.0
28 Jan 2006 29 Jan 2005 Number Number (millions) (millions)
Share capital at the beginning of the period 1,929 1,437 Effect of the increase of share capital during the period 639 296
Calculated average share capital 2,568 1,733
2006 2005 30.01-28.01 01.02-29.01 GBP 0.01 GBP 0.01 Earnings per share of ISK 1 0.491 0.139
Earnings per share of ISK 1 under UK GAAP for the comparative period 0.173
Amounts are in GBP million 40 Mosaic Group 2005-06 Property, plant and equipment 10. Property, plant and equipment and their depreciation is specified as follows:
Short leasehold Fixtures and Computer Motor property fittings equipment vehicles Total
Cost At 1 February 2004 1.5 41.0 10.2 0.5 53.2 Acquired on acquisition of Karen Millen Holdings Limited 3.7 32.3 3.3 0.9 40.2 Additions 0.7 15.8 1.1 0.2 17.8 Disposals -0.4 -10.6 -0.6 -0.4 -12.0
At 29 January 2005 5.5 78.5 14.0 1.2 99.2
At 30 January 2005 5.5 78.5 14.0 1.2 99.2 Additions 0.7 18.3 2.1 0.1 21.2 Disposals -0.7 -12.0 -0.1 -0.7 -13.5
At 28 January 2006 5.5 84.8 16.0 0.6 106.9
Accumulated depreciation At 1 February 2004 -2.1 -23.4 -7.3 -0.2 -33.0
Acquired on acquisition of Karen Millen Holdings Limited -1.1 -13.3 -2.2 -0.6 -17.2 Charge for the period -0.5 -7.9 -1.4 -0.1 -9.9 Disposals 0.4 8.9 0.5 0.3 10.1
At 29 January 2005 -3.3 -35.7 -10.4 -0.6 -50.0
At 30 January 2005 -3.3 -35.7 -10.4 -0.6 -50.0
Charge for the period -0.7 -10.1 -1.4 -0.2 -12.4 Disposals 0.2 5.8 – 0.4 6.4
At 28 January 2006 -3.8 -40.0 -11.8 -0.4 -56.0
Net book value At 28 January 2006 1.7 44.8 4.2 0.2 50.9
At 29 January 2005 2.2 42.8 3.6 0.6 49.2
Depreciation rate 4-10% 10-20% 20-33% 25%
Intangible Assets 11. The Group’s intangible assets are specified as follows: Brand Franchise Licence Goodwill names agreements agreements Total
Carrying amount at 31 January 2004 115.6 – – – 115.6 Acquired on acquisition of Karen Millen Holdings Limited 4.4 – – – 4.4 Created on acquisition of Karen Millen Holdings Limited 42.4 44.4 5.0 1.0 92.8 Fair value adjustments 0.1 – – – 0.1
Carrying amount at 29 January 2005 162.5 44.4 5.0 1.0 212.9 Amortisation – – -0.5 – -0.5 Fair value adjustments -0.6 – – – -0.6
Carrying amount at 28 January 2006 161.9 44.4 4.5 1.0 211.8
Amounts are in GBP million Mosaic Group 2005-06 41 notes
11. The Group’s intangible assets are specified as follows: (continued) Amortisation and impairment charge The amortisation and impairment charge is recognised in the following line items in the Income Statement:
2006 2005 30.01-28.01 01.02-29.01 Administrative expenses before acquisition, integration and professional charges relating to flotation 0.5 –
Fair value adjustments When the Group acquired the Karen Millen group in 2004, it ascribed provisional fair values to the assets and liabilities acquired in accordance with IFRS 3 and adjustments have been made during the 52 week period ended 28 January 2006. These have had the effect of decreasing goodwill by GBP 0.6 million and related primarily to the release of a provision for legal costs and an increase in stock provisions.
Impairment review The carrying amount of the Group's intangible assets were reviewed at the balance sheet date using the methodology described below: (i) Goodwill/brands/licences The recoverable amounts are based on value in use calculations. Cash flow projections, which were based on three year estimates, were used to calculate the value in use. A pre-tax discount rate of 10% has been used in discounting the cash flows. Based on this assessment, no impairment has been recognised.
(ii) Franchises The recoverable amounts are based on value in use calculations. Cash flow projections, which were based on ten year estimates, were used to calculate the value in use. A pre-tax discount rate of 10% has been used in discounting the cash flows. As disclosed in note g (ii), franchise agreements are considered to have an estimated useful life of 10 years. At the balance sheet date, 9 years remain.
12. The Group's depreciation charge in the income statement is specified as follows: Depreciation of property, plant and equipment 12.4
Investments in associates 13. The Group's investments in associates are specified as follows: Carrying Share amount
Oasis Pacific Rim Limited (incorporated in Hong Kong) 50% 0.3
Summary financial information for Oasis Pacific Rim Limited for the calendar year ended 31 December 2005: Balance sheet Assets 2.4 Liabilities -2.3 Income statement Revenue 3.6 Loss for the year -1.8 The financial information given is based on a 100% holding
Inventories 14. Inventories are specified as follows: 28 Jan 2006 29 Jan 2005
Goods for resale 36.7 23.1 Work in progress 3.1 1.9 Raw materials 3.3 3.3
Total inventories 43.1 28.3
Amounts are in GBP million 42 Mosaic Group 2005-06 Trade and other receivables 15. Trade and other receivables are specified as follows: 28 Jan 2006 29 Jan 2005
Trade receivables 13.3 9.7 Other receivables 0.7 1.9 Other taxation and social security – 0.3 Prepayments and accrued income 15.7 10.5
Total trade and other receivables 29.7 22.4
Equity 16. Share capital is specified as follows: Amount
Authorised: 2,900,461,613 Ordinary Shares of ISK 1 23.5
Issued: 2,900,461,613 Ordinary Shares of ISK 1 23.5
The movements in share capital for the period are shown below. Please refer to note b (i) which explains the background to these movements.
Share capital at 29 January 2005 37.1
Shares issued in Mosaic Fashions Limited 0.1 Conversion of existing Mosaic Fashions Limited shares to Mosaic Fashions hf. shares -37.2 Mosaic Fashions hf. shares issued to Mosaic Fashions Limited shareholders 19.3 Conversion of Mosaic Fashions Limited loan notes to Mosaic Fashions hf. shares 1.3 Shares issued in Mosaic Fashions hf. 2.9
Share capital at 28 January 2006 23.5
Non-current liabilities 17. Loans from credit institutions are specified as follows: 28 Jan 2006 29 Jan 2005
Bank loans 73.0 157.3 Unsecured loan notes – 23.3 Unsecured bond 51.9 –
124.9 180.6
Long term borrowing, including current portion 140.4 198.0 Current portion -15.5 -17.4
Total long term borrowings according to the Balance Sheet 124.9 180.6
During the period GBP 16.6 million of unsecured loan notes were exchanged for shares, and the balance was redeemed for cash. Bank loans were reduced by utilising part of the monies received from a combination of new shares issued of GBP 40.0 million and the issue of ISK 6.0 billion of quoted Icelandic Bonds, which have been swapped into GBP 51.9 million of LIBOR based borrowings.
Amounts are in GBP million Mosaic Group 2005-06 43 notes
18. Aggregated annual maturities of long term liabilities owed to credit institutions at the period end are specified as follows: 28 Jan 2006 29 Jan 2005
Year to January 2007 15.5 17.4 Year to January 2008 17.0 20.2 Year to January 2009 17.0 16.5 Year to January 2010 11.8 16.5 Year to January 2011 – 29.4 Subsequent 79.1 98.0
140.4 198.0
The carrying amount of financial assets and liabilities equate to their fair values at 29 January 2005 and 28 January 2006 The effective interest rate on the Icelandic Bond is 6.75%. The effective interest rate on the Bank of Scotland loan is 7.48% after allowing for amortisation of finance costs.
Deferred income 19. Deferred income relates primarily to lease incentives received on properties, which are being released over the life of the lease.
Deferred tax liability 20. The Group's deferred tax assets and liabilities according to the balance sheet are specified as follows: Assets Liabilities Net 28 Jan 2006 29 Jan 2005 28 Jan 2006 29 Jan 2005 28 Jan 2006 29 Jan 2005
Property, plant and equipment – – -1.5 -0.8 -1.5 -0.8 Provisions 0.3 0.2 – -0.5 0.3 -0.3 Leases 0.5 0.6 – – 0.5 0.6 Intangible assets – – -14.9 -15.1 -14.9 -15.1 Hedging reserve – – -0.2 -0.2 – Fair value of derivatives 0.5 – – – 0.5 –
Tax assets/(liabilities) 1.3 0.8 -16.6 -16.4 -15.3 -15.6
Movement in temporary differences during the period Balance at Balance at 29 January Recognised Recognised 28 January 2005 in income in equity 2006
Property, plant and equipment -0.8 -0.7 – -1.5 Provisions -0.3 0.6 – 0.3 Leases 0.6 -0.1 – 0.5 Intangible assets -15.1 0.2 – -14.9 Hedging reserve – – -0.2 -0.2 Fair value of derivatives – 0.5 – 0.5
-15.6 0.5 -0.2 -15.3
Balance at Balance at 31 January Recognised Recognised 29 January 2005 in income in equity 2006
Property, plant and equipment -0.2 -0.6 – -0.8 Provisions – 0.2 -0.5 -0.3 Leases 0.5 – 0.1 0.6 Intangible assets – – -15.1 -15.1
0.3 -0.4 -15.5 -15.6
Amounts are in GBP million 44 Mosaic Group 2005-06 Trade and other payables 21. Trade and other payables are specified as follows: 28 Jan 2006 29 Jan 2005
Trade creditors 25.0 8.8 Other creditors 5.4 2.6 Other taxation and social security 8.7 10.2 Accruals 20.1 33.5
Total trade and other payables 59.2 55.1
Commitments 22. Commitments are specified as follows: Commitments under non-cancellable operating leases for land and buildings 28 Jan 2006 29 Jan 2005
Within one year 35.8 32.9 Between two and five years 131.2 129.9 Over five years 172.5 150.1
339.5 312.9
Related parties Identity of related parties 23. The Group has a related party relationship with its subsidiaries and its associate, and with its directors and executive officers and with its major shareholder, BG Holding ehf.. Transactions with key management personnel and major shareholders Directors of the Company and their relatives control 12.3% of the voting shares. BG Holding ehf. controls 36.8% of the voting shares. Other related party transactions Associates During the 52 week period ended 28 January 2006, the associate purchased goods from the Group in the amount of GBP 0.3 million and at 28 January 2006 the associate owed the Group GBP 0.8 million.
Group entities 24. Entities in the Group are specified as follows: Share Share Name Country of incorporation 2006 2005
Mosaic Fashions Limited UK 100% – Patsy Limited UK 100% 100% Noel Acquisitions Limited UK 100% 100% Sierra Holdings Limited UK 100% 100% Sierra Acquisitions Limited UK 100% 100% Oasis Stores Limited UK 100% 100% Mosaic Fashions (Ireland) Limited Ireland 100% 100% Stanton Harcourt International Centre Limited UK 100% 100% Sonora Holdings Limited UK 100% 100% Mohave Limited UK 100% 100% Karen Millen Holdings Limited UK 100% 100% Karen Millen Limited UK 100% 100% Karen Millen Belgium SPRL Belgium 100% 100% Karen Millen Denmark APS Denmark 100% 100% Karen Millen Deutschland GmbH Germany 100% 100% Karen Millen France SARL France 100% 100% Karen Millen Holland BV Holland 100% 100% Karen Millen (Hong Kong) Limited Hong Kong 100% 100% Karen Millen Sweden AB Sweden 100% 100% Karen Millen US Limited UK 100% 100% Press & Bastyan Limited UK 100% 100% Whistles Limited UK 100% 100% Whistles (Bicester) Limited UK 100% 100% Whistles International Limited UK 100% 100%
Amounts are in GBP million Mosaic Group 2005-06 45 notes
Changes due to Adoption of International Financial Reporting Standards 25. As stated in the notes regarding significant accounting policies, these are the Group's consolidated Financial Statements prepared in accordance with IFRS. The accounting policies set out in the notes regarding significant accounting policies have been applied in preparing the Financial Statements for the period, the comparative information presented in these Financial Statements for the 52 week period ended 29 January 2005 and in the preparation of an opening IFRS Balance Sheet at 1 February 2004 (the Group’s date of transition, except as noted below in respect of IAS 32 and IAS 39).
In preparing its opening IFRS Balance Sheet, the Group has adjusted amounts reported previously in Financial Statements prepared in accordance with its old basis of accounting (UK GAAP). An explanation of how the transition from UK GAAP to IFRS has affected the Group’s financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables.
The rules for the first time adoption of IFRS are set out in IFRS 1 'First-time adoption of International Financial Reporting Standards'. In general, a company is required to determine its IFRS accounting policies and apply these retrospectively to determine its opening Balance Sheet under IFRS. A number of exceptions from retrospective application are allowed to assist companies as they move to reporting under IFRS. Where the group has taken advantage of the exemptions they are noted below.
Equity 29 January 2005 31 Jan 2004 29 Jan 2005
Equity according to UK GAAP 30.7 65.9 Equity according to IFRS 29.0 64.2
Net change from UK GAAP -1.7 -1.7
Changes in measurements 31 Jan 2004 29 Jan 2005 Total
Amortisation of lease incentives IAS17 -1.0 – -1.0 Fair value adjustment of business combination IFRS3 – -0.2 -0.2 Deferred tax -0.7 0.2 -0.5
Net change from UK GAAP to IFRSs -1.7 – -1.7
Changes in equity are stated after the deduction of income tax
Changes in presentation: Change in classification of lease incentives and upfront cost IAS17 3.6 Change in classification of intangible assets from goodwill IFRS3 50.4 Reclassification of special purpose entities SIC12 1.7
55.7
Changes in measurements Under IAS 17 lease incentives should be released over the lease term rather that the period to the first rent review. As a result the Group's equity decreased by GBP 1.0 million. Comparative amounts in the Income Statement in the Interim Financial Statements have been amended accordingly.
Goodwill created on business combinations after 1 February 2004 was re-evaluated as a result of applying accounting policies consistent with IFRS in the entities acquired. As a result the Group's equity decreased by GBP 0.2 million.
Changes in presentation At the implementation of IFRS, assets which fulfil the definition of lease incentives and upfront cost according to IAS 17, but were previously classified as operating fixed assets, have been transferred to current and non-current prepayments. These assets amount to a total of GBP 3.6 million, GBP 3.4 million being reclassified within Prepayments and GBP 0.2 million within Trade and other receivables.
Assets which fulfil the definition of intangible assets according to IAS 38, but were previously included in goodwill have been transferred to intangible assets. These assets amount to a total of GBP 50.4 million, with a related deferred tax provision of GBP 15.1million.
Under SIC 12, the Group's Employee Benefit Trust will be treated as a special purpose entity. Contributions made previously to the trust have been reclassified as own shares held to a total of GBP 1.2 million.
Amounts are in GBP million 46 Mosaic Group 2005-06 25. Continued Balance Sheet 29 January 2005 UK GAAP IFRS IFRS 29 Jan 2005 adjustments 29 Jan 2005
Assets Goodwill 197.7 -35.2 162.5 Other intangible assets – 50.4 50.4 Property, plant and equipment 52.8 -3.6 49.2 Investments in associates 0.2 – 0.2 Prepayments – 3.4 3.4
250.7 15.0 265.7
Inventories 28.3 – 28.3 Trade and other receivables 22.2 0.2 22.4 Cash and cash equivalents 21.9 – 21.9
72.4 0.2 72.6
Total assets 323.1 15.2 338.3
Equity and liabilities Equity: Issued capital -37.1 – -37.1 Share premium -23.0 – -23.0 Own shares held – 1.7 1.7 Retained earnings -5.8 – -5.8
Total equity -65.9 1.7 -64.2
Liabilities: Long term borrowings -180.6 – -180.6 Deferred income -0.9 -1.9 -2.8 Deferred tax -0.6 -15 -15.6
-182.1 -16.9 -199.0
Current portion of non-current liabilities -17.4 – -17.4 Trade and other payables -55.1 – -55.1 Deferred income -1.8 – -1.8 Current tax payable -0.8 – -0.8
-75.1 – -75.1
Total liabilities -257.2 -16.9 -274.1
Total equity and liabilities -323.1 -15.2 -338.3
Balance sheet changes are presented without the effect of income tax. Changes in equity are presented taking income tax into account.
The Group has taken the exemption not to restate comparatives for IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition and Measurement'. As a result, the comparative information for the 52 week period ended 29 January 2005 is presented on the previously existing UK GAAP basis.
The Group has adopted IAS 32 and IAS 39 in the 52 week period ended 28 January 2006. The following changes in policy were implemented as at the first day of the current period: – Preference shares are treated as Equity in the comparative period and as a liability up to the point of the Reverse acquisition in the current period. – Accordingly, the dividends relating to these shares have been treated as a dividend declared in the comparative period (£3.4m) and interest expense in the current period (£1.2m). – Derivatives in place at the end of the comparative period were fair valued and a hedging reserve created (£0.4m).
Amounts are in GBP million Mosaic Group 2005-06 47 notes
25. Continued The net effect on equity is shown below: Equity at 29 January 2005 64.2 Reclassification of preference shares -35.8 Dividends declared in prior period -3.4 Derivatives -0.4
Revised opening equity at 30 January 2005 24.6
Income Statement for the 52 week period ended 29 January 2005 IFRS UK GAAP adjustments IFRS
Sales 309.6 – 309.6 Cost of sales -123.7 – -123.7
Gross profit 185.9 – 185.9
Distribution cost -122.4 – -122.4 Administrative expenses before acquisition, integration and flotation charges -31.1 1.3 -29.8 Acquisition, integration and professional charges relating to flotation -4.2 – -4.2
Total administrative expenses -35.3 1.3 -34.0
Operating profit 28.2 1.3 29.5 Share of operating loss in associate -0.6 – -0.6
27.6 1.3 28.9 Interest receivable and similar income 0.3 – 0.3 Financing costs -18.0 -1.9 -19.9
Profit before tax 9.9 -0.6 9.3 Income tax expense -3.5 – -3.5
Profit after tax 6.4 -0.6 5.8
Net profit attributable to the shareholders of the Parent decreases by GBP 0.6 million in the comparative figures for the 52 week period ended 29 January 2005, due to the adoption of the standards.
Ratios 26. The Group's primary ratios are specified as follows: 2006 2005 30.01-28.01 01.02-29.01
Income statement EBITDA 59.2 43.5 EBIT 46.2 33.1
EBITDA for the 52 week period ended 28 Janaury 2006 and the 52 week period ended 29 January 2005 is adjusted for acquisition, integration and professional charges relating to the flotation.
28 Jan 2006 29 Jan 2005
Balance sheet Current ratio – current assets/current liabilities 1.1 0.9 Equity ratio – equity/capital employed (capital employed is defined as total assets) 37.3% 19.0% Return on equity 9.3% 9.0%
Amounts are in GBP million 48 Mosaic Group 2005-06 contents
Overview 1 Chairman’s statement 4 CEO’s statement 6
Oasis 8 Karen Millen 10 Coast 12 Whistles 14
Future growth 16
Finance Director’s report 20 Board of directors 22 Corporate responsibility 23 Corporate governance 24
Financial statements 26
Designed and produced by Loewy Group +44 (0)20 7798 2000 00 01 02 03 04 05 06 07 08 09 Mosaic Fashions hf. Annual Report and Accounts M o s a i c F a s h i o n s h f . A n n u a l R e p o r t a n d A c c o u n t s 2 0 0 5 - 0 6
Mosaic Fashions hf. 69-77 Paul Street London EC2A 4PN United Kingdom