ELECTRONIC TRANSMISSION DISCLAIMER STRICTLY NOT TO BE FORWARDED TO ANY OTHER PERSONS IMPORTANT: You must read the following disclaimer before continuing. This electronic transmission applies to the attached prospectus relating to Card Factory plc (the “Company”) dated 15 May 2014 (the “document” or “Prospectus”) and you are therefore advised to read this disclaimer carefully before reading, accessing or making any other use of the attached document accessed from this page or otherwise received as a result of such access. In accessing the attached document, you agree to be bound by the following terms and conditions, including any modifications to them from time to time, each time you receive any information from us as a result of such access. You acknowledge that this electronic transmission and the delivery of the attached document is confidential and intended for you only and you agree you will not forward, reproduce, copy, download or publish this electronic transmission or the attached document (electronically or otherwise) to any other person. This Prospectus has been prepared solely in connection with the offer to certain institutional and certain other investors (the “Offer”) of ordinary shares (the “Shares”) of the Company. The Prospectus has been published in connection with the admission of the securities to the Official List of the UK Financial Conduct Authority (the “Financial Conduct Authority”) and to trading on the London Stock Exchange plc’s main market for listed securities (together, “Admission”). The Prospectus has been approved by the Financial Conduct Authority as a prospectus prepared in accordance with the Prospectus Rules made under section 73A of the FSMA. The Prospectus has been published and is available from the Company’s registered office and on the Company’s website at http://www.cardfactoryinvestors.com. Pricing information and other related disclosures have been published on this website. Prospective investors are advised to access such information prior to making an investment decision. The document and the Offer are only addressed to and directed at persons in member states of the European Economic Area (“EEA”) who are “qualified investors” within the meaning of Article 2(l)(e) of the Prospectus Directive (Directive 2003/71/EC and amendments thereto, including Directive 2010/73/EU, to the extent implemented in the Relevant Member State of the EEA) and any implementing measure in each Relevant Member State of the EEA (the “Prospectus Directive”) (“Qualified Investors”). In addition, in the United Kingdom (“UK”), this document is being distributed only to, and is directed only at, Qualified Investors (i) who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”) and Qualified Investors falling within Article 49(2)(a) to (d) of the Order and (ii) to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This document must not be acted on or relied on (i) in the UK, by persons who are not relevant persons and (ii) in any member state of the EEA other than the UK, by persons who are not Qualified Investors. 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THE SECURITIES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE “SECURITIES ACT”) OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES OR IN ANY OTHER JURISDICTION AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE UNITED STATES EXCEPT (1) IN RELIANCE ON RULE 144A UNDER THE U.S. SECURITIES ACT OF 1933 (THE “SECURITIES ACT”) OR PURSUANT TO ANOTHER EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT TO A PERSON THAT THE HOLDER AND ANY PERSON ACTING ON ITS BEHALF REASONABLY BELIEVES IS A QIB OR (2) IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. YOU ARE NOT AUTHORISED TO AND MAY NOT FORWARD OR DELIVER THE ATTACHED DOCUMENT, ELECTRONICALLY OR OTHERWISE, TO ANY OTHER PERSON OR REPRODUCE SUCH DOCUMENT IN ANY MANNER WHATSOEVER, ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THE ATTACHED DOCUMENT IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS. Confirmation of your representation: By accepting electronic delivery of this document, you are deemed to have represented to Morgan Stanley & Co. International plc, Morgan Stanley Securities Limited, UBS Limited, Nomura International plc and Investec Bank plc (collectively, the “Banks”), the Company, CCP IX LP No.1, CCP IX LP No.2, CCP IX Co-Investment LP and certain individual shareholders comprising current and former members of Management to the extent that such persons elect to dispose of a portion of their Shares as part of the Offer (the “Selling Shareholders”) that: (i) you are acting on behalf of, or you are either (a) an institutional investor outside the United States (as defined in Regulation S under the Securities Act, or (b) in the United States and a qualified institutional buyer (“QIB”) that is acquiring securities for your own account or for the account of another QIB; (ii) if you are in the UK, you are a relevant person; (iii) if you are in any member state of the EEA other than the UK, you are a Qualified Investor; (iv) the securities acquired by you in the Offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, any person in circumstances which may give rise to an offer of any securities to the public other than their offer or resale in any member state of the EEA which has implemented the Prospectus Directive to Qualified Investors (as defined in the Prospectus Directive); and (v) if you are outside the U.S., UK and EEA (and the electronic mail addresses that you gave us and to which this document has been delivered are not located in such jurisdictions) you are a person into whose possession this document may lawfully be delivered in accordance with the laws of the jurisdiction in which you are located. This document has been made available to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently none of the Company, the Selling Shareholders, the Banks or any of their respective affiliates, directors, officers, employees or agents accepts any liability or responsibility whatsoever in respect of any difference between the document distributed to you in electronic format and any hard copy version. By accessing the linked document, you consent to receiving it in electronic form. A hard copy of the document will be made available to you only upon request. 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None of the Banks or any of their respective affiliates, or any of their respective directors, officers, employees or agents accepts any responsibility whatsoever for the contents of this document or for any statement made or purported to be made by it, or on its behalf, in connection with the Company or the Offer. The Banks and any of their respective affiliates accordingly disclaim all and any liability whether arising in tort, contract, or otherwise which they might otherwise have in respect of such document or any such statement. No representation or warranty, expressed or implied, is made by any of the Banks or any of their respective affiliates as to the accuracy, completeness, reasonableness or sufficiency of the information set out in this document. The Banks are acting exclusively for the Company and no one else in connection with the Offer. They will not regard any other person (whether or not a recipient of this document) as their client in relation to the Offer and will not be responsible to anyone other than the Company for providing the protections afforded to their clients nor for giving advice in relation to the Offer or any transaction or arrangement referred to herein. You are responsible for protecting against viruses and other destructive items. Your receipt of this document via electronic transmission is at your own risk and it is your responsibility to take precautions to ensure that it is free from viruses and other items of a destructive nature.
Prospectus dated 15 May 2014 This document comprises a prospectus (“Prospectus”) relating to Card Factory plc (the “Company”) prepared in accordance with the prospectus rules (the “Prospectus Rules”) of the Financial Conduct Authority (the “FCA”) made under section 73A of the Financial Services and Markets Act 2000 (as amended) (the “FSMA”), has been filed with the FCA and has been made available to the public in accordance with section 3.2 of the Prospectus Rules. Application has been made to the FCA in its capacity as competent authority under the FSMA (the “UKLA”) for all of the ordinary shares in the capital of the Company (the “Ordinary Shares”), issued and to be issued, to be admitted to the premium listing segment of the Official List of the FCA (the “Official List”) and to London Stock Exchange plc (the “London Stock Exchange”) for such Shares to be admitted to trading on the London Stock Exchange’s main market for listed securities (together “Admission”). Admission to trading on the London Stock Exchange’s main market for listed securities constitutes admission to trading on a regulated market. In the Offer, 40,000,000 new Ordinary Shares (the “New Shares”) are being issued by the Company and 91,834,049 existing Ordinary Shares (the “Existing Shares” and, together with the New Shares, the “Shares”) are being sold by the Selling Shareholders (as defined below) to certain institutional, professional and other investors (the “Offer”). Conditional dealings in the Shares are expected to commence on the London Stock Exchange on 15 May 2014. It is expected that Admission will become effective, and that unconditional dealings will commence in the Shares on the London Stock Exchange, at 8.00 a.m. (London time) on 20 May 2014. All dealings in the Shares prior to the commencement of unconditional dealings will be of no effect if Admission does not take place and such dealings will be at the sole risk of the parties concerned. No application has been, or is currently intended to be, made for the Ordinary Shares to be admitted to listing or trading on any other stock exchange. The Company and its Directors (whose names appear on page 64 of this Prospectus) accept responsibility for the information contained in this Prospectus. To the best of the knowledge and belief of the Company and the Directors (who have taken all reasonable care to ensure that such is the case), the information contained in this Prospectus is in accordance with the facts and contains no omission likely to affect the import of such information. Prospective investors are advised to examine all the risks that might be relevant in connection with an investment in the Shares. Prospective investors should read the entire Prospectus, and in particular Part I (Risk Factors), for a discussion of certain risk and other factors that should be considered in connection with any investment in the Shares. Prospective investors should be aware that an investment in the Company involves a degree of risk and that, if certain of the risks described in the Prospectus occur, investors may find their investment materially adversely affected. Accordingly, an investment in the Shares is only suitable for investors who are particularly knowledgeable in investment matters and who are able to bear the loss of the whole or part of their investment.
Card Factory plc (incorporated under the Companies Act 2006 and registered in England and Wales with registered number 9002747) Prospectus Offer of 131,834,049 Shares at an Offer Price of 225 pence per Share and admission to the premium listing segment of the Official List and to trading on the Main Market of the London Stock Exchange Joint Sponsors and Joint Global Co-ordinators Morgan Stanley UBS Investment Bank Joint Bookrunners Morgan Stanley UBS Investment Bank Nomura Joint Lead Manager Investec
Share capital immediately following Admission Number of Issued Ordinary Shares Nominal value of Issued Ordinary Shares 340,696,235 £3,406,962.35 Shares of £0.01 each Morgan Stanley & Co. International plc (“Morgan Stanley”) and UBS Limited (“UBS”) as joint sponsors (the “Joint Sponsors”) and Morgan Stanley Securities Limited and UBS as joint global co-ordinators (the “Joint Global Co-ordinators”) and Morgan Stanley Securities Limited, UBS and Nomura International plc (“Nomura”) (together the “Joint Bookrunners”) and Investec Bank plc (the “Joint Lead Manager” and, together with the Joint Bookrunners, the “Underwriters”) are authorised by the Prudential Regulation Authority (“PRA”) and regulated in the UK by the PRA and the FCA, and are acting exclusively for the Company and no one else in connection with the Offer, and will not regard any other person (whether or not a recipient of this Prospectus) as a client in relation to the Offer and will not be responsible to anyone other than the Company for providing the protections afforded to their respective clients nor for giving advice in relation to the Offer or any transaction or arrangement referred to in this Prospectus. The Underwriters and any of their respective affiliates may have engaged in transactions with, and provided various investment banking, financial advisory and other services for, the Company for which they would have received customary fees. In connection with the Offer, Morgan Stanley Securities Limited as Stabilising Manager, or any of its agents, may (but will be under no obligation to), to the extent permitted by applicable law, over-allot Shares or effect other transactions with a view to supporting the market price of the Shares at a higher level than that which might otherwise prevail in the open market. The Stabilising Manager is not required to enter into such transactions and such transactions may be effected on any securities market, over-the-counter market, stock exchange or otherwise and may be undertaken at any time during the period commencing on the date of the commencement of conditional dealings of the Shares on the London Stock Exchange and ending no later than 30 calendar days thereafter. However, there will be no obligation on the Stabilising Manager or any of its agents to effect stabilising transactions and there is no assurance that stabilising transactions will be undertaken. Such stabilisation, if commenced, may be discontinued at any time without prior notice. In no event will measures be taken to stabilise the market price of the Shares above the Offer Price. Except as required by law or regulation, neither the Stabilising Manager nor any of its agents intends to disclose the extent of any over-allotments made and/or stabilisation transactions conducted in relation to the Offer. In connection with the Offer, the Stabilising Manager may, for stabilisation purposes, over-allot Shares up to a maximum of 10 per cent. of the total number of Shares comprised in the Offer. For the purposes of allowing the Stabilising Manager to cover short positions resulting from any such over-allotments and/or from sales of Shares effected by it during the stabilising period, the Principal Shareholders have granted to it the Over-allotment Option, pursuant to which the Stabilising Manager may purchase or procure purchasers for additional Shares up to a maximum of 10 per cent. of the total number of Shares comprised in the Offer (the “Over-allotment Shares”) at the Offer Price. The Over-allotment Option is exercisable in whole or in part, upon notice by the Stabilising Manager, at any time on or before the 30th calendar day after the commencement of conditional dealings of the Shares on the London Stock Exchange. Any Over-allotment Shares made available pursuant to the Over-allotment Option will rank pari passu in all respects with the Shares, including for all dividends and other distributions declared, made or paid on the Shares, will be purchased on the same terms and conditions as the Shares being issued or sold in the Offer and will form a single class for all purposes with the other Shares. The number of issued Ordinary Shares and the nominal value of the issued Ordinary Shares as set out on the cover of this Prospectus include the issuance of the Residual Management Equity following Admission. Recipients of this Prospectus are authorised solely to use this Prospectus for the purpose of considering the acquisition of the Shares, and may not reproduce or distribute this Prospectus, in whole or in part, and may not disclose any of the contents of this Prospectus or use any information herein for any purpose other than considering an investment in the Shares. Such recipients of this Prospectus agree to the foregoing by accepting delivery of this Prospectus. This Prospectus does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, any securities other than the securities to which it relates or any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, such securities by any person in any circumstances in which such offer or solicitation is unlawful. Apart from the responsibilities and liabilities, if any, which may be imposed on any of the Underwriters by the FSMA or the regulatory regime established thereunder, or under the regulatory regime of any jurisdiction where the exclusion of liability under the relevant regulatory regime would be illegal, void or unenforceable, none of the Underwriters accepts any responsibility whatsoever for, or makes any representation or warranty, express or implied, as to the contents of this Prospectus or for any other statement made or purported to be made by it, or on its behalf, in connection with the Company, the Shares or the Offer and nothing in this Prospectus will be relied upon as a promise or representation in this respect, whether or not to the past or future. Each of the Underwriters accordingly disclaims all and any responsibility or liability, whether arising in tort, contract or otherwise (save as referred to above), which it might otherwise have in respect of this Prospectus or any such statement.
2 Prior to making any decision as to whether to invest in the Shares, prospective investors should read this Prospectus in its entirety. In making an investment decision, each investor must rely on their own examination, analysis and enquiry of the Company and the terms of the Offer, including the merits and risks involved. The investors also acknowledge that: (i) they have not relied on the Underwriters or any person affiliated with the Underwriters in connection with any investigation of the accuracy of any information contained in this Prospectus or their investment decision; and (ii) they have relied only on the information contained in this Prospectus and that no other person has been authorised to give any information or to make any representation concerning the Group or the Shares (other than as contained in this Prospectus) and, if given or made, any such other information or representation should not be relied upon as having been authorised by the Company, the directors, the Selling Shareholders or any of the Underwriters. No person has been authorised to give any information or make any representations other than those contained in this Prospectus and, if given or made, such information or representations must not be relied on as having been so authorised. Neither the delivery of this Prospectus nor any subscription or sale made under it shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date of this Prospectus or that the information in it is correct as of any subsequent time. None of the Company, the Selling Shareholders, the Underwriters or any of their respective representatives, is making any representation to any prospective investor of the Shares regarding the legality of an investment in the Shares by such prospective investor under the laws applicable to such prospective investor. The contents of the Prospectus should not be construed as legal, financial or tax advice. Each prospective investor should consult his, her or its own legal, financial or tax adviser for legal, financial or tax advice and related aspects of a purchase of the Shares.
3 NOTICE TO CERTAIN INVESTORS
The Shares are subject to selling and transfer restrictions in certain jurisdictions. Prospective subscribers or purchasers should read the restrictions described in Section 8 (Selling and Transfer Restrictions) of Part XIV (Details of the Offer). Each subscriber or purchaser of the Shares will be deemed to have made the relevant representations described therein.
The distribution of this Prospectus and the offer of the Shares in certain jurisdictions may be restricted by law. Neither the Company nor any of the Underwriters accepts any legal responsibility for any violation by any person, whether or not a prospective investor, of any such restrictions. No action has been or will be taken by the Company, the Selling Shareholders or the Underwriters to permit a public offering of the Shares or to permit the possession or distribution of this Prospectus (or any other offering or publicity materials relating to the Shares) in the UK or any other jurisdiction, where action for that purpose may be required. Accordingly, neither this Prospectus nor any advertisement or any other offering material may be distributed or published in any jurisdiction except under circumstances that will result in compliance with any applicable laws and regulations. Persons into whose possession this Prospectus comes should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction.
In particular, no actions have been taken to allow for a public offering of the Shares under the applicable securities laws of any jurisdiction, including Australia, Canada, Japan or the United States. This Prospectus does not constitute an offer of, or the solicitation of an offer to subscribe for or buy any of, the Shares in any jurisdiction where it is unlawful to make such offer or solicitation.
Notice to United States Investors The Shares have not been, and will not be, registered under the U.S. Securities Act of 1933 (the “Securities Act”) or the securities laws of any state of the United States or any other jurisdiction. The Shares offered by this Prospectus may not be offered or sold in the United States, except to QIBs as defined in, and in reliance on, Rule 144A under the Securities Act (“Rule 144A”) or pursuant to another exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Shares are being offered and sold outside the United States in compliance with Regulation S under the Securities Act (“Regulation S”). Prospective investors are hereby notified that the sellers of the Shares may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A.
THE SHARES OFFERED BY THIS PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE “SEC”), ANY STATE SECURITIES COMMISSION IN THE UNITED STATES OR ANY OTHER UNITED STATES REGULATORY AUTHORITY, NOR HAVE ANY SUCH AUTHORITIES PASSED UPON, OR ENDORSED THE MERITS OF, THE OFFER OR THE ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE IN THE UNITED STATES.
Notice to New Hampshire Residents NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENCE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES (“RSA 421-B”) WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE,
4 TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
Available Information For so long as any of the Shares are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, the Company will, during any period in which it is not subject to Section 13 or 15(d) under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”), nor exempt from reporting under the Exchange Act pursuant to Rule 12g3-2(b) thereunder, make available to any holder or beneficial owner of a Share, or to any prospective purchaser of a Share designated by such holder or beneficial owner, the information specified in, and meeting the requirements of, Rule 144A(d)(4) under the Securities Act.
Service of Process and Enforcement of Civil Liabilities The Company is incorporated under the laws of England and Wales. None of the Directors and executive officers of the Company are residents of the United States, and all of the assets of the Company and such persons are currently located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon the Company or such persons or to enforce against any of them in the U.S. courts judgments obtained in U.S. courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any State or territory within the United States.
5 TABLE OF CONTENTS
Page
NOTICE TO CERTAIN INVESTORS 4
SUMMARY INFORMATION 7
PART I: RISK FACTORS 22
PART II: PRESENTATION OF FINANCIAL AND OTHER INFORMATION 33
PART III: DIRECTORS, SECRETARY, REGISTERED AND HEAD OFFICE AND ADVISERS 39
PART IV: EXPECTED TIMETABLE OF PRINCIPAL EVENTS AND OFFER STATISTICS 41
PART V: BUSINESS OF THE GROUP 42
PART VI: MARKET OVERVIEW 58
PART VII: DIRECTORS, MANAGEMENT AND CORPORATE GOVERNANCE 64
PART VIII: REASONS FOR THE OFFER AND DIVIDEND POLICY 69
PART IX: SELECTED FINANCIAL INFORMATION 70
PART X: OPERATING AND FINANCIAL REVIEW 74
PART XI: CAPITALISATION AND INDEBTEDNESS STATEMENT 91
PART XII: HISTORICAL FINANCIAL INFORMATION 92
PART XIII: UNAUDITED PRO FORMA FINANCIAL INFORMATION 137
PART XIV: DETAILS OF THE OFFER 141
PART XV: TAXATION 150
PART XVI: ADDITIONAL INFORMATION 158
PART XVII: DEFINITIONS 188
6 SUMMARY INFORMATION
Summaries are made up of disclosure requirements known as “Elements”. These Elements are numbered in Sections A to E (A.1 to E.7).
This summary contains all the Elements required to be included in a summary for this type of securities and issuer. Because some Elements are not required to be addressed, there may be gaps in the numbering sequence of the Elements.
Even though an Element may be required to be inserted in the summary because of the type of securities and issuer, it is possible that no relevant information can be given regarding the Element. In this case, a short description of the Element is included in the summary with the mention of “not applicable”.
Section A – Introduction and warnings Annexes and Element Disclosure requirement
A.1 Warning This summary should be read as an introduction to the Prospectus. Any decision to invest in the Shares should be based on consideration of the Prospectus as a whole by the investor. Where a claim relating to the information contained in the Prospectus is brought before a court, the plaintiff investor might, under the national legislation of the Member States of the European Economic Area, be required to bear the costs of translating the Prospectus before legal proceedings are initiated. Civil liability attaches only to those persons who have tabled the summary, including any translation thereof, but only if the summary is misleading, inaccurate or inconsistent when read together with the other parts of the Prospectus or it does not provide, when read together with the other parts of the Prospectus, key information in order to aid investors when considering whether to invest in the Shares.
A.2 Subsequent resale Not applicable. The Company is not engaging any financial of securities or intermediaries for any resale of securities or final placement of final placement of securities after publication of the Prospectus. securities through financial intermediaries
Section B – Issuer and any guarantor Annexes and Element Disclosure requirement
B.1 Legal and Card Factory plc (the “Company” and, together with its subsidiaries, the commercial name “Group”)
B.2 Domicile and legal The Company is a public limited company, incorporated in England and form Wales with its registered office situated in England and Wales. The Company operates under the Companies Act 2006.
B.3 Operations and The Group is the UK’s leading specialist retailer of greeting cards. The principal activities Company focuses on the value and mid-market segments of the UK’s greeting cards market, offering a wide range of quality products at affordable prices principally through its nationwide chain of Card Factory stores, as well as its online offerings, www.gettingpersonal.co.uk and www.cardfactory.eu.com.
7 The Group has over 700 stores in the UK and a vertically integrated retail business model with:
(i) an in-house design team of over 40 employees, responsible for the design of nearly all products merchandised in-store;
(ii) an in-house printing facility which produces the vast majority of the non-handcrafted cards sold by the Group and has a potential capacity of 400 million cards per annum;
(iii) in-house sourcing, purchasing and quality assurance teams supporting direct sourcing of most non-card products from third- party manufacturers;
(iv) central warehousing capacity of over 360,000 square feet; and
(v) a retail operations team that ensures the consistency of product displays and range offering through the Card Factory store portfolio.
B.4a Significant recent The Group business model has consistently generated high levels of trends revenue growth and profitability. During the three financial years ended 31 January 2014, the Group’s revenue grew by a CAGR of 11.0 per cent. to £326.9 million, with EBITDA growing at a CAGR of 12.7 per cent. to £80.4 million. In the financial year ended 31 January 2014, the Group’s EBITDA margin and operating profit margin were 24.6 per cent. and 22.3 per cent., respectively.
The Group is highly cash generative, reflecting the efficiency of the Group’s business model, strong control of operating costs, low and predictable capital expenditure and limited working capital investment required to operate the business. Cash Conversion in the three financial years ended 31 January 2014 was 80.3 per cent. of EBITDA.
The Group has an unbroken track record of positive like-for-like sales growth since the Group opened its first store in 1997. This growth has been driven by a range of factors, including increasing ABV and developing and improving the quality and range of both card and non- card products.
The Group intends to expand its store portfolio organically from its existing 739 stores, to up to 1,200 stores in total over the next 10 years, at a similar rate to the Group’s historical rate of organic store openings.
The Group primarily operates in the single cards segment of the market, which OC&C estimated to be worth £1.3 billion in 2012 and which has experienced a rate of growth of 2.4 per cent. per annum, by value, over the three year period ended 31 December 2012. In the financial year ended 31 January 2014, one-third, by value, of the Group’s sales came from sales of associated gift dressings and gifts, which is a segment of the gifting market that Management estimates to be worth between £1 billion and £2 billion per annum.
The Directors believe that the market has seen a polarisation of specialist greeting card retailers between the “premium” and “mid- market/value” ends of the market.
B.5 Group description The Company is the parent company of the Group. The principal activity of the Company and all of the Company’s subsidiaries (with the
8 exception of CF Topco Limited, CF Midco Limited, CF Interco Limited, CF Bidco Limited, Short Rhyme Limited and Heavy Distance Limited, which are intermediate holding companies) is the design, production and sale of greeting cards, dressings and related gift items. Each of the Company’s subsidiaries is, directly or indirectly, wholly or substantially owned by the Company.
The Company is the principal holding company of the Group, which comprises the following principal subsidiaries:
• Sportswift Limited, a limited liability company incorporated in England and Wales, which acts as the Group’s principal operating company.
• Printcraft Limited, a limited liability company incorporated in England and Wales, which acts as the Group’s in-house manufacturing unit.
• Getting Personal Limited, a limited liability company incorporated in England and Wales, which acts as the Group’s online trading company for personalised greeting cards and gifts.
B.6 Major Shareholders Immediately following the Offer and the issuance of the Residual Management Equity, CCP IX LP No.1, CCP IX LP No.2 and CCP IX Co-Investment LP each acting through its general partner, Charterhouse General Partners (IX) Limited (the “Principal Shareholders”) will hold 22.2 per cent., 18.5 per cent. and 0.6 per cent., respectively, of the issued ordinary share capital of the Company (assuming no exercise of the over-allotment option granted by the Principal Shareholders) (the “Over-allotment Option”).
The Principal Shareholders and the Company have entered into a relationship agreement (the “Relationship Agreement”), the principal purpose of which is to ensure that the Company is capable of carrying out its business independently of the Principal Shareholders and their associates, that transactions and relationships with the Principal Shareholders and their associates are at arm’s length and on normal commercial terms (subject to the rules on related-party transactions in the Listing Rules) and to ensure the Principal Shareholders do not take any action that would prevent the Company from complying with, or would circumvent, the Listing Rules.
In accordance with the terms of the Relationship Agreement, for such time as they retain, in aggregate, an interest of 20 per cent. or more of the issued ordinary share capital of the Company (or an interest which carries 20 per cent. or more of the aggregate voting rights in the Company from time to time) the Principal Shareholders shall, together, be entitled to appoint one non-executive director to the Board.
The Relationship Agreement will terminate if the Ordinary Shares cease to be listed on the premium listing segment of the Official List and traded on the London Stock Exchange or the Principal Shareholders cease to retain, in aggregate, an interest of 20 per cent. or more of the issued ordinary share capital of the Company (or an interest which carries 20 per cent. or more of the aggregate voting rights in the Company from time to time).
9 The Ordinary Shares owned by the Principal Shareholders after Admission will rank pari passu with the other Shares in all respects.
B.7 Key financial The tables below set out summary financial information of the Group information for the years ended 31 January 2012, 2013 and 2014, as extracted from the reporting accountants’ report:
Consolidated Statement of Comprehensive Income
For the year ended 31 January 2012 2013 2014 ———— ———— ———— £’m £’m £’m Revenue 265.5 299.9 326.9 Cost of sales (183.4) (205.5) (223.3) ———— ———— ———— Gross profit 82.1 94.4 103.6 Operating expenses (24.0) (27.2) (30.7) ———— ———— ———— Operating profit 58.1 67.2 72.9 Finance income 0.2 0.4 0.5 Finance expenses (42.4) (44.6) (41.4) ———— ———— ———— Net financing expense (42.2) (44.2) (40.9) ———— ———— ———— Profit before tax 15.9 23.0 32.0 Taxation (7.7) (10.5) (12.1) ———— ———— ———— Profit for the year 8.2 12.5 19.9 ———— ———— ———— Earnings per share pence pence pence – Basic 167.1 254.5 405.1 – Diluted 167.1 254.5 405.1
Note: All financial information in this section is presented solely on an underlying basis, except where otherwise indicated, as the non-underlying items have not had a material impact on the Group’s results of operations in any of the three financial years ended 31 January 2014, and as the Group believes that underlying profit and earnings provides useful financial information for potential investors.
10 Consolidated Statement of Financial Position
As at 31 January 2012 2013 2014 ———— ———— ———— £’m £’m £’m Non-current assets Intangible assets 329.8 330.8 331.2 Property, plant and equipment 26.7 32.7 36.7 Deferred tax assets 1.4 2.0 1.2 Other receivables 1.7 1.8 1.5 Derivative financial instruments 0.3 0.5 – ———— ———— ———— 359.9 367.8 370.6 Current assets Inventories 37.5 34.6 39.3 Trade and other receivables 16.4 16.2 17.6 Derivative financial instruments 1.8 1.4 0.3 Cash and cash equivalents 37.1 64.7 40.7 ———— ———— ———— 92.8 116.9 97.9 ———— ———— ———— Total assets 452.7 484.7 468.5 ———— ———— ———— Current liabilities Borrowings (13.7) (10.6) (21.3) Trade and other payables (28.7) (26.5) (31.8) Tax payable (3.0) (6.3) (4.9) Derivative financial instruments (0.2) – (0.9) ———— ———— ———— (45.6) (43.4) (58.9) Non-current liabilities Borrowings (394.4) (414.7) (366.3) Trade and other payables (11.4) (13.1) (11.8) Derivative financial instruments (0.9) – (0.4) ———— ———— ———— (406.7) (427.8) (378.5) ———— ———— ———— Total liabilities (452.3) (471.2) (437.4) ———— ———— ———— Net assets/(liabilities) 0.4 13.5 31.1 ———— ———— ———— Equity Share capital 0.1 0.1 0.1 Share premium 4.6 4.6 4.6 Hedging Reserve – – (0.8) Retained earnings (4.3) 8.8 27.2 ———— ———— ———— Equity attributable to equity holders of the parent 0.4 13.5 31.1 ———— ———— ————
11 Consolidated Statement of Cash Flow For the year ended 31 January 2012 2013 2014 ———— ———— ———— £’m £’m £’m Cash inflow from operating activities 57.4 76.5 79.1 Corporation tax paid (7.7) (8.0) (12.1) ———— ———— ———— Net cash inflow from operating activities 49.7 68.5 67.0 Cash flows from investing activities Purchase of property, plant and equipment (12.0) (12.0) (10.6) Purchase of intangible assets (1.0) (1.7) (1.4) Acquisition of subsidiary undertaking, net of cash acquired (8.3) – – Payment of deferred consideration (0.4) (0.4) (0.5) Proceeds from sale of property, plant and equipment – 0.2 – Interest received 0.2 0.3 0.5 ———— ———— ———— Net cash outflow from investing activities (21.5) (13.6) (12.0) Cash flows from financing activities Proceeds from bank borrowings – – 159.7 Proceeds from finance leases 0.1 0.1 – Interest paid (10.0) (7.9) (108.7) Repayment of borrowings (17.7) (19.0) (129.8) Payment of finance lease liabilities (0.7) (0.5) (0.2) ———— ———— ———— Net cash outflow from financing activities (28.3) (27.3) (79.0) ———— ———— ———— Net (decrease)/increase in cash and cash equivalents (0.1) 27.6 (24.0) Cash and cash equivalents at the beginning of the year 37.2 37.1 64.7 ———— ———— ———— Closing cash and cash equivalents 37.1 64.7 40.7 ———— ———— ———— Certain significant changes to the Group’s financial condition and results of operations occurred during the three financial years ended 31 January 2014 and the period from 31 January 2014 to the date of this Prospectus. These changes are as set out below:
• The Group’s gross revenues increased from £265.5 million in the financial year ended 31 January 2012 to £326.9 million in the financial year ended 31 January 2014.
• EBITDA increased from £63.3 million in the financial year ended 31 January 2012 to £80.4 million in the financial year ended 31 January 2014.
• The Group acquired Getting Personal (www.gettingpersonal.co.uk), an online retailer of personalised gifts and cards, during the financial year ended 31 January 2012.
12 • In May 2013, the Group utilised retained cash balances to redeem loan notes and accrued interest, together totalling £47.1 million.
• The Group refinanced its senior debt in October 2013, incurring an additional £165 million of indebtedness in order to fund, together with surplus cash in hand, a partial repayment of loan notes held by the Principal Shareholders and certain members of Management and accrued interest thereon.
• The Group entered into an agreement to refinance its senior debt in April 2014, under which the Group will incur £180 million of indebtedness in order to fund, together with surplus cash in hand for general corporate purposes and proceeds from the Offer receivable by the Company, a prepayment in full of the Senior Facilities. This refinancing is conditional upon, inter alia, Admission.
Other than as set out above, there has been no significant change in the financial condition or operating results of the Group during the financial years ended 31 January 2012, 2013 and 2014 and the period since 31 January 2014, the date as of which the last published financial information of the Company was prepared.
Key Performance Indicators
Year ended 31 January 2012 2013 2014 ———— ———— ———— £’m £’m £’m EBITDA (£m) 63.3 73.6 80.4 EBITDA margin 23.8% 24.5% 24.6% Operating profit margin 21.9% 22.4% 22.3%
Year ended 31 January 2012 2013 2014 ———— ———— ———— % growth Like-for-like sales growth 1.4 3.2 3.1
B.8 Key Pro Forma The unaudited pro forma financial information set out below has been Financial prepared to illustrate the impact of the proceeds raised through the Offer Information on the consolidated net assets of the Group. The pro forma net assets statement is based on the audited consolidated net assets of the Group at 31 January 2014 and has been prepared on the basis that the Offer took place on 31 January 2014.
The unaudited pro forma financial information is compiled on the basis set out below and in accordance with the accounting policies applied in preparing the audited accounts of the Group for the financial year ended 31 January 2014.
Because of its nature, the pro forma information addresses hypothetical situations and, therefore, does not represent the Group’s actual financial position or results. It may not, therefore, give a true picture of the Group’s financial position or results nor is it indicative of the results that may, or may not, be expected to be achieved in the future. The pro forma information has been prepared for illustrative purposes only in accordance with Annex II of the Prospectus Directive Regulation.
13 Consolidated net assets Adjustments of the Adjustments for Group as at for conversion 31 January application of loan notes 2014 of proceeds to shares Pro forma Note 1 Note 2 Note 3 Note 4 ——— ——— ——— ——— £’m £’m £’m £’m Non-current assets Intangible assets 331.2 0 0 331.2 Property, plant and equipment 36.7 0 0 36.7 Deferred tax assets 1.2 0 0 1.2 Other receivables 1.5 0 0 1.5 Derivative financial instruments – 0 0 0 ——— ——— ——— ——— 370.6 0 0 370.6 Current assets Inventories 39.3 0 0 39.3 Trade and other receivables 17.6 0 0 17.6 Derivative financial instruments 0.3 0 0 0.3 Cash and cash equivalents 40.7 (26.2) 0 14.5 ——— ——— ——— ——— 97.9 (26.2) 0 71.7 ——— ——— ——— ——— Total assets 468.5 (26.2) 0 442.3 ——— ——— ——— ——— Current liabilities Borrowings (21.3) 14.1 0 (7.2) Trade and other payables (31.8) 0 0 (31.8) Tax payable (4.9) 0.7 0 (4.2) Derivative financial instruments (0.9) 0 0 (0.9) ——— ——— ——— ——— (58.9) 14.8 0 (44.1) Non-current liabilities Borrowings (366.3) 89.0 109.7 (167.6) Trade and other payables (11.8) 0 0 (11.8) Derivative financial instruments (0.4) 0 0 (0.4) ——— ——— ——— ——— (378.5) 89.0 109.7 (179.8) ——— ——— ——— ——— Total liabilities (437.4) 103.8 109.7 (223.9) ——— ——— ——— ——— Net assets 31.1 77.6 109.7 218.4 ——— ——— ——— ——— (1) The financial information of the Group has been extracted, without material adjustment, from the historical financial information as at 31 January 2014. (2) The gross proceeds of the Offer receivable by the Company, estimated to be £90 million, will be used (alongside £26.2 million of the Company’s existing cash and cash equivalent resources) for part payment of existing debt. (3) Shareholder debt instruments comprising loan notes with a value equal to £109.7 million will be exchanged for shares. (4) No adjustment has been made to reflect the trading results of the Group since 31 January 2014 or of any other change in its financial position in that period. The Directors believe that, had the Offer occurred at 31 January 2014, the consolidated income statement would have been affected. If the Offer and the application of the net proceeds therefrom to reduce the Company’s debt had taken place on 31 January 2014, it would have been earnings enhancing for the Group as a result of the reduced interest charges following the repayment of debt. (5) This pro forma statement of net assets does not constitute financial statements within the meaning of section 434 of the Companies Act 2006.
14 B.9 Profit forecast Not applicable. There is no profit forecast or estimate.
B.10 Description of the Not applicable. There are no qualifications in the reporting accountants’ nature of any report on the historical financial information. qualification in the audit report on the historical financial information
B.11 Explanation if there Not applicable. In the opinion of the Company, after taking into is insufficient consideration the net proceeds receivable by the Company from the working capital Offer, the Senior Facilities and the New Facilities available to the Group, the working capital available to the Group is sufficient for the Group’s present requirements, that is, for at least the next 12 months following the date of this Prospectus.
Section C – Securities Annexes and Element Disclosure requirement
C.1 Type and class of The Offer comprises an offering of 40,000,000 New Shares, which are securities to be issued by the Company, and 91,834,049 Existing Shares to be sold by the Selling Shareholders. The Shares to be sold in the Offer represent approximately 38.7 per cent. of the issued share capital of the Company immediately following Admission of the Ordinary Shares to trading on the London Stock Exchange’s main market for listed securities and their admission to the premium segment of the FCA’s Official List and the issuance of the Residual Management Equity. In addition, a further 13,183,404 Over-allotment Shares (representing 10 per cent. of the total number of Shares comprised in the Offer) are being made available by the Principal Shareholders, pursuant to the Over-allotment Option. The nominal value of the issued ordinary share capital of the Company immediately following Admission and issue of the Residual Management Equity will be £3,406,962.35 divided into 340,696,235 Ordinary Shares of £0.01 each, which are issued fully paid. When admitted to trading, the Shares will be registered with ISIN number GB00BLY2F708, SEDOL number BLY2F70 and trade under the symbol “CARD”.
C.2 Currency of the The currency of the issue is pounds sterling. securities issue
C.3 Issued share capital Immediately prior to Admission (following the Pre-IPO Reorganisation), there will be 296,321,235 Ordinary Shares in issue.
C.4 Description of the The Shares being sold pursuant to the Offer will, on Admission, rank rights attaching to pari passu in all respects with the other Ordinary Shares in the capital the securities of the Company in issue and will rank in full for all dividends and other distributions thereafter declared, made or paid on the share capital of the Company.
C.5 Restrictions on the Not applicable. The Shares are freely transferable and there are no free transferability restrictions on transfer. of the securities
15 C.6 Admission Application has been made to the FCA for all of the Ordinary Shares, issued and to be issued, to be admitted to the premium listing segment of the Official List of the FCA and to the London Stock Exchange for such Ordinary Shares to be admitted to trading on the London Stock Exchange’s main market for listed securities.
C.7 Dividends and The Board intends to adopt a progressive dividend policy for the dividend policy Company to reflect its strong earnings potential and cash flow characteristics, while allowing it to retain sufficient capital to fund ongoing operating requirements and to invest in the Company’s long- term growth plans. From Admission onwards, the Company intends, subject to, inter alia, available distributable profits, to pay annual dividends based on a targeted dividend cover of between 2.0 and 3.0 times the Company’s consolidated post-tax profit from its ongoing business, the first dividend being payable in relation to the financial year ending 31 January 2015.
Section D – Risks Annexes and Element Disclosure requirement
D.1 Key information Risks associated with the greeting cards, dressings and related gifts on the key risks market that are specific to • The greeting cards sector is highly competitive, including with the issuer or its respect to product selection and quality, store location and design, industry inventory, price and customer service. The Group competes at a national and local level with a wide range of retailers of varying sizes that offer competing products of varying quality and price. Some of the Group’s competitors, particularly supermarkets, general merchandise discounters and stationery retailers, may have greater market presence, name recognition, financial resources and purchasing economies of scale, any of which could give them a competitive advantage.
• The Group is vulnerable to changes in consumer preferences and cultural attitudes towards greeting cards. Consumer preferences towards greeting cards could change, and consumers could reduce their purchases of physical greeting cards or increasingly utilise e- cards and other electronic communications (via the web, email, social media or otherwise) instead of purchasing physical cards. Any changes in consumer behaviour could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
• The Group may be adversely affected by increases in stamp prices. Any such increase could increase the “all-in” price of purchasing and sending greeting cards for customers and thereby adversely affect the Group’s sales either by reducing the aggregate volumes of greeting cards it sells or by increasing the proportion of sales of its least expensive (and less profitable) lines of cards relative to its more expensive (and more profitable) lines. Increases in stamp prices could also cause consumers to increasingly use e-cards and other electronic communications (via the web, email, social media or otherwise) instead of purchasing physical cards. Any increases in stamp prices could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
16 Risks associated with the Group’s expansion plans • The Group’s ability to achieve its expansion goals will depend on a number of factors, including its continued ability to identify and secure suitable store locations on acceptable terms, open new stores in a timely manner, hire, train and retain additional store and supervisory personnel, and integrate new stores into its operations on a profitable basis. Also, there can be no assurance that the Group will be able to manage its expansion into the Republic of Ireland successfully or that its entry into this new market will not adversely affect the Group’s business, financial condition, results of operations and prospects.
• The Group may be unable to successfully grow its presence and sales online. The sales of personalised greeting cards and other merchandise online is a highly competitive business segment, and many of Getting Personal’s direct competitors in this segment, including Moonpig and Funky Pigeon, have more established brands and presence in the market. These competitors also further enhance consumer awareness of their brands via television marketing campaigns, which Getting Personal does not currently do. In addition, there can be no assurance, however, that the Group’s transactional website will deliver the anticipated growth in sales, including due to competitive factors. Any of the foregoing risks could result in increased costs, decreased revenues or a loss of opportunities for the Group and have an adverse effect on its business, financial condition, results of operations and prospects.
Risks associated with the Group’s business model • The Group’s greeting cards production is dependent on its wholly- owned subsidiary, Printcraft. Any major disruption to Printcraft’s operations, whether due to operational issues, machinery breakdowns or a failure by third-party service providers and suppliers of printing machinery to repair or service such machinery on a timely basis, or any major natural or man-made disasters affecting the facility, could severely affect the Group’s ability to supply merchandise to its stores. While the Group maintains insurance covering Printcraft’s facilities as well as business interruption insurance, any natural or man-made disaster could force it to engage third-party printing service providers to print the greeting cards that it currently produces in-house, which the Group may not be able to do on commercially acceptable terms, in a timely manner or at all. As a result, the Group remains vulnerable to any interruptions in the supply of the greeting cards produced at Printcraft, and any such interruptions could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
• The Group’s success is dependent on its logistics and distribution infrastructure. The Group relies on its warehousing and distribution facilities to supply its stores on a daily basis and maintains a significant inventory of merchandise at the warehouses. Although the Group maintains insurance covering its stored inventory as well as business interruption insurance, any natural or man-made disaster at such facilities could prevent the Group from supplying its stores on a timely basis, which could in
17 turn adversely affect its reputation and customer loyalty as well as its sales and profitability. Furthermore, the Group relies on third- party logistics companies to distribute its products from the distribution centre in Wakefield to its stores and is vulnerable to any failure by these companies to fulfil their obligations in a timely manner. Any significant disruption to the operations at the Group’s distribution and warehousing facilities in Wakefield would significantly impact its ability to maintain its supply chain and distribute products to its stores, which, if sustained, could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects. • The Group is exposed to risks related to its third-party suppliers and may be adversely affected by interruptions in supply. A failure by third-parties to supply the merchandise or raw materials that the Group orders, or a termination of, or a failure of a third-party to comply with the terms of, its supply agreement with the Group may adversely affect its business and its ability to meet customer demand, or result in it having to seek alternative suppliers, which may not be able to fulfil the Group’s requirements on commercially acceptable terms, in a timely manner or at all. These factors could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects. Risks associated with general economic conditions • The Group derives nearly all of its revenue from sales of merchandise at its physical retail stores. Accordingly, it is exposed to trends that affect high street shops, shopping centres and other retail locations. Footfall may decline due to a variety of factors outside of the Group’s control, including secular factors, such as changes in consumer shopping preferences towards new retail formats (including internet retail), or other factors including macro-economic trends. A general decline in foot traffic around the Group’s store locations would have a material adverse effect on the Group’s business, financial condition, results of operations and prospects. • The Group is exposed to increases in property costs for its retail outlets. Although, due to a recent market environment of generally declining rents in many high street and other retail locations, the Group has been able to successfully re-negotiate many of its leases at the time the applicable break clause permitted it to do so or upon the expiration of such leases and, consequently, reduce the rent, there can be no assurance that the Group will be able to do so in the future. Accordingly, property costs associated with the Group’s existing store portfolio may increase. In addition, as the Group continues to expand its store portfolio in the near to medium term, it is possible that the average market rents and business rates for new stores could exceed the average rents and business rates of stores in the Group’s existing store portfolio. These factors could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
• The majority of the Group’s employees are paid the UK national minimum wage. The Group also employs Seasonal Workers to meet increased staffing needs at times during the Christmas
18 trading period, all of whom are employed on so-called “zero-hour” contracts (whereby employees agree to be available for work as an when required by an employer with no guaranteed hours or times of work). The Government has recently announced that it has accepted the Low Pay Commission’s recommendation of a 3 per cent. rise in the adult national minimum wage to £6.50 from its current level of £6.31 and that the new level will come into force in October 2014. This increase or any further increases of the national minimum wage or increases in other wages above inflation could materially increase the Group’s operating costs. To date, the UK government has not proposed or introduced any specific legislative or regulatory actions that would curtail or limit the use of zero-hour contracts by employers in the UK. However, there is a risk that future legislative or regulatory developments will limit the Group’s ability to employ Seasonal Workers to match peak Christmas demand on zero-hour contracts or otherwise, which could increase the Group’s operating costs and reduce its operational flexibility.
• Inflation affects the Group by increasing the overall cost of the Group’s operations, including employee costs, energy costs and costs of raw materials. Although the general rate of inflation in the UK has been low in recent years, an increase in costs that is not offset by higher sales may have a negative impact on the Group’s profits.
D.3 Key information Key information on the key risks that are specific to the securities on the key risks • Immediately following the Offer and the issuance of the Residual that are specific Management Equity, assuming no exercise of the Over-allotment to the securities Option, the Principal Shareholders will together hold 41.3 per cent. of the Company’s share capital. Notwithstanding their entry into the Relationship Agreement, the Principal Shareholders, to the extent they act together, will be able to exercise control over the Company’s management and operations, and there can be no assurance that the interests of the Principal Shareholders will coincide with the interests of purchasers of the Shares.
• Subsequent sales by the Principal Shareholders (or any other substantial shareholders) of a substantial number of Ordinary Shares may significantly reduce the trading price of the Shares. Each of the Principal Shareholders and certain former members of the Group’s management who are Selling Shareholders will be subject to a lock-up for 180 days following the Closing Date subject to certain customary exceptions. Nevertheless, the Company is unable to predict whether substantial amounts of Ordinary Shares will be sold in the open market following termination or waiver by the Joint Bookrunners of these lock-up arrangements.
19 Section E – Offer Annexes and Element Disclosure requirement
E.1 Net proceeds and The net proceeds (after deducting underwriting commissions, other costs of the Offer estimated Offer related fees and expenses, and applicable taxes of approximately £10 million) from the Offer of New Shares by the Company will be approximately £80 million (assuming the maximum amount of the Underwriters’ discretionary commission and the discretionary elements of the fees of the Group’s other advisers will be paid).
The net proceeds (after deducting underwriting commissions and applicable taxes) from the Offer of 91,834,049 Existing Shares by the Selling Shareholders will be approximately £202.0 million (excluding the Over-allotment Option).
The Company will not receive any proceeds from the sale of Existing Shares by the Selling Shareholders. No expenses will be charged by the Company or the Selling Shareholders to the purchasers of the Shares.
E.2 Reasons for the In order to reduce the Company’s cost of financing, the Company Offer and use of intends to use all of the net proceeds from the Offer (£80 million) to proceeds repay part of the Group’s indebtedness under the Senior Facilities Agreement, with the remaining indebtedness under the Senior Facilities Agreement being re-financed pursuant to the New Facilities Agreement which is intended to become effective within four weeks of Admission. The Directors believe the Offer and Admission will: (i) enhance the Group’s public profile; (ii) create a liquid market in the Shares for holders of Ordinary Shares; (iii) assist in the incentivisation and retention of key Management and employees; and (iv) provide the Selling Shareholders with a partial realisation of their investment in the Company.
E.3 Terms and All Shares will be sold at the Offer Price. conditions of the Under the Offer, the Shares are being sold to certain institutional, Offer professional and other investors in the UK and elsewhere outside the United States in offshore transactions, as defined in, and in reliance on, Regulation S under the Securities Act and to QIBs in the United States in reliance on Rule 144A under the Securities Act or pursuant to another exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. The Company intends to issue 40,000,000 New Shares, and 91,834,049 Existing Shares are expected to be sold by the Selling Shareholders. In addition, a further 13,183,404 Over-allotment Shares (representing 10 per cent. of the total number of Shares comprised in the Offer) will be made available by the Principal Shareholders, pursuant to the Over-allotment Option. Admission is expected to become effective, and unconditional dealings in the Shares are expected to commence on the London Stock Exchange, at 8.00 a.m. on 20 May 2014. It is expected that dealings in the Shares will commence on a conditional basis on the London Stock Exchange at 8.00 a.m. on 15 May 2014. The earliest date for settlement
20 of such dealings will be 20 May 2014. All dealings in Shares prior to the commencement of unconditional dealings will be on a “when-issued” basis, will be of no effect if Admission does not take place and will be at the sole risk of the parties concerned. The Offer is subject to the satisfaction of conditions which are customary for transactions of this type contained in the Underwriting Agreement, including Admission becoming effective by no later than 8.00 a.m. on the Closing Date, determination of the Offer Price and the Underwriting Agreement not having been terminated prior to Admission. The Offer will be fully underwritten by the Underwriters in accordance with the terms of the Underwriting Agreement. None of the Shares may be offered for subscription, sale or purchase or be delivered, or be subscribed, sold or delivered, and this Prospectus and any other offering material in relation to the Shares may not be circulated, in any jurisdiction where to do so would breach any securities laws or regulations of any such jurisdiction or give rise to an obligation to obtain any consent, approval or permission, or to make any application, filing or registration.
E.4 Material interests Other than disclosed in B.6, there are no other interests, including conflicting interests, that are material to the Offer.
E.5 Selling Shareholder/ Each of the Principal Shareholders, Anthony Barraclough and certain Lock-up former members of the Group’s management who are Selling arrangements Shareholders are subject to a 180-day lock-up period following Admission, during which time they may not dispose of any interest in their respective Shares without the consent of the Joint Bookrunners.
For a 180-day lock-up period, the Company will not issue or dispose of any Ordinary Shares. The Directors and Management of the Company (excluding Anthony Barraclough) are subject to a 365-day lock-up period following Admission, during which time they may not dispose of any interest in their respective Ordinary Shares without the consent of the Joint Bookrunners (save for certain limited exceptions).
All lock-up arrangements are subject to certain customary exceptions.
E.6 Dilution The New Shares being issued in the Offer will represent approximately 11.7 per cent. of the expected issued share capital of the Company immediately following Admission and the issuance of the Residual Management Equity.
E.7 Expenses charged Not applicable. There are no commissions, fees or expenses to be to the investor charged to investors by the Company or the Selling Shareholders under the Offer.
21 PART I
RISK FACTORS
Investing in and holding the Shares involves financial risk. Investors in the Shares should carefully review all of the information contained in this Prospectus and should pay particular attention to the following risks associated with an investment in the Group and the Shares which should be considered together with all other information contained in this Prospectus. If one or more of the following risks were to arise, the Group’s business, financial condition, results of operations, prospects and/or its share price could be materially and adversely affected and investors could lose all or part of their investment. The risks set out below may not be exhaustive and do not necessarily comprise all of the risks associated with an investment in the Group and the Shares. Additional risks and uncertainties not currently known to the Group or which it currently deems immaterial may arise or become material in the future and may have a material adverse effect on the Group’s business, results of operations, financial condition, prospects and/or share price. Prospective investors should note that the risks relating to the Group, its industry and the Shares summarised in the section of this Prospectus headed “Summary Information” are the risks that the Company believes to be the most essential to an assessment by a prospective investor of whether to consider an investment in the Shares. However, as the risks which the Group faces relate to events and depend on circumstances that may or may not occur in the future, prospective investors should consider not only the information on key risks summarised in the section of this Prospectus headed “Summary Information” but also, among other things, the risks and uncertainties described below.
You should consult a legal adviser, an independent financial adviser or a tax adviser for legal, financial or tax advice if you do not understand this Prospectus.
1 Risks relating to the business and industry of the Group
The sector in which the Group operates is highly competitive The greeting cards sector is highly competitive, including with respect to product selection and quality, store location and design, inventory, price and customer service. The Group competes at a national and local level with a wide range of retailers of varying sizes that offer competing products of varying quality and price. The Group’s competitors include specialist greeting cards chains (including Clintons, Hallmark, Paperchase and Cards Galore), grocers (including ASDA, Tesco and Sainsbury’s), and other retailers, including generalists (including WH Smith and M&S), stationers, discount chains (including Poundland, Home Bargains and Wilkinsons) and the Post Office, which offer greeting cards alongside their other products. Some of the Group’s competitors, particularly supermarkets, general merchandise discounters and stationery retailers, may have greater market presence, name recognition, financial resources and purchasing economies of scale, any of which could give them a competitive advantage.
At present, according to OC&C, mainstream retail competitors and competing specialist greeting cards retailers may offer merchandise of comparable or superior quality to that offered by the Group, but at higher prices. Conversely, according to OC&C, general merchandise discount retailers and some specialist greeting cards retailers often compete with the Group offerings on price, but offer products that customers generally believe to be of a lower quality and offer a smaller card assortment overall. There can be no assurance, however, that these competitive dynamics will persist in the near or longer term. In particular:
• large grocers could begin to offer greeting cards at comparable or lower prices than the Group, and thereby significantly increase their market share of greeting cards sales by offering shoppers access to the same type of products the Group offers but at greater convenience;
• existing specialist greeting cards retailers could begin to offer greeting cards at comparable or lower prices than the Group while retaining the quality of their offerings;
• general merchandise discounters could improve the quality and/or breadth of their greeting cards offerings while continuing to compete with the Group on price; or
22 • new high street or internet retailers (including generalist retailers and new or existing greeting cards specialist retailers) could offer greeting cards and other merchandise at quality and prices comparable to, or superior to, the Group’s current offerings, offer customers greater variety or customisation options than the Group is able to offer, or otherwise gain market share due to changes in consumer tastes or shopping preferences.
In addition, a collapse of high street retailers could lead to an increased supply of available sites. This could lead to store openings by the Group’s competitors near to Card Factory stores.
There can be no assurance that the Group will be able to compete successfully against current competitors or future new entrants. Any of the foregoing market developments, should they materialise, could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
As an operator of physical retail stores in high street, shopping centre and other similar retail locations, the Group’s business may be adversely affected by a decline in footfall in such locations and general economic trends The Group derives nearly all of its revenue from sales of merchandise at its physical retail stores. Accordingly, it is exposed to trends that affect high street shops, shopping centres and other retail locations. Footfall may decline due to a variety of factors outside of the Group’s control, including secular factors, such as changes in consumer shopping preferences towards new retail formats (including internet retail), or other factors including macro-economic trends. A general decline in foot traffic around the Group’s store locations would have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
As a UK retailer, the Group’s business is also sensitive to general economic and business conditions and trends in consumer spending and other factors that impact the UK retail market. Retailers have in the past been, and are expected to remain, sensitive to consumer confidence, which may or may not be linked to economic conditions. A general decline in economic conditions, disruptions of specific industries or other factors that result in reduced levels of consumer spending could have a material adverse effect on the Group’s business, financial condition, results of operations or prospects. Other events outside of the Group’s control, such as prolonged periods of adverse weather, an outbreak of a pandemic disease in the UK or an act of terrorism, could also reduce the number of customers visiting its stores, which could cause a decline in its revenue and profit.
Furthermore, a high proportion of the Group’s total operating costs comprises store property costs, staff costs and other costs which are, to a large extent, fixed. Accordingly, an unanticipated decline in revenue, whether due to the foregoing macro-economic factors or otherwise, would generally not be offset by a corresponding reduction in the Group’s operating costs, and would result in a disproportionately large decrease of the Group’s operating profit.
There are risks associated with the Group’s expansion plans The Group has opened an average of over 50 new stores per year over the last 10 years. The Group expects to continue this new store roll out following Admission, and intends to expand its store portfolio organically from its existing 739 stores, to up to 1,200 stores in total over the next 10 years, including up to approximately 100 potential new stores in the Republic of Ireland. Continued growth of the Group’s sales and profits in the future will therefore depend, to a material extent, on its ability to expand operations through the opening of new retail stores in catchment areas where the Group’s stores are not currently present or which will not lead to profit dilution caused by cannibalisation of sales in existing stores located nearby. The Group’s ability to achieve its expansion goals will depend on a number of factors, including its continued ability to identify and secure suitable store locations on acceptable terms, open new stores in a timely manner, hire, train and retain additional store and supervisory personnel, and integrate new stores into its operations on a profitable basis. In recent years, the Group’s new stores have typically achieved positive EBITDA within the first full year from opening. Although the Group aims to open new stores in locations that would, in Management’s view, perform similarly, there can be no assurance that this will be the case.
23 Furthermore, there has been, and the Group anticipates that there will continue to be, significant competition among retailers for desirable store sites on acceptable lease terms. Opening stores in new locations is also inherently uncertain. Newly opened stores may not attract sufficient local demand, whether due to demographic factors or proximity of competitors. Accordingly, there can be no assurance that the Group will be able to achieve its expansion goals on a timely basis, or that such expansion will be profitable.
In the longer term, the Group’s expansion strategy is also subject to saturation risk. The Directors currently believe that there are approximately 400 retail locations in the UK (and up to approximately an additional 100 in the Republic of Ireland) where the Group’s stores, if opened, could operate profitably. However, in the longer term, it may find its further growth opportunities fundamentally constrained due to a lack of available retail locations with characteristics that have to date enabled the Group’s retail footprint to grow in a manner that has resulted in broadly consistent underlying operating margins during the periods under review and will enable the Group to open new stores which would deliver an appropriate ROCE and be value enhancing to shareholders. This may result in a material slowdown in the rate of growth of the Group’s sales and profits and have a material adverse effect on its business, financial condition, results of operations and prospects.
Expansion of the Group’s retail footprint will also increase the operating complexity of the Group’s business, which may place significant strain on the Group’s Management and on its operational infrastructure (including its production and distribution capabilities and its existing supplier base). Although the Directors believe that the Group has the operational infrastructure, financial systems and the managerial controls and procedures in place to monitor and manage its growth, it will have to maintain close coordination amongst its design, sourcing, printing, property, logistical, technical, accounting, finance and retail personnel in order to ensure that they are able to continue to support the growth of the Group’s business. Any failure to maintain the Group’s operational infrastructure, financial systems or managerial controls and procedures as it continues to grow its business may have a material adverse effect on its business, financial condition, results of operations and prospects.
The Group’s potential expansion into the Republic of Ireland may not be successful The Group is actively considering whether to open stores in the Republic of Ireland. A total of up to 100 potential store locations have been identified and the Group could begin to open stores in the Republic of Ireland as early as 2015. Management intends to begin this expansion with an initial opening of approximately 10 stores, with warehousing and distribution for these new stores provided by the Group’s existing facilities in the UK in the same way as the Group supplies its existing stores in Northern Ireland. Although Management believes that the characteristics of the greeting cards sector in the Republic of Ireland are broadly similar to those in the UK, the Group has no experience of operating in the Republic of Ireland. Furthermore, operating in the Republic of Ireland would initially require the Group to adapt the pricing of its products and its financial and accounting systems to reflect transactions in Euros. Any expansion beyond the initial opening would require the Group to adapt its supply chain arrangements, particularly with regard to printing and warehousing. There can be no assurance that the Group will be able to manage its expansion into the Republic of Ireland successfully or that its entry into this new market will not adversely affect the Group’s business, financial condition, results of operations and prospects.
The Group’s business may be impacted by the seasonality of its sales Historically, the Group’s sales have exhibited strong seasonal trends, with monthly sales in November and December (i.e., in the lead up to Christmas) being substantially higher than the average sales rate in other months. Periods leading up to other significant occasions, such as Valentine’s Day, Mother’s Day and Father’s Day, have also resulted in higher than average sales for the Group. As a substantial portion of the Group’s cost base (including property costs and a significant proportion of wages) is fixed, this has also resulted in a disproportionate share of its profit being attributable to November and December sales. Accordingly, reduced customer footfall or consumer spending in November and December, including due to changes in consumer behaviour, disproportionate discounting of greeting cards by the Group’s competitors during significant seasonal occasions or other factors beyond the Group’s control, may have a material adverse impact on its business, financial condition, results of operations and prospects.
24 Prolonged periods of adverse weather or severe weather during seasonal peaks could adversely affect the Group’s sales Footfall at the Group’s physical stores can be adversely affected by periods of abnormal, severe or unseasonal weather conditions. Accordingly, prolonged periods of adverse weather conditions or severe weather, in particular, during the weeks of peak seasonal sales of the Group could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group may not be able to accurately predict or fulfil customer preferences or demands The Group derives almost all of its revenue from the sale of greeting cards, dressings and related gift items, which may be subject to changing customer tastes. Historically, the designs of the Group’s product offering have evolved gradually, with principal card and non-card lines remaining broadly stable, even as new design themes, design features and products are introduced from time to time. Nevertheless, as a specialist greeting cards retailer, the Group’s success depends, in part, on its ability to effectively predict and respond to changing consumer demands and to offer appropriate, saleable product offerings in response to market trends. The availability of new competing products and changes in customer preferences may make it difficult for the Group to predict sales demand accurately.
Furthermore, although the Group currently designs and produces a significant proportion of its greeting cards in-house in the UK, the Group sources certain of its non-card merchandise as well as certain greeting cards lines from third-party suppliers, including some in the Far East, which results in significantly longer order and delivery lead times. There can be no assurance that the Group’s orders for such merchandise will match actual demand. If the Group is unable to successfully predict or respond to sales demand and changing customer preferences, this may have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group is vulnerable to changes in consumer preferences and cultural attitudes towards greeting cards Greeting cards sales contributed approximately two-thirds of the Group’s revenue in the year ended 31 January 2014. According to OC&C, sales of single greeting cards in the UK have grown over the past several years, with aggregate sales of single cards increasing from £1,206 million in 2009 to £1,296 million in 2012, representing a CAGR of 2.4 per cent. There can be no assurance, however, that this trend will persist in the future. Consumer preferences towards greeting cards could change, and consumers could reduce their purchases of physical greeting cards or increasingly utilise e-cards and other electronic communications (via the web, email, social media or otherwise) instead of purchasing physical cards. For example, according to OC&C, aggregate sales of boxed Christmas cards declined at a CAGR of 6.0 per cent. during the three year period ended 31 December 2012, reflecting, in part, changing consumer preferences (in part due to increasing stamp prices). Although the declining sales of this product had only a limited effect on the Group’s results of operations, as boxed Christmas cards contributed less than four per cent. of the Group’s total sales in each of the last three financial years, there can be no assurance that in the future a similar shift in consumer preferences will not have a more adverse effect on sales of single cards. Any such changes in consumer behaviour could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group may be adversely affected by increases in stamp prices An increase in stamp prices could increase the “all-in” price of purchasing and sending greeting cards for customers and thereby adversely affect the Group’s sales either by reducing the aggregate volumes of greeting cards it sells or by increasing the proportion of sales of its least expensive (and less profitable) lines of cards relative to its more expensive (and more profitable) lines. Increases in stamp prices could also cause consumers to increasingly use e-cards and other electronic communications (via the web, email, social media or otherwise) instead of purchasing physical cards. Royal Mail, the universal postal carrier in the UK, has increased stamp prices substantially in the past three years, including, most recently, on 28 February 2014, increasing the price of a first class stamp by two pence to 62 pence and of a second class stamp by three pence to 53 pence, notwithstanding guidance provided in the third quarter of 2013 that it expected any further price increase to be broadly in line with retail price inflation until April 2016 (although this was the
25 first price rise for two years). There can be no assurance that Royal Mail will not increase prices further at rates above inflation prior to April 2016 or that it will not increase prices substantially thereafter. Any such increases in stamp prices could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group greeting cards production is dependent on Printcraft The Group operates its in-house printing facility, Printcraft, in Shipley, Yorkshire, to print, finish and package greeting cards. The packaged cards are then sent on to the Group’s distribution and warehousing facilities in Wakefield, Yorkshire for subsequent distribution to the Group’s stores. Approximately 98 per cent. of the non-handcrafted single greeting cards sold by the Group at its stores during the year ended 31 January 2014 were produced at Printcraft.
Accordingly, any major disruption to Printcraft’s operations, whether due to operational issues, machinery breakdowns or a failure by third-party service providers and suppliers of printing machinery to repair or service such machinery on a timely basis, or any major natural or man-made disasters affecting the facility, could severely affect the Group’s ability to supply merchandise to its stores. In addition, while the Group maintains insurance covering Printcraft facilities as well as business interruption insurance, any natural or man-made disaster at Printcraft could also force the Group to engage third-party printing service providers to print the greeting cards that it currently produces in-house, which the Group may not be able to do on commercially acceptable terms, in a timely manner or at all. As a result, the Group remains vulnerable to any interruptions in the supply of the greeting cards produced at Printcraft, and any such interruptions could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group’s success is dependent on its logistics and distribution infrastructure The Group’s existing distribution and warehousing facilities at Wakefield comprise over 360,000 square feet of warehouse floor area, which the Directors believe to have sufficient capacity to support in excess of 1,100 UK stores. During the year, particularly in the run up to the Christmas period, the Group additionally utilises third-party storage facilities. The Group relies on its warehousing and distribution facilities to supply its stores on a daily basis and maintains a significant inventory of merchandise at its warehouses. Although the Group maintains insurance covering its stored inventory as well as business interruption insurance, any natural or man-made disaster at such facilities could prevent the Group from supplying its stores on a timely basis, which could in turn adversely affect its reputation and customer loyalty as well as its sales and profitability.
Furthermore, the Group relies on third-party logistics companies to distribute its products from the distribution centre in Wakefield to its stores and is vulnerable to any failure by these companies to fulfil their obligations in a timely manner. If the Group is required to change its logistics providers, the Group may not be able to obtain as favourable terms as its current terms, which could increase its costs. Any prolonged unexpected delivery delays, such as due to severe weather or disruptions to the national or international transportation infrastructure, could have a material adverse effect on the Group’s business.
Any significant disruption to the operations at the Group’s distribution and warehousing facilities in Wakefield would significantly impact its ability to maintain its supply chain and distribute products to its stores, which, if sustained, could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group is exposed to risks related to its third-party suppliers and may be adversely affected by interruptions in supply The Group relies on third-parties for the supply of nearly all of its non-card merchandise, as well as its handcrafted lines of greeting cards and the supply of helium and the supply of raw materials used in the production and printing of its greeting cards. The Group procures most of these items on a purchase order basis, without any medium or long-term contractual arrangements, although the Group has entered into medium-term supply agreements for the supply of helium. A failure by third-parties to supply the merchandise or raw materials that the Group orders, or a termination of, or a failure of a third-party to
26 comply with the terms of, its supply agreement with the Group, may adversely affect its business and its ability to meet customer demand, or result in it having to seek alternative suppliers, which may not be able to fulfil the Group’s requirements on commercially acceptable terms, in a timely manner or at all. In addition, as the Group does not have medium or long-term contracts with most of its third-party suppliers, it remains exposed to changes in supplier dynamics and vulnerable to industry-wide increases in the prices of raw materials and the merchandise it procures.
Interruptions in supply or an increase in the cost of merchandise and raw materials sourced by the Group from third-parties due to any of the factors described above could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
Furthermore, the Group sources the majority of its non-card merchandise as well as certain raw materials used in the production and printing of its greeting cards from suppliers located in the Far East. Consequently, it is subject to the risks associated with international trade, particularly those risks which are common in the manufacturing and import of goods from developing countries. These risks include the imposition of taxes or customs duties or other charges on imports, compliance with, and changes to, import restrictions and regulations and exposure to different legal standards, shipping and customs delays, political instability and unrest, availability of labour and raw materials to suppliers, and the burden of complying with a variety of foreign laws and changing foreign government policies. Any of these factors could, in certain circumstances, cause an increase in the costs of goods or raw materials it procures from overseas suppliers or cause an interruption in supply. In addition, while the Group monitors its third-party suppliers through the commissioning of supplier audits by third-party providers, the Group does not control its overseas suppliers or their labour practices and the risk remains that such safeguards may not be effective. Unfavourable publicity concerning the Group’s suppliers could have an adverse effect on the Group’s reputation and its business, financial condition, results of operations and prospects.
The Group is exposed to potential increases in property costs for its retail outlets Property costs, including the costs of leasing retail space for the Group’s stores (together with rates and, where applicable, service charges), comprised a significant proportion of the Group’s operating costs in the year ended 31 January 2014. The tenure of almost all of the Group’s stores is leasehold (with a small number held under more flexible licence arrangements), with an average lease length of less than five years, and its commercial lease terms often include periodic upwards-only rent reviews. Although, due to a recent market environment of generally declining rents in many high street and other retail locations, the Group has been able to successfully re-negotiate many of its leases at the time the applicable break clause permitted it to do so or upon the expiration of such leases and, consequently, reduce the rent, there can be no assurance that the Group will be able to do so in the future. Further, the Directors are aware of the ongoing public debate involving the major political parties, the Government, other retailers and retail trade bodies such as the British Retail Consortium as to possible changes in the business rates system, and the potential outcome of these discussions and its effect on the Group remains uncertain. Accordingly, property costs associated with the Group’s existing store portfolio may increase. In addition, as the Group continues to expand its store portfolio in the near to medium term, it is possible that the average market rents and business rates for new stores could exceed the average rents and business rates of stores in the Group’s existing store portfolio. Future increases in property costs would increase the Group’s operating costs and could reduce its operating profit. Increased base costs could also adversely affect the economic viability of the affected stores, which, together with higher operating costs, could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
Increases in the national minimum wage or changes to labour market laws or conditions in the UK could increase the Group’s operating costs and reduce its operational flexibility The majority of the Group’s employees are paid the UK national minimum wage. The Group also employs Seasonal Workers to meet increased staffing needs at times during the Christmas trading period, with over 6,000 Seasonal Workers employed by the Group for Christmas 2013. In line with the currently widespread practice in the retail industry, all of these Seasonal Workers are employed on so-called “zero-hour” contracts (whereby employees agree to be available for work as and when required by an employer with no guaranteed hours or times of work). Both the national minimum wage level and the increasing prevalence of zero-hour
27 employment contracts in the retail and hospitality industries have recently received increasing attention from the media and political leaders of both the governing coalition in the UK and the opposition party.
With respect to the level of minimum wage, the Government has recently announced that it has accepted the Low Pay Commission’s recommendation of a three per cent. rise in the adult national minimum wage to £6.50 from its current level of £6.31 and that the new level will come into force in October 2014. This increase or any further increases of the national minimum wage or increases in other wages above inflation could materially increase the Group’s operating costs. To date, the UK government has not proposed or introduced any specific legislative or regulatory actions that would curtail or limit the use of zero-hour contracts by employers in the UK. However, there is a risk that future legislative or regulatory developments will limit the Group’s ability to employ Seasonal Workers to match peak Christmas demand on zero-hour contracts or otherwise, which could increase the Group’s operating costs and reduce its operational flexibility. Furthermore, continued broad-based improvement in the UK economy and its labour market could adversely affect the ability of the Group to attract suitable employees at the national minimum wage, which could in turn lead to an increase in the Group’s operating costs and cost of sales, and could adversely affect the Group’s operating profit margin.
There can be no assurance that the Group would be able to mitigate increases in the Group’s cost of sales that could occur due to any of the foregoing factors through compensating increases in sales, a reduction in staff employed by the Group, a reduction in staff hours allocated to stores and/or other business efficiencies.
General inflation and increases in energy costs could increase the Group’s operating costs Inflation affects the Group by increasing the overall cost of the Group’s operations, including employee costs, energy costs and costs of raw materials. Although the general rate of inflation in the UK has been low in recent years, an increase in costs that is not offset by higher sales may have a negative impact on the Group’s profits.
The Group may incur unanticipated costs relating to its property portfolio A number of the Group’s retail stores are located in older buildings, which may require extensive maintenance and/or renovation from time to time due to ageing and dilapidation. If the necessary works are not performed in a timely manner or at all, this could adversely affect the physical condition of the Group’s stores as well as the safety of the premises, which could, in turn have a material adverse effect on the performance of the affected stores.
In addition, some of the Group’s properties (principally, its Printcraft printing facility and its distribution and warehousing facilities in Wakefield) have been constructed in areas that have historically been the subject of commercial or industrial use. It is possible that on-site pollution or contamination could have been caused by such previous uses, or in limited circumstances by current uses, for which the Group could be held liable. Although the Group is not aware of any relevant material liability, claims or actions of such nature, a claim or regulatory action against it for pollution or contamination could have a material adverse effect on the Group’s financial condition, results of operations and prospects.
The Group relies on the reputation of its brand names The “Card Factory” and “Getting Personal” brands are important assets to the Group. Failure to protect the Group’s brand names, an event which materially damaged the reputation of its brand names and/or the failure to sustain its appeal to its customers could have an adverse impact on the Group’s sales.
In addition, the Group may become the subject of a complaint and litigation from its customers, employees or other third-parties, related to injury, health, environmental, safety or operational concerns or alleged nuisances, negligence, or failure to comply with applicable laws and regulations. These claims, even if successfully defended without significant financial impact, could have a material adverse effect on the Group’s reputation and brand, and divert its financial and managerial resources from its core retail operations, which could adversely affect the Group’s business, financial condition, results of operations and prospects.
28 The Group is subject to adverse fluctuations in currency exchange rates The Group’s customers pay for products they purchase in pounds sterling. However, approximately 50 per cent. of the Group’s costs of goods sold are typically attributable to products purchased in the Far East, typically in U.S. Dollars. Consequently, the Group is exposed to fluctuations and changes in foreign exchange rates between the U.S. Dollar and pounds sterling. Although the Group seeks to hedge a portion of this exposure, these transactions have not always been sufficient to, and may not in the future, adequately protect the Group’s operating results from the effects of exchange rate fluctuations. In addition, the Group’s hedging transactions may reduce any benefit that it might otherwise receive as a result of favourable movements in pounds sterling/U.S. Dollar.
The Group is dependent on key members of its Management and other highly qualified employees to manage its business, particularly its design team, the loss of whom could adversely affect its business The Group is dependent upon key senior management personnel who have extensive experience and knowledge of the Group’s market sector of the retail industry. The successful implementation of the Group’s strategy depends on the continuing availability of its Management team and its ability to continue to attract, motivate and retain other highly qualified employees. Retention of the Group’s Management is especially important in its business due to the limited availability of experienced and talented executives. The Group also relies on its in-house design team to design nearly all of the cards and non-card merchandise sold in its stores. The continued service of the members of this team is also important to the success of the Group’s business.
If the Group were to lose the services of any of these employees and was unable to employ suitable replacements in a timely manner, the Group’s business, financial condition, results of operations and prospects could be adversely affected.
The Group’s pricing strategy may be adversely affected by inflation To date, a key component of the Group’s pricing strategy has been to maintain a clear, value-orientated pricing structure with the key price points for the Group’s cards principally being below £1. The Directors believe that these key price points have been, and will continue to be, important in conveying the Group’s value proposition to its customers. Notwithstanding the inflationary pressures during periods under review, since formation the Group has been able to maintain these key price points, while simultaneously improving its operating margins due to increasing vertical integration and economies of scale achieved as the Group’s business grew. Nevertheless, a higher than anticipated rise in inflation in the medium to longer term could potentially undermine the Group’s ability to maintain its key price points. If the Group is unable to maintain its current pricing structure, its customers’ perception of the value proposition offered by the Group could erode, which could, in turn, have an adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group may be unable to successfully grow its presence and sales online In 2011, the Group acquired Getting Personal to establish a presence in the retail distribution of personalised greeting cards and other merchandise online. In August 2013, the Group relocated the manufacturing and distribution operations of Getting Personal to its Shipley-based Printcraft plant, and its efforts to streamline and expand the operations of Getting Personal are on-going. This integration of Getting Personal’s manufacturing and distribution operations into the Group’s existing operations involves risks, including the risk that the integration may divert the focus of Management from its other strategic initiatives, and the risk that integration may take longer and be more expensive than expected and may fail to produce the anticipated results.
The sales of personalised greeting cards and other merchandise online is a highly competitive business segment, and many of Getting Personal’s direct competitors in this segment, including Moonpig and Funky Pigeon, have more established brands and presence in the market. These competitors also further enhance consumer awareness of their brands via television and physical marketing campaigns, which Getting Personal does not currently do. Further, approximately half of Getting Personal’s sales relate to products designed and produced in-house. The products which Getting Personal designs in-house may not be as
29 successful as the products marketed by competing web-based businesses. Accordingly, there can be no assurance that Getting Personal will be able to compete effectively against these and other online competitors. See also “The sector in which the Group operates is highly competitive” above.
The Group also established the Card Factory transactional website in late 2012. The volumes of sales of greeting cards, dressings and related gift items online under the Card Factory brand during the periods under review have not been significant for the Group as a whole, but the Directors believe that these volumes of sales are likely to grow, albeit remain a small proportion of Group sales, in the future. There can be no assurance, however, that the Group’s website will deliver the anticipated growth in sales, including due to competitive factors. In addition, the Group may also fail to develop its website in line with changing customer tastes and evolving technology, which may adversely impact the Group’s reputation and customers’ perception of its Card Factory brand.
Any of the foregoing risks could result in increased costs, decreased revenues or a loss of opportunities for the Group and have an adverse effect on its business, financial condition, results of operations and prospects.
The Group relies on important information and communication technology (“ICT”) systems As with most retail businesses, the Group relies on a number of important ICT systems. These include electronic point-of-sale (“EPOS”) terminals in the Group’s stores (which have been introduced to approximately 20 per cent. of the Group’s stores to date), software applications and supporting systems for card rack planning, financial reporting and payroll systems, enterprise resource planning systems for inventory management, store replenishment, order processing, purchase order management and logistics management, website operations as well as other operational ICT systems. A failure to adequately maintain the Group’s ICT systems or any system performance problems could seriously affect the Group’s ability to carry on its business. In addition, although the Directors believe the Group’s ICT development and upgrade strategy will be sufficient to support the growth of its business in the medium term, the underlying technology and the Group’s ICT needs may evolve faster than anticipated. Any failure to upgrade the Group’s ICT systems in a timely manner and in line with its business needs could adversely affect the Group’s growth strategy which could, in turn, have a material adverse effect on its business, financial condition, results of operations and prospects. Furthermore, the Group may face unforeseen technical difficulties in the deployment of new technologies on a large scale, including with respect to the current roll- out of the EPOS terminals across its store network, as these new technologies could result in disruption of back-office support systems or in-store transactions.
The Group also relies on the integrity of its ICT systems to protect customer data for transactions it processes through the Card Factory and Getting Personal websites. Cyber-attacks could result in a loss of customer confidential data, or that data could otherwise be lost, stolen, or processed in breach of applicable data protection regulation. If this were to occur, it could have an adverse effect on the Group’s reputation, business, financial condition, results of operations and prospects.
Increased use of credit and debit cards in the Group’s stores by customers could increase the Group’s operating costs Customers predominantly use cash to pay for their purchases in the Group’s stores. However, these payment patterns could change in the future, including due to the increased prevalence and acceptance of credit and debit cards as the preferred method of payment by the Group’s customers or due to the increased convenience of using credit and debit cards with the EPOS terminals, which the Group is currently rolling out in its stores. Increased use of credit and debit cards would increase the amount of interchange fees paid by the Group and thereby increase the Group’s operating costs which could have an adverse effect on the Group’s business, financial condition, results of operations and prospects.
Goodwill reported in the Group’s consolidated balance sheet may be written down as a result of impairment testing, which may result in a loss in the Group’s income statement As of 31 January 2014, the goodwill recognised in the Group’s consolidated statement of financial position amounted to £328.2 million, of which £313.8 million was attributable to the acquisition of Card Factory by CF Topco Limited, with funding from Charterhouse in April 2010. Goodwill is recorded at the date of
30 acquisition and, in accordance with EU IFRS, is tested for impairment annually and whenever there is any indication of possible permanent loss. Impairment may result from, among other things, a deterioration in the Group’s performance, a decline in expected future cash flows, adverse market conditions, adverse changes in applicable laws and regulations and a variety of other factors. For the preparation of its consolidated financial statements, the Group estimates the recoverable amount of cash-generating units to which goodwill has been allocated. The recoverable value is calculated by determining the value in use, based on the current value of future estimated cash flows, using a discount rate that reflects the Management’s current market assessments of the time value of money and the risk specifically associated with the assessed asset. If future cash flows are determined to be lower than the carrying amount, an impairment loss is recognised in the Group’s income statement. For the years ended 31 January 2014, 2013 and 2012, the Group did not recognise any impairments of goodwill. However, if the Group has to recognise any impairment in future periods, it would have an adverse (non-cash) impact on its consolidated statement of comprehensive income and consolidated balance sheet.
The Group may be affected by its transition to a public company The Group has been successful as a private business owned by the Principal Shareholders, who have been closely involved in the business. The Group’s transition to a public company involves changes in its ownership and board structure. There can be no assurance that, under a changed board structure and ownership, and in the more public environment of a listed public company, the Group will be able to manage its operations and strategic direction as successfully as it has as a private business.
2 Risks relating to the Offer and to the Shares
After the Offer, certain shareholders will continue to be able to exercise significant influence over the Group, its management and its operations As at the date of this Prospectus, the Principal Shareholders, being CCP IX LP No.1, CCP IX LP No.2 and CCP IX Co-Investment LP, together hold 67.0 per cent. of its issued share capital. Immediately following the Offer and the issuance of the Residual Management Equity, and assuming the Over-allotment Option is not exercised, these Principal Shareholders will hold 22.2 per cent., 18.5 per cent. and 0.6 per cent. of the Group’s share capital, respectively (or 20.1 per cent., 16.7 per cent. and 0.6 per cent., respectively, assuming that the Over-allotment Option is exercised in full). Although the Principal Shareholders have entered into the Relationship Agreement with the Company to govern their relationship with the Company after Admission, the Principal Shareholders, to the extent they elect to act together, will be able to exercise control over the Group’s management and operations and over its shareholders’ meetings, such as in relation to the payment of dividends and the appointment of the majority of the Directors to the Group’s Board. There can be no assurance that the interests of the Principal Shareholders will coincide with the interests of purchasers of the Shares or that the Principal Shareholders will act in a manner that is in the best interests of the Group.
Substantial sales of Ordinary Shares by significant shareholders could depress the price of the Ordinary Shares Subsequent sales by the Principal Shareholders (or any other substantial shareholders) or by the Issuer of a substantial number of Ordinary Shares may significantly reduce the Group’s share price. Each of the Principal Shareholders has agreed in the Underwriting Agreement to certain restrictions on their ability to sell, transfer and otherwise deal in their Ordinary Shares for a period of 180 days from the Closing Date, unless otherwise consented to by the Joint Bookrunners. Nevertheless, the Group is unable to predict whether substantial amounts of Ordinary Shares (in addition to those which will be available in the Offer) will be sold in the open market following the termination of the lock-up arrangements or their waiver by the Joint Bookrunners. Any sales of substantial amounts of Ordinary Shares in the public market, or the perception that such sales might occur, could materially and adversely affect the market price of the Ordinary Shares.
Dilution and future issuances of shares The Group may make future acquisitions or enter into financings or other transactions involving the issuance of securities of the Group which may dilute the holdings of shareholders. The Company has agreed to refrain
31 from issuing Ordinary Shares or securities convertible or exchangeable into Ordinary Shares for a period of 180 days commencing on the date of Admission without the consent of the Joint Bookrunners, subject to certain exceptions. At the end of this 180-day period, there will be no restrictions on the Company issuing Ordinary Shares, other than pursuant to applicable securities laws and stock exchange policies.
The Offer may not result in an active or liquid market for the Ordinary Shares Prior to the Offer, there has been no public trading market for the Ordinary Shares. The Offer Price has been agreed by the Company in consultation with the Joint Global Co-ordinators, and may not be indicative of the market price for the Ordinary Shares following Admission. The Group cannot guarantee that an active trading market will develop or be sustained following the completion of the Offer, or that the market price of the Ordinary Shares will not decline thereafter below the Offer Price.
The Company may not pay cash dividends on its Ordinary Shares While the Board of Directors intends to adopt a progressive dividend policy that maintains an appropriate level of dividend cover, there can be no assurance that it will pay dividends in the future. Any decision to declare and pay dividends in the future will be made at the discretion of the Board and will depend on, among other things, applicable law, regulations, restrictions, its results of operations, financial condition, cash requirements, contractual restrictions, its future projects and plans and other factors that its Board may deem relevant. In addition, the Group currently conducts substantially all of its operations through its subsidiaries, and these entities generate substantially all of the Group’s operating income and cash flow. Because the Group has no direct operations or significant assets other than the capital stock of these entities, it relies on its subsidiaries for cash dividends, investment income, financing proceeds and other cash flows to pay dividends, if any, on the shares and, in the long term, to pay other obligations at the holding company level that may arise from time to time. The ability of the Group’s subsidiaries to make payments to the Company depends largely on their financial condition, their ability to generate profits and the terms of the contractual agreements to which they are a party. There can, therefore be no assurance that the Company will be able to pay any dividends in the future.
Holders of the Ordinary Shares in certain jurisdictions, including the United States, may not be able to exercise their pre-emptive rights if the Group increase its share capital Under the Group’s Articles of Association (the “Articles”) to be adopted with effect from, and conditional upon, Admission, holders of the Ordinary Shares generally have the right to subscribe and pay for a sufficient number of the Group’s ordinary shares to maintain their relative ownership percentages prior to the issuance of any new ordinary shares in exchange for cash consideration. U.S. holders of the Ordinary Shares may not be able to exercise their pre-emptive rights unless a registration statement under the Securities Act is effective with respect to such rights and the related ordinary shares or an exemption from the registration requirements of the Securities Act is available. Similar restrictions exist in certain other jurisdictions. The Group currently does not intend to register the Shares under the Securities Act or the laws of any other jurisdiction, and no assurance can be given that an exemption from such registration requirements will be available to U.S. or other holders of the Shares. To the extent that the U.S. or other holders of the Shares are not able to exercise their pre-emptive rights, the pre-emptive rights would lapse and the proportional interests of such U.S. or other holders would be reduced.
32 PART II
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
1 General Investors should only rely on the information in this Prospectus. No person has been authorised to give any information or to make any representations other than those contained in this Prospectus in connection with the Offer and, if given or made, such information or representations must not be relied upon as having been authorised by or on behalf of the Company, the Directors, the Selling Shareholders or any of the Underwriters. No representation or warranty, express or implied, is made by any of the Underwriters or any selling agent as to the accuracy or completeness of such information, and nothing contained in this Prospectus is, or shall be relied upon as, a promise or representation by any of the Underwriters or any selling agent as to the past, present or future. Without prejudice to any obligation of the Company to publish a supplementary prospectus pursuant to the FSMA and paragraph 3.4.1 of the Prospectus Rules, neither the delivery of this Prospectus nor any subscription or sale of Shares pursuant to the Offer shall, under any circumstances, create any implication that there has been no change in the business or affairs of the Company since the date of this Prospectus or that the information contained herein is correct as of any time subsequent to its date.
The Company does not accept any responsibility for the accuracy or completeness of any information reported by the press or other media, nor the fairness or appropriateness of any forecasts, views or opinions expressed by the press or other media regarding the Offer or the Group. The Company makes no representation as to the appropriateness, accuracy, completeness or reliability of any such information or publication.
The Company will update the information provided in this Prospectus by means of a supplement hereto if a significant new factor that may affect the evaluation by prospective investors of the Offer occurs prior to Admission or if this Prospectus contains any material mistake or inaccuracy. The Prospectus and any supplement thereto will be subject to approval by the FCA and will be made public in accordance with the Prospectus Rules. If a supplement to the Prospectus is published prior to Admission, investors shall have the right to withdraw their subscriptions made prior to the publication of the supplement. Such withdrawal must be done within the time limits set out in the supplement (if any) (which shall not be shorter than two days after publication of the supplement).
The contents of this Prospectus are not to be construed as legal, business or tax advice. Each prospective investor should consult his or her own lawyer, financial adviser or tax adviser for legal, financial or tax advice in relation to any subscription, purchase or proposed subscription or purchase of Shares. In making an investment decision, each investor must rely on their own examination, analysis and enquiry of the Company, the Group and the terms of the Offer, including the merits and risks involved.
This Prospectus is not intended to provide the basis of any credit or other evaluation and should not be considered as a recommendation by any of the Company, the Directors, the Underwriters or any of their representatives that any recipient of this Prospectus should subscribe for or purchase the Shares. Prior to making any decision as to whether to subscribe for or purchase the Shares, prospective investors should read this Prospectus. Investors should ensure that they read the whole of this Prospectus and not just rely on key information or information summarised within it. In making an investment decision, prospective investors must rely upon their own examination of the Company and the terms of this Prospectus, including the risks involved.
Investors who subscribe for or purchase Shares in the Offer will be deemed to have acknowledged that: (i) they have not relied on any of the Underwriters or any person affiliated with any of them in connection with any investigation of the accuracy of any information contained in this Prospectus or their investment decision; (ii) they have relied solely on the information contained in this Prospectus; and (iii) no person has been authorised to give any information or to make any representation concerning the Group or the Shares (other than as contained in this Prospectus) and, if given or made, any such other information or
33 representation should not be relied upon as having been authorised by or on behalf of the Company, the Directors, the Selling Shareholders or the Underwriters.
None of the Company, the Directors, the Underwriters, the Selling Shareholders or any of their representatives is making any representation to any offeree or purchaser of the Shares regarding the legality of an investment by such offeree or purchaser.
In connection with the Offer, the Underwriters and any of their respective affiliates, acting as investors for their own accounts, may subscribe for and/or acquire Shares, and in that capacity may retain, purchase, sell, offer to sell or otherwise deal for their own accounts in such Shares and other securities of the Company or related investments in connection with the Offer or otherwise. Accordingly, references in this Prospectus to the Shares being issued, offered, subscribed, acquired, placed or otherwise dealt in should be read as including any issue or offer to, or subscription, acquisition, dealing or placing by, the Underwriters and any of their affiliates acting as investors for their own accounts. In addition, certain of the Underwriters or their respective affiliates may enter into financing arrangements and swaps with investors in connection with which such Underwriters or their respective affiliates may from time to time acquire, hold or dispose of Shares. None of the Underwriters intends to disclose the extent of any such investment or transactions otherwise than in accordance with any legal or regulatory obligations to do so.
In no event will measures be taken to stabilise the market price of the Shares above the Offer Price.
2 Presentation of financial information and non-financial operating data
Historical financial information The historical financial information in Part XII (Historical Financial Information) has been prepared in accordance with the requirements of the Prospectus Directive regulation and the Listing Rules and in accordance with EU IFRS and with standards for investment reporting and international standards for auditing (UK and Ireland) issued by the UK Auditing Practices Board. The basis of preparation is further explained in Part XII (Historical Financial Information).
The Company was recently incorporated and has no historical operations of its own. Therefore, this Prospectus does not present any standalone, unconsolidated historical financial information for the Company.
For the purposes of the Historical Financial Information, the Group has chosen to present an underlying profit and earnings measure and, accordingly, the Consolidated Statement of Comprehensive Income for the Group included in the Historical Financial Information includes certain items that have been classified as “non-underlying” (such as acquisition costs and gains and losses on derivative financial instruments). See Notes 1 and 3 to the Historical Financial Information for more detail. All financial information extracted from the Consolidated Statement of Comprehensive Income for each of the three financial years ended 31 January 2014 in this Prospectus (other than data presented in Part XII (Historical Financial Information)) is presented solely on an underlying basis, except where otherwise indicated, as the non-underlying items have not had a material impact on the Group’s results of operations in any of the three financial years ended 31 January 2014, and as the Group believes that underlying profit and earnings provides useful financial information for potential investors. However, potential investors are cautioned that underlying earnings is not a recognised profit measure under EU IFRS and may not be directly comparable with ‘adjusted’ profit measures reported by other companies.
In order to present its financial results on an underlying basis, the Group makes the following adjustments:
• Net fair value remeasurement gains and losses on derivative financial instruments: The Group utilises foreign currency derivative contracts to manage the foreign exchange risk on U.S. Dollar denominated purchases and interest rate derivative contracts to manage the risk on floating interest rate bank borrowings. Fair value gains and losses on such instruments are recognised in the income statement to the extent they are not hedge accounted under IAS 39. Such gains and losses are unrealised and relate to future cash flows. In accordance with the commercial reasoning for entering into these
34 agreements, the gains/losses are deemed not representative of the underlying financial performance in the year and are presented as non-underlying items in the Historical Financial Information.
• Acquisition costs: Under IFRS 3, expenses attributable to the acquisition of a subsidiary are expensed in the income statement. Such expenses are not representative of the underlying financial performance in the year and are presented as non-underlying items in the Historical Financial Information.
Pro forma financial information In this Prospectus, any reference to “pro forma” financial information is to information which has been extracted without material adjustment from the unaudited pro forma financial information contained in Part XIII (Unaudited Pro Forma Financial Information) (the “Pro Forma Financial Information”).
The unaudited pro forma statement of net assets contained in Part XIII (Unaudited Pro Forma Financial Information) includes certain adjustments in respect of the Offer as if they had occurred on 31 January 2014. However, the unaudited pro forma statement of net assets is not necessarily indicative of what the financial position of the Group would have been had the Offer occurred on 31 January 2014.
The Pro Forma Financial Information is for illustrative purposes only. Because of its nature, the Pro Forma Financial Information addresses a hypothetical situation and, therefore, does not represent the Group’s actual financial position. Future results of operations may differ materially from those presented in the Pro Forma Financial Information due to various factors.
Non-EU IFRS information Included in this Prospectus are certain measures that are not measures defined by EU IFRS, namely, EBITDA and EBITDA margin. Information regarding EBITDA and EBITDA margin is sometimes used by investors to evaluate the efficiency of a company’s operations and its ability to employ its earnings toward repayment of debt, capital expenditures and working capital requirements. There are no generally accepted principles governing the calculation of EBITDA and EBITDA margin and the criteria upon which such measures are based can vary from company to company. EBITDA and EBITDA margin alone do not provide a sufficient basis to compare the Group’s performance with that of other companies and should not be considered in isolation or as a substitute for operating income or any other measure as an indicator of operating performance or as an alternative to cash generated from operating activities as a measure of liquidity. In addition, these measures should not be used instead of, or considered as an alternative to, the Group’s historical financial results under EU IFRS. For a reconciliation of EBITDA to net profit, see “Other Consolidated Financial Information” in Part IX (Selected Financial Information).
Currency presentation Unless otherwise indicated, all references in this Prospectus to:
• “pounds sterling” or “£” are to the lawful currency of the UK;
• “Euro” are to the lawful currency of the EU (as adopted by certain Member States); and
• “U.S. Dollars” or “U.S.$” are to the lawful currency of the United States.
The Offer Price is stated in pounds sterling.
The average exchange rates of U.S. Dollars (the Group’s main trading currency other than pounds sterling) are shown relative to pounds sterling below. The rates may differ from the actual rates used in the preparation of the financial statements and other financial information that appear elsewhere in this Prospectus. The inclusion of these exchange rates is for illustrative purposes only and does not mean that the sterling amounts actually represent such U.S. Dollar amounts or that such sterling amounts can or could have been converted into U.S. Dollars at any particular rate, if at all.
35 Average Highest Lowest daily daily daily exchange exchange exchange rate of rate of rate of U.S. Dollars U.S. Dollars U.S. Dollars to one pound to one pound to one pound Calendar Year sterling sterling sterling –––––––––––– –––––––––––– –––––––––––– 2009 1.5656 1.6965 1.3669 2010 1.5456 1.6372 1.4304 2011 1.6037 1.6704 1.5341 2012 1.5849 1.6270 1.5285 2013 1.5644 1.6563 1.4831 Month Ended 31 January 2014 1.6474 1.6631 1.6344 28 February 2014 1.6567 1.6759 1.6295 31 March 2014 1.6622 1.6731 1.6490 (Compiled from daily rates as at 16.00 (UK time) quoted by WM/Reuters. Source: Datastream)
On 14 May 2014 (being the latest practicable date prior to the publication of this Prospectus), £1.00 = U.S.$1.6778, based on the exchange rate quoted by WM/Reuters at 16.00 (UK time).
Rounding Certain data in this Prospectus, including financial, statistical and operating information, has been rounded. As a result of the rounding, the totals of data presented in this Prospectus may vary slightly from the actual arithmetic totals of such data. Percentages in tables have been rounded and accordingly may not add up to 100 per cent.
No profit forecast No profit forecast or estimate has been made in this Prospectus.
Market, economic and industry data Certain statements in this Prospectus relating to the Company’s Business and markets have been extracted without material adjustment from the report prepared by OC&C dated 6 January 2014 (the “OC&C Report”). The Company confirms that this information and any other information extracted from third-party sources has been accurately reproduced and, so far as the Company is aware and is able to ascertain from information published by OC&C and these third-parties, no facts have been omitted which would render reproduced information inaccurate or misleading. Such information is approximate and has not been audited or independently verified, nor has the Company ascertained the underlying economic assumptions relied upon therein.
The OC&C Report has been produced based on publications comprising industry data, forecasts, surveys and other information made available to OC&C by third-party data providers. Those publications are based on estimates in respect of Card Factory whereas OC&C have been provided with actual data by the Group. The OC&C Report is therefore based on a combination of third-party sources, adjusted where appropriate to reflect actual Card Factory data. As such, the data, statistics and analysis provided by OC&C may differ from the data, statistics and analysis contained in other industry publications.
3 Definitions Certain terms used in this Prospectus, including all capitalised terms and certain technical and other items, are defined and explained in Part XVII (Definitions).
36 4 Information regarding forward-looking statements This Prospectus includes forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond the Company’s control and all of which are based on the Directors’ current beliefs and expectations about future events. Forward-looking statements are sometimes identified by the use of forward-looking terminology such as “believe”, “expects”, “may”, “will”, “could”, “should”, “shall”, “risk”, “intends”, “estimates”, “aims”, “plans”, “predicts”, “continues”, “assumes”, “positioned” or “anticipates” or the negative thereof, other variations thereon or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Prospectus and include statements regarding the intentions, beliefs and current expectations of the Directors or the Company concerning, among other things, the results of operations, financial condition, liquidity, prospects, growth, strategies and dividend policy of the Company and the industry in which it operates. In particular, the statements under the headings regarding the Company’s strategy and other future events or prospects are forward-looking statements: “Summary Information”, Part I (Risk Factors), Part V (Business of the Group) and Part X (Operating and Financial Review), and include, but are not limited to, express or implied statements relating to:
• possible or assumed future results of the Group’s business, financial position, results of operations, liquidity, plans, objectives, goals or strategies;
• the Group’s expectations of demand for its products;
• the evolution of the greeting cards market in the UK;
• the Group’s expectations for new store roll-out; and
• the assumptions underlying such forward-looking statements.
These forward-looking statements and other statements contained in this Prospectus regarding matters that are not historical facts involve predictions. No assurance can be given that such future results will be achieved: actual events or results may differ materially as a result of risks and uncertainties facing the Company. Such risks and uncertainties could cause actual results to vary materially from the future results indicated, expressed or implied in such forward-looking statements. Please refer to Part I (Risk Factors) for further confirmation in this regard.
Prospective investors should be aware that a number of important factors could cause actual results, level of activity, performance or achievements to differ materially from the plans, objectives, expectations, estimates and intentions expressed or implied in such forward-looking statements. These factors include:
• increases or decreases in footfall in physical retail stores;
• the effects of competition;
• the Group’s ability to execute successfully its expansion plans;
• the effects of seasonality on the Group’s sales;
• the Group’s ability to successfully predict and respond to customer preferences and demand;
• changes in consumer preferences and cultural attitudes towards greeting cards;
• the effects of increases or decreases in stamp prices;
• the effects of unanticipated interruptions in the Group’s supply chain;
• inflation, interest rate and exchange rate fluctuations in the UK;
• increases in personnel costs, specifically in the minimum wage;
• changes in property costs for retail outlets; and
• various other factors, including those factors discussed in Part I (Risk Factors).
37 The forward-looking statements contained in this Prospectus speak only as of the date of this Prospectus. The Company, the Directors, the Selling Shareholders and the Underwriters expressly disclaim any obligation or undertaking to update these forward-looking statements contained in the Prospectus to reflect any change in their expectations or any change in events, conditions or circumstances on which such statements are based unless required to do so by applicable law, the Prospectus Rules, the Listing Rules or the Disclosure and Transparency Rules of the FCA. Investors should note that the contents of these paragraphs relating to forward-looking statements are not intended to qualify the statements made as to sufficiency of working capital in this Prospectus.
Forward-looking statements contained in this Prospectus do not in any way seek to qualify the working capital statement contained in Section 17 (Working Capital) of Part XVI (Additional Information).
5 Over-allotment and stabilisation In connection with the Offer, Morgan Stanley Securities Limited, as Stabilising Manager, or any of its agents, may (but will be under no obligation to), to the extent permitted by applicable law, over-allot Shares or effect other transactions with a view to supporting the market price of the Shares at a higher level than that which might otherwise prevail in the open market. The Stabilising Manager is not required to enter into such transactions and such transactions may be effected on any securities market, over-the-counter market, stock exchange or otherwise and may be undertaken at any time during the period commencing on the date of the commencement of conditional dealings of the Shares on the London Stock Exchange and ending no later than 30 calendar days thereafter. However, there will be no obligation on the Stabilising Manager or any of its agents to effect stabilising transactions and there is no assurance that stabilising transactions will be undertaken. Such stabilisation, if commenced, may be discontinued at any time without prior notice. In no event will measures be taken to stabilise the market price of the Shares above the Offer Price. Except as required by law or regulation, neither the Stabilising Manager nor any of its agents intends to disclose the extent of any over-allotments made and/or stabilisation transactions conducted in relation to the Offer.
6 Information not contained in this Prospectus No person has been authorised to give any information or make any representation other than those contained in this Prospectus and, if given or made, such information or representation must not be relied upon as having been so authorised. Neither the delivery of this Prospectus nor any subscription or sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date of this Prospectus or that the information in this Prospectus is correct as of any time subsequent to the date hereof.
7 No incorporation of website information The contents of the Company’s websites, any website mentioned in this Prospectus or any website, directly or indirectly, linked to these websites have not been verified and do not form part of this Prospectus, and investors should not rely on such information.
38 PART III
DIRECTORS, SECRETARY, REGISTERED AND HEAD OFFICE AND ADVISERS
Directors Geoff Cooper Richard Hayes Darren Bryant Graeme Coulthard Octavia Morley David Stead
Company Secretary Shiv Sibal
Registered office of the Company Century House Brunel Road Wakefield West Yorkshire WF2 0XG United Kingdom
Head Office of the Company Century House Brunel Road Wakefield West Yorkshire WF2 0XG United Kingdom
Joint Sponsor Morgan Stanley & Co. International plc 25 Cabot Square London E14 4QA United Kingdom
Joint Global Co-ordinator and Morgan Stanley Securities Limited Joint Bookrunner 25 Cabot Square London E14 4QA United Kingdom
Joint Sponsor, Joint Global UBS Limited Co-ordinator and Joint Bookrunner 1 Finsbury Avenue London EC2M 2PP United Kingdom
Joint Bookrunner Nomura International plc 1 Angel Lane London EC4R 3AB United Kingdom
Joint Lead Manager Investec Bank plc 2 Gresham Street London EC2V 7QP United Kingdom
English and U.S. legal advisers to Linklaters LLP the Company One Silk Street London EC2Y 8HQ United Kingdom
39 English and U.S. legal advisers to Latham & Watkins (London) LLP the Joint Sponsors, Joint Global 99 Bishopsgate Co-ordinators, Joint Bookrunners London EC2M 3XF and Joint Lead Manager United Kingdom
Reporting Accountants and Auditors KPMG LLP 1 The Embankment Neville Street Leeds LS1 4DW United Kingdom
Registrar Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA United Kingdom
Public relations advisers to the MHP Communications Company 60 Great Portland Street London W1W 7RT United Kingdom
40 PART IV
EXPECTED TIMETABLE OF PRINCIPAL EVENTS AND OFFER STATISTICS
Expected timetable of principal events Event Time and date ––––– ––––––––––––––––––– Prospectus published/Announcement of Offer Price and allocation 8.00 a.m. on 15 May 2014 Commencement of conditional dealings on the London Stock Exchange 8.00 a.m. on 15 May 2014 Admission and commencement of unconditional dealings on the London Stock Exchange 8.00 a.m. on 20 May 2014 CREST accounts credited 8.00 a.m. on 20 May 2014 Despatch of definitive share certificates (where applicable) from 28 May 2014
It should be noted that, if Admission does not occur, all conditional dealings will be of no effect and any such dealings will be at the sole risk of the parties concerned.
All times are London times. Each of the times and dates in the above timetable is subject to change without further notice.
Offer statistics Offer Price (per Share) 225 pence Number of Shares in the Offer 131,834,049 Number of Shares in the Offer to be issued by the Company 40,000,000 Number of Shares being sold in the Offer by the Selling Shareholders(1) 91,834,049 Percentage of the enlarged issued share capital in the Offer(1) 38.7% Maximum number of Shares subject to the Over-allotment Option 13,183,404 Number of Ordinary Shares in issue following the Offer(2) 340,696,235 Estimated net proceeds of the Offer receivable by the Company(3) £80 million Estimated gross proceeds of the Offer receivable by the Selling Shareholders(1) £206.6 million Estimated net proceeds of the Offer receivable by the Selling Shareholders(1)(4) £202.0 million Market capitalisation of the Company at the Offer Price £766.6 million
Notes: (1) Assuming no exercise of the Over-allotment Option. (2) Includes issuance of the Residual Management Equity. (3) The estimated net proceeds (after deducting underwriting commissions, other estimated Offer related fees and expenses payable and applicable taxes of approximately £10 million) from the Offer of New Shares by the Company will be approximately £80 million (assuming the maximum amount of the Underwriters’ discretionary commission and the discretionary elements of the fees of the Group’s other advisers will be paid). The Company will not receive any portion of the proceeds resulting from the sale of the Existing Shares by the Selling Shareholders in the Offer, all of which will be paid to the Selling Shareholders or to such persons as the Selling Shareholders may direct. (4) After deducting underwriting commissions and applicable taxes payable by the Selling Shareholders of £4.6 million.
41 PART V
BUSINESS OF THE GROUP
Investors should read this Part V (Business of the Group) of this Prospectus in conjunction with the more detailed information contained in this Prospectus, including the financial and other information appearing in Part X (Operating and Financial Review) and market information appearing in Part VI (Market Overview). Where stated, financial information in this Part V (Business of the Group) of this Prospectus has been extracted from Part XII (Historical Financial Information).
1 Introduction The Group is the UK’s leading specialist retailer of greeting cards. The Group focuses on the value and mid- market segments of the UK’s greeting cards market, offering a wide range of quality products at affordable prices principally through its nationwide chain of over 700 Card Factory stores, as well as through its online offerings, www.gettingpersonal.co.uk (which sells personalised single cards and personalised gifts), and www.cardfactory.eu.com (which sells a selection of the products available in Card Factory stores).
The Group sells single cards for everyday occasions (e.g., birthdays and anniversaries), single cards for seasonal occasions (e.g., Christmas, Mother’s Day, Father’s Day and Valentine’s Day), single personalised cards (through its online offering) and Christmas box sets of multiple cards. The Group also offers cards in multi-buy promotion offers (e.g., seven cards for £1).
Approximately 96 per cent., by value, of cards sold by Card Factory are single cards, of which approximately 90 per cent., by volume, are sold for less than £1. In the financial year ended 31 January 2014, sales of greeting cards represented approximately two-thirds, by value, of total sales of the Group.
The Group also sells a wide range of complementary products for “dressing” a gift, principally comprising gift bags, gift boxes, gift wrap, bows, ribbons and gift tags, as well as related small gift items such as soft toys, ceramics and glassware and party products, including helium balloons, banners and badges. These non- card products, covering both everyday and seasonal occasions, largely range from 99p to £4.99 in price. In the financial year ended 31 January 2014, sales of these non-card items together represented approximately one-third, by value, of total sales of the Group.
Card Factory commenced operations in 1997 as a one-store discount retailer and has been developed, through organic growth supplemented with strategic acquisitions, into a value retailer with a national network of over 700 stores in the UK, supported by a vertically integrated retail business model with:
• an in-house design team of over 40 employees, responsible for the design of the vast majority of products merchandised in-store;
• an in-house printing facility which produces the vast majority of the non-handcrafted cards sold by the Group and has a potential capacity of 400 million cards per annum;
• in-house sourcing, purchasing and quality assurance teams supporting direct sourcing of most non- card products from third-party manufacturers;
• central warehousing capacity of over 360,000 square feet; and
• a retail operations team that ensures the consistency of product displays and range of offering throughout the Card Factory store portfolio.
The Directors believe that this vertical integration enables the Group to differentiate itself from its competitors by significantly reducing external costs and adding value to customers in terms of both price and quality, underpinning the Group’s motto: “compare the quality, compare the price”.
The UK has a large and resilient greeting cards market which was estimated by OC&C to be worth approximately £1.4 billion for the year ended 31 December 2012. Card Factory primarily operates in the
42 single cards segment of the market, which OC&C estimated to be worth £1.3 billion in 2012 and which has experienced a higher rate of growth of 2.4 per cent. per annum, by value, over the three year period ended 31 December 2012, compared to the greeting cards market as a whole, which grew by 1.4 per cent. per annum, by value, over the same period. The Group has a sustained track record of continuously growing market share year-on-year, and is now the largest greeting cards retailer in the UK by value and volume of sales, with a market share of 15.5 per cent., by value, and 26.6 per cent., by volume, (in the year ended 31 December 2012). The Directors believe that these market shares have increased in the year ended 31 December 2013.
The Group sold over 285 million single cards in the financial year ended 31 January 2014, with card sales and non-card sales representing approximately two-thirds and one-third of revenues, respectively. In the same period, sales from Card Factory stores and online sales represented 96 per cent. and 4 per cent., respectively, of total Group sales.
In the financial year ended 31 January 2014, the Group generated total revenue of £326.9 million, operating profit of £72.9 million and EBITDA of £80.4 million, with an operating profit margin of 22.3 per cent. and an EBITDA margin of 24.6 per cent. The Group has a strong, consistent track record of growth, having grown sales and EBITDA by a CAGR of 11.0 per cent. and 12.7 per cent., respectively, in the three-year period ended 31 January 2014.
2 History of the Group Twelve months Number of ended 31 January Milestone stores –––––––––––––– ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– ––––––––– 1998 First Card Factory store opened in Wakefield by Dean and Janet Hoyle, 1 trading as a discount retailer with products sourced from wholesalers 2003 Richard Hayes appointed to the Board as Finance Director 39 2006 Acquired Card Concepts and Excelsior Graphics, marking the start of the 189 Group’s vertical integration, with Stuart Middleton (Creative Director) joining the Business, and the establishment of a design studio in Wakefield and direct relationships with printers 2007 Acquired 39 Celebrations Cards and Card Crazy stores (subsequently 333 converted to Card Factory fascia) 2009 Acquired 74 stores from Celebrations Group (subsequently converted to 384 Card Factory fascia) Richard Hayes appointed as Managing Director (re-named Chief Executive Officer in 2010) 2010 Darren Bryant appointed as Group Finance Director (re-named Chief 484 Financial Officer in 2010) Acquired Printcraft, a Yorkshire-based manufacturer of greeting cards and a significant existing supplier to Card Factory, creating the Group’s in-house printing operations, further developing the vertically integrated model 2011 Charterhouse acquired the Business through an MBO from the founder 531 shareholders and minority shareholder, Lloyds Development Capital (April 2010) 2012 Acquired Getting Personal, an online retailer of personalised gifts and 611 cards (www.gettingpersonal.co.uk) Expanded and relocated the Group’s printing operations to a new freehold property in Shipley, Yorkshire 2013 Launched Card Factory’s transactional website www.cardfactory.eu.com 664 2014 Opened new Head Office and additional Gate 4 warehouse 713
43 3 Key Strengths The Directors believe that the Group has the following key strengths:
3.1 Offering exceptional value through a compelling price and quality proposition for customers The Group provides a clearly differentiated value proposition to that of its competitors, offering a wide range of quality products at affordable prices. While over 90 per cent. of Card Factory’s single cards sold, by volume, are priced at less than £1, the Directors believe that the majority of the Group’s cards are comparable in quality to those of its principal competitors in the mid-market segment of the greeting cards market, who typically charge significantly higher prices than Card Factory.
The strength of the Group’s value proposition is consistently reflected in independent consumer surveys which indicate a clear and favourable differentiation in customer perception between Card Factory and the rest of the greeting cards market when considering a combination of price and quality. The Directors believe that competitors can compete on price or quality, but currently not both on a consistent basis.
Card Factory also provides a complementary value proposition in the non-card segment. Dressings and gift items are similarly low-priced, generally ranging from 99p to £4.99, and the Directors believe they are comparable in quality to the non-card products sold by its principal competitors in the mid-market segment, but typically offered at lower prices.
The Group’s value proposition is attractive to a range of demographics, with a recent independent survey conducted by OC&C suggesting that 27 per cent. of the Group’s customers are from the affluent AB socio-demographic group.
3.2 A vertically integrated retail business model that creates significant advantages for the Group Since 2005, the Group has invested over £50 million, including through acquisitions and new store openings, to develop a vertically integrated retail business model whereby the Group can perform its own design, print, sourcing, warehousing, merchandising and retail functions. The Directors believe that this model provides significant advantages to the Group, including:
• enabling Card Factory to offer its clearly differentiated value proposition of quality products at affordable prices while maintaining margins;
• providing Card Factory with control over the quality, design and merchandising of its products, with the ability to act directly on customer preferences;
• exclusivity of design – the vast majority of Card Factory’s products are exclusive to Card Factory;
• economies of scale (e.g., with regard to the size of card print runs) that have been built up over a significant period of time;
• greater security of supply chain and enhanced visibility of stock, allowing the Group to react more dynamically to trends in the greeting cards market;
• enhanced financial flexibility through better working capital management;
• benefits from the significant investment in design capabilities (including the artwork and verses required to support the range of designs), production and warehousing infrastructure, staff and retail stores;
• a management team with the diverse experience and expertise required to operate a deeply vertically integrated retail business as opposed to a pure retail model; and
• an integrated business model that would involve execution risk to replicate.
44 3.3 Leader in a large and resilient market The UK greeting cards market was estimated by OC&C to be worth £1.4 billion in 2012, having grown historically at 1.4 per cent. per annum, by value, over the three year period ended 31 December 2012. Card Factory primarily operates in the single cards segment of the market, which was estimated by OC&C to be worth £1.3 billion in 2012 and which has experienced a higher rate of growth of 2.4 per cent. per annum, by value, over the same period. According to OC&C, the market outlook in the UK for the six year period ended 31 December 2018 is for growth at a similar level to that experienced historically, driven primarily by an ingrained culture of sending greeting cards for a wide range of occasions, and a favourable demographic profile, of a growing and ageing population, in a market where older people and people who have children typically send more greeting cards to mark seasonal and everyday occasions than the rest of the general population.
Having been transformed from a “discount” retailer to a vertically integrated “value” retailer, the Directors believe that the Group is now clearly established as the UK’s leading specialist greeting cards retailer, having grown market share from 3.2 per cent., by value, and 6.5 per cent., by volume, in 2005 to 15.5 per cent., by value, and 26.6 per cent., by volume, in 2012.
Management estimates that the diverse non-card market which Card Factory addresses has a size of between £1 billion and £2 billion.
Driven by its continued store roll-out and the strength of its value proposition to customers, the Directors believe that there is opportunity for continued significant growth of the Group’s market share at the expense of specialist greeting cards retailers, generalist retailers, independent greeting cards retailers and other established competitors.
3.4 A successful track record of delivering like-for-like sales growth The Group has a strong track record of delivering like-for-like sales growth from existing stores, having delivered positive like-for-like sales since the Group opened its first store in 1997. This growth has been driven by a range of factors, including increasing ABV, transaction volumes and developing and improving the quality and range of both card and non-card products.
The Group also typically benefits from increases in like-for-like sales over the four to six-year period after a new store is opened, as awareness of the store increases (primarily through word-of-mouth) and the sales profile matures and market share gains are achieved from other local competitors.
3.5 A successful track record of growing the Group’s store portfolio and operating stores profitably in a range of retail locations Card Factory has grown from one store in 1997 to over 700 stores in 2014, reflecting a long and successful track record of organic expansion (i.e., individual new store openings), supplemented by the acquisition of 39 stores from Celebration Cards and Card Crazy in the 2007 financial year and 74 stores from Celebrations Group in the 2009 financial year. Excluding these small acquisitions, on average, the Group has successfully opened approximately 50 stores a year over the last 10 years.
The Group’s value proposition, vertically integrated retail business model and low average capital expenditure requirements for new stores allow the Group to operate profitably at store contribution level (i.e., after direct store costs but excluding shared Head Office costs) in a wide range of locations and formats while maintaining the quality and flexibility of its store-rental portfolio. The Group has stores operating profitably on high streets in both small towns and major cities, in shopping centre developments, in out-of-town retail parks and in factory outlet centres.
The vast majority of the Group’s stores are held through leasehold arrangements, with a small proportion operated on more flexible licence agreements. The average period until the next exit opportunity across the store portfolio is approximately three years. Currently, over 99 per cent. of the Group’s stores that have been open for at least one year are operating profitably (at store contribution level).
45 The success of the store roll-out plan is demonstrated by the strong returns on capital from new store openings. In the three financial years ended 31 January 2014, capital expenditure required to open a new store averaged approximately £60,000 per store, with the stores opened during this period generating an average first 12 months’ EBITDA in excess of this initial investment.
3.6 Consistently strong financial performance and cash generation Card Factory’s business model has consistently generated high levels of revenue growth and profitability. During the three financial years ended 31 January 2014, the Group’s revenue grew by a CAGR of 11.0 per cent. to £326.9 million, with EBITDA growing at a CAGR of 12.7 per cent. to £80.4 million. In the financial year ended 31 January 2014, the Group’s EBITDA margin and operating profit margin were 24.6 per cent. and 22.3 per cent., respectively.
The Group is highly cash generative, reflecting the efficiency of the Group’s business model, strong control of operating costs, low and predictable capital expenditure and limited working capital investment required to operate the business. In the financial year ended 31 January 2014, Cash Generation was £69 million and Cash Conversion was 85.8 per cent. of EBITDA. Cash Conversion in the three financial years ended 31 January 2014 was 80.3 per cent. of EBITDA.
3.7 Well-invested infrastructure to support future growth plans The Group has made a significant investment in its information technology over a number of years, including its current roll-out of EPOS terminals in its store portfolio and the implementation of an enterprise resource planning (“ERP”) solution to support its warehouse management function. The Group has also increased the size of its central distribution centre warehouses and invested in machinery at Printcraft to support the potential growth of its store portfolio and sales of greeting cards. The Directors believe that the Group’s physical infrastructure is ready to support its current future growth plans (with only moderate additional capital expenditure).
The Group has continually invested in its Head Office team over the last three years. In the financial year ended 31 January 2014, the Group recruited a selected number of new Head Office staff and moved to a new Head Office. The Group also recruited new employees in its in-house design team to further strengthen this function.
3.8 Experienced and committed management team The Group’s Management team, led by the Chief Executive Officer, Richard Hayes, is highly experienced in the greeting cards market and in their areas of expertise and has been working for the Group for a significant period of time. This Management team provides the Group with a depth of expertise across all aspects of its Business, and has been responsible for the successful implementation of significant strategic and operational initiatives throughout the team’s tenure. This has included the continued development of the Group’s retail proposition, undertaking and integrating acquisitions, establishment and development of the vertically integrated retail business model, the ongoing roll-out of new stores, ongoing management of the store portfolio and strong financial management.
Immediately following Admission and the issuance of the Residual Management Equity, the Management team will own, in aggregate, 19.2 per cent. of the Company’s share capital. Accordingly, Management is strongly incentivised to ensure the continued success of the Business.
In recent years, the Management team has been augmented with a number of other senior appointments to strengthen the second tier of management to ensure that the Business is well-placed for future growth.
46 4 Strategy The Group intends to continue with its existing successful strategy in order to enhance its status as the market-leading specialist retailer of greeting cards. That clear strategy is focused on maintaining the Group’s value proposition of combining affordable prices with a wide range of quality products through its vertically integrated model, while:
• continuing to grow like-for-like sales in existing stores;
• continuing to roll-out profitable new stores;
• continuing to focus on delivering business efficiencies; and
• increasing penetration of the complementary online market.
4.1 Continue to grow like-for-like sales in existing stores The Directors intend to build on the Group’s strong track record of consistently delivering like-for- like growth and growing ABV, whilst maintaining its core value proposition, by:
• continuing to improve overall product quality and range for both card and non-card products developed by its established design team;
• further developing the Group’s in-store merchandising and pricing architecture to increase the number of items sold per basket and/or to encourage customers to trade up to higher priced items; and
• leveraging the recent investment in EPOS to provide more granular sales data for analysis of customer purchasing trends, thereby assisting in increasing items sold per basket, for example through identifying and stocking non-card products that are more likely to be purchased alongside greeting cards.
The Group also expects to benefit from growth in transaction volumes, and increased revenue contribution, from up to approximately 400 stores opened in the past six years as these stores grow to reach maturity. At the point of maturity, annual sales are typically 30 to 40 per cent. higher than in the first year post-opening, providing growth in like-for-like sales in these stores.
4.2 Continue to roll out profitable new stores New stores are expected to continue to be a further driver of sales growth for the Business. The Group intends to expand its store portfolio organically from its existing 739 stores to up to 1,200 stores in total over the next 10 years, at a similar rate to the Group’s historical rate of organic store openings. The proposed roll-out of new stores includes up to approximately 100 potential new stores in the Republic of Ireland, although this remains subject to the Group’s continuing evaluation of this opportunity. Management currently intends to begin this expansion with an initial opening of approximately 10 stores, as early as calendar year 2015, with warehousing and distribution for these new stores provided by the Group’s existing facilities in the UK in the same way as the Group supplies its existing stores in Northern Ireland. The remainder of the new stores are expected to be opened in the UK, taking the UK estate to approximately 1,100 stores (a figure supported by external analysis undertaken by OC&C).
Target locations for all of these new stores have already been identified. These locations, and other potential locations, are kept under regular review. Although these new opportunities are expected to have, on average, lower sales potential than the average of the Group’s existing store locations, primarily due to the new stores typically being in lower footfall locations than the average of the Group’s existing stores, the Directors believe these new stores will nevertheless enhance EBITDA and will continue the trend of delivering a strong ROCE.
47 4.3 Continue to focus on delivering business efficiencies The Directors intend to focus on maintaining and, where possible, improving the Group’s market- leading margins through an ongoing focus on business efficiencies:
Cost control The Group intends to protect and, where possible, enhance operating margins through continued strong control of operating costs, including the management of overall employee costs, negotiation of improved rental terms upon the expiry and renewal of existing leases, and tight control over other costs and expenses.
Leveraging infrastructure The Directors believe that the Group can also benefit from leveraging the recent significant investment in, and continuing to make improvements to, the Group’s infrastructure, including the:
• extensive sales data that will be available from the Group’s new EPOS system which is being introduced in a controlled manner across the existing store portfolio over the next three years (currently approximately 20 per cent. of stores have the EPOS system). This will allow the Group to identify customer purchasing trends and popular products with greater speed and accuracy and will over time, help provide improved controls around stock management;
• ongoing expansion of Printcraft, coupled with further piecemeal automation, particularly in relation to certain finishes that are applied to some lines of greeting cards (this is part of an anticipated £8 million to £10 million capital expenditure programme for Printcraft over the next 10 years);
• recent relocation of Getting Personal’s gift production facility to Printcraft which provides a better platform for targeting further growth and efficiencies for the Getting Personal business; and
• recent investment in the new fourth warehouse, providing more effective stock order fulfilment, reduced requirements for third-party storage and associated stock holding and movement costs.
Improving supply chain The Group intends to maintain and, where possible, enhance its operating margins through continuous improvement in the supply chain process. In particular, the Group intends to continue to diversify its range of suppliers (to reduce reliance on key suppliers) and further develop direct sourcing relationships with manufacturers. Please see Section 7.2 (Sourcing and purchasing) of this Part V (Business of the Group) for further details.
Continue to leverage economies of scale The Group will continue to leverage the growing economies of scale when negotiating contracts with suppliers and manufacturers.
4.4 Increase penetration of the complementary online market While the personalised online segment of the greeting cards market remains small, according to OC&C representing just five per cent. of the total greeting cards market, by value, and two per cent., by volume, in 2012, the segment is projected by OC&C to grow at a CAGR of 12.2 per cent., by value, during the six year period ended 31 December 2018. The Directors believe that the Group is well placed to capture a greater share of this growing segment of the market through its website www.gettingpersonal.co.uk.
The Directors also believe there are opportunities to further grow the Group’s sales in the complementary online personalised gifts market (which currently represents the vast majority of sales from www.gettingpersonal.co.uk) through further product development (e.g., changes to existing product ranges and new product ranges) and improved marketing.
48 The Group also offers a selection of non-personalised cards, dressings and gift items on its recently established Card Factory website www.cardfactory.eu.com. The Directors plan to grow the offering from its current relatively small base, albeit that this will remain a relatively small proportion of total Group sales.
5 Description of Business 5.1 Products The Group offers a clear value proposition with a wide range of quality products at affordable prices within the UK greeting cards market. Following the creation of the Design Studio as the Group’s in- house design function in 2005, the Group has continually increased product quality across its extensive range of over 2,400 cards for everyday occasions, together with over 3,000 seasonal cards and, more recently, across its non-card ranges. This strategically important in-house design function means that the vast majority of Card Factory products on sale are exclusive to Card Factory.
The products sold through the Card Factory store portfolio can be categorised as follows:
(a) Cards • Everyday cards: single cards for everyday occasions, such as birthdays, anniversaries and weddings, as well as thank you, get well soon, good luck, congratulations, sympathy and new baby cards;
• Seasonal cards: single cards for seasonal occasions, such as Christmas, Mother’s Day, Father’s Day, Valentine’s Day, Easter, thank you teacher, graduation and exam congratulations; and
• Christmas box cards: sets of multiple Christmas cards sold in boxes, typically for sending to a wider group of friends, relatives, friends and colleagues.
(b) Non-card items • Dressings: products for dressing gifts such as gift wrap, gift bags, gift boxes, ribbons, gift tags, bows and tissue (for both everyday and seasonal occasions);
• Everyday non-card gift items: products for everyday occasions such as photo frames, ceramics, glassware, novelty items and soft toys;
• Party items: principally products for everyday occasions, including helium balloons, banners and badges; and
• Seasonal non-card items: including diaries and calendars and gifts for seasonal occasions, such as Christmas ceramics, glassware and novelty items.
The product offering is standardised across the Card Factory store portfolio, subject to individual store size.
The Card Factory website (www.cardfactory.eu.com) also offers a selection of the card and non-card products that are available in-store. In addition, the Group sells personalised greeting cards and personalised small gifts through its website www.gettingpersonal.co.uk. The types of products that can be personalised (in addition to cards) include notebooks, mugs, chocolates, wine, champagne and various engraved items.
For the financial year ended 31 January 2014, approximately two-thirds of Group revenue was attributable to card sales, with less than one per cent. attributable to personalised cards, and one-third of revenue was attributable to non-card sales, with three per cent. attributable to personalised gifts. During this period, approximately 65 per cent. of card and non-card sales were related to everyday occasions, with Christmas sales comprising 26 per cent. of card and non-card sales. Approximately eight per cent. of sales related to seasonal occasions in Spring (i.e., Mother’s Day, Father’s Day,
49 Valentine’s Day and Easter) with the remaining one per cent. coming from sales of card and non-card items for minor seasonal events such as thank you teacher and graduation.
5.2 Pricing Card Factory is a multi-price point value retailer principally offering single cards at various price points of less than £1 (for example 29p, 59p, 79p, 89p and 99p). Over recent years, a small proportion of cards retailing at over £1 have also been selectively introduced at a price and quality which supports the Group’s key value proposition. The Group also offers other cards in multi-buy promotion offers (e.g., seven cards for £1) as well as Christmas box sets of multiple cards.
In the financial year ended 31 January 2014, approximately 90 per cent. of single cards sold by the Group had a retail price of less than £1. Competitors offering comparable quality cards are generally 2.5 to 3 times more expensive than Card Factory’s comparable prices, according to Management estimates.
Card Factory is committed to offering value for money at all times and therefore does not generally promote discounting in its stores (outside of its Everyday promotion cards offering). The key exceptions to this are the post-Christmas sale period, where most Christmas card and non-card products are sold at, or slightly less than, half price, and the Christmas box card sale in July.
5.3 Customers The Group does not have a particular target customer demographic. Through the development of the Group’s vertically integrated retail business model it has evolved into a clearly differentiated value retailer, offering both affordability and quality. The Directors therefore believe that the Group’s product offering has broad appeal across customer demographics and, as reflected in its consistent growth in market share by both value and volume, as well as the Group’s expansion into a range of locations including high streets, shopping centres and retail parks, the Group’s value proposition is increasingly attractive to customers from all socio-demographic backgrounds.
5.4 Marketing and advertising The Group’s historic growth has been achieved with limited external advertising. With the exception of any publicity in respect of the Group’s partnership with and donations to the Macmillan Cancer Support charity, Card Factory relies principally on word-of-mouth regarding the strength of its proposition to increase brand awareness. The Group intends to continue with this strategy going forward.
6 Store Portfolio Card Factory’s store portfolio has grown from one store in 1997 to 739 stores as at the date of this Prospectus. This expansion has been achieved primarily through organic growth, with, on average, 50 new Card Factory stores being opened per year in each of the last 10 years, supplemented by three small portfolio acquisitions.
The following table sets out the Group’s store numbers for each of the last three financial years:
2012 2013 2014 ————— ————— ————— Existing stores as at 1 February 531 611 664 New stores opened during the year 81 59 50 Stores closed during the year (1) (6) (1) ————— ————— ————— Total stores as at 31 January ————— 611 ————— 664 ————— 713 Since 31 January 2014, the Group has opened a further 26 stores and has not closed any stores, bringing its total store portfolio to 739 as at the date of this Prospectus. Historically, the Group has closed or fully re-fitted relatively few stores each year. Management expects this trend to continue.
50 Store locations The Group’s 739 stores are located on high streets, retail parks, shopping centres and factory outlet centres across the UK, as set out in the map below:
124
124
Management takes a rigorous approach to identifying potential new store locations. The factors considered and tools used to identify sites include:
• the location of a number of “indicator” retailers which Management believes Card Factory stores trade well in proximity to;
• feedback and intelligence from a network of property agents and contacts;
• the location of public transport links and car parks;
• the proximity of existing Card Factory stores and greeting cards retailer competitors;
51 • independent third-party data of the top 2,000 retail locations in the UK and analysis of population densities; and
• Management site visits.
Management undertakes a formalised appraisal process for new location opportunities which includes an assessment of potential store sales and profitability. This process has been undertaken for each of the identified sites in the Group’s new store roll-out plan. The result of this exercise is stored in a database of new store opportunities which is continually updated and refreshed.
Store size and layout The average size of the Group’s 713 stores as at 31 January 2014 was 1,177 square feet, with stores ranging from 420 square feet to 3,213 square feet. The target store size varies by store location and is also impacted, to an extent, by the availability of appropriately sized units in any retail location and the rents of those units. Over 75 per cent. of the Group’s existing stores are between 700 square feet and 1,700 square feet in size.
The Group’s commercial, property and retail operations teams oversee the design of store layout.
Store management The day-to-day management of each of the Group’s stores is undertaken by a local store manager, who has responsibility for key tasks, including rota planning, stock ordering and merchandising (in most cases to centrally agreed detailed plans). Each store manager reports to one of 42 area managers who, in turn, report to one of five regional managers. The Retail Operations Director has overall responsibility for the store operations, with the five regional managers reporting directly to him.
Leases The Group holds the vast majority of its 739 stores in the UK on leasehold arrangements, with a small proportion operated on more flexible licence agreements. As at 31 January 2014, the average remaining tenure for Card Factory stores was under four years, with an average period until the next exit opportunity of approximately three years.
The Group adopts an active approach to managing its lease arrangements, seeking to retain as much flexibility as possible in terms of average lease length and time to next break. This approach is enabled by the short period (less than one year on average) for recovery of new store fit out capital expenditure from profits generated by the new store. Where the length of lease or length to break is relatively short, this quick recovery of costs allows the Group the opportunity to consider whether to close or relocate a store or seek to introduce a shorter lease upon renewal.
Store re-fits and maintenance The Group has a dedicated in-house team responsible for undertaking virtually all of the Group’s maintenance (except where the in-house team does not have the required specialist expertise) and the same team undertakes approximately one-third of the Group’s store fit-outs, relocations and refurbishments, allowing the Group to efficiently manage the costs and timing of such work. The remaining store fit-outs, relocation and refurbishments are performed by external specialists.
7 Vertically Integrated Supply Chain The Group has invested over £50 million since 2005 (including acquisitions and new store roll-out) in the development and implementation of its vertically integrated retail business model, which comprises design, sourcing, printing, warehousing, distribution and retailing functions. This process has transformed Card Factory from a discounter, selling third-party products, to a vertically integrated high margin, value retailer. With the exception of the distribution of products, which is largely carried out by third-parties, the Group performs each of the other functions in its business model in relation to nearly all of its greeting cards and most of its non-card items.
52 This model provides a number of strategic benefits, including greater cross-function interaction, security of supply chain, enhanced product quality and control and significantly improved margins.
7.1 Design The Group acquired its in-house design function with the acquisition of Excelsior Graphics and Card Concepts in 2005, prior to which all products were designed by, and sourced from, third-parties. The design team is led by the Group’s Creative Director, Stuart Middleton, and now has over 40 staff, including illustrators, verse writers, packaging specialists, editors, technical constructors and designers who work on cards and non-card items. The design team has grown from approximately 20 employees in 2009 in order to allow the Group to improve its product range and expand into the design of non-card items.
More than 98 per cent. of all greeting cards sold by the Group in its stores or on its website (www.cardfactory.eu.com) are designed by the Group’s in-house design team. The remaining two per cent. represents everyday humorous cards, which are predominantly designed externally and sourced from a range of suppliers. The Group also designs an increasing proportion of the cards sold through its Getting Personal website.
The design team typically produces over 4,000 new card designs each year and has built up a databank of over 8,000 creative designs and 15,000 verses that can be applied to the redesign of existing cards and the design of new cards. The majority of non-card items are also designed by the design team.
The Group’s buyers work closely with the design studio and the Group’s manufacturers to drive improvement and innovation through existing and new product offerings. The Directors believe that this in-house design function and direct sourcing allows Card Factory to maintain quality and high margins, whilst maintaining low retail prices to strengthen its competitive position.
7.2 Sourcing and purchasing The Group has taken the strategic approach of reducing reliance on key suppliers and shifting greater production in-house to Printcraft. All non-handcrafted cards (with the exception of some humour ranges) sold through Card Factory stores or on its website www.cardfactory.eu.com are now produced in-house. In addition, where possible, the Group’s sourcing team seeks to deal directly with manufacturers rather than intermediary suppliers in order to improve and control product quality and reduce costs. The Group intends to continue this strategy to further leverage its vertically integrated model and reduce its supplier costs.
The Group relies on third-parties for the supply of handcrafted cards, some humorous cards and nearly all of its non-card merchandise (including soft toys, balloons, ceramics and glassware). Approximately 50 per cent. of the annual cost of goods sold relates to products sourced directly from overseas manufacturers, mostly in the Far East. The remainder are principally sourced from the UK and Europe.
The Group’s sourcing team is assisted by a quality assurance team and a purchasing team which is responsible for maintaining the quality, safety and on-shelf availability of all Card Factory’s products.
Printcraft’s most significant raw material costs are paper and board (coated and un-coated). These items are currently sourced from four main suppliers, although there are a number of established alternative suppliers. Paper is sourced directly from paper mills in Europe, India and the Far East and cardboard is sourced from suppliers in the UK. Prices are negotiated for each individual order and typically cover three months of production, facilitating lower prices due to economies of scale.
In the financial year ended 31 January 2013, the Group incurred additional costs in respect of purchases of helium gas due to a global shortage of helium gas. Management has subsequently broadened its helium supplier base and now purchases helium on a medium term supply arrangement. No further material supply issues have arisen since. The Group procures its other supplies on a purchase order basis, without any medium or long-term contractual arrangements. See “The Group is
53 exposed to risks related to its third-party suppliers and may be adversely affected by interruptions in supply” of Part I (Risk Factors).
7.3 Printing of cards The Group prints, finishes and packages nearly all of its non-handcrafted everyday and seasonal cards sold in its stores and via the Card Factory website at its in-house print facility, Printcraft. Handcrafted cards and all of the personalised cards sold through Getting Personal are printed by third-parties, typically, in the Far East and the UK, respectively. In addition to its in-house supply of cards and merchandise to the Group, Printcraft also generates a small amount of revenue from sales to third- parties, primarily from legacy contracts and relationships with smaller external card publishers which were in place when the Group acquired Printcraft. These sales totalled approximately £1 million of Group revenue in the financial year to 31 January 2014.
The Group acquired Printcraft in 2009 to further support and enhance the depth of its vertical integration as well as to provide secure control over the Group’s UK printing. Since its acquisition, Printcraft has been transformed from a loss-making business prior to acquisition to a profitable element of the Group’s supply chain. The Directors believe that the Group has benefited from increasing operating margin as a result of owning its own print facilities, adding further vertical integration to the supply chain. This has supported an integrated approach to design, production planning, manufacturing and distribution and associated knowledge sharing between business functions to drive efficiencies and economies.
The Group relocated Printcraft in 2011 to a larger freehold facility in Shipley, West Yorkshire (132,000 square feet) allowing the business to streamline production and work flow and allow for expansion of Printcraft’s capacity as well as to provide a small amount of additional storage capacity for finished cards. As a result, Printcraft has the potential capacity to produce approximately 400 million cards per annum from this new site, which would be sufficient to service over 1,200 Card Factory stores based on current sales volumes. The Group expects to achieve this capacity through an additional investment of £8 million to £10 million in aggregate over the next 10 years.
Once the greeting cards are printed, finished and packaged by Printcraft, they are then held on site before being transferred to the Group’s warehousing facilities when required prior to distribution to the Group’s stores.
7.4 Warehousing The Group stores nearly all of its products at its National Distribution Centre in Wakefield, Yorkshire. The National Distribution Centre has expanded in a controlled manner to meet the Group’s growing warehousing requirements and now extends across four separate warehouse facilities at one site totalling approximately 363,000 square feet of warehouse floor space, the newest of which was 53,000 square feet and opened in April 2013. The Group has additional warehousing facilities at Printcraft in Shipley. The table below sets out the square footage, usage and key lease terms (where applicable) of each of the Group’s warehousing facilities:
Warehousing Pallet Lease Building Use Tenure space (sq. ft) spaces expiry ––––––– ––––––––––––––––––––––––––– ––––––––– –––––––––– –––––––– –––––––– Gate 1 Everyday Card Freehold 45,050 1,599 n/a Gate 2 Seasonal card and ancillaries Leasehold 143,000 4,445 July 2022 Gate 3 Seasonal non card and fulfilment of www.cardfactory.eu.com Freehold 121,829 11,240 n/a Gate 4 Everyday non card Freehold 53,000 7,992 n/a Printcraft Printcraft and Getting Personal building production and warehousing Freehold 132,000 2,000 n/a ———— ———— ———— Total 494,879 27,276 n/a
54 Each warehouse operates its own picking area together with additional stock on-hand to replenish the picking area without disrupting supply to stores. The Group’s investment in its warehouses means that they can support Card Factory’s medium-term store roll-out plans, although the Group continues to use some third-party off-site storage particularly for bulk items during seasonal peaks. These bulk storage warehouses are located close to the National Distribution Centre to enable such stock to be readily transported to the replenishment area of each warehouse as required.
The close proximity of the Group’s four warehouses permits significant operational leverage, and allows staff to be moved between operations during weekly and seasonal peaks so as to maximise efficiency and minimise non-productive labour.
The Directors believe that the continued investment in the Group’s warehousing facilities has resulted in significant cost benefits from improved stock management.
7.5 Distribution The National Distribution Centre in Wakefield is structured to receive containers of imported goods (for products from outside Europe) and UK and European trailer deliveries from its suppliers, ready for onward distribution to stores.
In 2009, the Group implemented an ERP solution to support all warehouse movements from purchase order to despatch to store with the initial deployment to provide a scalable replenishment order processing, warehouse management and purchase order placing and receiving solution. Stores have a scanner to create replenishment orders which are processed at Head Office based on an agreed order profile with stores. These replenishment orders are complemented with allocations of stock pushed from Head Office to stores to support the launch of new ranges, together with seasonal and promotional campaigns which, due to short selling windows, are driven by Head Office.
The Group primarily uses third-party logistics companies to distribute its products from the National Distribution Centre to its stores. The companies used by the Group to distribute its products to its stores have integrated track and trace systems between carriers and the Group’s planning ERP system. This allows the Group’s Head Office and its stores to track consignments of stock from the National Distribution Centre to the store which has requested the stock. The Group uses third-party logistics companies for the distribution of the majority of its products as the Directors believe this represents the most flexible solution for the Group.
Card Factory also uses its own fleet of seven vans, a 7.5 tonne vehicle and a leased 21 tonne heavy goods vehicle for reverse logistics (i.e., deliveries from stores to the National Distribution Centre of, for example, unsold seasonal stock) and certain local deliveries and national deliveries with restricted access. With the exception of a small number of items such as postage stamps and helium gas, all stock is distributed to stores from the Group’s National Distribution Centre in Wakefield.
7.6 Merchandising The Group’s merchandising function is performed by an in-house retail operations team. The team designs and develops detailed plans for stock merchandising in a “mock shop” located at the Group’s Head Office in Wakefield, in order to ensure consistency of display and optimisation of product range across the network. These plans are tailored for different sized stores and include card rack plans, details on the footage to be allocated for each non-card product range and detailed photos to guide stores as to how each product range is to be displayed in the store. These plans are then sent to Card Factory stores as instructions to be implemented by the store staff.
Card Factory’s retail operations team focuses its product displays on its core value proposition and price points, as well as seeking to create in-store “theatre” through utilising all available wall-space for merchandising. Over recent years, there has been an increased focus on space and range optimisation within stores, as well as a continued focus on improving store standards and merchandising. The Directors believe that further operational improvements can be made in this area by leveraging the current investment in the new EPOS system.
55 8 Employees As at 31 January 2014, the Group employed 6,308 permanent employees. The following table sets out the breakdown of the Group’s employees by function as at 31 January 2014.
Category Number –––––––– –––––––– Retail (permanent)(1) 5,618 Head Office (including Regional and Area Managers) 208 Design team 43 Warehouse 271 Printcraft 125 Getting Personal 43 ———— Total 6,308
Note: (1) Not full time equivalent figures.
The vast majority of the Group’s sales assistants work on a part-time basis, this being key to ensure flexibility of staff during peak trading periods whilst controlling costs. During the Christmas trading periods the Group employs additional temporary sales staff (“Seasonal Workers”). Over 6,000 Seasonal Workers were employed by the Group for Christmas 2013. The majority of sales assistants, including all Seasonal Workers, are paid the UK national minimum wage as at the date of this Prospectus. Accordingly if the national minimum wage were to increase significantly, it may have a material impact on the Group’s operating costs. See “Increases in the minimum wage, or changes to labour market laws or conditions in the UK, could increase the Group’s operating costs and reduce its operational flexibility” in Part I (Risk Factors).
9 Pensions The Group operates an auto-enrolment pension scheme, which was introduced in 2013. As at 31 January 2014, 3,034 employees have been enrolled in the scheme.
The Group does not operate a defined benefit scheme.
10 Information Technology The Group has made a significant investment in its information technology over a number of years, including in its current roll-out of EPOS terminals in stores as part of the already implemented ERP solution. The EPOS terminals are currently installed in approximately 20 per cent. of the Group’s stores and Management intends that further terminals will be installed in each new store that is opened going forward and its existing stores over the next three years. The new EPOS system will provide the Group with more detailed product sales information than the more generic data provided through the electronic cash registers used in the remainder of its stores.
The Group operates several other business-specific information technology systems, which are primarily maintained by third-parties through support and maintenance agreements.
The Getting Personal website is principally developed and maintained by a dedicated web development team based in Wythenshawe, near Manchester.
To help ensure that the Group IT function continues to support future business growth, the Group recently appointed a Chief Information Officer.
11 Intellectual Property The Group has registered a number of key trademarks to protect its brands, and a number of key design registrations to protect its designs, primarily in the United Kingdom, as this is the principal market in which the Group currently trades. The Group’s key registered intellectual property includes “THE CARD FACTORY”, “CARD FACTORY” and the Getting Personal logos.
56 The Group recognises the importance of intellectual property rights to its brands and undertakes the following measures to protect these interests:
• registration of key names and logos as trademarks in the key markets for the Group’s brands;
• resistance to third-party efforts to encroach on the Group’s trademarks by monitoring third-party applications and opposing them where appropriate; and
• defending third-party oppositions to the Group’s trademark applications.
The Group also uses external legal advisers to detect third-party applications to register its trademarks, and undertakes a wide programme of store visits and market sweeps to detect infringement at the earliest opportunity.
12 Insurance The Group maintains comprehensive insurance policies which are arranged via its broker, Oval Insurance Broking Ltd, which the Directors believe is consistent with that normally maintained by companies in its industry. The Group maintains 18 month business interruption insurance. The Directors believe that the 18 month period would be sufficient for the Group to re-establish operations or make alternative arrangements for the supply of its store portfolio.
The Group’s other insurance policies include public and products liability, employer liability, motor fleet and marine transit insurance, Directors and Officers insurance and travel insurance.
The Group does not maintain any significant key man insurance cover.
13 Health and Safety The Group is subject to health and safety laws and regulations in the UK. The Group is committed to ensuring that its employees and customers are appropriately protected from health and safety risks associated with its operations. All new members of staff undergo appropriate health and safety training. The Directors believe that the Group complies in all material respects with its health and safety requirements. There have been no material health and safety incidents in the Group’s operations in the last three years.
14 Quality Control The Group has an internal quality control and inspection team, whose role is to ensure that all of the Group’s suppliers conform to the Group’s compliance manual and expected standards. The quality control and inspection team is supported by a third-party technical and ethical audit for certain of the Group’s suppliers. The suppliers that undergo this audit are identified based on the potential risk associated with the products they supply to the Group.
The quality control and inspection team is also responsible for carrying out inspections on suppliers during the production of products to be supplied to the Group and also upon arrival of products in the United Kingdom prior to their despatch to stores for sale. The team is supported by external testing partners to ensure that all products are compliant with necessary standards and labelled accordingly.
57 PART VI
MARKET OVERVIEW
1 Large and Stable Greeting Cards Market According to OC&C, in 2012, total sales of greeting cards in the UK market were approximately £1.4 billion, by value, and approximately 1.4 billion, by volume. The market has grown by 1.4 per cent. per annum, by value, over the three year period ended 31 December 2012 and is expected to grow at a level of approximately 1.6 per cent. per annum, by value, over the six year period ended 31 December 2018. Approximately 96 per cent., by value, of cards sold by Card Factory are single cards, which is a segment of the market estimated to be worth £1.3 billion alone in 2012. The single cards segment of the market has experienced a higher rate of growth of 2.4 per cent. per annum, by value, over the three year period ended 31 December 2012.
In addition, Card Factory also operates in the significant associated gift dressings and gifting segment of the overall gifting market (collectively referred to as “non-card” by the Group). The gift dressings and gifting market includes products such as gift wrap, gift bags and boxes, small gifts (e.g., soft toys, ceramics and glassware), party products (e.g., balloons, banners, badges and candles) and other non-card products (e.g., calendars and diaries). These are adjacent product categories that customers have a high propensity to purchase on the same occasions as greeting cards. This market, estimated by Management to be worth between £1 billion and £2 billion, has a wider and more fragmented competitor landscape which includes card retailers and other retailers. Due to the level of fragmentation, the diverse nature of the products in this market, and the broad definition of “gifting” products, precise data is much more limited and more difficult to ascertain than for the greeting cards market.
2 Greeting Cards – Segment Trends The UK greeting cards market can be split into two product-based segments: single cards (consisting of both single non-personalised cards and single personalised physical cards purchased online) and Christmas boxed cards. The Group’s focus is on the sale of single greeting cards, which in the financial year ended 31 January 2014 generated approximately 96 per cent. of total card sales and approximately 60 per cent. of Group sales, by value, of the Group’s annual sales, compared with approximately two per cent. of Group sales, by value, from the sale of Christmas boxed cards during the same period.
2.1 Single cards
2.1.1 Non-personalised cards Single non-personalised cards comprise individual cards for everyday occasions (e.g., birthdays, anniversaries and weddings as well as thank you, get well soon, good luck, congratulations, sympathy and new baby cards) and seasonal occasions (e.g., for Christmas, Mother’s Day, Father’s Day, Valentine’s Day, Easter, thank you teacher, graduation and exam congratulations cards).
According to OC&C, the single non-personalised cards segment of the greeting cards market accounted for approximately 87 per cent. of the market, by value, and approximately 65 per cent., by volume, in 2012, having a CAGR of 1.5 per cent., by value, with broadly flat volumes over the three year period ended 31 December 2012. The single non-personalised cards segment is projected to have a CAGR of 1.3 per cent., by value, and in terms of volume is projected to remain broadly flat, over the six year period ended 31 December 2018.
2.1.2 Personalised cards Personalised cards are single (physical) cards purchased online, with an element of personalisation as part of the purchase (e.g., to add the recipient’s name or a photograph).
58 According to OC&C, the online personalised cards segment remains a small part of the market accounting for approximately six per cent. of the single cards segment of the market, by value, and approximately three per cent., by volume, in 2012. OC&C estimates suggest that this segment of the market has grown rapidly at a CAGR of 28.9 per cent., by value, and 26.7 per cent., by volume, between 2009 and 2012. This growth is projected to moderate to 12.2 per cent., by value, and 10.5 per cent., by volume, over the six year period ended 31 December 2018, although the segment is expected to only represent 5.4 per cent. of the UK singles greeting cards market, by volume, in 2018.
2.2 Christmas boxed cards Christmas boxed cards are boxes of multiple cards purchased at Christmas, typically to send to a wider group of relatives, friends and colleagues and are often associated with a charity.
According to OC&C, the Christmas boxed card segment accounted for 7.8 per cent., by value, of the market in 2012, having declined by a CAGR of -8.3 per cent., by value, and -5.8 per cent., by volume, between 2009 and 2012. Value decline was driven by falling prices for Christmas boxed cards in addition to the decline in volume, which is thought to be due, in part, to significant increases in stamp prices over this period and, in part, to a lower level of emotional attachment to Christmas boxed cards than to other greeting cards. OC&C’s analysis shows that this segment is expected to decline further by value and volume over the six year period ended 31 December 2018. The Group has limited exposure to this segment, with sales of Christmas boxed cards having accounted for approximately two per cent. of the Group’s turnover in the financial year ended 31 January 2014.
3 Consumer Trends Driving the Market There is an ingrained culture of sending greeting cards in the UK, with estimates suggesting an average of approximately 30 cards (including both single cards and Christmas boxed cards) sent per person each year, of which on average 21 are single greeting cards. OC&C’s research suggests that the number of cards purchased per-capita has been broadly flat over the three year period ended 31 December 2012, with this trend expected to continue for the foreseeable future. According to OC&C’s review of the greeting cards market, card purchasing is non-cyclical, with the macro-economic environment in recent years appearing to have had a minimal impact on card purchasing despite the significant reduction in consumer spending as a whole.
According to OC&C, card purchasing is occasion-driven, focused around key events (e.g., birthdays, anniversaries and seasons such as Christmas). A person’s age and stage of life are major drivers of their propensity to purchase greeting cards, with purchasing levels significantly higher in older consumers and those with families. The evidence suggests that card purchasing behaviour is broadly stable within generations which, with both a growing and ageing UK population, is expected to help support future card purchasing levels in the UK.
59 Number of Single Cards Bought by Age and Life Stage 20131
Age Band Average 16-24 25-34 35-44 45-54 55-64 65 and over
No Child 14 16 14 18 29 n/a 17
Parent < 5yr old n/a20 20n/a n/a n/a 22
Life Stage Life Parent > 5yr old n/a n/a20 22 21 27 23 Increasing # of cards of # Increasing purchased # by children
Average 17 18 18 21 23 27 21
Increasing # of cards purchased by # age
Notes: (1) Based on Customer responses to the question: “Thinking about the physical greetings cards you buy – How many greeting cards have you bought in the last 12 months?” (2) Number of people surveyed was 1,578. Source: OC&C Consumer Survey (December 2012 and November 2013), OC&C analysis. Stamp price rises appear to have a muted impact on the number of greeting cards sent overall. OC&C reports that approximately 75 per cent. of respondents in a 2012 survey stated that stamp price rises in the prior year had no negative impact on their propensity to send single cards. However, there is a greater impact for boxed cards where over 40 per cent. of respondents stated that their Christmas card purchasing had been negatively impacted by stamp price rises in the last year. On 28 February 2014, Royal Mail increased the price of a first class stamp by two pence to 62 pence and of a second class stamp by three pence to 53 pence, notwithstanding guidance provided in the third quarter of 2013 that it expected any further price increase to be broadly in line with retail price inflation until April 2016, although this was the first rise in two years. OC&C reports that while there has been growth in the online personalised segment of the market (involving purchasing online, and sending, a physical card) there has only been a small amount of digital substitution where cards are sent in electronic form (mostly among younger consumers), with the evidence suggesting that penetration of these digital alternatives within generations has stabilised. Furthermore, evidence suggests that these digital alternatives are often used in addition to sending a physical greeting card.
4 Competitive Landscape The greeting cards market is highly fragmented, with a wide range of retailers selling greeting cards. The market can be split into the following types of retailers: • Specialist Greeting Cards chains: retailers which represent a destination location for greeting cards (e.g., Card Factory, Clintons, Hallmark, Paperchase and Cards Galore); • Grocers: retailers which primarily capture “convenience” and “distressed” purchases (e.g., ASDA, Tesco and Sainsbury’s); and • Others: retailers including generalists (e.g., WH Smith and M&S), stationers, discount chains (e.g., Poundland, Home Bargains and Wilkinsons) and the Post Office, which offer greeting cards alongside their other products. According to OC&C’s analysis, the Group has established itself as the UK’s leading specialist retailer of greeting cards and has delivered significant market share gain of 3.2 per cent., by value, and 6.5 per cent., by volume, in 2005 to 15.5 per cent., by value, and 26.6 per cent., by volume, in 2012. The graphs below illustrate the market share of Card Factory compared to its competitors during the period from 2004 to 2012.
60 Value Market Share of Greetings Card Retailers, 2004-12
%pts change 2004-12
1,240 1,285 1,299 1,314 1,328 1,348 1,383 1,400 1,406 100%
26.6% 26.3% 26.7% 27.8% 28.9% 29.6% 29.9% 31.2% 32.4% Grocers Grocers +6
4.6% 4.1% 3.7% 3.5% 3.2% 0.0% 0.0% 0.0% 0.0% Woolworth’s
30.8% 32.5% 31.2% 29.4% 27.1% 31.9% 31.1% Other Card Specialist Other -5 32.1% 31.9% & Multi-Category1
6.4% 6.1% 6.6% 5.6% 5.4% 7.2% 2 7.0% 7.9% 5.4% Major Card Specialists -2
Clinton Cards 21.4% 19.5% 18.2% 14.9% 24.3% (incl. Birthdays) 3 -13 Chain 24.3% -1 25.2% Specialists 27.5% 26.0%
13.0% 14.1% 15.5% Card Factory +13 10.1% 12.1% 6.0% 8.5% 2.3% 3.2%
2004 2005 2006 2007 2008 2009 2010 2011 2012
Notes: (1) Includes: WH Smiths, Discounters, Specialists for whom time series is unavailable (incl. Cards Galore & Paper Kisses for years before 2012); franchises (e.g., Hallmark); independents; charity shops; gift shops; galleries; garden centres; online; mail order; market stalls (2) Card Control liquidation in 2013, trading under a number of fascias including Paperbox, Kiss Cards, Lawson Cards and Pound Party (3) Restructuring took place in June 2012. First half of year uses 2011 market share; second half uses American Greetings’ 8 month sales estimate scaled to year Source: OC&C
Volume Market Share of Greetings Card Retailers, 2004-12
1,480 1,502 1,500 1,499 1,497 1,487 1,478 1,444 1,402 %pts change 100% 2004-12
27.7% 28.8% 28.1% 28.1% 29.0% 29.0% 28.7% 29.4% 30.3% Grocers Grocers +2
3.7% 0.0% 0.0% 4.8% 4.2% 3.3% 3.1% 0.0% 0.0% Woolworth’s
29.0% 29.4% 28.0% -9 26.1% 28.6% Other 31.0% 28.5% Other Card Specialist 1 33.3% 33.3% & Multi-Category
4.6% 6.0% 5.5% 4.9% 4.5% Major Card Specialists2 -3 6.3% 7.1% 12.2% Clinton Cards 8.1% 10.0% 3 -11 7.2% 15.0% 13.4% (incl. Birthdays) 17.4% Chain 17.5% Specialists +8 18.7%
21.2% 19.8% 25.8% 26.6% Card Factory 21.5% 23.6% +22 16.2% 18.6% 11.9% 4.7% 6.5%
2004 2005 2006 2007 2008 2009 2010 2011 2012
Notes: (1) Includes: WH Smiths, Discounters, Specialists for whom time series is unavailable (incl. Cards Galore & Paper Kisses for years before 2012); franchises (e.g., Hallmark); independents; charity shops; gift shops; galleries; garden centres; online; mail order; market stalls (2) Card Control liquidation in 2013, trading under a number of fascias including Paperbox, Kiss Cards, Lawson Cards and Pound Party (3) Restructuring took place in June 2012. First half of year uses 2011 market share; second half uses American Greetings’ 8 month sales estimate scaled to year Source: OC&C Card Factory’s store roll-out and like-for-like sales growth has led to an overall increase in its share of the greeting cards market, and in respect of which the Directors believe that Card Factory has taken market share from other card specialists as well as generalist retailers. The market share, by volume, of greeting cards sold by grocers has remained generally stable; however, they have increased their market share by value.
61 According to OC&C, Card Factory’s gain in market share has correspondingly caused a deflationary effect on the market share by value of the greeting cards chain specialists, driven by Card Factory’s low average price point as compared to other specialist card and generalist retailers (see Pricing, Value and Range below in this Part VI(Market Overview)).
This deflationary effect and the Group’s gain in market share has had a dampening effect on the total market value growth. However, the value of the greeting cards market has continued to grow while the Group’s market share has grown.
Pricing, Value and Range The Group provides a clearly differentiated value proposition to its competitors, offering a wide range of quality products at affordable prices. The Directors believe that consumers are increasingly value focused, while demanding better card quality at the same time. Further, the Directors also believe that the Group’s competitors can compete against the Group on either price, or quality, but not both. The strength of the Group’s value proposition is consistently reflected in independent consumer surveys conducted by OC&C which indicate a clear and favourable differentiation in customer perception between Card Factory and the rest of the greeting cards market when considering a combination of price and quality.
OC&C research suggests that as the Group has grown its market share, other specialist greeting cards retailers have either maintained or moved to a more premium or expensive retail proposition. The Directors believe that where other specialist greeting cards retailers have attempted to establish a chain with a mid- market or value position, they have found it difficult to sustain their business model in direct competition with Card Factory’s value proposition. This has resulted in a polarisation of price ranges by specialist greeting cards retailers.
Consumer Perceptions of Greeting Cards Value for Money1 Average Rating On Scale 1-5
5.0
Card Factory 4.5
99p Store
4.0 Poundland Home Bargains 1 Cards Galore Wilkinson Price Supermarket 3.5 B&M Bargains Funkypigeon.com Post Office
Moonpig.com 3.0 WH Smith Stronger Perception for Low Price for Low Perception Stronger Hallmark Clintons Paperchase
2.5 3.0 3.5 4.0 4.5 5.0 Quality1 Stronger Perception of Quality
Notes: (1) Based on Customer responses to the question: How would you rate
62 Greeting Card Competitor Positioning – 2012 Data
5.0
“Mainstream Specialists” “Value Specialists” 4.5 Just Cards Moonpig.com3
Hallmark Funky Pigeon Card Factory Clintons Cards Galore 4.0 Paperchase
“Value Generalists” Grocers WHSmiths
Range Depth Range 3.5 Wilkinsons “Mainstream Generalists”
Poundland Specialist Home Bargains Grocer 3.0 Generalists # Stores
2.5 £0.00 £0.50 £1.00 £1.50 £2.00 £2.50 £3.00 £3.50
Average Price Point2
Notes: (1) Range Depth Based on Customer responses to Q: How would you rate
63 PART VII
DIRECTORS, MANAGEMENT AND CORPORATE GOVERNANCE
1 Directors The following table lists the names, positions and ages of the Directors. The Company’s Directors are:
Name Date of Birth Position Date appointed ––––––––––––––– ––––––––––– –––––––––––––––––––––––––––––––––––– ––––––––––––– Geoff Cooper 06/03/1954 Chairman 30 April 2014 Richard Hayes 28/08/1965 Chief Executive Officer 30 April 2014(1) Darren Bryant 26/04/1968 Chief Financial Officer 30 April 2014(1) Octavia Morley 17/04/1968 Senior Independent Non-Executive Director 30 April 2014 David Stead 22/03/1958 Independent Non-Executive Director 30 April 2014 Graeme Coulthard 10/09/1967 Non-Executive Director 30 April 2014(1)
Note: (1) Richard Hayes, Darren Bryant and Graeme Coulthard have been directors of CF Topco Limited, the former parent company of the Group, since 8 April 2010. The business address of each of the Directors (other than Graeme Coulthard) is Century House, Brunel Road, Wakefield, West Yorkshire, WF2 0XG, United Kingdom. The business address of Graeme Coulthard is Charterhouse Capital Partners LLP, Warwick Court, Paternoster Square, London EC4M 7DX.
The management expertise and experience of each of the Directors is set out below:
Geoff Cooper – Chairman – Aged 60 Geoff joined the Board and became Chairman of the Group in April 2014. Geoff has over 20 years’ experience of serving on boards of UK public companies, in particular as Chief Executive of Travis Perkins plc from March 2005 until December 2013. Geoff is also a director of Dunelm plc, where he has been non- executive Chairman since 2004. He is a chartered management accountant and had a career in management consultancy before joining Gateway (subsequently Somerfield plc) as Finance Director in 1990. In 1994, he became Finance Director of UniChem plc, subsequently Alliance UniChem plc (which later became part of Alliance Boots plc), where he was appointed Deputy Chief Executive in 2001.
Richard Hayes – Chief Executive Officer – Aged 48 Richard was appointed Managing Director in 2008 (subsequently renamed Chief Executive Officer in 2010), prior to which he held the positions of Finance Director and Commercial Director of the Group. During his time at the Company, Richard has been actively involved in, and since 2008 has overseen, the Group growing from a 40-store discount chain to a vertically integrated value retailer with over 700 stores and two transactional websites. Richard led the 2010 MBO funded by Charterhouse and has overseen the continued growth under Charterhouse’s ownership. Before he joined the Group in 2003, Richard spent 19 years at RBS working mainly in the Corporate Division.
Darren Bryant – Chief Financial Officer – Aged 46 Darren was appointed Group Finance Director in June 2009 (subsequently renamed Chief Financial Officer in 2010) having previously been a Partner at PwC LLP. Darren spent over 17 years at PwC, principally in the London Corporate Finance division, where he advised on a wide range of private company, private equity and public company transactions. He also spent two years on secondment at The Panel on Takeovers & Mergers in the late 1990s where he regulated a large number of public company transactions. Darren is a Fellow of the Institute of Chartered Accountants in England and Wales and holds a First Class MEng degree in Electrical & Electronic Engineering with Business Studies from Imperial College, London University.
64 Octavia Morley – Senior Independent Non-Executive Director – Aged 46 Octavia joined the board as Senior Independent Non-Executive Director in April 2014. Octavia is currently the Managing Director of Crew Clothing Co. Limited and has eight years’ experience of serving on boards of UK public companies in the retail sector. She has served on the board of John Menzies plc as a non- executive director since 2006. Octavia joined the board of LighterLife UK Limited in 2006 as Chief Executive Officer and later served as Chairman until December 2009. She served as Commercial Director of Woolworths plc between 2003 and 2005 and has also held positions as Managing Director of e-commerce at Asda Stores Limited and as Buying and Merchandising Director at Laura Ashley plc.
David Stead – Independent Non-Executive Director – Aged 56 David Stead joined the board as an Independent Non-Executive Director in April 2014. He has over 15 years’ experience as a director of companies in the UK retail sector. David has held the role of Executive Finance Director of Dunelm Group plc since September 2003. Prior to this, David served as Finance Director for Boots The Chemists and Boots Healthcare International between 1991 and 2003. David is a chartered accountant, having spent the early part of his career with KPMG, and currently leads the Finance and HR departments for Dunelm Group plc.
Graeme Coulthard – Non-Executive Director – Aged 46 Graeme joined Card Factory as a Non-Executive Director in April 2010. He joined Charterhouse in 1997 and is a partner focused on investments in the consumer sector. He qualified as a Chartered Accountant while working for Price Waterhouse in 1992, and holds an MBA from City University and a BSc (Hons) in Economics and Accounting from Bristol University.
The Company’s current Management, in addition to the Executive Directors listed above, is as follows:
Name Date of Birth Position ––––––––––––––––– ––––––––––– ––––––––––––––––––––––––––––– Christopher Beck 02/08/1974 Supply Chain & Logistics Director Stuart Middleton 16/12/1963 Creative Director Andy Garbutt 30/04/1977 Corporate Development Director Ian McEvoy 01/08/1967 Retail Operations Director Gavin Peck 11/10/1981 Commercial Director Helen Lockwood 19/01/1967 Human Resources Director Andrew Wasley 02/08/1972 Printcraft Managing Director John Smith 08/06/1973 Getting Personal Managing Director Anthony Barraclough 12/05/1954 Director
The management expertise and experience of each of the Management team is set out below:
Chris Beck – Supply Chain & Logistics Director – Aged 39 Chris joined the Group in 2007 as Corporate Development Director and was appointed Supply Chain and Logistics Director, with Board responsibility for ICT, in 2008. Prior to joining the Group, he qualified as a Certified Chartered Accountant with Grant Thornton where he worked for 15 years, principally in Corporate Restructuring and Corporate Finance.
Stuart Middleton – Creative Director – Aged 50 Stuart joined the Group in 2005 as Creative Director, following the acquisition by the Group of Excelsior Graphics and Card Concepts, which he founded in 1996. He has over 29 years’ experience in the greeting cards industry, having previously worked for Hanson White and Carte Blanche.
65 Andy Garbutt – Corporate Development Director – Aged 36 Andy joined the Group in 2010 as Corporate Development Director. Prior to joining the Group, he worked at PwC as Retail Director within Transaction Services for nine years, where he focused on commercial and operational due diligence on consumer facing businesses.
Ian McEvoy – Retail Operations Director – Aged 46 Ian joined the Group as an Area Manager in 2000, held the position of Sales Manager from 2002 and was appointed Retail Operations Director in 2006. Prior to joining the Group, Ian worked at Alfred Jones, which is a SPAR retailer.
Gavin Peck – Commercial Director – Aged 32 Gavin joined the Group in 2011 as Commercial Finance Manager and was appointed Commercial Director in 2013. Prior to joining the Group, Gavin worked at PwC for eight years in Audit and Corporate Finance. Gavin is a Chartered Accountant and has a BSc in Economics from The London School of Economics.
Helen Lockwood – Human Resources Director – Aged 47 Helen joined the Group in 2003 as Business Development Manager and was appointed as Human Resources Director in 2006. Prior to joining the Group, Helen held management roles including Marketing Manager, Production Office/Quality Manager in companies across various sectors. Helen is a chartered member of the Chartered Institute of Personnel and Development.
Andrew Wasley – Printcraft Managing Director – Aged 41 Andrew joined the Group in 2010 as Printcraft Managing Director, following the acquisition by the Group of Printcraft, which he owned and co-founded. Andrew has been involved in the production of greeting cards for 24 years, initially working for Hallmark and Fine Art Developments and for the last 20 years as managing director of Printcraft.
John Smith – Getting Personal Managing Director – Aged 40 John joined the Group following its acquisition in 2011 of Getting Personal, which he co-founded in 2005. Prior to founding Getting Personal, John had roles as a Business Consultant with a focus on the Customer Experience, in companies including IBM and Avaya (Bell Lab Innovations).
Anthony Barraclough – Director – Aged 59 Tony joined the Group in 2000 as Operations Director, and was appointed as Property Director in 2008. Prior to joining the Group, Tony held senior management positions for 18 years as Operations Director and Managing Director in a PLC Marketing and Product Design Group.
2 Corporate Governance
2.1 UK Corporate Governance Code The Board is committed to the highest standards of corporate governance. Other than as set out in this Corporate Governance section, from Admission, the Company will comply and intends to continue to comply with the requirements of the UK Corporate Governance Code published in September 2012 by the Financial Reporting Council (the “UK Corporate Governance Code”). The Company will report to its shareholders on its compliance with the UK Corporate Governance Code in accordance with the Listing Rules. As envisaged by the UK Corporate Governance Code, the Board has established three committees: an Audit and Risk Committee, a Nomination Committee and a Remuneration Committee. If the need should arise, the Board may set up additional committees as appropriate.
66 The UK Corporate Governance Code recommends that at least half the board of directors of a UK- listed company, excluding the chairman, should comprise non-executive directors determined by the Board to be independent in character and judgement and free from relationships or circumstances which may affect, or could appear to affect, the director’s judgement. At Admission, the Company will not comply with this recommendation. As of the date of this Prospectus, the Board consists of the non- executive Chairman and three further non-executive Directors (the “Non-Executive Directors”) and two Executive Directors. Notwithstanding the matters described in Section 8 (Directors’, CEO and CFO Service Agreements, Letters of Appointment, Remuneration and Other Matters) of Part XVI (Additional Information) in relation to Geoff Cooper’s share options as part of his remuneration, the Board regards Geoff Cooper to be independent on his appointment and considers all of the other Non- Executive Directors, other than Graeme Coulthard who has been nominated by the Principal Shareholders, as “independent non-executive directors” (within the meaning of the UK Corporate Governance Code) and free from any business or other relationships that are likely to interfere with the exercise of their independent judgement.
The UK Corporate Governance Code recommends that the board of directors of a company with a premium listing on the Official List of the FCA should appoint one of the Non-Executive Directors to be the Senior Independent Non-Executive Director to provide a sounding board for the chairman and to serve as an intermediary for the other directors when necessary. The Senior Independent Non-Executive Director should be available to shareholders if they have concerns which contact through the normal channels of the CEO has failed to resolve or for which such contact is inappropriate. Octavia Morley has been appointed Senior Independent Non-Executive Director.
The UK Corporate Governance Code further recommends that directors should be subject to annual re-election. The Company intends to comply with these recommendations.
The Chairman’s remuneration includes share options (see Section 8 (Directors’, CEO and CFO Service Agreements, Letters of Appointment, Remuneration and Other Matters) of Part XVI (Additional Information) which does not comply with UK Corporate Governance Code recommendations.
2.2 Audit and Risk Committee The Audit and Risk Committee assists the Board in discharging its responsibilities with regard to financial reporting, external and internal audits and controls, including reviewing and monitoring the integrity of the Group’s annual and interim financial statements, reviewing and monitoring the extent of the non-audit work undertaken by external auditors, advising on the appointment of external auditors, overseeing the Group’s relationship with its external auditors, reviewing the effectiveness of the external audit process, and reviewing the effectiveness of the Group’s internal control review function. The ultimate responsibility for reviewing and approving the annual report and accounts and the half-yearly reports remains with the Board. The Audit and Risk Committee will give due consideration to laws and regulations, the provisions of the UK Corporate Governance Code and the requirements of the Listing Rules.
The UK Corporate Governance Code recommends that an audit committee should comprise at least three members who are Independent Non-Executive Directors, and that at least one member should have recent and relevant financial experience. The Audit and Risk Committee will be chaired by David Stead, and its other members will be Geoff Cooper and Octavia Morley. Although the inclusion of the Chairman of the Board (Geoff Cooper) as a member of the Audit and Risk Committee is not technically compliant with the UK Corporate Governance Code, the Directors believe that the Company is compliant with the spirit of the UK Corporate Governance Code. The Directors consider that David Stead has recent and relevant financial experience. The Audit and Risk Committee will meet no fewer than three times a year.
The Audit and Risk Committee has taken appropriate steps to ensure that the Company’s Auditors are independent of the Company and obtained written confirmation from the Company’s Auditors that they comply with guidelines on independence issued by the relevant accountancy and auditing bodies.
67 2.3 Nomination Committee The Nomination Committee assists the Board in discharging its responsibilities relating to the composition and make-up of the Board and any committees of the Board. It is also responsible for periodically reviewing the Board’s structure and identifying potential candidates to be appointed as Directors or committee members as the need may arise. The Nomination Committee is responsible for evaluating the balance of skills, knowledge and experience and the size, structure and composition of the Board and committees of the Board, retirements and appointments of additional and replacement directors and committee members and will make appropriate recommendations to the Board on such matters.
The UK Corporate Governance Code recommends that a majority of the members of a nomination committee should be independent non-executive directors. The Nomination Committee is chaired by Geoff Cooper, and its other members will be Octavia Morley and David Stead. The Directors therefore believe that the Company is in compliance with the UK Corporate Governance Code. The Nomination Committee will meet not less than once a year.
2.4 Remuneration Committee The Remuneration Committee assists the Board in determining its responsibilities in relation to remuneration, including making recommendations to the Board on the Company’s policy on executive remuneration, including setting the over-arching principles, parameters and governance framework of the Group’s remuneration policy and determining the individual remuneration and benefits package of each of the Company’s Executive Directors and its Company secretary. The Remuneration Committee will also ensure compliance with the UK Corporate Governance Code in relation to remuneration.
The UK Corporate Governance Code provides that a remuneration committee should comprise at least three members who are Independent Non-Executive Directors and that a chairman of the board of directors may also be a member provided he is considered independent on appointment. The Remuneration Committee will be chaired by Octavia Morley, and its other members will be Geoff Cooper and David Stead. Therefore, although the composition of the Remuneration Committee is not technically compliant, the Directors believe that the Company is compliant with the spirit of the UK Corporate Governance Code. The Remuneration Committee will meet not less than twice a year.
2.5 Share Dealing Code The Company has adopted, with effect from Admission, a code of securities dealings in relation to the Ordinary Shares which is based on, and is at least as rigorous as, the Model Code as published in the Listing Rules. The code adopted will apply to the Directors, Senior Managers and other relevant employees of the Company.
2.6 Anti-Bribery The Company has implemented internal procedures and measures (including the provision of an Anti- Corruption and Bribery Policy) designed to ensure compliance by it and other members of the Group with the UK Bribery Act 2010 (as amended).
3 Relationship with the Principal Shareholders For information about the Company’s relationship with the Principal Shareholders, see Section 13 (Relationship with the Principal Shareholders) of Part XVI (Additional Information).
68 PART VIII
REASONS FOR THE OFFER AND DIVIDEND POLICY
1 Reasons for the Offer and Use of Proceeds The Directors believe the Offer and Admission will:
(i) enhance the Group’s public profile;
(ii) create a liquid market in the Ordinary Shares for Shareholders;
(iii) assist in the incentivisation and retention of key management and employees; and
(iv) provide the Selling Shareholders with a partial realisation of their investment in the Company.
The Company’s net proceeds from the issue of New Shares pursuant to the Offer are estimated to be £80 million.
As at 31 March 2014, the Group had £392.9 million in indebtedness, as well as £55.1 million in cash and cash equivalents, leaving a net debt position of £337.8 million. To reduce the Group’s overall cost of financing, shortly following the Offer, the Company intends to use cash in hand, and the net proceeds of the Offer receivable by the Company, to repay part of the Senior Facilities with the remaining indebtedness under the Senior Facilities Agreement (including accrued interest and other charges) being re-financed pursuant to the New Facilities Agreement which is intended to become effective within approximately four weeks of Admission.
2 Dividend Policy The Board intends to adopt a progressive dividend policy for the Company to reflect its strong earnings potential and cash flow characteristics, while allowing it to retain sufficient capital to fund ongoing operating requirements and to invest in the Company’s long-term growth. The Board may revise the dividend policy from time to time.
From Admission onwards, the Company intends, subject to, inter alia, available distributable profits, to pay annual dividends based on a targeted dividend cover of between 2.0 and 3.0 times the Company’s consolidated post-tax profit from its ongoing business, the first dividend being a full year dividend (not pro-rated) payable in relation to the financial year ending 31 January 2015. The Directors intend to maintain a capital structure that is conservative yet efficient in terms of providing long-term returns to Shareholders.
The ability of the Company to pay dividends is dependent on a number of factors and there is no assurance that the Company will pay dividends, or, if a dividend is paid, what the amount of such dividend will be. See Section 2 (Risks relating to the Offer and to the Shares – The Company may not pay cash dividends on its Ordinary Shares) of Part I (Risk Factors).
69 PART IX
SELECTED FINANCIAL INFORMATION
The following tables summarise the Group’s historical consolidated financial information as at the dates and for the periods indicated. The selected financial information of the Group as at and for the years ended 31 January 2012, 2013 and 2014 and the information has been extracted without material adjustment from the historical financial information included in Part XII (Historical Financial Information) of this Prospectus.
The Consolidated Statement of Comprehensive Income for the Group included in the Historical Financial Information includes certain items that have been classified as “non-underlying.” See notes 1 and 3 to the Historical Financial Information for more detail. As the non-underlying items have not had a material impact on the Group’s results of operations in any of the three financial years ended 31 January 2014, and as the Group believes that underlying profit and earnings provides useful financial information for potential investors, all financial information extracted from the Consolidated Statement of Comprehensive Income for each of the three financial years ended 31 January 2014 in this Part IX (Selected Financial Information) is presented solely on an underlying basis, except where otherwise indicated. However, potential investors are cautioned that underlying earnings is not a recognised profit measure under EU IFRS and may not be directly comparable with “adjusted” profit measures reported by other companies. See Section 2 (Presentation of financial information and non-financial operating data) of Part II (Presentation of Financial and Other Information) for more information on the non-underlying adjustments made in the Historical Financial Information.
Consolidated Statement of Comprehensive Income For the year ended 31 January ———————————————————— 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Revenue 265.5 299.9 326.9 Cost of sales (183.4) (205.5) (223.3) –––––––– –––––––– –––––––– Gross profit 82.1 94.4 103.6 Operating expenses (24.0) (27.2) (30.7) –––––––– –––––––– –––––––– Operating profit 58.1 67.2 72.9 Financial income 0.2 0.4 0.5 Financial expenses (42.4) (44.6) (41.4) –––––––– –––––––– –––––––– Net financing expense (42.2) (44.2) (40.9) –––––––– –––––––– –––––––– Profit before tax 15.9 23.0 32.0 Taxation (7.7) (10.5) (12.1) –––––––– –––––––– –––––––– Profit for the year –––––––– 8.2 –––––––– 12.5 –––––––– 19.9 Earnings per share pence pence pence – Basic 167.1 254.5 405.1 – Diluted 167.1 254.5 405.1
70 Consolidated Statement of Financial Position As at 31 January ———————————————————— 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Non-current assets Intangible assets 329.8 330.8 331.2 Property, plant and equipment 26.7 32.7 36.7 Deferred tax assets 1.4 2.0 1.2 Other receivables 1.7 1.8 1.5 Derivative financial instruments 0.3 0.5 – –––––––– –––––––– –––––––– 359.9 367.8 370.6 Current assets Inventories 37.5 34.6 39.3 Trade and other receivables 16.4 16.2 17.6 Derivative financial instruments 1.8 1.4 0.3 Cash and cash equivalents 37.1 64.7 40.7 –––––––– –––––––– –––––––– 92.8 116.9 97.9 –––––––– –––––––– –––––––– Total assets 452.7 484.7 468.5 –––––––– –––––––– –––––––– Current liabilities Borrowings (13.7) (10.6) (21.3) Trade and other payables (28.7) (26.5) (31.8) Tax payable (3.0) (6.3) (4.9) Derivative financial instruments (0.2) – (0.9) –––––––– –––––––– –––––––– (45.6) (43.4) (58.9) Non-current liabilities Borrowings (394.4) (414.7) (366.3) Trade and other payables (11.4) (13.1) (11.8) Derivative financial instruments (0.9) – (0.4) –––––––– –––––––– –––––––– (406.7) (427.8) (378.5) –––––––– –––––––– –––––––– Total liabilities –––––––– (452.3) –––––––– (471.2) –––––––– (437.4) Net assets 0.4 13.5 31.1 –––––––– –––––––– –––––––– Equity Share capital 0.1 0.1 0.1 Share premium 4.6 4.6 4.6 Hedging reserve – – (0.8) Retained earnings (4.3) 8.8 27.2 –––––––– –––––––– –––––––– Equity attributable to equity holders of the parent –––––––– 0.4 –––––––– 13.5 –––––––– 31.1
71 Consolidated Statement of Cash Flows For the year ended 31 January ———————————————————— 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Cash inflow from operating activities 57.4 76.5 79.1 Corporation tax paid (7.7) (8.0) (12.1) –––––––– –––––––– –––––––– Net cash inflow from operating activities 49.7 68.5 67.0
Cash flows from investing activities Purchase of property, plant and equipment (12.0) (12.0) (10.6) Purchase of intangible assets (1.0) (1.7) (1.4) Acquisition of subsidiary undertaking, net of cash acquired (8.3) – – Payment of deferred consideration (0.4) (0.4) (0.5) Proceeds from sale of property, plant and equipment – 0.2 – Interest received 0.2 0.3 0.5 –––––––– –––––––– –––––––– Net cash outflow from investing activities (21.5) (13.6) (12.0)
Cash flows from financing activities Proceeds from bank borrowings – – 159.7 Proceeds from finance leases 0.1 0.1 – Interest paid (10.0) (7.9) (108.7) Repayment of borrowings (17.7) (19.0) (129.8) Payment of finance lease liabilities (0.7) (0.5) (0.2) –––––––– –––––––– –––––––– Net cash outflow from financing activities (28.3) (27.3) (79.0) –––––––– –––––––– –––––––– Net (decrease)/increase in cash and cash equivalents (0.1) 27.6 (24.0) Cash and cash equivalents at the beginning of the year 37.2 37.1 64.7 –––––––– –––––––– –––––––– Closing cash and cash equivalents 37.1 64.7 40.7 –––––––– –––––––– ––––––––
72 Other Consolidated Financial Information For the year ended 31 January 2012 2013 2014 –––––––– –––––––– –––––––– (£m) EBITDA (£m)(1) 63.3 73.6 80.4 EBITDA margin 23.8% 24.5% 24.6% Operating profit margin 21.9% 22.4% 22.3%
Note: (1) Earnings before interest, tax, depreciation and amortisation. The table below sets forth a reconciliation of EBITDA to net profit: For the year ended 31 January 2012 2013 2014 –––––––– –––––––– –––––––– (£m) Profit before tax (underlying) 15.9 23.0 32.0 Add: Depreciation 4.9 5.7 6.5 Amortisation 0.3 0.7 1.0 Finance income (0.2) (0.4) (0.5) Finance expenses 42.4 44.6 41.4 –––––––– –––––––– –––––––– EBITDA –––––––– 63.3 –––––––– 73.6 –––––––– 80.4
73 PART X
OPERATING AND FINANCIAL REVIEW
The following discussion summarises the significant factors and events affecting results of operations and the financial condition of the Group for the financial years ended 31 January 2012, 2013 and 2014, and should be read in conjunction with the consolidated financial information of the Group reported in accordance with IFRS as adopted for use in the EU set out under Part XII (Historical Financial Information) and the other financial information contained elsewhere in this Prospectus, including under Part II (Presentation of Financial and Other Information) and Part IX (Selected Financial Information). The following discussion of the Group’s results of operations and financial condition contains forward looking statements that reflect the current view of the Group’s Management. The Group’s actual results could differ materially from those anticipated in any forward-looking statements as a result of the factors discussed below and elsewhere in this Prospectus, particularly under Part I (Risk Factors). Investors should carefully consider the following information, together with the other information contained in this Prospectus, before investing in the Shares. The Consolidated Statement of Comprehensive Income for the Group included in the Historical Financial Information includes certain items that have been classified as “non-underlying.” See notes 1 and 3 to the Historical Financial Information for more detail. All financial information extracted from the Consolidated Statement of Comprehensive Income for each of the three financial years ended 31 January 2014 in this Part X (Operating and Financial Review) is presented solely on an underlying basis, except where otherwise indicated, as the non-underlying items have not had a material impact on the Group’s results of operations in any of the three financial years ended 31 January 2014, and as the Group believes that underlying profit and earnings provides useful financial information for potential investors. However, potential investors are cautioned that underlying earnings is not a recognised profit measure under IFRS and may not be directly comparable with “adjusted” profit measures reported by other companies. See Section 2 (Presentation of financial information and non-financial operating data) of Part II (Presentation of Financial and Other Information) for more information on the non-underlying adjustments made in the Historical Financial Information.
1 Overview of the Group’s Business The Group is the UK’s leading specialist retailer of greeting cards. The Group focuses on the value and mid- market segments of the UK’s greeting card market, offering a wide range of quality products at affordable prices principally through its nationwide chain of over 700 Card Factory stores, as well as through its online offerings, www.gettingpersonal.co.uk (which sells personalised single cards and personalised gifts) and www.cardfactory.eu.com (which sells a selection of the products available in Card Factory stores). The Group sells single cards for everyday occasions (e.g., birthdays, anniversaries), single cards for seasonal occasions (e.g., Christmas, Mother’s Day, Father’s Day and Valentine’s Day), single personalised cards (through its online offering) and Christmas box sets of multiple cards. The Group principally sells single greeting cards for less than £1, with a small proportion sold above £1. The Group also offers cards in multi-buy promotion offers. In the financial year ended 31 January 2014, sales of greeting cards represented approximately two-thirds, by value, of total sales of the Group. The Group also sells a wide range of complementary products for “dressing” a gift, principally comprising gift bags, gift boxes, gift wrap, bows, ribbons and gift tags, as well as related small gift items such as soft toys, ceramics and glassware and party products, including helium balloons, banners and badges. These non- card products, covering both everyday and seasonal occasions, largely range from 99p to £4.99 in price. In the financial year ended 31 January 2014, sales of these non-card items together represented approximately one-third, by value, of total sales of the Group. The proportion of the Group’s revenues generated by the sale of non-card items has increased slightly over the three financial years ended 31 January 2014 reflecting the focus on improving the quality and designs of these product ranges along with an increased focus on space and range optimisation within the non-card offering.
74 The Group sold over 285 million single cards in the financial year ended 31 January 2014. In the financial year ended 31 January 2014, the Group generated total revenue of £326.9 million, operating profit of £72.9 million and EBITDA of £80.4 million, with an operating profit margin of 22.3 per cent. and an EBITDA margin of 24.6 per cent. Gross margins differ by product with single cards representing the highest gross margin, followed typically by non-card items and then boxed cards, although gross margins within non-card items vary considerably.
2 Significant Factors Affecting Results of Operations and Financial Condition The Group’s operations and results of operations have been, and may continue to be, affected by certain key factors including, in particular, new store openings, like-for-like store sales performance, employee costs and wages, store property costs, seasonality of the Group’s sales and fluctuations in currency exchange rates.
2.1 New store openings Continued, profitable expansion of the Group’s store portfolio has historically been, and continues to be, one of the Group’s strategic imperatives. In line with this strategy, the Group has expanded its store portfolio by opening new stores at an average rate of more than 50 stores per year over the last 10 years. The Group’s store portfolio grew from 531 stores as of 31 January 2011 to 611 stores, 664 stores and 713 stores as of 31 January 2012, 2013 and 2014, respectively. As of the date of this Prospectus, the Group operated 739 stores, having opened 26 new stores in the current financial year. In the three financial years ended 31 January 2014, new store fit out capital expenditure required to open a new store averaged approximately £60,000 per store, with these stores generating on average first 12 months store contribution (defined by Management as EBITDA before Head Office and central costs) in excess of this initial capital investment.
New store openings have had, and are expected to continue to have, a significant impact on the sales growth of the Group’s business and results of operations and to make a significant contribution to the Group’s sales growth and operating profit. Expansion of the Group’s store portfolio also has a direct effect on cost of sales, increasing the Group’s total property costs, its aggregate payroll expense (due to the necessary increases in workforce) and other direct expenses related to servicing an increasing number of stores (for example, warehouse wages, costs related to distribution and transportation of the Group’s merchandise to its stores, store utility costs, packaging, waste disposal and maintenance costs). During the periods under review, the Group’s operating lease expense and aggregate payroll expense have generally increased in line with the growth in the number of its stores.
Management intends to continue to expand the Group’s store portfolio at a rate similar to its historical rate of store openings to establish a potential total portfolio of up to 1,200 stores in the UK and Republic of Ireland. This implies a future new store roll out programme, at a rate similar to the Group’s historical rate of new store openings, of up to a further 10 years. Locations for these targeted new stores have already been identified and include the potential for up to approximately 100 new stores in the Republic of Ireland. Management intends to begin this expansion into the Republic of Ireland as early as 2015 with an initial opening of approximately 10 stores, with warehousing and distribution for these initial new stores provided by the Group’s existing facilities in the UK in the same way as the Group supplies its existing stores in Northern Ireland.
The Directors believe that these remaining new store opportunities have, on average, lower sales potential than the average of its existing store locations, primarily due to the new store sites being, on average, in lower footfall locations than the average of the Group’s existing stores. The effects of this lower footfall on store contribution of the new stores may be offset, in part, by lower average rents at these sites. Accordingly, while the Group’s rate of revenue growth may gradually slow in the future, the Directors believe that the new stores will continue to be earnings enhancing and incremental to shareholder value. Management evaluates each new store prior to opening to assess whether its anticipated contribution level (as defined above) after its first year of trading is expected to be greater than the capital expenditure required to open the store.
75 Given this proposed 10 year roll-out to the full potential estate of up to 1,200 stores, the Board will continue to regularly assess the sales and profit contribution of all future store openings, taking into account a wide range of factors (including, but not limited to, actual store performance, the prevailing competitive landscape, the general retail environment outlook, the commercial property market and wider macroeconomic factors), to seek to ensure that these incremental store openings continue to deliver an appropriate return and are value enhancing for shareholders.
2.2 Like-for-like store sales performance The Group has a strong track record of consistent annual growth in like-for-like sales for existing stores, having achieved positive like-for-like sales growth in each year since the Group opened its first store in 1997.
Management defines the Group’s like-for-like store sales as the year-on-year growth in sales for stores which have been opened for a full year, calculated on a calendar week basis. As such, this reported like-for-like sales figure excludes sales:
• relating to Card Factory stores that have not yet been open for a full 52 weeks;
• from the recently established Card Factory transactional website, www.cardfactory.eu.com;
• made via the separately branded personalised card and gift website, Getting Personal;
• by Printcraft to external third-party customers;
• from stores closed during the relevant period (or the prior year comparable period); and
• attributable to discontinued operations, comprising, during the periods under review, the wholesale operations of Card Concepts and Excelsior Graphics, which ceased to trade during 2012.
The table below highlights for each of the past three financial years, the annual percentage growth in like-for-like sales for the Group.
Year ended 31 January 2012 2013 2014 –––––––– –––––––– –––––––– % growth Like-for-like sales growth (as defined above) 1.4 3.2 3.1
This consistent positive growth in the Group’s like-for-like sales is impacted by a number of factors, which can be grouped into two principal categories:
Average basket value growth Increases in ABV (i.e., average value per transaction) in the Group’s stores have made a significant contribution to the Group’s like-for-like revenue increase during the periods under review.
The Directors believe that the growth in ABV reflects, inter alia:
• ongoing improvement and development of the Group’s product offering, in-store merchandising and pricing architecture, which encourage customers to increase the number of items per basket and/or to buy more of the higher priced items; and
• Management’s focus on continuously improving the quality and range of both card and non- card products developed by the Group’s established design team for exclusive use by the Group.
The Group has been able to achieve growth in ABV in the periods under review while maintaining the key historical core price points of the Card Factory greeting cards of 59p, 89p and 99p.
76 Transaction volumes A key factor impacting transaction volumes is the time taken for the recently opened stores to reach so-called “maturity” (i.e., when the initially rapid sales growth tapers to a level consistent with the Group’s average growth rates for older comparable stores). Whilst this can vary by location (e.g., depending upon local demographics and the presence of other competitors), the Group’s stores have historically increased sales, over a four to six year period, to a level from which future growth will be in line with the estate as a whole and which is, on average, approximately 30-40 per cent. higher than that achieved in the first full year post opening, with the greatest increase normally occurring in the first two years. Management attributes this to the gradual increase in Card Factory’s market share in that location as consumers in each catchment become aware of the Group’s excellent value proposition and gradually switch to purchasing greeting cards, dressings and related non-card items in Card Factory stores instead of from other local retailers.
The closure or opening of competitors’ stores in the same catchment areas as Card Factory stores also affects footfall in its stores and thereby impacts transaction volumes and sales. Clintons, one of the Group’s principal competitors, entered administration in May 2012, resulting in the closure of 388 stores over the following months. The Directors believe that these closures resulted in increased footfall and sales in the 241 Card Factory stores that were previously co-located with the now-closed Clintons stores.
Further, the Directors believe that due to the Group’s consistent rate of store openings over the past 10 years, the Group has experienced a degree of sales cannibalisation over a number of years, with like-for-like sales performance of some of the Group’s older existing stores adversely affected by the opening of a new Card Factory store in the same town or city as an existing store or, alternatively, in another neighbouring retail location, not necessarily in the same town or city as an existing store. Consistent with the Group’s overriding objective that any incremental store openings should enhance shareholder value, Management takes the estimated impact of such cannibalisation into account in deciding whether to open new stores.
The Group, in common with most retailers, is not immune to the general levels and frequency of footfall on the high street, in shopping centres and in other retail locations. According to OC&C data, since 2005, the trends in the volumes of greeting card sales in the UK have not experienced a significant degree of cyclical fluctuation, with sales volumes of single cards broadly flat over the period and sales volumes of boxed Christmas cards, to which the Group has limited exposure, consistently declining. The Group closely monitors its own transaction volumes relative to other industry-wide footfall statistics (for example, Ipsos Retail Traffic Index) and Management believes that the Group’s transaction volumes growth rates compare favourably to these wider retail industry trends.
2.3 Employee costs and wages The Group’s total number of employees varies considerably during the course of each financial year given the recruitment of Seasonal Workers, many of whom are employed on a part-time basis, particularly in the build up to the Christmas trading period. The table below summarises the average number of employees (including Seasonal Workers, management and headquarters staff and directors) for each of the three years ended 31 January 2014.
Year ended 31 January 2012 2013 2014 –––––––– –––––––– –––––––– Average number of employees(1) 6,950 8,003 8,603
Note: (1) Includes Seasonal Workers. Not full time equivalent figures. The increases in the Group’s headcount during the periods under review principally reflect an expansion of the Group’s store portfolio during this time from 531 stores as of 31 January 2011 to 713 stores as of 31 January 2014, as well as the opening of additional warehouse facilities, the
77 acquisition of Getting Personal and the investment in people throughout the business in anticipation of ongoing growth. During the peak Christmas trading periods, the Company employs Seasonal Workers as additional temporary staff on short term contracts. The Group employed over 6,000 Seasonal Workers for Christmas 2013.
As a majority of the Group’s employees are paid the minimum wage, increases in national minimum wage from £6.08 (for adults) in 2011/2012 to £6.19 from 1 October 2012 and to £6.31 from 1 October 2013 also contributed to increases in the Group’s cost of sales. Despite increases in the level of national minimum wage during the periods under review, active management of store hours, various in-store efficiency initiatives and ongoing growth in like-for-like sales has enabled the Group to maintain this cost as a ratio of revenue at a constant level, as discussed in Section 4.1 (Comparison of results of operations for the financial years ended 31 January 2012, 2013 and 2014) of this Part X (Operating and Financial Review).
The minimum wage level has recently received an increasing amount of attention from political leaders of both the governing coalition in the UK and the opposition party. The Government has recently announced that it has accepted the Low Pay Commission’s recommendation of a three per cent. rise in the adult national minimum wage to £6.50 from its current level of £6.31 and that the new level will come into force in October 2014. Increases of the national minimum wage or increases in other wages above inflation would materially increase the Group’s cost of sales, and could, in common with much of the retail sector, adversely affect the Group’s operating profit margin if it were unable to mitigate these increases in the Group’s cost of sales through compensating increases in sales, a reduction in staff employed by the Group, a reduction in staff hours allocated to stores and other business efficiencies.
2.4 Store property costs Prevailing commercial property rents, business rates and, where applicable, service charges in high streets, shopping centres and other retail locations where the Group’s existing stores are located or where future stores will be opened impact the Group’s store property costs and its cost of sales. All of the Group’s stores operate on a leasehold or, in a limited number of cases, short-term agreements such as licences. A number of the Group’s store leases were entered into before the economic downturn and the weakening of the commercial property market and, as such, reflect rents higher than the prevailing rents available in the market today.
During the periods under review, due to a recent market of generally declining rents in these locations, the Group has been able to successfully re-negotiate many of its leases at the time the applicable break clause permitted it to do so or upon the expiration of such leases and, consequently, reduce the rent payable in line with current market conditions. Consequently, the Group has been able to reduce the lease costs for the affected stores. This had a positive impact on the Group’s cost of sales during the periods under review. Over this period, the reduction in arm’s length market rents has generally not been accompanied by a similar reduction in business rates and, as such, business rates have become an increasing proportion of the Group’s total property costs and an increasing burden on retail businesses generally. The Directors are aware of the ongoing public debate involving the major political parties, the Government, other retailers and retail trade bodies such as the British Retail Consortium as to possible changes in the business rates system. The Directors understand that the potential outcome of these discussions remains uncertain and are therefore not able to assess the potential impact on the Group’s business or results of operations.
In addition, in a number of circumstances in the periods under review, the Group has taken advantage of a break in a lease or lease expiry to relocate an existing store to a more suitable location, often with a larger retail trading area. Given the relatively low average capital expenditure to fit out a new store, the Group has a significant degree of flexibility in considering potential store relocations in such circumstances. As set out in Section 6 (Store Portfolio) of Part V (Business of the Group), a total of eight stores have been closed in the periods under review.
78 Overall, the ratio of the store property costs to revenue has remained reasonably constant during the periods under review, as discussed further in Section 4.1 (Comparison of results of operations for the financial years ended 31 January 2012, 2013 and 2014) of this Part X(Operating and Financial Review).
2.5 Investments in the Group operational and distribution infrastructure During the periods under review, the Group has made significant investments into the expansion and improvement of its operational and distribution infrastructure. These included investments in additional warehousing facilities and head office expansion, investments in a new freehold site, machinery and equipment at Printcraft, establishment of in-house production for Getting Personal, as well as the Group’s current roll-out of EPOS terminals in its store portfolio and the implementation of an ERP solution to support its distribution function. Over the three financial years ended 31 January 2014, the aggregate amount of the Group’s investments into these one-off strategic projects amounted to £16.7 million. See Section 6 (Capital Expenditure) of this Part X(Operating and Financial Review).
The Directors believe that the Group’s current warehousing and distribution facilities have sufficient capacity to support in excess of 1,100 UK stores. As a result, the Group’s future needs for investments in the expansion of its warehousing and distribution facilities are expected to be limited (although the Group’s potential expansion into the Republic of Ireland may require the Group to adapt its supply chain arrangements, particularly with regard to printing and warehousing, as well as its financial and accounting systems to reflect transactions in Euros). However, the Group expects to invest between £8 million to £10 million in aggregate over the next ten years to continue to expand Printcraft’s production capacity, to enable Printcraft to produce approximately 400 million cards per annum, which would be sufficient to service over 1,200 Card Factory stores based on current sales volumes. The Group also expects to continue the roll-out of EPOS terminals across its store portfolio, and expects that this will require up to an additional £5 million of capital expenditure over the next two to three years. The Directors expect that this ongoing incremental investment will be funded from organic cashflow of the Group.
2.6 Seasonality of the Group’s sales Historically, the Group’s sales have exhibited strong seasonal trends, with monthly sales in November and December (i.e., in the lead up to Christmas) being substantially higher than the average sales rate in other months. Periods leading up to other significant occasions, such as Valentine’s Day, Mother’s Day and Father’s Day, have also resulted in higher than average sales for the Group. As a substantial portion of the Group’s cost base (including property costs and a significant proportion of wages) is fixed, this has also resulted in a disproportionate share of its profit being attributable to November and December sales. As a result, the Group’s reported revenue and gross profit historically have been higher in the second half of each financial year compared to the first half of the same financial year, and the Directors expect this to remain the case in future periods.
2.7 Fluctuations in currency exchange rates The Group’s customers pay for products they purchase in pounds sterling. However, during the periods under review, approximately 50 per cent. of the Group’s costs of goods sold were related to products purchased in the Far East, typically in U.S. Dollars. Consequently, the Group is exposed to fluctuations and changes in foreign exchange rates between the U.S. Dollar and pounds sterling. Transactions in foreign currencies are recorded at the exchange rate on the transaction date and are recognised in the Group’s income statement within cost of sales. The Group utilises derivative contracts to hedge its U.S. Dollar exposure and lock in forward rates.
2.8 The Group’s financing arrangements The Group’s net financing expense was £42.2 million, £44.2 million and £40.9 million in the financial years ended 31 January 2012, 2013 and 2014, respectively, with the interest expense comprising principally interest on bank loans, the 10 per cent. loan notes and the 14 per cent. loan notes. See
79 Section 4 (Results of Operations – Net financing expense) of this Part X(Operating and Financial Review). Following Admission, the Group’s existing Senior Facilities will be refinanced pursuant to the New Facilities Agreement, which is intended to become effective within four weeks of Admission. See Section 14.5 (New Facilities Agreement) of Part XVI (Additional Information).
3 Current trading and prospects The Group continues to trade in line with Management expectations since the end of its previous financial year. As at the date of this Prospectus and since 31 January 2014 the Group has continued to grow like-for- like sales and has opened a further 26 new Card Factory stores.
The Board remains confident of the Group’s ability to grow sales, profit and market share for the foreseeable future.
4 Results of Operations The following table sets out the Group’s results of operations for the periods indicated:
Year ended 31 January Change ––––––––––––––––––––––––––––––––––– –––––––––––––––––––––– 2012 2013 2014 2012/2013 2013/2014 ———— ———— ———— ———— ———— (£m) (£m) (£m) (%) (%) Revenue 265.5 299.9 326.9 13.0 9.0 Cost of sales (183.4) (205.5) (223.3) 12.1 8.7 ———— ———— ———— ———— ———— Gross profit 82.1 94.4 103.6 15.0 9.7 Operating expenses (24.0) (27.2) (30.7) 13.3 12.9 ———— ———— ———— ———— ———— Operating profit 58.1 67.2 72.9 15.7 8.5 ———— ———— ———— ———— ———— Net financing expense (42.2) (44.2) (40.9) 4.7 (7.5) ———— ———— ———— ———— ———— Profit before tax 15.9 23.0 32.0 44.7 39.1 Taxation (7.7) (10.5) (12.1) 36.4 15.2 ———— ———— ———— ———— ———— Profit for the year 8.2 12.5 19.9 52.4 59.2 ———— ———— ———— ———— ———— Other consolidated financial information EBITDA (£m)(1) 63.3 73.6 80.4 16.3 9.2 EBITDA margin (%)(2) 23.8 24.5 24.6 – – Gross profit margin (%)(3) 30.9 31.5 31.7 – –
Notes: (1) Earnings before interest, tax, depreciation and amortisation. For reconciliation of EBITDA to net profit, see Part IX (Selected Financial Information). (2) EBITDA divided by revenue. (3) Gross profit divided by revenue.
Comparison of results of operations for the financial years ended 31 January 2012, 2013 and 2014
Revenue The Group’s revenue consists primarily of sales of card and non-card goods in Card Factory’s retail stores and online through Getting Personal and the Card Factory website. Revenue is recognised at the point goods are sold or delivered. The table below sets out a breakdown of the Group’s revenue, presented on an underlying basis for the periods indicated:
80 Year ended 31 January Change ––––––––––––––––––––––––––––––––––– –––––––––––––––––––––– 2012 2013 2014 2012/2013 2013/2014 ———— ———— ———— ———— ———— (£m) (£m) (£m) (%) (%) Revenue Card Factory(1) 255.5 287.2 314.3 12.4 9.4 Getting Personal(2) 8.5 12.6 12.6 48.2 – Discontinued operations(3) 1.5 0.1 – – – ———— ———— ———— ———— ———— Total 265.5 299.9 326.9 13.0 9.0 ———— ———— ———— ———— ———— Notes: (1) Principally relates to revenue generated by the national network of physical Card Factory stores together with annual revenue for the Card Factory transactional website (www.cardfactory.eu.com), launched in late 2012, totalling less than £1 million per annum in each of the three financial years ended 31 January 2012, 2013 and 2014. (2) Sales of Getting Personal Ltd, acquired July 2011. (3) Card Concepts and Excelsior Graphics: during early 2012 the Group closed the small wholesale operation that was acquired together with a design capability in 2005. The Group’s revenue increased by £34.4 million, or 13.0 per cent., from £265.5 million in the financial year ended 31 January 2012 to £299.9 million in the financial year ended 31 January 2013 and by a further £27.0 million, or 9.0 per cent., to £326.9 million in the financial year ended 31 January 2014.
The increase in the year ended 31 January 2013 was principally attributable to the continued expansion of the Group’s store portfolio, which increased from 611 stores as of 31 January 2012 to 664 stores as of 31 January 2013, as well as an increase of 3.2 per cent. in like-for-like sales over the previous financial year. The increase in the sales of Getting Personal principally reflects the impact of a full year’s sales in the year ended 31 January 2013, the business having being acquired part way through the previous financial year.
Similarly, the increase in the year ended 31 January 2014 was principally attributable to the continued expansion of the Group’s store portfolio, which increased from 664 stores as of 31 January 2013 to 713 stores as of 31 January 2014, as well as an increase of 3.1 per cent. in like-for-like sales over the previous financial year.
Cost of sales The Group’s cost of sales increased by £22.1 million, or 12.1 per cent., from £183.4 million in the financial year ended 31 January 2012 to £205.5 million in the financial year ended 31 January 2013 and by a further £17.8 million, or 8.7 per cent., to £223.3 million in the financial year ended 31 January 2014.
The table below sets out a breakdown of the cost of sales for the periods indicated:
Year ended 31 January Change ––––––––––––––––––––––––––––––––––– –––––––––––––––––––––– 2012 2013 2014 2012/2013 2013/2014 ———— ———— ———— ———— ———— (£m) (£m) (£m) (%) (%) Cost of sales Cost of goods sold (84.3) (93.1) (102.0) 10.4 9.6 Store wages (43.6) (48.4) (52.9) 11.0 9.3 Store property costs (42.9) (49.8) (53.7) 16.1 7.8 Other direct expenses (12.6) (14.2) (14.7) 12.7 3.5 ———— ———— ———— ———— ———— Cost of sales (183.4) (205.5) (223.3) 12.1 8.7 ———— ———— ———— ———— ———— Cost of goods sold Cost of goods sold principally comprises the cost of finished goods, production costs and raw materials purchased from suppliers for the production of certain products, warehouse wages together with other related costs such as import duty, and freight and carriage costs. The Group’s cost of goods sold increased by
81 £8.8 million, or 10.4 per cent., from £84.3 million in the financial year ended 31 January 2012 to £93.1 million in the financial year ended 31 January 2013 and by a further £8.9 million, or 9.6 per cent., to £102.0 million in the financial year ended 31 January 2014.
The increase in the periods under review principally reflects the growth in revenue from the new store roll out and like-for-like sales growth, together with the impact of the acquisition on Getting Personal which has a lower gross margin than the Card Factory store network.
As a consequence of the Group’s foreign exchange hedging strategy, the weighted average exchange rate reflected in cost of goods sold was reasonably constant in the period under review ($1.61, $1.64 and $1.62 for the financial years ended 31 January 2012, 2013 and 2014, respectively). The Group has hedged 100 per cent. of its forecast U.S. Dollar requirements for the financial year ending 31 January 2015, and 60 per cent. of its forecast requirements for the financial year ending 31 January 2016.
The ratio of cost of goods sold to revenue has remained reasonably consistent during the periods under review, at 31.8 per cent. in the year ended 31 January 2012, 31.0 per cent. in the year ended 31 January 2013 and 31.2 per cent. in the year ended 31 January 2014.
Store wages Store wages include wages and salaries (including bonuses) for store-based staff, together with employers’ National Insurance, employers’ pension contributions, overtime, holiday pay and sick pay. The Group’s store wages increased by £4.8 million, or 11.0 per cent., from £43.6 million in the financial year ended 31 January 2012 to £48.4 million in the financial year ended 31 January 2013 and by a further £4.5 million, or 9.3 per cent., to £52.9 million in the financial year ended 31 January 2014. These increases were driven principally by the increase in the Group’s total headcount and average wage rates, which were partly offset by various in-store efficiency initiatives to reduce store hours.
The ratio of store wages to revenue has remained reasonably constant during the periods under review, at 16.4 per cent. in the year ended 31 January 2012, 16.2 per cent. in the year ended 31 January 2013 and 16.2 per cent. in the year ended 31 January 2014.
Whilst a significant proportion of the Group’s store wages is dependent upon the national minimum wage, which typically increases each year, active management of store hours, various in-store efficiency initiatives and ongoing growth in like-for-like sales has enabled the Group to maintain this cost as a ratio of revenue at a constant level during the periods under review.
Store property costs Store property costs principally comprise store rents (net of rental incentives), business rates and service charges. The Group’s store property costs increased by £6.9 million, or 16.1 per cent., from £42.9 million in the financial year ended 31 January 2012 to £49.8 million in the financial year ended 31 January 2013 and by a further £3.9 million, or 7.8 per cent., to £53.7 million in the financial year ended 31 January 2014. These increases were driven principally by the growth of the Group’s store portfolio from 611 stores as of 31 January 2012 to 664 stores and 713 stores as of 31 January 2013 and 2014, respectively, as well as a slight increase in the average store size, partly offset by reduced rents for certain store locations where the Group has been able to successfully negotiate such reductions at renewal or under the applicable break clause.
The ratio of the store property costs to revenue has remained reasonably constant during the periods under review being 16.2 per cent. in the year ended 31 January 2012, 16.6 per cent. in the year ended 31 January 2013 and 16.4 per cent. in the year ended 31 January 2014.
Other direct expenses Other direct expenses include store opening costs, store utility costs, waste disposal, store maintenance and point-of-sale costs. The Group’s other direct expenses increased by £1.6 million, or 12.7 per cent., from £12.6 million in the financial year ended 31 January 2012 to £14.2 million in the financial year ended 31 January 2013 and by a further £0.5 million, or 3.5 per cent., to £14.7 million in the financial year ended
82 31 January 2014. These increases were primarily due to the increasing size of the Group’s store portfolio, with these costs being principally variable in nature.
The ratio of other direct expenses to revenue has remained reasonably consistent during the periods under review being 4.7 per cent. in the year ended 31 January 2012, 4.7 per cent. in the year ended 31 January 2013 and 4.5 per cent. in the year ended 31 January 2014, with savings in certain areas (for example third-party storage) being offset by growing expenses in other areas (for example, electricity costs and debit and credit card charges).
Gross profit and gross profit margin As a result of the foregoing factors, the Group’s gross profit increased by £12.3 million, or 15.0 per cent., from £82.1 million in the financial year ended 31 January 2012 to £94.4 million in the financial year ended 31 January 2013 and by a further £9.2 million, or 9.7 per cent., to £103.6 million in the financial year ended 31 January 2014. The Group’s gross profit margin increased from 30.9 per cent. in the financial year ended 31 January 2012 to 31.5 per cent. and 31.7 per cent. in the financial years ended 31 January 2013 and 2014, respectively.
Operating expenses Operating expenses include central administration costs and operating expenses such as Head Office salaries and remuneration, design studio costs, insurance, costs relating to Regional/Area Managers, third-party rent (for leasehold, non-store properties) and business rates for the Group’s offices, production facilities and warehousing and depreciation. The Group’s operating expenses increased by £3.2 million, or 13.3 per cent., from £24.0 million in the financial year ended 31 January 2012 to £27.2 million in the financial year ended 31 January 2013 and by a further £3.5 million, or 12.9 per cent., to £30.7 million in the financial year ended 31 January 2014.
The ratio of operating expenses to revenue has remained reasonably constant during the periods under review being 9.0 per cent. in the year ended 31 January 2012, 9.1 per cent. in the year ended 31 January 2013 and 9.4 per cent. in the year ended 31 January 2014 as the Group has continued to invest in its infrastructure for anticipated further growth.
Net financing expense The Group’s net financing expense comprised the following:
Year ended 31 January 2012 2013 2014 –––––––– –––––––– –––––––– (£’m) (£’m) (£’m) Finance income Bank interest received (0.2) (0.4) (0.5) Fair value gain on interest rate derivative contracts – (0.1) – ———— ———— ———— Finance income (0.2) (0.5) (0.5) ———— ———— ———— Finance expense Interest on bank loans and overdrafts 9.5 7.7 9.5 Amortisation of loan issue costs 1.8 1.8 1.9 Interest on 10 per cent. loan notes 3.8 4.2 1.3 Interest on 14 per cent. loan notes 27.0 30.8 28.6 Loan note redemption premium 0.3 – – Fair value loss on interest rate derivative contracts 0.6 – – Interest on deferred consideration – 0.1 0.1 ———— ———— ———— Finance expense 43.0 44.6 41.4 ———— ———— ———— Net finance expense 42.8 44.1 40.9 ———— ———— ————
83 Bank interest received related to interest receivable on cash balances held by the Group. The movement each year reflects the changes in levels of deposits and interest rates on the Group’s current and deposit accounts.
Interest on bank loans and overdrafts principally related to the senior debt facility that was entered into as part of the funding of the acquisition of the Group by Charterhouse in 2010 (referred to as the “MBO” below). The reduction in interest expense in the financial year ended 31 January 2013 (compared to the financial year ended 31 January 2012) principally reflected the lower average level of senior debt outstanding in the year following repayments of senior debt principal of £13.7 million in the financial year ended 31 January 2012, together with a lower average interest rate chargeable as the Group benefited from a margin reduction based on the EBITDA leverage ratchet contained in the Senior Facilities Agreement. The subsequent increase of £1.8 million, or 23.4 per cent., in the year ended 31 January 2014 principally reflected the impact of the senior debt refinancing completed in October 2013 under which an additional £165 million of senior debt was incurred to fund, together with surplus cash on hand, a £170 million repayment of the 14 per cent. loan notes and accrued interest.
The amortisation of loan issue costs in the two years ended 31 January 2013 reflected the costs associated with the debt funding for the MBO. The increase in amortisation of loan issue costs in the year ended 31 January 2014 reflects the costs incurred in the senior debt refinancing completed in October 2013 and referred to above.
The interest expense in relation to the 10 per cent. loan notes represented the accrued coupon on these payment-in-kind notes. The 10 per cent. loan notes were issued by the Group at the time of the MBO. The reduction in the interest of the 10 per cent. loan notes in the year ended 31 January 2014 relates to the early repayment of this instrument (due to be repaid in full in 2019) from surplus cash in May 2013.
The interest expense in relation to the 14 per cent. loan notes represents the accrued coupon on these payment in kind notes. The 14 per cent. loan notes were issued by the Group at the time of the MBO. The reduction in the interest of the 14 per cent. loan notes in the year ended 31 January 2014 relates to the partial early repayment of these notes following the senior debt refinancing in October 2013.
Fair value gains and losses on interest rate derivative contracts relate to fair value movements on a £50 million interest rate cap (expired 31 July 2013) and a £70 million interest rate swap (expired 31 July 2012) entered into at the time of the acquisition of the Group by Charterhouse in 2010. As the Group historically prepared its accounts under UK GAAP, the derivatives were not designated as a hedging relationship under IFRS at inception and consequently the fair value gains and losses are recognised as a finance income/expense in the income statement. Interest rate swaps entered into on completion of the October 2013 refinancing with a notional value of £100 million are designated as a hedging relationship, with fair value gains and losses recognised in a hedging reserve.
Taxation The Group’s income statement tax charge increased by £2.8 million, or 36.4 per cent., from £7.7 million in the financial year ended 31 January 2012 to £10.5 million in the financial year ended 31 January 2013, by a further £1.6 million, or 15.2 per cent., to £12.1 million in the financial year ended 31 January 2014. The Group’s effective tax rate was 48.4 per cent., 45.7 per cent. and 37.8 per cent. in the financial years ended 31 January 2012, 2013 and 2014, respectively, while the statutory tax rate during these periods was 26.3 per cent., 24.3 per cent. and 23.2 per cent., respectively. The relatively high effective tax rate compared to the statutory tax rate principally reflects the significant proportion of interest relating to the 14 per cent. loan notes not being deductible for tax purposes.
Profit for the year As a result of the foregoing factors, the Group’s profit for the year increased by £4.3 million, or 52.4 per cent., from £8.2 million in the financial year ended 31 January 2012 to £12.5 million in the financial year ended 31 January 2013 and by a further £7.4 million, or 59.2 per cent., to £19.9 million in the financial year ended 31 January 2014.
84 5 Liquidity and Capital Resources The Group has historically funded its capital expenditure and working capital needs through cash flows from operations, together with a revolving credit facility utilised principally for letters of credit with certain suppliers. The Group expects to continue to operate on this basis going forward. The Group’s cash and cash equivalents as at 31 January 2012, 2013 and 2014 were £37.1 million, £64.7 million and £40.7 million, respectively.
As cash generated by the Group’s operating activities is its principal source of liquidity, and as a high proportion of the Group’s operating costs are fixed, significant risks to the Group’s sources of liquidity include operational risks, such as the risk of flat or declining revenues.
Cash flows During the periods under review, the Group has been highly cash generative, reflecting the impact of high gross margins on cost of goods sold, strong control of operating costs, low and predictable capital expenditure, a limited working capital investment required to operate and grow the business and a significant deleveraging of the Group. Cash Conversion (calculated as EBITDA less capital expenditures less changes in working capital, divided by EBITDA) in the three financial years ended 31 January 2014 was 80.3 per cent. of EBITDA. As discussed in Section 6 (Capital Expenditure) of this Part X(Operating and Financial Review), the Group has incurred expenditure on a number of one-off strategic projects during the period under review. Excluding this capital expenditure, Cash Conversion in the three financial years ending 31 January 2014 was 87.9 per cent. of EBITDA.
The table below sets out certain information regarding the Group’s cash flows in the periods indicated:
Year ended 31 January 2012 2013 2014 –––––––– –––––––– –––––––– (£’m) (£’m) (£’m) Net cash inflow from operating activities 49.7 68.5 67.0 Net cash outflow from investing activities (21.5) (13.6) (12.0) Net cash outflow from financing activities (28.3) (27.3) (79.0) ———— ———— ———— Net increase/(decrease) in cash and cash equivalents (0.1) 27.6 (24.0) Cash and cash equivalents at the beginning of the year 37.2 37.1 64.7 ———— ———— ———— Closing cash and cash equivalents 37.1 64.7 40.7 ———— ———— ———— Other cash flow data Cash conversion (%)(1) 68.6 84.2 85.8 Cash conversion before one off strategic projects (%)(2) 77.6 92.0 92.4
Notes: (1) Calculated as EBITDA less capital expenditures less changes in working capital, divided by EBITDA. (2) Calculated as EBITDA less capital expenditures excluding expenditures on one off strategic projects less changes in working capital, divided by EBITDA. The increase in the cash and cash equivalents balance as at 31 January 2013 compared to 31 January 2012 reflects surplus cash generated from the business. The Group also generated surplus cash in the financial year ended 31 January 2014. The cash and cash equivalents balance as at 31 January 2014 was, however, lower than at the same time in the prior year, principally because £47.1 million of this surplus cash was used to make an early repayment of principal and accrued interest on the 10 per cent. loan notes in May 2013.
85 Cash flows from operating activities Net cash flows from operating activities comprise operating profit, plus non-cash items, less changes in net working capital and less corporation taxes paid during the period. The following table sets out a reconciliation of net cash inflow from operating activities to operating profit for the periods indicated:
Year ended 31 January 2012 2013 2014 –––––––– –––––––– –––––––– (£’m) (£’m) (£’m) Total operating profit(1) 59.1 67.9 71.0 Depreciation and amortisation 5.2 6.4 7.5 Loss on disposal of fixed assets – 0.1 – ———— ———— ————
Year ended 31 January 2012 2013 2014 –––––––– –––––––– –––––––– (£’m) (£’m) (£’m) Operating cash flows before changes in working capital 64.3 74.4 78.5 (Increase)/decrease in receivables (4.7) 0.3 0.5 (Increase)/decrease in inventories (10.6) 2.9 (4.7) Increase/(decrease) in payables 8.4 (1.1) 4.8 ———— ———— ———— Net (increase)/decrease in working capital (6.9) 2.1 0.6 ———— ———— ———— Cash inflow from operating activities 57.4 76.5 79.1 ———— ———— ———— Corporation tax paid (7.7) (8.0) (12.1) ———— ———— ———— Net cash flows from operating activities 49.7 68.5 67.0 ———— ———— ———— Note: (1) Total operating profit includes operating profit of £58.1 million, £67.2 million and £72.9 million for the three financial years ended 31 January 2012, 2013 and 2014, respectively, together with the net non-underlying profit/(loss) of £1.0 million, £0.7 million and (£1.9 million) in the same periods. The Group’s net cash flow from operating activities increased by £18.8 million, or 37.8 per cent., from £49.7 million in the financial year ended 31 January 2012 to £68.5 million in the financial year ended 31 January 2013. In the financial year ended 31 January 2014, the Group’s cash inflow from operating activities decreased slightly by £1.5 million, or 2.2 per cent., to £67.0 million. These changes were primarily due to an increase in the Group’s revenue and operating profit in both years due to the factors discussed in Section 4 (Results of Operations) of this Part X(Operating and Financial Review), together with changes in working capital, and corporation tax paid.
Net changes in working capital for the financial year ended 31 January 2012 resulted in an outflow of £6.9 million primarily due to an increase in inventories in advance of the launch of a number of new product ranges in the following year and an adverse movement relating to the mark-to-market on foreign exchange derivatives. The net working capital inflow of £2.1 million in the financial year ended 31 January 2013 was primarily due to a decrease in inventories as those high opening levels of inventory from the previous year were unwound.
Net changes in working capital in the financial year ended 31 January 2014 resulted in a small inflow of £0.6 million primarily reflecting an increase in payables and a favourable movement in the mark-to-market of derivatives offset by an increase in inventories in advance of the launch of a number of new product ranges in the following year.
Cash flows from investing activities Net cash outflow from investing activities decreased by £7.9 million, or 36.7 per cent., from £21.5 million in the financial year ended 31 January 2012 to £13.6 million in the financial year ended 31 January 2013.
86 This year-on-year decrease in outflows was primarily attributable to the acquisition of Getting Personal in the financial year ended 31 January 2012 which resulted in net cash outflow attributable to acquisitions of subsidiary undertakings (net of cash acquired) of £8.3 million in that period compared to nil in the financial year ended 31 January 2013.
Net cash outflow from investing activities decreased by £1.6 million, or 11.8 per cent., from £13.6 million in the financial year ended 31 January 2013 to £12.0 million in the financial year ended 31 January 2014. This decrease was primarily due to reduced expenditure on property, plant and equipment.
Cash flows from financing activities Net cash outflow from financing activities decreased by £1.0 million, or 3.5 per cent., from £28.3 million in the financial year ended 31 January 2012 to £27.3 million in the financial year ended 31 January 2013. This small decrease in outflows was due to a decrease in interest paid on the secured bank loans offset by an increase in the repayment of these loans.
Net cash outflow from financing activities increased by £51.7 million, or 189.4 per cent., from £27.3 million in the financial year ended 31 January 2013 to £79.0 million in the financial year ended 31 January 2014. This increase was primarily due to the early repayment of the 10 per cent. loan notes and accrued interest, representing a total cash outflow of £47.1 million.
6 Capital Expenditure The Group’s capital expenditure during the periods under review consisted primarily of expenditures related to the opening of new stores as well as investments in new warehousing facilities and a new Head Office and the commencement of an EPOS roll-out. The table below sets out the breakdown of the Group’s capital expenditure during the periods under review.
Year ended 31 January 2012 2013 2014 –––––––– –––––––– –––––––– (£’m) (£’m) (£’m) One-off strategic projects New warehousing facilities and Head Office 0.7 4.3 1.7 Printcraft (relocation and expansion) 5.0 0.2 – Getting Personal (vertical integration) – 0.3 0.3 EPOS rollout – 0.9 3.3 ———— ———— ———— Sub-total 5.7 5.7 5.3 ———— ———— ———— Annual capital expenditure New stores 4.5 3.1 3.4 Existing stores 0.3 0.3 0.4 Relocations 0.8 2.2 1.0 Other 1.7 2.4 1.9 ———— ———— ———— Sub total 7.3 8.0 6.7 ———— ———— ———— Total capital expenditure 13.0 13.7 12.0 ———— ———— ———— The Group’s total capital expenditure in the financial years ended 31 January 2012, 2013 and 2014 was £13.0 million, £13.7 million and £12.0 million, respectively.
The Group’s capital expenditure on one-off strategic projects during the periods under review comprised expenditures related to the Group’s expansion of its warehousing facilities, the building of a new Head Office, the relocation and expansion of Printcraft, roll-out of EPOS terminals in the Group stores and the commencement of vertical integration at Getting Personal. As set out in the table above, capital expenditure attributable to new store openings in the financial years ended 31 January 2012, 2013 and 2014 was £4.5 million, £3.1 million and £3.4 million, respectively. In the three financial years ended 31 January 2014, new store fit out capital expenditure required to open a new store averaged approximately £60,000 per store.
87 7 Financial Liabilities and Contractual Obligations
Liabilities and indebtedness
Contractual obligations The table below analyses the contractual cash flows of the Group’s non-derivative financial liabilities as 31 January 2014. The amounts disclosed in the tables are the contractual undiscounted cash flows, inclusive of interest, stated at the balance sheet date interest rates in respect of floating rate liabilities.
Less than One to Two to More than one year two years five years five years Total ———— ———— ———— ———— ———— (£’m) (£’m) (£’m) (£’m) (£’m) As at 31 January 2014 –––––––––––––––––– Secured bank loans: – Term loan A 20.0 16.1 2.8 – 38.9 – Term loan B 6.4 4.6 89.4 – 100.4 – Term loan C 12.3 8.9 185.7 – 206.9 14 per cent. loan notes – – – 246.7 246.7 Obligations under finance leases 0.1 – – – 0.1 Trade and other payables 28.3 – – – 28.3 Deferred consideration 0.8 0.8 – – 1.6 ———— ———— ———— ———— ———— Total 67.9 30.4 277.9 246.7 622.9 ———— ———— ———— ———— ———— Secured bank loans and New Facilities As of the date of this Prospectus, outstanding secured bank loans comprised £33.5 million term loan A, £85.0 million term loan B and £165.0 million term loan C. Secured bank loans are presented net of £8.4 million debt issue costs and inclusive of £0.1 million accrued interest in Part XII (Historical Financial Information).
The loans bear interest of three month LIBOR plus a 4.50 per cent. margin for term loan A and a 5.00 per cent. margin for term loans B and C. The interest margin is subject to an EBITDA leverage ratchet in the range of 3.75 per cent. to 4.50 per cent. for term loan A and 4.50 per cent. to 5.00 per cent. for term loans B and C. The Group has entered into interest rate swaps with a notional value of £100.0 million, which fixed the Group’s interest rate in respect of £100.0 million (out of the £283.5 million of the aggregate amount of secured bank loans outstanding at the date of this Prospectus) at 0.795 per cent. plus the applicable margin.
Term loan A is repayable in instalments over a period of six years which commenced May 2010. Term loan B is repayable in full in June 2017. Term loan C is repayable in full in October 2018.
The Group also has in place a £15,000,000 multi-currency revolving credit facility for working capital purposes. As at 31 January 2014, the Group had utilised £0.5 million of the facility in relation to letters of credit. The Group utilises letters of credit to facilitate contracts with certain third-party suppliers. The Group has not utilised the facility in respect of an overdraft during the financial year ended 31 January 2014.
See Section 14.4 (Senior Facilities Agreement) of Part XVI (Additional Information) for a more detailed description of the terms of the Senior Facilities Agreement.
On 17 April 2014, CF Bidco Limited (a wholly-owned subsidiary of the Company) entered into the New Facilities Agreement, with the Company and certain other members of the Group to accede as guarantors thereunder. The facilities available to the Group under the New Facilities Agreement include a £180 million term loan facility (the “New Term Facility”), a £20 million revolving facility (which may be used for general corporate purposes), and an uncommitted accordion facility (which, upon commitment, may be used for general corporate purposes, including for acquisitions and distributions) and will terminate in April 2019.
88 Borrowings under the New Facilities Agreement will bear interest at the aggregate of (i) a margin and (ii) LIBOR or, in relation to any loan in euro, EURIBOR. The applicable margin is subject to an EBITDA leverage ratchet in the range of 1.25 per cent. to 2.25 per cent. Borrowings under the New Facilities Agreement will be unsecured.
Following Admission, the Group expects to draw £180 million under the New Term Facility. The proceeds of the New Term Facility together with the proceeds of the Offer of the New Shares by the Company and other cash on hand, will be used to repay and refinance all of the outstanding borrowings under the Group’s existing senior secured financing facilities.
See Section 14.5 (New Facilities Agreement) of Part XVI (Additional Information) for a more detailed description of the terms of the New Facilities Agreement.
Loan notes As at 31 January 2014, £109.7 million of loan notes, including accrued interest of £4.5 million, remained outstanding, which includes:
• £23.0 million, including accrued interest, in favour of directors, management and related trusts; and
• £86.7 million, including accrued interest, in favour of funds managed by their general partner Charterhouse General Partners (IX) Limited.
Prior to Admission and as part of the Pre-IPO Reorganisation, all of the outstanding loan notes will have been converted into Ordinary Shares. See Section 4 (Pre-IPO Reorganisation) of Part XVI (Additional Information).
Finance leases The Group’s aggregate liabilities under finance leases totalled £0.7 million, £0.3 million and £0.1 million in the financial years ended 31 January 2012, 2013 and 2014, respectively. These finance leases principally related to an element of Card Factory warehouse plant and machinery and certain historic shop fit capital expenditure.
Contingent liabilities The Group has liabilities in respect of deferred consideration related to the acquisition of Printcraft and Getting Personal, which amounted to £2.2 million, £1.9 million and £1.5 million in the financial years ended 31 January 2012, 2013 and 2013 respectively. These amounts included £1.3 million, £0.9 million and £0.4 million contingent on meeting certain future performance targets.
Financial Instruments For a detailed further discussion of the financial instruments utilised by the Group during each of the periods under review, please refer to note 24 in Part XII (Historical Financial Information).
8 Quantitative and Qualitative Disclosures about Market Risk The principal financial risks faced by the Group are liquidity, foreign currency, interest rate, counterparty credit and capital risks. The Board of Directors has overall responsibility for the oversight of the Group’s risk management strategy. The principal financial risk factors and the actions taken to mitigate those risks are reviewed on an on-going basis.
Liquidity risk The Group generates significant operational cash inflows enabling the Group to maintain substantial cash balances. The Group also has a £15.0 million revolving credit facility to meet seasonal short-term liquidity requirements. Cash flow forecasts are prepared to assist management in identifying future liquidity requirements.
89 Long-term bank funding is subject to certain agreed financial covenants. The risk of a breach of these covenants is mitigated by regular and thorough financial forecasting, detailed covenant modelling and close monitoring of covenant compliance. As at 31 January 2014, the Group had adequate headroom against all of its financial covenants. Further details on the Group’s borrowings are set out in note 16 in Part XII (Historical Financial Information).
Interest rate risk The Group’s principal interest rate risk arises from long-term borrowings. Bank borrowings are denominated in pounds sterling and are borrowed at floating interest rates. The Group utilises interest rate derivative financial instruments to hedge an element of its borrowing costs, and in the financial year ended 31 January 2014 entered into interest rate swaps to hedge its exposure in respect of £100.0 million of the total of £286.1 million of its aggregate outstanding principal amount of its bank facilities as at 31 January 2014. If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Group’s profit for the financial year ended 31 January 2014 would decrease/increase by £0.5 million (2013: £0.2 million, 2012: £0.2 million).
Counterparty credit risk The Group is exposed to counterparty credit risk on its holdings of cash and cash equivalents and derivative financial assets. To mitigate the risk, counterparties are limited to high credit-quality financial institutions.
As a retail business the Group has minimal exposure to credit risk on trade receivables.
Capital risk management The Group’s capital risk management policy is to maintain a strong and efficient capital base to support the strategic objectives of the Group, provide optimal returns to shareholders and safeguard the going concern status of the Group.
The Group defines capital as equity attributable to the equity holders of the Company plus net debt. Net debt is shown in note 20 in Part XII (Historical Financial Information).
The Group has a continued focus on free cashflow generation. The Directors monitor a range of financial metrics together with standard banking covenant ratios (for example, leverage, interest cover and cashflow cover), maintaining suitable headroom to ensure that the Group’s financing requirements continue to be serviceable.
Foreign exchange risk management At 31 January 2014, the Group held a portfolio of foreign currency derivative contracts with notional principal amounts totalling £81.4 million (2013: £75.0 million and 2012: £69.5 million) to mitigate the exchange risk on future U.S. Dollar denominated trade purchases from its suppliers in the Far East.
9 Critical accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 1 in Part XII (Historical Financial Information).
90 PART XI
CAPITALISATION AND INDEBTEDNESS STATEMENT
The following table sets out the consolidated capitalisation and indebtedness of the Group as at 31 March 2014.
You should read this table together with Part X (Operating and Financial Review) and Part XII (Historical Financial Information).
The Group’s consolidated capitalisation and indebtedness will be significantly impacted by the Offer and the use of proceeds therefrom. See Part VIII (Reasons for the Offer and Dividend Policy) and Part XIII (Unaudited Pro Forma Financial Information).
Consolidated Capitalisation and Indebtedness Statement 31 March 2014 –––––––––––– (£ millions) Total current debt Guaranteed – Secured (23.9) Unguaranteed/unsecured –
Total non-current debt (excluding current portion of long-term debt) Guaranteed – Secured (256.9) Unguaranteed/unsecured (112.1)
31 March 2014 –––––––––––– (£ millions) Shareholders’ equity Share capital 0.1 Share premium 4.6 Other reserves –
The following table details the net financial indebtedness of the Group as at 31 March 2014.
31 March 2014 –––––––––––– (£ millions) Cash 55.1 Trading securities – Liquidity – Current financial receivable 55.1 Current bank debt (23.8) Other current financial debt (0.1) Current financial debt (23.9) Net current financial indebtedness 31.2 Non-current bank loans (256.9) Bonds issued – Other non-current loans (112.1) Non-current financial indebtedness (369.0) Net financial indebtedness (337.8)
91 PART XII
HISTORICAL FINANCIAL INFORMATION
For the purposes of the Historical Financial Information presented below, the Group has chosen to present an underlying profit and earnings measure and, accordingly, the Consolidated Statement of Comprehensive Income for the Group included in the Historical Financial Information includes certain items that have been classified as “non-underlying.” See Notes 1 and 3 to the Historical Financial Information for more detail. All financial information extracted from the Consolidated Statement of Comprehensive Income for each of the three financial years ended 31 January 2014 included elsewhere in this Prospectus is presented solely on an underlying basis, except where otherwise indicated, as the non-underlying items have not had a material impact on the Group’s results of operations in any of the three financial years ended 31 January 2014, and as the Group believes that underlying profit and earnings provides useful financial information for potential investors.
Section A – Accountant’s report on Historical Financial Information
KPMG Audit Plc Tel +44 (0) 113 231 3000 1 The Embankment Fax +44 (0) 113 231 3200 Neville Street DX 72440 Leeds Leeds LS1 4DW United Kingdom The Directors Card Factory plc Century House Brunel Road Wakefield 41 Industrial Estate Wakefield WF2 0XG 15 May 2014
Dear Sirs
Card Factory plc (the ‘Company’) We report on the financial information set out on pages 94 to 136 for the three years ended 31 January 2014. This financial information has been prepared for inclusion in the prospectus dated 15 May 2014 of the Company on the basis of the accounting policies set out in note 1 to the financial information. This report is required by paragraph 20.1 of Annex I of the Prospectus Directive Regulation and is given for the purpose of complying with that paragraph and for no other purpose.
Responsibilities The Directors of the Company are responsible for preparing the financial information on the basis of preparation set out in note 1 to the financial information and in accordance with International Financial Reporting Standards as adopted by the European Union.
It is our responsibility to form an opinion on the financial information and to report our opinion to you.
Save for any responsibility arising under Prospectus Rule 5.5.3R (2)(f) to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with paragraph 23.1 of Annex I of the Prospectus Directive Regulation, consenting to its inclusion in the prospectus.
92 Basis of opinion We conducted our work in accordance with Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidence relevant to the amounts and disclosures in the financial information. It also included an assessment of the significant estimates and judgments made by those responsible for the preparation of the financial information and whether the accounting policies are appropriate to the entity’s circumstances, consistently applied and adequately disclosed.
We planned and performed our work so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial information is free from material misstatement whether caused by fraud or other irregularity or error.
Opinion on financial information In our opinion, the financial information gives, for the purposes of the prospectus dated 15 May 2014, a true and fair view of the state of affairs of CF Topco Limited and its subsidiaries as at 31 January 2012, 31 January 2013 and 31 January 2014 and of its profits, cash flows and recognised gains and losses for the three years ended 31 January 2014 in accordance with the basis of preparation set out in note1and in accordance with International Financial Reporting Standards as adopted by the European Union as described in note1.
Declaration For the purposes of Prospectus Rule 5.5.3R (2)(f) we are responsible for this report as part of the prospectus and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the prospectus in compliance with paragraph 1.2 of Annex I of the Prospectus Directive Regulation.
Yours faithfully
KPMG LLP
93 Section B – Historical financial information for the three years ended 31 January 2012, 2013 and 2014.
Consolidated Statement of Comprehensive Income For the year ended 31 January
2012 2013 2014 –––––––––––––––––––––––––––– –––––––––––––––––––––––––––– –––––––––––––––––––––––––––– Non- Non- Non- underlying underlying underlying Note Underlying (note 3) Total Underlying (note 3) Total Underlying (note 3) Total £’m £’m £’m £’m £’m £’m £’m £’m £’m Revenue 265.5 – 265.5 299.9 – 299.9 326.9 – 326.9 Cost of sales (183.4) 1.5 (181.9) (205.5) 0.7 (204.8) (223.3) (1.9) (225.2) –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Gross profit/(loss) 82.1 1.5 83.6 94.4 0.7 95.1 103.6 (1.9) 101.7 Operating expenses (24.0) (0.5) (24.5) (27.2) – (27.2) (30.7) – (30.7) –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Operating profit/(loss) 4 58.1 1.0 59.1 67.2 0.7 67.9 72.9 (1.9) 71.0 Finance income 6 0.2 – 0.2 0.4 0.1 0.5 0.5 – 0.5 Finance expenses 6 (42.4) (0.6) (43.0) (44.6) – (44.6) (41.4) – (41.4) –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Net financing expense (42.2) (0.6) (42.8) (44.2) 0.1 (44.1) (40.9) – (40.9) –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Profit/(loss) before tax 15.9 0.4 16.3 23.0 0.8 23.8 32.0 (1.9) 30.1 Taxation 7 (7.7) (0.2) (7.9) (10.5) (0.2) (10.7) (12.1) 0.4 (11.7) –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Profit/(loss) for the year 8.2 0.2 8.4 12.5 0.6 13.1 19.9 (1.5) 18.4 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– ––––––––
Earnings per share pence pence pence pence pence pence – Basic 9 167.1 171.2 254.5 266.7 405.1 374.6 – Diluted 9 167.1 171.2 254.5 266.7 405.1 374.6
All activities relate to continuing operations
The notes on pages 99 to 136 form an integral part of this historical financial information.
94 Consolidated Statement of Comprehensive Income (continued) For the year ended 31 January 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Profit for the year 8.4 13.1 18.4 –––––––– –––––––– –––––––– Items that may be recycled subsequently to profit or loss: Effective portion of changes in fair value of cash flow hedges – – (1.0) Tax relating to components of other comprehensive income – – 0.2 –––––––– –––––––– –––––––– Other comprehensive income for the year, net of income tax – – (0.8) –––––––– –––––––– –––––––– Total comprehensive income for the year attributable to equity shareholders of the parent –––––––– 8.4 –––––––– 13.1 –––––––– 17.6 The notes on pages 99 to 136 form an integral part of this historical financial information.
95 Consolidated Statement of Financial Position As at 31 January Note 2011 2012 2013 2014 –––––––– –––––––– –––––––– –––––––– £’m £’m £’m £’m Non-current assets Intangible assets 10 314.4 329.8 330.8 331.2 Property, plant and equipment 11 19.4 26.7 32.7 36.7 Deferred tax assets 12 0.9 1.4 2.0 1.2 Other receivables 14 1.5 1.7 1.8 1.5 Derivative financial instruments 23 0.6 0.3 0.5 – –––––––– –––––––– –––––––– –––––––– 336.8 359.9 367.8 370.6 Current assets Inventories 13 26.7 37.5 34.6 39.3 Trade and other receivables 14 13.7 16.4 16.2 17.6 Derivative financial instruments 23 – 1.8 1.4 0.3 Cash and cash equivalents 15 37.2 37.1 64.7 40.7 –––––––– –––––––– –––––––– –––––––– 77.6 92.8 116.9 97.9 –––––––– –––––––– –––––––– –––––––– Total assets –––––––– 414.4 –––––––– 452.7 –––––––– 484.7 –––––––– 468.5 Current liabilities Borrowings 16 (11.8) (13.7) (10.6) (21.3) Trade and other payables 17 (22.8) (28.7) (26.5) (31.8) Tax payable (2.3) (3.0) (6.3) (4.9) Derivative financial instruments 23 (0.5) (0.2) – (0.9) –––––––– –––––––– –––––––– –––––––– (37.4) (45.6) (43.4) (58.9) Non-current liabilities Borrowings 16 (377.4) (394.4) (414.7) (366.3) Trade and other payables 17 (7.8) (11.4) (13.1) (11.8) Derivative financial instruments 23 – (0.9) – (0.4) –––––––– –––––––– –––––––– –––––––– (385.2) (406.7) (427.8) (378.5) –––––––– –––––––– –––––––– –––––––– Total liabilities –––––––– (422.6) –––––––– (452.3) –––––––– (471.2) –––––––– (437.4) Net (liabilities)/assets –––––––– (8.2) –––––––– 0.4 –––––––– 13.5 –––––––– 31.1 Equity Share capital 18 0.1 0.1 0.1 0.1 Share premium 18 4.4 4.6 4.6 4.6 Hedging reserve – – – (0.8) Retained earnings (12.7) (4.3) 8.8 27.2 –––––––– –––––––– –––––––– –––––––– Equity attributable to equity holders of the parent –––––––– (8.2) –––––––– 0.4 –––––––– 13.5 –––––––– 31.1 The notes on pages 99 to 136 form an integral part of this historical financial information.
96 Consolidated Statement of Changes in Equity For the year ended 31 January
Cash flow Share Share hedging Retained Total Capital Premium reserve Earnings Equity –––––––– –––––––– –––––––– –––––––– –––––––– £’m £’m £’m £’m £’m Balance at 1 February 2013 0.1 4.6 – 8.8 13.5 –––––––– –––––––– –––––––– –––––––– –––––––– Total comprehensive income for the year Profit or loss – – – 18.4 18.4 Other comprehensive income – – (0.8) – (0.8) –––––––– –––––––– –––––––– –––––––– –––––––– – – (0.8) 18.4 17.6 –––––––– –––––––– –––––––– –––––––– –––––––– Balance at 31 January 2014 –––––––– 0.1 –––––––– 4.6 –––––––– (0.8) –––––––– 27.2 –––––––– 31.1 Cash flow Share Share hedging Retained Total Capital Premium reserve Earnings Equity –––––––– –––––––– –––––––– –––––––– –––––––– £’m £’m £’m £’m £’m Balance at 1 February 2012 0.1 4.6 – (4.3) 0.4 Total comprehensive income for the year Profit or loss – – – 13.1 13.1 –––––––– –––––––– –––––––– –––––––– –––––––– Balance at 31 January 2013 –––––––– 0.1 –––––––– 4.6 –––––––– – –––––––– 8.8 –––––––– 13.5 Cash flow Share Share hedging Retained Total Capital Premium reserve Earnings Equity –––––––– –––––––– –––––––– –––––––– –––––––– £’m £’m £’m £’m £’m Balance at 1 February 2011 0.1 4.4 – (12.7) (8.2) –––––––– –––––––– –––––––– –––––––– –––––––– Total comprehensive income for the year Profit or loss – – – 8.4 8.4 –––––––– –––––––– –––––––– –––––––– –––––––– Transactions with owners, recorded directly in equity: Issue of shares (note 18) – 0.2 – – 0.2 –––––––– –––––––– –––––––– –––––––– –––––––– Balance at 31 January 2012 –––––––– 0.1 –––––––– 4.6 –––––––– – –––––––– (4.3) –––––––– 0.4 The notes on pages 99 to 136 form an integral part of this historical financial information.
97 Consolidated Statement of Cash Flow For the year ended 31 January Note 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Cash inflow from operating activities 19 57.4 76.5 79.1 Corporation tax paid (7.7) (8.0) (12.1) –––––––– –––––––– –––––––– Net cash inflow from operating activities 49.7 68.5 67.0 Cash flows from investing activities Purchase of property, plant and equipment 11 (12.0) (12.0) (10.6) Purchase of intangible assets 10 (1.0) (1.7) (1.4) Acquisition of subsidiary undertaking, net of cash acquired (8.3) – – Payment of deferred consideration (0.4) (0.4) (0.5) Proceeds from sale of property, plant and equipment – 0.2 – Interest received 0.2 0.3 0.5 –––––––– –––––––– –––––––– Net cash outflow from investing activities (21.5) (13.6) (12.0) Cash flows from financing activities Proceeds from bank borrowings – – 159.7 Proceeds from finance leases 0.1 0.1 – Interest paid (10.0) (7.9) (108.7) Repayment of borrowings (17.7) (19.0) (129.8) Payment of finance lease liabilities (0.7) (0.5) (0.2) –––––––– –––––––– –––––––– Net cash outflow from financing activities (28.3) (27.3) (79.0) –––––––– –––––––– –––––––– Net (decrease)/increase in cash and cash equivalents (0.1) 27.6 (24.0) Cash and cash equivalents at the beginning of the year 37.2 37.1 64.7 –––––––– –––––––– –––––––– Closing cash and cash equivalents 15 –––––––– 37.1 –––––––– 64.7 –––––––– 40.7 The notes on pages 99 to 136 form an integral part of this historical financial information
98 Notes to the financial statements
1 Accounting policies
General information CF Topco Limited (the Company) is a company incorporated and domiciled in the UK.
The consolidated financial information appearing in this report comprises consolidated financial information of the Company and its subsidiaries (together referred to as the Group).
On 30 April 2014 the Group undertook a reorganisation of its corporate structure ahead of the Offer. The effect of the reorganisation is to make Card Factory plc the ultimate holding company of the Group. Card Factory plc is a newly-incorporated company.
Statement of compliance The group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (EU IFRS) and with those parts of the Companies Act 2006 applicable to companies reporting under EU IFRS.
The principal 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 EU IFRS balance sheet at 1 February 2011 for the purposes of the transition to EU IFRS.
Basis of preparation The financial statements have been prepared on a going concern basis under the historical cost convention except for derivative financial instruments and deferred contingent consideration.
The preparation of financial statements in conformity with EU IFRS requires the use of judgements, estimates and assumptions that affect the application of the Group’s accounting policies and reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.
Areas subject to significant judgement, assumption or estimation are detailed below:
Goodwill impairment Goodwill is assessed for impairment based on the recoverable amount of the cash generating units (‘CGUs’). The recoverable amounts of the CGUs are based on a value in use calculation. The key assumptions in the calculation are disclosed in note 10.
Depreciation and amortisation Judgement is used in assessing useful lives and residual values of property plant and equipment and intangible fixed assets.
Transition to EU IFRS The Group is preparing financial statements in accordance with EU IFRS for the first time and consequently has applied IFRS 1. An explanation of how the transition to EU IFRS has affected the reported financial position, financial performance and cash flows of the Group is provided in note 29. The estimates used in the preparation of the group financial statements remain consistent with the estimates at the time of approval of the UK GAAP group financial statements for the equivalent periods.
IFRS 1 grants certain exemptions from the full requirements of EU IFRS in the transition period. The following exemptions have been taken in these financial statements:
• Business combinations – Business combinations that took place prior to 1 February 2011 have not been restated.
99 1 Accounting policies (continued) • Borrowing costs – Borrowing costs directly attributable to qualifying assets constructed prior to 1 February 2011 have not been capitalised as part of the cost of that asset.
EU Endorsed International Financial Reporting Standards in issue but not yet effective The Directors considered the impact on the Group of new and revised accounting standards, interpretations or amendments. The following revised and new accounting standards are currently endorsed but not yet effective. None are expected to be material to the financial statements.
Periods beginning on/after 1 January 2014 • Offsetting Financial Assets and Financial Liabilities – Amendments to IAS 32
• Investment Entities Amendments to: IFRS 10 IFRS 12 IAS 27
• Novation of Derivatives and Continuation of Hedge Accounting
• Recoverable Amount Disclosures for Non-Financial Assets – Amendments to IAS 36
• IFRIC 21 Levies
Periods beginning on/after 1 July 2014 • Defined Benefit Plans: Employee Contributions (Amendments to IAS 19)
• Annual Improvements to IFRSs 2010 – 2012 cycle
• Annual Improvements to IFRSs 2011 – 2013 cycle
Basis of consolidation
Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Intercompany transactions and balances between Group companies are eliminated upon consolidation.
Business combinations Subject to the transitional relief in IFRS 1, all business combinations are accounted for by applying the acquisition method. Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group.
The Group measures goodwill at the acquisition date as the fair value of the consideration transferred less the fair value of identifiable assets acquired and liabilities assumed. Any contingent consideration payable is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. Costs related to the acquisition are expensed to the income statement as incurred.
100 1 Accounting policies (continued)
Acquisitions prior to 1 February 2011 (date of transition to EU IFRS) IFRS 1 grants certain exemptions from the full requirements of EU IFRS in the transition period. The Group and Company elected not to restate business combinations that took place prior to 1 February 2011. In respect of acquisitions prior to the transition date, goodwill is included at 1 February 2011 on the basis of its deemed cost at that date, which represents the amount recorded under UK GAAP.
Revenue Revenue represents the fair value of amounts receivable for goods sold to customers and is stated net of value added tax and returns. Revenue is recognised at the point goods are sold or delivered and the risks and rewards are deemed to have been transferred to the customer.
Turnover is attributable to the retail sale of cards and gifts in the UK.
Financing income and expenses Finance expenses comprise interest charges and losses on interest rate derivative financial instruments. Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that takes a substantial time to be prepared for use, are capitalised as part of the cost of that asset.
Finance income comprises interest income and gains on interest rate derivative financial instruments.
Interest income and interest charges are recognised in profit or loss as it accrues, using the effective interest method.
Foreign Currencies
Functional and presentation currency The consolidated financial statements are presented in pounds sterling, which is the functional currency of the company and all subsidiary entities.
Transactions and balances Transactions in foreign currencies are recorded at the exchange rate on the transaction date. All foreign currency transactions relate to the requisition of inventory. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement within cost of sales, except when deferred in other comprehensive income as qualifying cash flow hedges. Foreign currency gains and losses are reported on a net basis.
Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity or through other comprehensive income, in which case it is recognised in equity or other comprehensive income respectively.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided on 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: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, 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 or substantively enacted at the balance sheet date.
101 1 Accounting policies (continued) A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised.
Underlying profit and earnings The Group has chosen to present an underlying profit and earnings measure. The group believes that underlying profit and earnings provides additional useful information for shareholders. Underlying earnings is not a recognised profit measure under EU IFRS and may not be directly comparable with ‘adjusted’ profit measures reported by other companies.
The reported non-underlying adjustments are as follows:
Net fair value remeasurement gains and losses on derivative financial instruments The Group utilises foreign currency derivative contracts to manage the foreign exchange risk on U.S. Dollar denominated purchases and interest rate derivative contracts to manage the risk on floating interest rate bank borrowings. Fair value gains and losses on such instruments are recognised in the income statement to the extent they are not hedge accounted under IAS 39. Such gains and losses are unrealised and relate to future cash flows. In accordance with the commercial reasoning for entering into these agreements, the gains/losses are deemed not representative of the underlying financial performance in the year and presented as non- underlying items.
Acquisition costs Under IFRS 3, expenses attributable to the acquisition of a subsidiary are expensed in the income statement. Such expenses are not representative of the underlying financial performance in the year and presented as non-underlying items.
Financial instruments
Financial assets The Group classifies all its non-derivative financial assets as loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Group has no intention of trading these loans and receivables. Subsequent to initial recognition at fair value plus transaction costs, these assets are carried at amortised cost using the effective interest method, subject to impairment.
Derivative financial assets are categorised as fair value through profit or loss (“FVTPL”) and classified as held for trading, unless accounted for as an effective hedging instrument.
Financial liabilities Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Non derivative financial liabilities are initially recognised at fair value, less any transaction costs and subsequently stated at amortised cost using the effective interest method except for derivatives and contingent consideration. Derivatives are categorised as FVTPL and classified as held for trading, unless accounted for as an effective hedging instrument. Contingent consideration on business combinations is designated as FVTPL.
Non-derivative financial instruments Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents, borrowings and trade and other payables.
102 1 Accounting policies (continued)
Trade and other receivables Trade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses.
Cash and cash equivalents Cash and cash equivalents comprise cash in hand, at bank and on short term deposit of less than three months. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the cash flow statement.
Trade and other payables Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method.
Borrowings Borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, borrowings are stated at amortised cost using the effective interest method.
Impairment of financial assets Financial assets are assessed for objective evidence of impairment at the balance sheet date. Where there is objective evidence that an impairment loss exists, impairment provisions are made to reduce the carrying value of financial assets to the present value of estimated future cash flows.
Derivative financial instruments The Group utilises foreign currency derivative contracts and U.S. Dollar denominated cash balances to manage the foreign exchange risk on U.S. Dollar denominated purchases and interest rate derivative contracts to manage the risk on floating interest rate bank borrowings.
Derivative financial instruments are recognised at fair value. The gain or loss on remeasurement to fair value is recognised immediately within profit or loss except to the extent the instrument has been designated an effective hedging arrangement. Gains and losses in respect of foreign currency derivative contracts are recognised within cost of sales. Gains and losses in respect of interest rate derivative contracts are recognised within finance income or expense.
Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a highly probable forecast 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 profit or loss.
The cumulative gain or loss is removed from other comprehensive income (‘OCI’) and recognised in profit or loss in the same period or periods during which the hedged forecast transaction, or a resulting asset or liability affects profit or loss.
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 OCI and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in OCI is recognised in profit or loss immediately.
103 1 Accounting policies (continued)
Fair value estimation The techniques applied in determining the fair values of financial assets and liabilities are disclosed in note 23.
Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses.
Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives as follows:
• buildings 25 – 50 years • leasehold improvements shorter of 5 years and lease term • plant and equipment 3 – 10 years • fixtures and fittings 5 years • motor vehicles 4 years
Depreciation methods, useful lives and residual values are reviewed at each balance sheet date.
Intangible assets and goodwill
Goodwill Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment.
Software Computer software is carried at cost less accumulated amortisation and any provision for impairment. Costs relating to development of computer software are capitalised if the recognition criteria of IAS38 ‘Intangible Assets’ are met or expensed as incurred otherwise.
Other intangible assets Expenditure on internally generated goodwill and brands is recognised in the income statement as an expense as incurred.
Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and less accumulated impairment losses.
Amortisation Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Intangible assets with an indefinite useful life and goodwill are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. The estimated useful life of software is 3-5 years.
Impairment of non-financial assets The carrying values of non-financial assets are reviewed for impairment where there is an indication of impairment. If an impairment loss arises, the asset value is adjusted to its estimated recoverable amount and the impairment loss is recognised in the income statement. Goodwill is reviewed for impairment at the balance sheet date and whenever an indication of impairment is identified.
104 1 Accounting policies (continued)
Inventories Inventories are stated at the lower of cost and net realisable value. Cost is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories, production costs and other costs in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity.
Finance leases Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Leased assets acquired by way of finance lease are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and less accumulated impairment losses. The lease obligations are included in liabilities, net of finance charges. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Operating leases An operating lease is a lease which is not a finance lease. Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives are recognised in the income statement over the term of the lease as an integral part of the total lease expense.
2 Segmental reporting The Group has two operating segments trading under the names Card Factory and Getting Personal. Card Factory retails cards and gifts in the UK though an extensive store network. Getting Personal is an on-line retailer of personalised cards and gifts. Getting Personal does not meet the quantitative thresholds of a reportable segment as defined in IFRS 8. Consequently the results of the Group are presented as a single reportable segment. Revenues outside of the UK are not significant at less than £0.1 million.
The Chief Operating Decision Maker is the Board of Directors. The principal measures of performance highlighted in the monthly financial information reviewed by the Board are revenue, adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) and store numbers.
Major Customers Group revenue is derived from high volume, low value retail sales and are therefore not dependent on any major customer.
3 Non-underlying items 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Cost of sales Gains/(losses) on foreign currency derivative financial instruments not designated as a hedge (note 23) 1.5 0.7 (1.9) –––––––– –––––––– –––––––– Operating expenses Acquisition costs (note 27) (0.5) – – –––––––– –––––––– –––––––– Net finance expense (Losses)/gains on interest rate derivative financial instruments not designated as a hedge (note 23) –––––––– (0.6) –––––––– 0.1 –––––––– –
105 4 Operating profit Operating profit is stated after charging/(crediting) the following items:
2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Employee costs (note 5) 60.5 68.0 75.8 Depreciation expense (note 11) – owned fixed assets 4.8 5.6 6.4 – assets held under finance lease 0.1 0.1 0.1 Amortisation expense (note 10) 0.3 0.7 1.0 Operating lease rentals: – land and buildings 27.9 31.1 32.9 – plant, equipment and vehicles 0.4 0.4 0.4 Loss on disposal of fixed assets – 0.1 – Foreign exchange gains –––––––– (0.4) –––––––– (1.6) –––––––– (1.9) The total fees payable by the Group to KPMG LLP and their associates during the period was as follows:
2012 2013 2014 –––––––– –––––––– –––––––– £’000 £’000 £’000 Audit of the Company’s and the consolidated financial statements 2 2 8 Amounts receivable by the company’s auditor and its associates in respect of: Audit of financial statements of subsidiaries of the company 93 93 87 Taxation compliance services 61 63 38 Other assurance services – 11 40 –––––––– –––––––– –––––––– –––––––– 156 –––––––– 169 –––––––– 173 5 Staff numbers and costs The average number of persons employed by the group (including directors) during the year, analysed by category, was as follows:
2012 2013 2014 –––––––– –––––––– –––––––– Number Number Number Management and administration 261 285 303 Operations 6,689 7,718 8,300 –––––––– –––––––– –––––––– –––––––– 6,950 –––––––– 8,003 –––––––– 8,603 The aggregate payroll costs of these persons were as follows:
2012 2013 2014 –––––––– –––––––– –––––––– £’000 £’000 £’000 Wages and salaries 57.6 64.7 71.9 Social security costs 2.9 3.3 3.8 Pension costs – – 0.1 –––––––– –––––––– –––––––– –––––––– 60.5 –––––––– 68.0 –––––––– 75.8
106 5 Staff numbers and costs (continued) Aggregate emoluments of the Directors of the Company:
2012 2013 2014 –––––––– –––––––– –––––––– £’000 £’000 £’000 Aggregate emoluments –––––––– 2.2 –––––––– 1.4 –––––––– 3.5 Emoluments of the highest paid Director:
2012 2013 2014 –––––––– –––––––– –––––––– £’000 £’000 £’000 Emoluments –––––––– 0.5 –––––––– 0.3 –––––––– 0.7 The Group made defined contribution pension contributions on behalf of employees totalling £0.1 million in the year (2013: £nil, 2012: £nil). At 31 January 2014 the Group had employee and employer contributions due to pension schemes totalling £nil (2013: £nil, 2012: £nil).
6 Finance income and expense 2012 2013 2014 –––––––– –––––––– –––––––– £’000 £’000 £’000 Finance income: Bank interest received (0.2) (0.4) (0.5) Fair value gain on interest rate derivative contracts – (0.1) – –––––––– –––––––– –––––––– (0.2) (0.5) (0.5) Finance expense Interest on bank loans and overdrafts 9.5 7.7 9.5 Amortisation of loan issue costs 1.8 1.8 1.9 Interest on loan notes 31.1 35.0 29.9 Fair value loss on interest rate derivative contracts 0.6 – – Interest on deferred consideration – 0.1 0.1 –––––––– –––––––– –––––––– 43.0 44.6 41.4 –––––––– –––––––– –––––––– Net financing expense –––––––– 42.8 –––––––– 44.1 –––––––– 40.9 7 Taxation Recognised in the income statement 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Current tax expense Current year 9.7 11.6 11.4 Adjustments in respect of prior periods (1.4) (0.3) (0.7) –––––––– –––––––– –––––––– 8.3 11.3 10.7 Deferred tax (credit)/expense Origination and reversal of temporary differences (0.5) (0.7) 0.2 Adjustments in respect of prior periods – (0.1) 0.6 Effect of change in tax rate 0.1 0.2 0.2 –––––––– –––––––– –––––––– (0.4) (0.6) 1.0 –––––––– –––––––– –––––––– Total income tax expense –––––––– 7.9 –––––––– 10.7 –––––––– 11.7
107 7 Taxation (continued) The effective tax rate of 38.9 per cent. (2013: 45.0 per cent., 2012: 48.5 per cent.) is higher than the standard rate of corporation tax in the UK. The tax charge is reconciled to the standard rate of UK corporation tax as follows:
2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Profit before tax 16.3 23.8 30.1 Tax at the standard UK corporation tax rate of 23.16% (2013: 24.33%, 2012: 26.33%) 4.3 5.8 7.0 Tax effects of: Interest expense not deductible for tax purposes 4.5 4.8 4.2 Other expenses not deductible for tax purposes 0.5 0.4 0.6 Non-taxable income – (0.2) (0.2) Provision for unrealised profit – 0.1 – Adjustments in respect of prior periods (1.5) (0.4) (0.1) Effect of change in tax rate 0.1 0.2 0.2 –––––––– –––––––– –––––––– Total income tax expense –––––––– 7.9 –––––––– 10.7 –––––––– 11.7 Reductions in the Corporation tax rates to 21 per cent. from 1 April 2014 and 20 per cent. from 1 April 2015 were substantially enacted on 2 July 2013. Deferred tax assets in respect of timing differences are expected to be recoverable against future taxable profits and are recognised at 20 per cent. (2013: 23 per cent, 2012: 25 per cent).
Income tax credited to other comprehensive income during the year is as follows:
2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Effective portion of changes in fair value of cash flow hedges: – – 0.2 –––––––– –––––––– –––––––– Deferred tax credit –––––––– – –––––––– – –––––––– 0.2 8 Dividends No dividends have been paid or proposed in the year (2013: £nil, 2012: £nil).
108 9 Earnings per share Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year.
There are no dilutive potential ordinary shares.
The Group has chosen to present an alternative earnings per share measure, with profit adjusted for non- underlying items to reflect the Group’s underlying profit for the year. Underlying earnings is not a recognised profit measure under EU IFRS and may not be directly comparable with ‘adjusted’ profit measures used by other companies. 2012 2013 2014 –––––––– –––––––– –––––––– Weighted average number of shares in issue 4,907,158 4,912,500 4,912,500 –––––––– –––––––– –––––––– £’m £’m £’m Profit for the financial year 8.4 13.1 18.4 Non-underlying items (0.2) (0.6) 1.5 –––––––– –––––––– –––––––– Total underlying profit for underlying earnings per share –––––––– 8.2 –––––––– 12.5 –––––––– 19.9 pence pence pence Basic earnings per share 171.2 266.7 374.6 Diluted earnings per share 171.2 266.7 374.6 Underlying basic earnings per share 167.1 254.5 405.1 Underlying diluted earnings per share 167.1 254.5 405.1 –––––––– –––––––– ––––––––
10 Intangible assets Goodwill Software Total –––––––– –––––––– –––––––– £’m £’m £’m Cost At 1 February 2013 328.2 4.0 332.2 Additions – 1.4 1.4 –––––––– –––––––– –––––––– At 31 January 2014 328.2 5.4 333.6 Amortisation At 1 February 2013 – 1.4 1.4 Provided in the period – 1.0 1.0 –––––––– –––––––– –––––––– At 31 January 2014 – 2.4 2.4 Net book value At 31 January 2014 328.2 3.0 331.2 –––––––– –––––––– –––––––– At 31 January 2013 328.2 2.6 330.8 –––––––– –––––––– ––––––––
109 10 Intangible assets (continued) Goodwill Software Total –––––––– –––––––– –––––––– £’m £’m £’m Cost At 1 February 2012 328.2 2.3 330.5 Additions – 1.7 1.7 –––––––– –––––––– –––––––– At 31 January 2013 328.2 4.0 332.2 Amortisation At 1 February 2012 – 0.7 0.7 Provided in the period – 0.7 0.7 –––––––– –––––––– –––––––– At 31 January 2013 – 1.4 1.4 Net book value At 31 January 2013 328.2 2.6 330.8 –––––––– –––––––– –––––––– At 31 January 2012 328.2 1.6 329.8 –––––––– –––––––– ––––––––
Goodwill Software Total –––––––– –––––––– –––––––– £’m £’m £’m Cost At 1 February 2011 313.8 1.0 314.8 Acquisition of subsidiaries (note 27) 14.4 0.3 14.7 Additions – 1.0 1.0 –––––––– –––––––– –––––––– At 31 January 2012 328.2 2.3 330.5 Amortisation At 1 February 2011 – 0.4 0.4 Provided in the period – 0.3 0.3 –––––––– –––––––– –––––––– At 31 January 2012 – 0.7 0.7 Net book value At 31 January 2012 328.2 1.6 329.8 –––––––– –––––––– –––––––– At 31 January 2011 313.8 0.6 314.4 –––––––– –––––––– –––––––– Impairment testing For the purposes of impairment testing, goodwill has been allocated to the Group’s CGU’s as follows: 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Card Factory 313.8 313.8 313.8 Getting Personal 14.4 14.4 14.4 –––––––– –––––––– –––––––– The recoverable amount has been determined based on value-in-use calculations. Value in use calculations are based on five year management forecasts with a two per cent. terminal growth rate applied thereafter, representing management’s estimate of the long term growth rate of the sector. The forecast cash flows are discounted at a pre-tax discount rate of 10 per cent.. No impairment loss was identified in the current year (2013: £nil, 2012: £nil). The valuations indicate sufficient headroom such that a reasonably possible change to key assumptions would not result in an impairment of the related goodwill.
110 11 Property, plant and equipment Plant, equipment, Freehold Leasehold fixtures & property Improvements vehicles Total –––––––– –––––––– –––––––– –––––––– £’m £’m £’m £’m Cost At 1 February 2013 15.4 23.0 29.5 67.9 Additions 1.3 3.1 6.2 10.6 Disposals – – (0.1) (0.1) –––––––– –––––––– –––––––– –––––––– At 31 January 2014 16.7 26.1 35.6 78.4 Depreciation At 1 February 2013 0.9 16.9 17.4 35.2 Provided in the period 0.4 2.3 3.8 6.5 –––––––– –––––––– –––––––– –––––––– At 31 January 2014 1.3 19.2 21.2 41.7 Net book value At 31 January 2014 15.4 6.9 14.4 36.7 –––––––– –––––––– –––––––– –––––––– At 31 January 2013 14.5 6.1 12.1 32.7 –––––––– –––––––– –––––––– ––––––––
Plant, equipment, Freehold Leasehold fixtures & property Improvements vehicles Total –––––––– –––––––– –––––––– –––––––– £’m £’m £’m £’m Cost At 1 February 2012 11.6 20.0 24.8 56.4 Additions 3.8 3.0 5.2 12.0 Disposals – – (0.5) (0.5) –––––––– –––––––– –––––––– –––––––– At 31 January 2013 15.4 23.0 29.5 67.9
Depreciation At 1 February 2012 0.6 14.7 14.4 29.7 Provided in the period 0.3 2.2 3.2 5.7 Disposals – – (0.2) (0.2) –––––––– –––––––– –––––––– –––––––– At 31 January 2013 0.9 16.9 17.4 35.2
Net book value At 31 January 2013 14.5 6.1 12.1 32.7 –––––––– –––––––– –––––––– –––––––– At 31 January 2012 11.0 5.3 10.4 26.7 –––––––– –––––––– –––––––– ––––––––
111 11 Property, plant and equipment (continued) Plant, equipment, Freehold Leasehold fixtures & property Improvements vehicles Total –––––––– –––––––– –––––––– –––––––– £’m £’m £’m £’m Cost At 1 February 2011 7.8 17.3 19.1 44.2 Acquisition of subsidiaries (note 27) – 0.1 0.1 0.2 Additions 3.8 2.5 5.7 12.0 –––––––– –––––––– –––––––– –––––––– At 31 January 2012 11.6 19.9 24.9 56.4
Depreciation At 1 February 2011 0.5 12.7 11.6 24.8 Provided in the period 0.1 2.0 2.8 4.9 –––––––– –––––––– –––––––– –––––––– At 31 January 2012 0.6 14.7 14.4 29.7
Net book value At 31 January 2012 11.0 5.2 10.5 26.7 –––––––– –––––––– –––––––– –––––––– At 31 January 2011 7.3 4.6 7.5 19.4 –––––––– –––––––– –––––––– ––––––––
Finance leases Assets held under finance leases have a net book amount of £0.3 million (2013: £0.4 million, 2012: £0.5 million).
Assets under construction Included within freehold property are assets under construction amounting to £nil (2013: £3.5 million, 2012: £0.1 million). Interest capitalised included in additions amounted to £nil (2013: £0.1 million, 2012: £nil).
112 12 Deferred tax assets and liabilities Movement in deferred tax during the year
Fixed Interest Other asset deductible Financial timing differences when paid instruments Leases differences Total ––––––––– –––––––– –––––––––– –––––– ––––––––– –––––– £’m £’m £’m £’m £’m £’m At 1 February 2013 0.1 1.4 (0.4) 0.7 0.2 2.0 –––––– –––––– –––––– –––––– –––––– –––––– Credit/(charge) to income statement – (1.3) 0.4 0.1 (0.2) (1.0) Credit/(charge) to other comprehensive income – – 0.2 – – 0.2 –––––– –––––– –––––– –––––– –––––– –––––– At 31 January 2014 0.1 0.1 0.2 0.8 – 1.2 –––––– –––––– –––––– –––––– –––––– ––––––
Fixed Interest Other asset deductible Financial timing differences when paid instruments Leases differences Total ––––––––– –––––––– –––––––––– –––––– ––––––––– –––––– £’m £’m £’m £’m £’m £’m At 1 February 2012 – 0.9 (0.2) 0.5 0.2 1.4 –––––– –––––– –––––– –––––– –––––– –––––– Credit/(charge) to income statement 0.1 0.5 (0.2) 0.2 – 0.6 –––––– –––––– –––––– –––––– –––––– –––––– At 31 January 2013 0.1 1.4 (0.4) 0.7 0.2 2.0 –––––– –––––– –––––– –––––– –––––– ––––––
Fixed Interest Other asset deductible Financial timing differences when paid instruments Leases differences Total ––––––––– –––––––– –––––––––– –––––– ––––––––– –––––– £’m £’m £’m £’m £’m £’m At 1 February 2011 (0.4) 0.4 – 0.4 0.5 0.9 –––––– –––––– –––––– –––––– –––––– –––––– Credit/(charge) to income statement 0.4 0.5 (0.2) 0.1 (0.3) 0.5 –––––– –––––– –––––– –––––– –––––– –––––– At 31 January 2012 – 0.9 (0.2) 0.5 0.2 1.4 –––––– –––––– –––––– –––––– –––––– ––––––
Deferred tax assets and liabilities are offset to the extent they are levied by the same tax authority and the Group has a legally enforceable right to make or receive a single payment. Deferred tax assets and liabilities are offset as follows:
2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Deferred tax assets 3.0 3.7 2.5 Deferred tax liabilities (1.6) (1.7) (1.3) –––––––– –––––––– –––––––– Net deferred tax asset 1.4 2.0 1.2 –––––––– –––––––– ––––––––
Deferred tax assets are recognised in full based on current expectations of future taxable profits.
13 Inventories 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Finished goods 37.1 34.2 38.9 Work in progress 0.4 0.4 0.4 –––––––– –––––––– –––––––– 37.5 34.6 39.3 –––––––– –––––––– –––––––– The cost of inventories recognised as an expense and charged to cost of sales in the year was £89.3 million (2013 £83.1 million. 2012: £74.2 million).
113 14 Trade and other receivables 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Current Trade receivables 0.6 0.3 0.3 Other receivables 2.7 2.4 3.1 Prepaid property costs 11.1 11.4 11.4 Other prepayments and accrued income 2.0 2.1 2.8 –––––––– –––––––– –––––––– 16.4 16.2 17.6 –––––––– –––––––– –––––––– Non-current Prepaid property costs 1.7 1.8 1.5 –––––––– –––––––– –––––––– Non-current prepaid property costs relate to lease premiums and fees released to the income statement over the period of the lease.
Other receivables include £2.7 million (2013: £1.9 million, 2012: £2.2 million) in relation to deposits paid on inventory purchases.
15 Cash and cash equivalents 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Cash at bank and in hand 16.1 64.7 40.7 Cash on Deposit 21.0 – – –––––––– –––––––– –––––––– 37.1 64.7 40.7 –––––––– –––––––– –––––––– The Group’s cash and cash equivalents are denominated in the following currencies:
2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Pounds Sterling 34.2 51.2 37.2 U.S. Dollars 2.9 13.5 3.5 –––––––– –––––––– –––––––– 37.1 64.7 40.7 –––––––– –––––––– –––––––– 16 Borrowings 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Current liabilities Current portion of secured bank loans 13.2 10.4 21.2 Obligations under finance leases and hire purchase contracts 0.5 0.2 0.1 –––––––– –––––––– –––––––– 13.7 10.6 21.3 –––––––– –––––––– –––––––– Non-current liabilities Secured bank loans 132.3 117.7 256.6 Loan notes 261.9 296.9 109.7 Obligations under finance leases and hire purchase contracts 0.2 0.1 – –––––––– –––––––– –––––––– 394.4 414.7 366.3 –––––––– –––––––– ––––––––
114 16 Borrowings (continued)
Secured Bank Loans Secured bank borrowings are summarised as follows:
Interest margin Interest ratchet Repayment Liability rate range terms ––––––– –––––––––––––––– –––––––––– –––––––––––––––––––– £’m % % 31 January 2014 Term loan A 36.1 4.50 + 3M LIBOR 3.75 – 4.50 Instalments to June 2016 Term loan B 85.0 5.00 + 3M LIBOR 4.50 – 5.00 In full June 2017 Term loan C 165.0 5.00 + 3M LIBOR 4.50 – 5.00 In full Oct 2018 –––––– 286.1 Accrued interest 0.1 Debt issue costs (8.4) –––––– 277.8 –––––– 31 January 2013 Term loan A 48.0 3.75 + 3M LIBOR 3.75 – 4.50 Instalments to June 2016 Term loan B 85.0 4.50 + 3M LIBOR 4.50 – 5.00 In full June 2017 –––––– 133.0 Accrued interest 0.1 Debt issue costs (5.0) –––––– 128.1 –––––– 31 January 2012 Term loan A 67.0 4.50 + 3M LIBOR 3.75 – 4.50 Instalments to June 2016 Term loan B 85.0 5.00 + 3M LIBOR 4.50 – 5.00 In full June 2017 –––––– 152.0 Accrued interest 0.3 Debt issue costs (6.8) –––––– 145.5 –––––– The interest margin on secured bank borrowings is subject to an EBITDA leverage ratchet in the range disclosed above.
Term loan C was issued in October 2013 to fund the repayment of £170.0 million of 14 per cent. loan notes and accrued interest.
Repayment terms are subject to voluntary and mandatory prepayments in accordance with the facility agreement. Contractual cash flows of financial liabilities are disclosed in note 23.
The Group also has in place a £15.0 million (2013: £15.0 million, 2012: £15.0 million) multi-currency revolving credit facility for working capital purposes. At the balance sheet date the Group had utilised £0.5 million (2013: £0.3 million, 2012: £0.7 million) of the facility in relation to letters of credit. The Group utilises letters of credit to facilitate contracts with certain third party suppliers. The Group has not utilised the facility in respect of an overdraft during the year.
The bank facilities are secured by a fixed and floating charge over substantially all of the assets of the Group.
115 16 Borrowings (continued)
Loan Notes The loan notes are due to related parties as disclosed in note 26.
Principal Accrued Interest Interest repayment Principal Interest rate terms terms –––––––– –––––––– –––––– –––––––––––––––––––– ––––––––– £’000s £’000s % 31 January 2014 14% loan notes 105.2 4.5 14% Compound annually. In full –––––– –––––– Interest paid on approval April 2020 of the Board. 31 January 2013 10% loan notes 35.0 10.8 10% Compound annually. In full Due on repayment of April 2019 principal. 14% loan notes 188.0 63.1 14% Compound annually. In full –––––– –––––– 223.0 73.9 Due on repayment of April 2020 –––––– –––––– principal. 31 January 2012 10% loan notes 35.0 6.6 10% Compound annually. In full Due on repayment of April 2019 principal. 14% loan notes 180.3 40.0 14% Compound annually. In full –––––– –––––– 215.3 46.6 Due on repayment of April 2020 –––––– –––––– principal.
In May 2013 the Group utilised retained cash balances to redeem £35 million 10 per cent. loan notes and pay £12.1 million related accrued interest.
In October 2013 the Group redeemed 14 per cent. loan notes and accrued interest, together totalling £170.0 million, funded by an additional £165.0 million bank loan facility (term loan C). On re-financing the loan notes, the interest payment terms on the 14 per cent. loan notes were amended to payment on approval of the Board.
17 Trade and other payables 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Current Trade payables 12.3 9.1 13.2 Other taxation and social security 2.7 2.6 4.1 Deferred consideration 0.4 0.5 0.8 Other payables 0.9 1.0 0.9 Property accruals and deferred income 4.0 4.7 4.9 Other accruals 8.4 8.6 7.9 –––––––– –––––––– –––––––– –––––––– 28.7 –––––––– 26.5 –––––––– 31.8
116 17 Trade and other payables (continued) 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Non-current Deferred consideration 1.8 1.4 0.7 Other payables 0.2 0.2 – Property accruals and deferred income 9.4 11.5 11.1 –––––––– –––––––– –––––––– –––––––– 11.4 –––––––– 13.1 –––––––– 11.8 Property deferred income relates to lease incentives recognised in the income statement over the period of the lease.
Deferred consideration includes £0.4 million (2013: £0.9 million, 2012: £1.3 million) contingent on meeting certain performance targets.
The Group has net U.S. Dollar denominated trade and other payables of £7.0 million (2013: £2.2 million, 2012: £4.1 million).
18 Called up share capital and share premium account 2012 2013 2014 –––––––– –––––––– –––––––– £’000 £’000 £’000 Share capital Allotted, called up and fully paid 4,000,000 ‘A’ ordinary shares of £0.01 each 40 40 40 912,500 ‘B’ ordinary shares of £0.01 each 9 9 9 –––––––– –––––––– –––––––– –––––––– 49 –––––––– 49 –––––––– 49 £’m £’m £’m Share premium At 31 January –––––––– 4.6 –––––––– 4.6 –––––––– 4.6 The ‘A’ ordinary shares carry voting rights whereas the ‘B’ ordinary shares do not carry voting rights.
The ‘A’ ordinary shares and ‘B’ ordinary shares rank pari passu on a liquidation, reduction of capital or other return of capital.
On 7 July 2011 12,500 ‘B’ ordinary shares with an aggregate nominal value of £125, were issued as consideration for the redemption of loan notes with a total value of £0.2 million (see note 27).
117 19 Notes to the cash flow statement Reconciliation of operating profit to cash generated from operations
2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Profit before tax 16.3 23.8 30.1 Net finance expense 42.8 44.1 40.9 –––––––– –––––––– –––––––– Operating profit 59.1 67.9 71.0 Depreciation and amortisation 5.2 6.4 7.5 Loss on disposal of fixed assets – 0.1 – –––––––– –––––––– –––––––– Operating cash flows before changes in working capital 64.3 74.4 78.5 (Increase)/decrease in receivables (4.7) 0.3 0.5 (Increase)/decrease in inventories (10.6) 2.9 (4.7) Increase/(decrease) in payables 8.4 (1.1) 4.8 –––––––– –––––––– –––––––– Cash inflow from operating activities –––––––– 57.4 –––––––– 76.5 –––––––– 79.1 20 Analysis of net debt At 1 February Cash Non-cash At 31 January 2013 flow changes 2014 –––––––––––– –––––––– –––––––– –––––––––––– £’m £’m £’m £’m Secured bank loans (128.1) (147.8) (1.9) (277.8) Loan notes (296.9) 217.1 (29.9) (109.7) Finance leases (0.3) 0.2 – (0.1) –––––––– –––––––– –––––––– –––––––– Total borrowings (425.3) 69.5 (31.8) (387.6) Cash and cash equivalents 64.7 (24.0) – 40.7 –––––––– –––––––– –––––––– –––––––– Total net debt (360.6) 45.5 (31.8) (346.9) –––––––– –––––––– –––––––– –––––––– At 1 February Cash Non-cash At 31 January 2012 flow changes 2014 –––––––––––– –––––––– –––––––– –––––––––––– £’m £’m £’m £’m Secured bank loans (145.5) 19.0 (1.6) (128.1) Loan notes (261.9) – (35.0) (296.9) Finance leases (0.7) 0.4 – (0.3) –––––––– –––––––– –––––––– –––––––– Total borrowings (408.1) 19.4 (36.6) (425.3) Cash and cash equivalents 37.1 27.6 – 64.7 –––––––– –––––––– –––––––– –––––––– Total net debt (371.0) 47.0 (36.6) (360.6) –––––––– –––––––– –––––––– –––––––– At 1 February Cash Non-cash At 31 January 2011 flow changes 2014 –––––––––––– –––––––– –––––––– –––––––––––– £’m £’m £’m £’m Secured bank loans (157.3) 13.7 (1.9) (145.5) Loan notes (230.6) 4.0 (35.3) (261.9) Finance leases (1.3) 0.6 – (0.7) –––––––– –––––––– –––––––– –––––––– Total borrowings (389.2) 18.3 (37.2) (408.1) Cash and cash equivalents 37.2 (0.1) – 37.1 –––––––– –––––––– –––––––– –––––––– Total net debt (352.0) 18.2 (37.2) (371.0) –––––––– –––––––– –––––––– ––––––––
118 21 Operating lease commitments Future minimum rentals payable under non-cancellable operating leases:
2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Aggregate future minimum lease payments: Within one year 31.4 34.3 36.0 Within one to two years 29.3 32.0 33.0 Within two to three years 27.1 29.0 29.2 Within three to four years 24.3 25.6 25.2 Within four to five years 21.0 22.0 20.6 Within five to ten years 53.8 57.6 46.2 Within eleven to fifteen years 2.7 1.4 0.8 After fifteen years 0.2 0.1 0.0 –––––––– –––––––– –––––––– –––––––– 189.8 –––––––– 202.0 –––––––– 191.0 The Group enters into non-cancellable operating leases, primarily in respect of retail stores. The majority of the Group’s operating leases provide for their renewal by mutual agreement at the expiry of the lease term. Certain leases have a break clause, enforceable at the discretion of the Group. The Group also leases its motor vehicle fleet and a small component of equipment and warehousing requirements.
22 Financial risk management The principal financial risks faced by the Group are liquidity, foreign currency, interest rate and counterparty credit risk.
The Board of Directors have overall responsibility for the oversight of the Group’s risk management strategy. The principal financial risk factors and the actions taken to mitigate those risks are reviewed on an on-going basis.
Liquidity risk The Group generates significant operational cash inflows enabling the Group to maintain substantial cash balances. The Group also has a £15.0 million revolving credit facility to meet seasonal short term liquidity requirements. Cash flow forecasts are prepared to assist management in identifying future liquidity requirements.
Long term bank funding is subject to certain agreed financial covenants. The risk of a breach of these covenants is mitigated by regular financial forecasting, detailed covenant modelling and monthly monitoring of covenant compliance. As at 31 January 2014, the Group had adequate headroom against all of its financial covenants. Further details on Group borrowings are set out in note 16 of the financial statements.
119 22 Financial risk management (continued) The table below analyses the contractual cash flows of the Group’s non-derivative financial liabilities as at the balance sheet date. The amounts disclosed in the tables are the contractual undiscounted cash flows, inclusive of interest, stated at balance sheet date interest rates in respect of floating interest rate liabilities.
Less than One to Two to More than one year two years five years five years Total –––––––– –––––––– –––––––– –––––––– –––––––– £m £m £m £m £m At 31 January 2014 Secured bank loans: – Term loan A 20.0 16.1 2.8 – 38.9 – Term loan B 6.4 4.6 89.4 – 100.4 – Term loan C 12.3 8.9 185.7 – 206.9 14% loan notes – – – 246.7 246.7 Obligations under finance leases 0.1 – – – 0.1 Trade and other payables 28.3 – – – 28.3 Deferred consideration 0.8 0.8 – – 1.6 –––––––– –––––––– –––––––– –––––––– –––––––– 67.9 30.4 277.9 246.7 622.9 –––––––– –––––––– –––––––– –––––––– –––––––– Less than One to Two to More than one year two years five years five years Total –––––––– –––––––– –––––––– –––––––– –––––––– £m £m £m £m £m At 31 January 2013 Secured bank loans: – Term loan A 14.0 18.5 19.8 – 52.3 – Term loan B 4.5 4.5 95.5 – 104.5 10% loan notes – – – 82.5 82.5 14% loan notes – – – 642.7 642.7 Obligations under finance leases 0.2 0.1 – – 0.3 Trade and other payables 24.2 – – – 24.2 Deferred consideration 0.5 0.8 1.1 – 2.4 –––––––– –––––––– –––––––– –––––––– –––––––– 43.4 23.9 116.4 725.2 908.9 –––––––– –––––––– –––––––– –––––––– –––––––– Less than One to Two to More than one year two years five years five years Total –––––––– –––––––– –––––––– –––––––– –––––––– £m £m £m £m £m At 31 January 2012 Secured bank loans: – Term loan A 18.2 18.8 38.6 – 75.6 – Term loan B 5.2 5.2 15.6 86.7 112.7 10% loan notes – – – 82.5 82.5 14% loan notes – – – 642.7 642.7 Obligations under finance leases 0.5 0.2 – – 0.7 Trade and other payables 26.7 – – – 26.7 Deferred consideration 0.4 0.5 1.5 – 2.4 –––––––– –––––––– –––––––– –––––––– –––––––– 51.0 24.7 55.7 811.9 943.3 –––––––– –––––––– –––––––– –––––––– ––––––––
120 22 Financial risk management (continued) The table below analyses the contractual cash flows of the Group’s derivative financial instruments as at the balance sheet date. The amounts disclosed represent the total contractual undiscounted cash flows at the balance sheet date exchange and interest rates.
Less than One to Two to More than one year two years five years five years Total –––––––– –––––––– –––––––– –––––––– –––––––– £m £m £m £m £m At 31 January 2014 Foreign exchange contracts Inflow 58.4 21.9 – – 80.3 Outflow (59.1) (22.3) – – (81.4) Interest rate contracts Outflow (0.1) (0.1) – – (0.2) –––––––– –––––––– –––––––– –––––––– –––––––– At 31 January 2013 Foreign exchange contracts Inflow 39.7 26.5 – – 66.2 Outflow (38.2) (25.4) – – (63.6) –––––––– –––––––– –––––––– –––––––– –––––––– At 31 January 2012 Foreign exchange contracts Inflow 46.6 19.0 7.6 – 73.2 Outflow (44.3) (18.0) (7.2) – (69.5) Interest rate contracts Outflow (0.1) – – – (0.1) –––––––– –––––––– –––––––– –––––––– –––––––– Foreign currency risk A significant proportion of the Group’s retail products are procured from overseas suppliers denominated in U.S. Dollars. The Group typically maintains 12 to 24 months forward cover of forecast exchange exposures using foreign exchange derivative contracts and U.S. Dollar denominated cash balances.
The table below analyses the sensitivity of the Group’s U.S. Dollar denominated financial instruments to a 10 cent movement in the USD to GBP exchange rate at the balance sheet date, holding all other assumptions constant.
2012 2013 2014 ––––––––––––––––––– ––––––––––––––––––– ––––––––––––––––––– Impact on Impact on Impact on Impact cash flow Impact cash flow Impact cash flow on profit hedging on profit hedging on profit hedging after tax reserve after tax reserve after tax reserve –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– £’m £’m £’m £’m £’m £’m 10 cent increase (2.8) – (4.4) – (1.5) (1.9) 10 cent decrease 3.7 – 4.2 – 2.4 2.2 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Interest rate risk The Group’s principal interest rate risk arises from long term borrowings. Bank borrowings are denominated in Sterling and are borrowed at floating interest rates. The Group utilises interest rate derivative financial instruments to mitigate the interest rate risk on an element of these borrowing costs.
121 22 Financial risk management (continued) The table below shows the impact on the reported results of a 50 basis point increase or decrease in the interest rate for the year. 2012 2013 2014 ––––––––––––––––––– ––––––––––––––––––– ––––––––––––––––––– Impact on Impact on Impact on Impact cash flow Impact cash flow Impact cash flow on profit hedging on profit hedging on profit hedging after tax reserve after tax reserve after tax reserve –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– £’m £’m £’m £’m £’m £’m 50 basis point interest rate increase (0.2) – (0.2) – (0.5) (0.7) 50 basis point interest rate decrease 0.2 – 0.2 – 0.5 0.7 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Counterparty credit risk The Group is exposed to counterparty credit risk on its holdings of cash and cash equivalents and derivative financial assets. To mitigate the risk, counterparties are limited to high credit-quality financial institutions.
As a retail business the Group has minimal exposure to credit risk on trade receivables.
Capital management The Group’s capital risk management policy is to maintain a strong and efficient capital base to support the strategic objectives of the Group, provide optimal returns to shareholders and safeguard the going concern status of the Group.
The Group defines capital as equity attributable to the equity holders of the parent plus net debt. Net debt is shown in note 20.
The Group has a continued focus on free cashflow generation. The Directors monitor a range of financial metrics together with standard banking covenant ratios (for example, leverage, interest cover and cashflow cover), maintaining suitable headroom to ensure that the Group’s financing requirements continue to be serviceable.
23 Financial instruments Derivative financial instruments 2012 2013 2014 –––––––– –––––––– –––––––– £’m £’m £’m Derivative assets Current Foreign exchange contracts 1.8 1.4 0.3 –––––––– –––––––– –––––––– Non-current Foreign exchange contracts 0.3 0.5 – –––––––– –––––––– –––––––– Derivative liabilities Current Interest rate contracts (0.2) – – Foreign exchange contracts – – (0.9) –––––––– –––––––– –––––––– Non-current Foreign exchange contracts (0.9) – (0.4) –––––––– –––––––– ––––––––
122 23 Financial instruments (continued) Of the above £1.0 million derivative liabilities (2013: £nil, 2012: £nil) are in a designated hedging relationship.
Interest rate swap At 31 January 2014 the Group held fixed for floating interest rate swaps with notional principal amount of £100.0 million (2013: £nil, 2012: £70.0 million) to hedge a portion of the variable interest rate risk on bank loans. £70.0 million interest rate swaps expired 31 July 2012 were not designated as a hedging relationship. Fair value movements of £0.1 million in 2013 and £nil in 2012 were credited to the income statement.
Interest rate cap At 31 January 2014 the Group held interest rate caps with notional principal amount of £nil (2013: £50.0 million, 2012: £50.0 million) to mitigate a portion of the variable interest rate risk on bank loans. The interest rate cap was not designated as a hedging relationship and expired on 31 July 2013. Fair value movements of £nil (2013: £nil, 2012: £0.60 million) relating to the interest rate derivatives have been expensed in the income statement as part of net financing expense.
Foreign exchange contracts At 31 January 2014 the Group held a portfolio of foreign currency derivative contracts with notional principal amounts totalling £81.4 million (2013: £75.0 million, 2012: £69.5 million) to mitigate the exchange risk on future U.S. Dollar denominated trade purchases. Foreign currency derivative contracts with a notional value of £36.5 million (2013: £75.0 million, 2012: £69.5 million) were not designated as hedging relationships. Fair value movements of £1.9 million (2013: £(0.7) million, 2012: £(1.5) million) relating to foreign currency contracts not designated as hedging relationships have been charged/(credited) to the income statement within cost of sales.
Fair value Financial instruments carried at fair value are measured by reference to the following fair value hierarchy:
– Level 1: quoted prices in active markets for identical assets or liabilities
– Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
– Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Derivative financial instruments are measured under a level 2 valuation method.
The fair values of all other financial instruments have been assessed as approximating to their carrying values.
123 23 Financial instruments (continued)
Classification of financial instruments The table below shows the classification of financial assets and liabilities at the balance sheet date.
Cash flow Other Held for hedging Loans and financial trading instruments receivables liabilities –––––––– ––––––––– ––––––––– –––––––– £’m £’m £’m £’m 31 January 2014 Financial assets measured at fair value Derivative financial instruments 0.3 – – – Financial assets not measured at fair value Trade and other receivables – – 3.4 – Cash and cash equivalents – – 40.7 – Financial liabilities measured at fair value Derivative financial instruments (0.3) (1.0) – – Financial liabilities not measured at fair value
Secured bank loans – – – (277.8) Loan notes – – – (109.7) Deferred consideration – – – (1.5) Finance lease liabilities – – – (0.1) Trade and other payables – – – (28.3) –––––––– –––––––– –––––––– –––––––– – (1.0) 44.1 (417.4) –––––––– –––––––– –––––––– –––––––– Cash flow Other Held for hedging Loans and financial trading instruments receivables liabilities –––––––– ––––––––– ––––––––– –––––––– £’m £’m £’m £’m 31 January 2013 Financial assets measured at fair value Derivative financial instruments 1.9 – – – Financial assets not measured at fair value Trade and other receivables – – 2.7 – Cash and cash equivalents – – 64.7 – Financial liabilities not measured at fair value Secured bank loans – – – (128.1) Loan notes – – – (296.9) Deferred consideration – – – (1.9) Finance lease liabilities – – – (0.3) Trade and other payables – – – (24.2) –––––––– –––––––– –––––––– –––––––– 1.9 – 67.4 (451.4) –––––––– –––––––– –––––––– ––––––––
124 23 Financial instruments (continued) Cash flow Other Held for hedging Loans and financial trading instruments receivables liabilities –––––––– ––––––––– ––––––––– –––––––– £’m £’m £’m £’m 31 January 2012 Financial assets measured at fair value Derivative financial instruments 2.1 – – – Financial assets not measured at fair value Trade and other receivables – – 3.3 – Cash and cash equivalents – – 37.1 – Financial liabilities measured at fair value Derivative financial instruments (1.1) – – – Financial liabilities not measured at fair value Secured bank loans – – – (145.5) Loan notes – – – (261.9) Deferred consideration – – – (2.2) Finance lease liabilities – – – (0.7) Trade and other payables – – – (26.7) –––––––– –––––––– –––––––– –––––––– 1.0 – 40.4 (437.0) –––––––– –––––––– –––––––– –––––––– Derivative financial instruments are utilised to mitigate foreign exchange risk on the requisition of inventory and interest rate risk on borrowings. The Group does not trade in derivative financial instruments. However derivatives that are not designated as a hedging relationship are classified as held for trading for accounting purposes.
24 Capital Commitments There were capital commitments of £0.1 million at 31 January 2014 (2013: £1.6 million, 2012: £nil).
25 Contingent liabilities There were no material contingent liabilities at 31 January 2014, 31 January 2013 and 31 January 2012 except in relation to deferred contingent consideration as disclosed in notes 17 and 27.
26 Ultimate controlling party and related party transactions The Group’s ultimate controlling party is funds managed by Charterhouse General Partners (IX) Limited, a company incorporated in England.
The Group has taken advantage of the exemptions contained within IAS 24 ‘Related Party Disclosures’ from the requirement to disclose transactions between Group companies as these have been eliminated on consolidation.
Transactions with Key Management Personnel The key management personnel comprise the Board of Directors. Directors remuneration is disclosed in note 5 of the financial statements. Directors of the Company control 32.0 per cent. of the ordinary shares of the Company.
125 26 Ultimate controlling party and related party transactions (continued) Included in loan notes are:
• unsecured 10 per cent. loan notes of £nil (2013: £45.8 million. 2012: £41.6 million), including accrued interest, in favour of Dean Hoyle, Janet Hoyle, and related trusts. Loan notes and accrued interest totalling £47.1 million were repaid in May 2013.
• unsecured 14 per cent. loan notes of £23.0 million (2013: £52.6 million, 2012: £46.2 million), including accrued interest, in favour of directors, management and related trusts. Loan notes and accrued interest totalling £35.6 million were repaid in October 2013.
• unsecured 14 per cent. loan notes of £86.7 million (2013: £198.5 million, 2012: £174.1 million), including accrued interest, in favour of funds managed by their general partner Charterhouse General Partners (IX) Limited. During the year loan notes totalling £nil (2013: £7.8 million, 2012: £6.8 million) were issued on the same terms as the existing loan notes as payment against accrued loan note interest. Loan notes and accrued interest totalling £134.4 million were repaid in October 2013.
Details of the terms of the loan notes are included in note 16.
Under an agreement between the shareholders of the company, Charterhouse General Partners (IX) Limited, as general partner of funds managed by it, appointed three Directors to the board of CF Topco Limited. The total aggregate fee for the services of these Directors is £0.04 million per annum. Upon Admission, Charterhouse’s right to appoint a Director to the Board will be governed by the Relationship Agreement.
On 30 April 2014 the Group undertook a reorganisation of its corporate structure ahead of the Offer. The effect of the reorganisation is to make Card Factory plc the ultimate holding company of the Group. Card Factory plc is a newly-incorporated company.
27 Acquisitions On 7 July 2011 the Group acquired 100 per cent. of the issued ordinary share capital of Getting Personal Group Limited and its subsidiaries, Getting Personal (UK) Limited and Getting Personal Limited (collectively Getting Personal). Getting Personal is an online retailer of personalised products and gifts. The acquisition provides the Group with an online retail platform.
In the 7 months to 31 January 2012, Getting Personal contributed Revenue of £8.5 million and profit of £0.3 million to the Group’s results. If the acquisition had occurred on 1 February 2011 consolidated Group Revenue for the year would have been an estimated £268.8 million and consolidated Group profit would have been an estimated £7.9 million.
The fair value of the assets acquired, liabilities assumed and consideration transferred at the date of acquisition were as follows:
Fair value ––––––––– £’m Net assets acquired: Intangible fixed assets 0.3 Tangible fixed assets 0.2 Inventory 0.2 Debtors 0.3 Cash at bank and in hand 1.1 Creditors (5.7) –––––– (3.6) ––––––
126 27 Acquisitions (continued) Fair value ––––––––– £’m Satisfied by: Cash consideration 9.4 Deferred consideration 0.6 Loan notes 0.8 –––––– 10.8 –––––– Goodwill arising on acquisition 14.4 –––––– Goodwill The goodwill is principally attributable to the knowledge and experience of the Getting Personal management and workforce and the synergies expected to be achieved on integrating the operations of Getting Personal within the Group. None of the goodwill recognised is expected to be deductible for tax purposes.
Creditors Included within acquired creditors were loan notes, accrued loan note interest and loan note redemption premium, totalling £4.6 million which were redeemed immediately on acquisition.
Contingent consideration The Group has agreed to pay the retained management vendors additional consideration contingent on meeting certain future performance targets, subject to a continued employment factor. The range of possible additional consideration contingent on performance and employment is between £nil and £2.2 million. Under IFRS 3 the contingent consideration is treated as remuneration for post-acquisition services accrued over the period of required service. At 31 January 2014 no contingent consideration was accrued.
Loan notes Loan notes of £0.8 million were issued to management in exchange for the purchase of their shares in Getting Personal Group Limited.
On 7 July 2011 The Group issued 12,500 ‘B’ ordinary shares with an aggregate nominal value of £125 to management of Getting Personal, as consideration for the redemption of loan notes with a total value of £216,000 issued as part of the Getting Personal acquisition.
Fair values • The fair value of the assets acquired and liabilities assumed has been assessed as not materially different from the acquired carrying values. • A review of the acquired entities did not highlight any additional material intangible assets. • The fair value of deferred consideration has been calculated on a discounted cash flow basis.
The net cash outflow arising from the acquisition of Getting Personal was as follows:
£’m Cash consideration 9.4 Deal costs expensed to the income statement 0.5 Bank and cash acquired (1.1) –––––– Net cash outflow from the acquisition 8.8 –––––– Loan note redemption and redemption premium 4.6 –––––– Total cash outflow 13.4 ––––––
127 27 Acquisitions (continued) The group incurred acquisition related costs of £0.5 million on legal and due diligence fees. These costs have been included in operating expenses in the group’s consolidated income statement for the year to 31 January 2012.
Copies of the financial statements for Getting Personal Group Limited and its subsidiaries are available at Century House, Brunel Road, Wakefield 41 Industrial Park, Wakefield, WF2 0XG.
28 Subsidiary undertakings At 31 January 2014 the group controlled 100 per cent. of the issued ordinary share capital of the following principal subsidiaries, all of which are registered in England and Wales, and all of which are included in the consolidated financial statements:
Subsidiary undertaking Nature of business ––––––––––––––––––– ––––––––––––––– CF Midco Limited Intermediate holding company CF Interco Limited Intermediate holding company CF Bidco Limited Intermediate holding company Short Rhyme Limited Intermediate holding company Heavy Distance Limited Intermediate holding company Sportswift Limited Sale of greeting cards and gifts Sportswift Properties Limited Property letting Lupfaw 221 Limited Property letting Printcraft Limited Printers Getting Personal Limited Sale of personalised product and gifts
29 Transition to EU IFRS This is the Group’s first consolidated financial information prepared in accordance with IFRSs.
The accounting policies set out in note 1 have been applied in preparing the consolidated financial information for the years ending 31 January 2012, 31 January 2013 and 31 January 2014 and in the preparation of an opening EU IFRS Statement of Financial Position at 31 January 2011, also presented in the primary statements.
In preparing the EU IFRS financial information, the Group has adjusted amounts previously reported in financial statements prepared under UK GAAP. The analysis below shows a reconciliation of net assets and profit as reported under UK GAAP to the revised net assets and profit under EU IFRS
128 29 Transition to EU IFRS (continued)
Consolidated Statement of Financial Position Holiday Derivatives UK Lease pay & currency Deferred EU GAAP incentives accrual translation taxation IFRS –––––– –––––––– –––––– ––––––––– ––––––– –––––– £’m £’m £’m £’m £’m £’m 31 January 2011 (Transition Date) Non-current assets Intangible assets 314.4 – – – – 314.4 Property, plant and equipment 19.7 (0.3) – – – 19.4 Deferred tax assets 1.0 – – – (0.1) 0.9 Other receivables 1.5 – – – – 1.5 Derivative financial instruments – – – 0.6 – 0.6 –––––– –––––– –––––– –––––– –––––– –––––– 36.6 (0.3) – 0.6 (0.1) 336.8 Current assets Inventories 26.5 – – 0.2 – 26.7 Trade and other receivables 12.7 1.0 – – – 13.7 Cash and cash equivalents 37.2 – – – – 37.2 –––––– –––––– –––––– –––––– –––––– –––––– 76.4 1.0 – 0.2 – 77.6 –––––– –––––– –––––– –––––– –––––– –––––– Total assets 413.0 0.7 – 0.8 (0.1) 414.4 –––––– –––––– –––––– –––––– –––––– ––––––
129 29 Transition to EU IFRS (continued) Holiday Derivatives UK Lease pay & currency Deferred EU GAAP incentives accrual translation taxation IFRS –––––– –––––––– –––––– ––––––––– ––––––– –––––– £’m £’m £’m £’m £’m £’m Current liabilities Borrowings (11.8) – – – – (11.8) Trade and other payables (19.2) (2.0) (1.6) – – (22.8) Tax payable (2.3) – – – – (2.3) Derivative financial instruments – – – (0.5) – (0.5) –––––– –––––– –––––– –––––– –––––– –––––– (33.3) (2.0) (1.6) (0.5) – (37.4) Non-current liabilities Borrowings (377.4) – – – – (377.4) Other payables (7.8) – – – – (7.8) –––––– –––––– –––––– –––––– –––––– –––––– (385.2) – – – – (385.2) –––––– –––––– –––––– –––––– –––––– –––––– Total liabilities (418.5) (2.0) (1.6) (0.5) – (422.6) –––––– –––––– –––––– –––––– –––––– –––––– Net liabilities (5.5) (1.3) (1.6) 0.3 (0.1) (8.2) –––––– –––––– –––––– –––––– –––––– –––––– Equity attributable to equity holders of the parent Share capital 0.1 – – – – 0.1 Share premium 4.4 – – – – 4.4 Retained earnings (10.0) (1.3) (1.6) 0.3 (0.1) (12.7) –––––– –––––– –––––– –––––– –––––– –––––– Total equity (5.5) (1.3) (1.6) 0.3 (0.1) (8.2) –––––– –––––– –––––– –––––– –––––– ––––––
130 29 Transition to EU IFRS (continued) Holiday Getting Deferred & Derivatives UK Lease Borrowing pay Goodwill Personal contingent & currency Deferred EU GAAP incentives costs accrual amortisation acquisition consideration translation taxation IFRS –––––– ––––––––– ––––––––– ––––––– ––––––––––– –––––––––– –––––––––––– –––––––––– ––––––– –––––– £’m £’m £’m £’m £’m £’m £’m £’m £’m £’m 31 January 2012 Non-current assets Intangible assets 313.9 –––17.3 (1.4) –––329.8 Property, plant and equipment 27.0 (0.3) –– – – – ––26.7 Deferred tax assets 1.7 ––––– ––(0.3) 1.4 Other receivables 1.7 ––––– –––1.7 Derivative financial instruments –––––– –0.3 – 0.3 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– 344.3 (0.3) ––17.3 (1.4) – 0.3 (0.3) 359.9 Current assets Inventories 37.0 ––––– –0.5 – 37.5 Trade and other receivables 15.3 1.1 –– – – – ––16.4 Derivative financial instruments –––––– –1.8 – 1.8 Cash and cash equivalents 37.1 ––––– –––37.1 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– 89.4 1.1 –– – – – 2.3 – 92.8 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Total assets 433.7 0.8 ––17.3 (1.4) – 2.6 (0.3) 452.7 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Current liabilities Borrowings (13.7) ––––– –––(13.7) Trade and other payables (24.4) (2.5) – (1.8) –– –––(28.7) Tax payable (3.0) ––––– –––(3.0) Derivative financial instruments –––––– –(0.2) – (0.2) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– (41.1) (2.5) – (1.8) –– –(0.2) – (45.6) Non-current liabilities Borrowings (394.4) ––––– –––(394.4) Other payables (12.1) ––––0.9 (0.2) ––(11.4) Derivative financial instruments –––––– –(0.9) – (0.9) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– (406.5) ––––0.9 (0.2) (0.9) – (406.7) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Total liabilities (447.6) (2.5) – (1.8) – 0.9 (0.2) (1.1) – (452.3) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Net (liabilities)/assets (13.9) (1.7) – (1.8) 17.3 (0.5) (0.2) 1.5 (0.3) 0.4 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Equity attributable to equity holders of the parent Share capital 0.1 ––––– –––0.1 Share premium 4.6 ––––– –––4.6 Retained earnings (18.6) (1.7) – (1.8) 17.3 (0.5) (0.2) 1.5 (0.3) (4.3) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Total equity (13.9) (1.7) – (1.8) 17.3 (0.5) (0.2) 1.5 (0.3) 0.4 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– ––––––
131 29 Transition to EU IFRS (continued) Holiday Getting Deferred & Derivatives UK Lease Borrowing pay Goodwill Personal contingent & currency Deferred EU GAAP incentives costs accrual amortisation acquisition consideration translation taxation IFRS –––––– ––––––––– ––––––––– ––––––– ––––––––––– –––––––––– –––––––––––– –––––––––– ––––––– –––––– £’m £’m £’m £’m £’m £’m £’m £’m £’m £’m 31 January 2013 Non-current assets Intangible assets 297.0 –––34.8 (1.4) 0.4 ––330.8 Property, plant and equipment 32.8 (0.2) 0.1 ––– –––32.7 Deferred tax assets 2.2 ––––– ––(0.2) 2.0 Other receivables 1.8 ––––– –––1.8 Derivative financial instruments –––––– –0.5 – 0.5 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– 333.8 (0.2) 0.1 – 34.8 (1.4) 0.4 0.5 (0.2) 367.8 Current assets Inventories 34.2 ––––– –0.4 – 34.6 Trade and other receivables 15.2 1.0 –– – – – ––16.2 Derivative financial instruments –––––– –1.4 – 1.4 Cash and cash equivalents 64.7 ––––– –––64.7 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– 114.1 1.0 –– – – – 1.8 – 116.9 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Total assets 447.9 0.8 0.1 – 34.8 (1.4) 0.4 2.3 (0.2) 484.7 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Current liabilities Borrowings (10.6) ––––– –––(10.6) Trade and other payables (20.8) (3.6) – (2.1) –– –––(26.5) Tax payable (6.3) ––––– –––(6.3) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– (37.7) (3.6) – (2.1) –– –––(43.4) Non-current liabilities Borrowings (414.7) ––––– –––(414.7) Other payables (13.3) ––––0.9 (0.7) ––(13.1) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– (428.0) ––––0.9 (0.7) ––(427.8) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Total liabilities (465.7) (3.6) – (2.1) – 0.9 (0.7) ––(471.2) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Net (liabilities)/assets (17.8) (2.8) 0.1 (2.1) 34.8 (0.5) (0.3) 2.3 (0.2) 13.5 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Equity attributable to equity holders of the parent Share capital 0.1 ––––– –––0.1 Share premium 4.6 ––––– –––4.6 Retained earnings (22.5) (2.8) 0.1 (2.1) 34.8 (0.5) (0.3) 2.3 (0.2) 8.8 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Total equity (17.8) (2.8) 0.1 (2.1) 34.8 (0.5) (0.3) 2.3 (0.2) 13.5 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– ––––––
132 29 Transition to EU IFRS (continued) Holiday Getting Deferred & Derivatives UK Lease Borrowing pay Goodwill Personal contingent & currency Deferred EU GAAP incentives costs accrual amortisation acquisition consideration translation taxation IFRS –––––– ––––––––– ––––––––– ––––––– ––––––––––– –––––––––– –––––––––––– –––––––––– ––––––– –––––– £’m £’m £’m £’m £’m £’m £’m £’m £’m £’m 31 January 2014 Non-current assets Intangible assets 279.5 –––52.3 (1.4) 0.8 ––331.2 Property, plant and equipment 36.8 (0.2) 0.1 ––– –––36.7 Deferred tax assets 0.8 ––––– ––0.4 1.2 Other receivables 1.5 ––––– –––1.5 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– 318.6 (0.2) 0.1 – 52.3 (1.4) 0.8 – 0.4 370.6 Current assets Inventories 39.1 ––––– –0.2 – 39.3 Trade and other receivables 16.6 1.0 –– – – – ––17.6 Derivative financial instruments –––––– –0.3 – 0.3 Cash and cash equivalents 40.7 ––––– –––40.7 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– 96.4 1.0 –– – – – 0.5 – 97.9 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Total assets 415.0 0.8 0.1 – 52.3 (1.4) 0.8 0.5 0.4 468.5 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Current liabilities Borrowings (21.3) ––––– –––(21.3) Trade and other payables (25.3) (4.4) – (2.1) –– –––(31.8) Tax payable (4.9) ––––– –––(4.9) Derivative financial instruments –––––– –(0.9) – (0.9) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– (51.5) (4.4) – (2.1) –– –(0.9) – (58.9) Non-current liabilities Borrowings (366.3) ––––– –––(366.3) Other payables (11.8) ––––0.9 (0.9) ––(11.8) Derivative financial instruments –––––– –(0.4) – (0.4) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– (378.1) ––––0.9 (0.9) (0.4) – (378.5) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Total liabilities (429.6) (4.4) – (2.1) – 0.9 (0.9) (1.3) – (437.4) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Net (liabilities)/assets (14.6) (3.6) 0.1 (2.1) 52.3 (0.5) (0.1) (0.8) 0.4 31.1 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Equity attributable to equity holders of the parent Share capital 0.1 ––––– –––0.1 Share premium 4.6 ––––– –––4.6 Hedging reserve –––––– –(1.0) 0.2 (0.8) Retained earnings (19.3) (3.6) 0.1 (2.1) 52.3 (0.5) (0.1) 0.2 0.2 27.2 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Total equity (14.6) (3.6) 0.1 (2.1) 52.3 (0.5) (0.1) (0.8) 0.4 31.1 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– ––––––
133 29 Transition to EU IFRS (continued)
Consolidated Statement of Comprehensive income Holiday Getting Deferred & Derivatives UK Lease Borrowing pay Goodwill Personal contingent & currency Deferred EU GAAP incentives costs accrual amortisation acquisition consideration translation taxation IFRS –––––– ––––––––– ––––––––– ––––––– ––––––––––– –––––––––– –––––––––––– –––––––––– ––––––– –––––– £’m £’m £’m £’m £’m £’m £’m £’m £’m £’m Year Ended 31 January 2012 Revenue 265.5 ––––– –––265.5 Cost of sales (183.1) (0.4) – (0.2) –– –1.8 – (181.9) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Gross profit 82.4 (0.4) – (0.2) –– –1.8 – 83.6 Operating expenses (41.1) –––17.3 (0.5) (0.2) ––(24.5) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Operating profit 41.3 (0.4) – (0.2) 17.3 (0.5) (0.2) 1.8 – 59.1 Finance expense (42.4) ––––– –(0.6) – (43.0) Finance income 0.2 ––––– –––0.2 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Net financing expense (42.2) ––––– –(0.6) – (42.8) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Profit/(loss) before tax (0.9) (0.4) – (0.2) 17.3 (0.5) (0.2) 1.2 – 16.3 Income tax expense (7.7) ––––– ––(0.2) (7.9) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Profit/(loss) for the year (8.6) (0.4) – (0.2) 17.3 (0.5) (0.2) 1.2 (0.2) 8.4 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– ––––––
Holiday Getting Deferred & Derivatives UK Lease Borrowing pay Goodwill Personal contingent & currency Deferred EU GAAP incentives costs accrual amortisation acquisition consideration translation taxation IFRS –––––– ––––––––– ––––––––– ––––––– ––––––––––– –––––––––– –––––––––––– –––––––––– ––––––– –––––– £’m £’m £’m £’m £’m £’m £’m £’m £’m £’m Year Ended 31 January 2013 Revenue 299.9 ––––– –––299.9 Cost of sales (204.2) (1.1) – (0.2) –– –0.7 – (204.8) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Gross profit 95.7 (1.1) – (0.2) –– –0.7 – 95.1 Operating expenses (44.6) ––(0.1) 17.5 ––––(27.2) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Operating profit 51.1 (1.1) – (0.3) 17.5 ––0.7 – 67.9 Finance expense (44.6) – 0.1 –––(0.1) ––(44.6) Finance income 0.4 ––––– –0.1 – 0.5 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Net financing expense (44.2) – 0.1 –––(0.1) 0.1 – (44.1) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Profit/(loss) before tax 6.9 (1.1) 0.1 (0.3) 17.5 – (0.1) 0.8 – 23.8 Income tax expense (10.8) ––––– ––0.1 (10.7) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Profit/(loss) for the year (3.9) (1.1) 0.1 (0.3) 17.5 – (0.1) 0.8 0.1 13.1 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– ––––––
Holiday Getting Deferred & Derivatives UK Lease Borrowing pay Goodwill Personal contingent & currency Deferred EU GAAP incentives costs accrual amortisation acquisition consideration translation taxation IFRS –––––– ––––––––– ––––––––– ––––––– ––––––––––– –––––––––– –––––––––––– –––––––––– ––––––– –––––– £’m £’m £’m £’m £’m £’m £’m £’m £’m £’m Year Ended 31 January 2014 Revenue 326.9 ––––– –––326.9 Cost of sales (222.2) (0.8) – (0.1) –– –(2.1) – (225.2) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Gross profit 104.7 (0.8) – (0.1) –– –(2.1) – 101.7 Operating expenses (48.5) ––0.1 17.5 – 0.2 ––(30.7) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Operating profit 56.2 (0.8) ––17.5 – 0.2 (2.1) – 71.0 Finance expense (41.4) ––––– –––(41.4) Finance income 0.5 ––––– –––0.5 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Net financing expense (40.9) ––––– –––(40.9) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Profit before tax 15.3 (0.8) ––17.5 – 0.2 (2.1) – 30.1
Income tax expense (12.1) ––––– ––0.4 (11.7) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Profit for the year 3.2 (0.8) ––17.5 – 0.2 (2.1) 0.4 18.4 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Other comprehensive loss: Movement in exchange rate hedging reserve –––––– –(1.0) – (1.0) Deferred tax movement on hedging reserves –––––– ––0.2 0.2 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Other comprehensive loss for the year, net of tax –––––– –(1.0) 0.2 (0.8) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Total comprehensive income for the year 3.2 (0.8) ––17.5 – 0.2 (3.1) 0.6 17.6 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– ––––––
134 29 Transition to EU IFRS (continued)
Consolidated Cash Flow Statement In the year ending 31 January 2012, acquisition costs of £0.5 million previously treated as a cash flow from investing activities under UK GAAP are included in cash from operating activities under EU IFRS. There are no other material differences between the consolidated cash flow statements presented under EU IFRS and those previously presented under UK GAAP for the years ending 31 January 2012, 31 January 2013 and 31 January 2014.
Explanation of reconciling items between UK GAAP and EU IFRS
Lease incentives Under UK GAAP the Group recognised lease incentives in the income statement over the shorter of the period to rent review, break date or lease expiry. Under IAS 17 Leases, incentives are recognised over the full term of the lease.
Borrowing costs Under UK GAAP the Group elected not to capitalise borrowing costs on constructed assets. Under IAS 23 Borrowing Costs, the Group has capitalised interest in relation to the construction of new warehousing and offices. The Group has elected to apply the optional exemption under IFRS 1 for borrowing costs on assets constructed prior to the transition date.
Holiday pay accrual Under IAS 19 Employee Benefits, the Group has accrued for obligations in relation to holiday pay. Holiday pay obligations were not accrued in the UK GAAP financial statements.
Goodwill amortisation Under UK GAAP goodwill is amortised through the income statement. Under IAS 38 Intangible Assets, goodwill is not amortised, but instead is subject to impairment testing at least annually. Goodwill amortisation after the transition date under UK GAAP has been reversed in the EU IFRS financial statements. Under IFRS 1 optional exemptions, the business combination giving rise to goodwill prior to the transition date is not restated and the carrying amount of goodwill under UK GAAP as at the transition date is not adjusted.
Business Combinations: • First time adoption – The Group has elected to apply the optional exemption under IFRS 1 for business combinations prior to the transition date.
• Getting Personal acquisition – Under IFRS 3 Business Combinations, the Group has expensed acquisition costs previously recognised as part of goodwill under UK GAAP. A review of the acquired entities did not highlight any additional material intangible assets to be recognised under EU IFRS recognition criteria.
• Contingent consideration – In relation to the acquisition of Getting Personal, the Group has agreed to pay the retained management vendors additional consideration contingent on continued employment and meeting certain future performance targets. Under IFRS 3 Business Combinations, the contingent consideration in relation to the acquisition is treated as remuneration for post-acquisition services, accrued over the required period of service. Under UK GAAP the contingent consideration was treated as part of the consideration and included in goodwill.
• Deferred consideration – Under EU IFRS the Group has recognised deferred consideration on the acquisition of Getting Personal initially at fair value on a discounted cash flow basis and subsequently at amortised cost. Under UK GAAP deferred consideration was not discounted.
135 29 Transition to EU IFRS (continued)
Derivative financial instruments Under UK GAAP the Group was not required to apply FRS26 Financial Instruments: Recognition and Measurement and consequently did not recognise the fair value of derivative financial instruments. Under IAS 39 Financial Instruments: Recognition and Measurement, the Group recognises the fair value of derivative financial instruments as a financial asset or liability at the balance sheet date. The gain/loss on derivative financial instruments is recognised in the income statement as part of cost of sales for foreign currency derivatives and net finance expense for interest rate derivatives, except to the extent recognised in other comprehensive income as a qualifying cash flow hedge.
Foreign Currency Translation The Group utilises foreign currency derivative financial instruments to mitigate exchange risk on the requisition of inventory purchased in U.S. Dollars. Under UK GAAP the Group translates transactions in foreign currencies at the exchange rate applicable to the specific foreign exchange contract affecting the transaction. Under IAS 21 The Effects of Changes in Foreign Exchange Rates, the Group translates transactions in foreign currencies at the exchange rate on the transaction date. Foreign exchange gains/losses on the maturity of foreign currency contracts are recognised separately in cost of sales as they arise, except when deferred in other comprehensive income as qualifying cash flow hedges. This gives rise to a timing difference between UK GAAP and EU IFRS financial statement in the recognition of exchange gains and losses in the income statement.
Deferred Taxation IAS 12 Income Taxes is conceptually different from UK GAAP FRS 19 Deferred Tax. Under EU IFRS, deferred tax is recognised on the basis of taxable temporary differences (differences between the carrying amount of an asset or liability and its tax base). UK GAAP recognises deferred tax on the basis of timing differences between the recognition of gains and losses in the financial statements and their recognition in a tax computation.
The statutory financial statements of the Company and its subsidiaries continue to be prepared under UK GAAP and consequently the consolidated current tax charge under EU IFRS remains unchanged from the UK GAAP consolidated financial statements. The adjustments recognised in the EU IFRS consolidated financial statements representing taxable temporary differences are reflected in deferred tax.
136 PART XIII
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Section A: Pro forma financial information
1. Introduction The unaudited pro forma financial information set out below has been prepared to illustrate the impact of the proceeds raised through the Offer on the consolidated net assets of the Group. The pro forma net assets statement is based on the audited consolidated net assets of the Group at 31 January 2014 and has been prepared on the basis that the Offer took place on 31 January 2014.
The unaudited pro forma financial information is compiled on the basis set out below and in accordance with the accounting policies applied in preparing the audited accounts of the Group for the financial year ended 31 January 2014.
Because of its nature, the pro forma information addresses hypothetical situations and, therefore, does not represent the Group’s actual financial position or results. It may not, therefore, give a true picture of the Group’s financial position or results nor is it indicative of the results that may, or may not, be expected to be achieved in the future. The pro forma information has been prepared for illustrative purposes only in accordance with Annex II of the Prospectus Directive Regulation.
2. Unaudited pro forma financial information Consolidated net assets of the Adjustments Adjustments Group as at for for conversion 31 January application of loan notes 2014 of proceeds to shares Pro forma Note 1 Note 2 Note 3 Note 4 ———— ———— ———— ———— £’m £’m £’m £’m Non-current assets Intangible assets 331.2 0 0 331.2 Property, plant and equipment 36.7 0 0 36.7 Deferred tax assets 1.2 0 0 1.2 Other receivables 1.5 0 0 1.5 Derivative financial instruments – 0 0 0 ———— ———— ———— ———— 370.6 0 0 370.6 Current assets Inventories 39.3 0 0 39.3 Trade and other receivables 17.6 0 0 17.6 Derivative financial instruments 0.3 0 0 0.3 Cash and cash equivalents 40.7 (26.2) 0 14.5 ———— ———— ———— ———— 97.9 (26.2) 0 71.7 ———— ———— ———— ———— Total assets 468.5 (26.2) 0 442.3 ———— ———— ———— ———— Current liabilities Borrowings (21.3) 14.1 0 (7.2) Trade and other payables (31.8) 0 0 (31.8) Tax payable (4.9) 0.7 0 (4.2) Derivative financial instruments (0.9) 0 0 (0.9) ———— ———— ———— ———— (58.9) 14.8 0 (44.1)
137 Consolidated net assets of the Adjustments Adjustments Group as at for for conversion 31 January application of loan notes 2014 of proceeds to shares Pro forma Note 1 Note 2 Note 3 Note 4 ———— ———— ———— ———— £’m £’m £’m £’m Non-current liabilities Borrowings (366.3) 89.0 109.7 (167.6) Trade and other payables (11.8) 0 0 (11.8) Derivative financial instruments (0.4) 0 0 (0.4) ———— ———— ———— ———— (378.5) 89.0 109.7 (179.8) ———— ———— ———— ———— Total liabilities (437.4) 103.8 109.7 (223.9) ———— ———— ———— ———— Net assets 31.1 77.6 109.7 218.4 ———— ———— ———— ———— (1) The financial information of the Group has been extracted, without material adjustment, from the historical financial information as at 31 January 2014 as set out in Part X (Historical Financial Information) of this document. (2) The gross proceeds of the Offer receivable by the Company, estimated to be £90 million, will be used (alongside £26.2 million of the Company’s existing cash and cash equivalent resources) for part payment of existing debt and payment of fees. (3) Shareholder debt instruments comprising loan notes with a value equal to £109.7 million will be exchanged for shares. (4) No adjustment has been made to reflect the trading results of the Group since 31 January 2014 or of any other change in its financial position in that period. The Directors believe that, had the Offer occurred at 31 January 2014, the consolidated income statement would have been affected. If the Offer and the application of the net proceeds therefrom to reduce the Company’s debt had taken place on 31 January 2014, it would have been earnings enhancing for the Group as a result of the reduced interest charges following the repayment of debt. (5) This pro forma statement of net assets does not constitute financial statements within the meaning of section 434 of the Companies Act 2006.
138 Section B: Accountant’s Report on Pro Forma Financial Information
KPMG Audit Plc Tel +44 (0) 113 231 3000 1 The Embankment Fax +44 (0) 113 231 3200 Neville Street DX 72440 Leeds Leeds LS1 4DW United Kingdom The Directors Card Factory plc Century House Brunel Road Wakefield 41 Industrial Estate Wakefield WF2 0XG
Dear Sirs 15 May 2014
Card Factory plc (the ‘Company’) We report on the pro forma financial information (the ‘Pro forma financial information’) set out in Part XIII of the prospectus dated 15 May 2014, which has been prepared on the basis described in notes 1 to 5 of the Pro forma financial information, for illustrative purposes only, to provide information about how the transaction might have affected the financial information presented on the basis of the accounting policies adopted by the Company in preparing the financial statements for the period ended 31 January 2014. This report is required by paragraph 7 of Annex II of the Prospectus Directive Regulation and is given for the purpose of complying with that paragraph and for no other purpose.
Responsibilities It is the responsibility of the directors of the Company to prepare the Pro forma financial information in accordance with Annex II of the Prospectus Directive Regulation.
It is our responsibility to form an opinion, as required by paragraph 7 of Annex II of the Prospectus Directive Regulation, as to the proper compilation of the Pro forma financial information and to report that opinion to you.
In providing this opinion we are not updating or refreshing any reports or opinions previously made by us on any financial information used in the compilation of the Pro forma financial information, nor do we accept responsibility for such reports or opinions beyond that owed to those to whom those reports or opinions were addressed by us at the dates of their issue.
Save for any responsibility arising under Prospectus Rule 5.5.3R (2)(f) to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with paragraph 23.1 of Annex I of the Prospectus Directive Regulation, consenting to its inclusion in the prospectus.
Basis of Opinion We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro forma financial information with the directors of the Company.
139 We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Pro forma financial information has been properly compiled on the basis stated and that such basis is consistent with the accounting policies of the Company.
Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in the United States of America or other jurisdictions and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.
Opinion In our opinion:
• the Pro forma financial information has been properly compiled on the basis stated; and
• such basis is consistent with the accounting policies of the Company.
Declaration For the purposes of Prospectus Rule 5.5.3R (2)(f) we are responsible for this report as part of the prospectus and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the prospectus in compliance with paragraph 1.2 of Annex I of the Prospectus Directive Regulation.
Yours faithfully
KPMG LLP
140 PART XIV
DETAILS OF THE OFFER
1 Summary of the Offer Pursuant to the Offer, the Company intends to issue 40,000,000 New Shares, raising gross proceeds of approximately £90 million. The underwriting commissions and other estimated fees, expenses and applicable taxes payable by the Company in connection with the Offer are expected to be approximately £10 million. Accordingly, the Company expects to raise net proceeds from the Offering of approximately £80 million. The New Shares will represent approximately 11.7 per cent. of the expected issued ordinary share capital of the Company immediately following Admission and the issuance of the Residual Management Equity.
91,834,049 Existing Shares are expected to be sold by the Selling Shareholders. It is estimated that the Selling Shareholders will receive gross proceeds of £206.6 million, assuming no exercise of the Over- allotment Option. The underwriting commissions and other estimated fees, expenses and applicable taxes payable by the Selling Shareholders in connection with the Offer are expected to be approximately £4.6 million. Accordingly, the Selling Shareholders expect to raise net proceeds from the Offering of approximately £202.0 million. In addition, a further 13,183,404 Over-allotment Shares (representing approximately 10 per cent. of the maximum number of Shares comprised in the Offer) are being made available pursuant to the Over-allotment Option described below. The maximum number of Shares comprised in the Offer represents approximately 42.6 per cent. of the issued share capital of the Company.
The Shares have not been, and will not be, registered under the Securities Act or any State securities laws of the United States and, subject to certain exceptions, may not be offered or sold within the United States (as defined in Regulation S under the Securities Act (“Regulation S”)).
In the Offer, Shares will be offered (i) to certain institutional and other investors in the UK and elsewhere outside the United States and (ii) in the United States only, to QIBs in reliance on an exemption from the registration requirements of the Securities Act.
Certain restrictions that apply to the distribution of this Prospectus and the Shares being issued and sold under the Offer in jurisdictions outside the UK are described below.
The Offer Price per Share is 225 pence. The Offer Price for the Shares has been determined by the Selling Shareholders and the Company in consultation with the Joint Global Co-ordinators, following a bookbuilding process. Among the factors considered in determining the Offer Price, in addition to prevailing market conditions, were the Company’s historical performance, estimates of its business potential and earnings prospects, an assessment of the Company’s management and consideration of the above factors in relation to the market valuation of companies in related businesses.
The Offer is fully underwritten by the Underwriters, in accordance with the terms of the Underwriting Agreement, and is subject to satisfaction of the conditions set out in the Underwriting Agreement, including Admission occurring and becoming effective by no later than 8.00 a.m. (London time) on the Closing Date or such later time and/or date as the Selling Shareholders, the Company and the Joint Global Co-ordinators may agree, and to the Underwriting Agreement not having been terminated in accordance with its terms.
When admitted to trading, the Ordinary Shares will be registered with ISIN number GB00BLY2F708, SEDOL number BLY2F70 and trade under the symbol “CARD”. Admission is expected to take place and unconditional dealings in the Ordinary Shares are expected to commence on the London Stock Exchange on 20 May 2014.
141 Immediately following Admission and the issuance of the Residual Management Equity, it is expected that approximately 38.6 per cent. of the Company’s issued ordinary share capital will be held in public hands (within the meaning of paragraph 6.1.19R of the Listing Rules) assuming that no Over-allotment Shares are acquired pursuant to the Over-allotment Option (increasing to approximately 42.5 per cent. if the maximum number of Over-allotment Shares are acquired pursuant to the Over-allotment Option). The Shareholders immediately prior to the Offer will be diluted by 11.9 per cent. as a result of the Offer of New Shares.
2 Bookbuilding and Allocation The Offer Price has been determined by the Selling Shareholders and the Company in consultation with the Joint Global Co-ordinators.
The Underwriters have solicited from prospective investors indications of interest in acquiring Shares under the Offer. Prospective investors have been required to specify the number of Shares which they would be prepared to acquire at the Offer Price. Subject to the Company and the Selling Shareholders determining allocations (in consultation with the Joint Bookrunners), there was no minimum or maximum number of Shares which can be applied for and multiple applications may be accepted.
The rights attaching to the Shares (being Ordinary Shares) will be uniform in all respects with all other Ordinary Shares and will form a single class for all purposes with the other Ordinary Shares. All Shares issued or sold pursuant to the Offer will be issued or sold, payable in full, at the Offer Price. The Shares allocated under the Offer have been underwritten, subject to certain conditions, by the Underwriters, as described in Section 6 (Underwriting Arrangements) of this Part XIV (Details of the Offer) and in Section 14.1 (Underwriting Agreement) of Part XVI (Additional Information).
Liability for UK stamp duty and stamp duty reserve tax is described in Part XV (Taxation).
3 Dealings and Admission The Offer and Admission are subject to the satisfaction of certain conditions contained in the Underwriting Agreement, which are typical for an agreement of this nature. Certain conditions are related to events which are outside the control of the Company, the Directors, the Selling Shareholders and the Underwriters. Further details of the Underwriting Agreement are described in Section 14.1 (Underwriting Agreement) of Part XVI (Additional Information).
Application has been made to the FCA for the Ordinary Shares to be admitted to the premium listing segment of the Official List and to the London Stock Exchange for such Ordinary Shares to be admitted to trading on the London Stock Exchange’s main market for listed securities. It is expected that Admission will take place and unconditional dealings in the Ordinary Shares will commence on the London Stock Exchange at 8.00 a.m. (London time) on 20 May 2014. Settlement of dealings from that date will be on a three-day rolling basis. Prior to Admission, it is expected that dealings in the Ordinary Shares will commence on a conditional basis on the London Stock Exchange on 15 May 2014. The earliest date for settlement of such dealings will be 20 May 2014. All dealings in the Ordinary Shares prior to the commencement of unconditional dealings will be on a “conditional basis”, will be of no effect if Admission does not take place and will be at the sole risk of the parties concerned. These dates and times may be changed without further notice.
Each investor will be required to undertake to pay the Offer Price for the Shares sold or issued to such investor in such manner as shall be directed by the Joint Global Co-ordinators.
It is expected that Shares allocated to investors in the Offer will be delivered in uncertificated form and settlement will take place through CREST on Admission. No temporary documents of title will be issued. Dealings in advance of crediting of the relevant CREST stock account shall be at the risk of the person concerned.
142 4 Over-allotment and Stabilisation In connection with the Offer, Morgan Stanley Securities Limited, as Stabilising Manager, or any of its agents, may (but will be under no obligation to), to the extent permitted by applicable law, over-allot Shares or effect other stabilising transactions with a view to supporting the market price of the Ordinary Shares at a higher level than that which might otherwise prevail in the open market. The Stabilising Manager is not required to enter into such transactions and such stabilisation transactions may be effected on any securities market, over-the-counter market, stock exchange or otherwise and may be undertaken at any time during the period commencing on the date of the commencement of conditional dealings in the Ordinary Shares on the London Stock Exchange and ending no later than 30 calendar days thereafter. However, there will be no obligation on the Stabilising Manager or any of its agents to effect stabilising transactions and there is no assurance that stabilising transactions will be undertaken. Such stabilisation, if commenced, may be discontinued at any time without prior notice.
In connection with the Offer, the Stabilising Manager may, for stabilisation purposes, over-allot Shares up to a maximum of 10 per cent. of the total number of Shares comprised in the Offer. For the purposes of allowing the Stabilising Manager to cover short positions resulting from any such over-allotments and/or from sales of Shares effected by it during the stabilising period, the Principal Shareholders have granted to it the Over-allotment Option, pursuant to which the Stabilising Manager may purchase or procure purchasers for additional Shares up to a maximum of 10 per cent. of the Shares comprised in the Offer, at the Offer Price. The Over-allotment Option is exercisable in whole or in part, upon notice by the Stabilising Manager, at any time on or before the 30th calendar day after the commencement of conditional dealings of the Ordinary Shares on the London Stock Exchange. Any Over-allotment Shares made available pursuant to the Over-allotment Option will rank pari passu in all respects with the Ordinary Shares, including for all dividends and other distributions declared, made or paid on the Ordinary Shares, will be purchased on the same terms and conditions as the Shares being issued or sold in the Offer and will form a single class for all purposes with the other Ordinary Shares.
In no event will measures be taken to stabilise the market price of the Ordinary Shares above the Offer Price. Except as required by law or regulation, neither the Stabilising Manager nor any of its agents intends to disclose the extent of any over-allotments made and/or stabilising transactions conducted in relation to the Offer.
For a discussion of certain stock lending arrangements entered into in connection with the Over-allotment Option, see Section 14 (Material Contracts) of Part XVI (Additional Information).
5 CREST With effect from Admission, the Articles will permit the holding of Ordinary Shares under the CREST system. CREST is a paperless settlement system allowing securities to be transferred from one person’s CREST account to another’s without the need to use share certificates or written instruments of transfer. Settlement of transactions in the Ordinary Shares following Admission may take place within the CREST system if any shareholder so wishes.
CREST is a voluntary system and holders of Ordinary Shares who wish to receive and retain share certificates will be able to do so. Investors applying for Shares in the Offer may elect to receive Shares in uncertificated form, if that investor is a system member (as defined in the CREST Regulations) with regard to CREST.
6 Underwriting Arrangements The Underwriters have entered into commitments under the Underwriting Agreement pursuant to which they have agreed, subject to certain conditions, to procure purchasers for Shares, or, failing which, to subscribe for or purchase such Shares themselves, at the Offer Price.
143 The Underwriting Agreement contains provisions entitling the Joint Bookrunners to terminate the Offer (and the arrangements associated with it), at any time prior to Admission in certain circumstances. If this right is exercised, the Offer and these arrangements will lapse and any monies received in respect of the Shares will be returned to applicants without interest. The Underwriting Agreement provides for the Underwriters to be paid commission in respect of the Shares issued. Any commissions received by the Underwriters may be retained, and any Shares acquired by them may be retained or dealt in, by them, for their own benefit. The Principal Shareholders have granted to the Stabilising Manager, on behalf of the Underwriters, the Over-allotment Option under the Underwriting Agreement.
Further details of the terms of the Underwriting Agreement are set out in Section 14.1 (Underwriting Agreement) of Part XVI (Additional Information). Certain selling and transfer restrictions are set out below.
7 Lock-up Arrangements Pursuant to the Underwriting Agreement, the Company, the Principal Shareholders, Anthony Barraclough and certain former members of the Group’s Management who are Selling Shareholders have each agreed that, subject to certain exceptions, during the period of 180 calendar days from the date of Admission, they will not, without the prior written consent of the Joint Bookrunners, directly or indirectly, issue, offer, lend, sell or issue options in respect of, or contract to sell, or otherwise dispose of, directly or indirectly, or announce any offer or issue of, any Shares (or any interest therein or in respect thereof) or any other securities exchangeable for, or convertible into, or substantially similar to, Shares or enter into any transaction with the same economic effect as any of the foregoing.
Pursuant to the Underwriting Agreement and related arrangements, the Directors and members of Management of the Company (excluding Anthony Barraclough) have agreed that, subject to certain exceptions, during the period of 365 days from the date of Admission, they will not, without the prior written consent of the Joint Bookrunners, directly or indirectly, offer, lend, sell or contract to sell, issue options in respect of or otherwise dispose of, directly or indirectly, or announce any offer of, any Shares (or any interest therein or in respect thereof) or any other securities exchangeable for, or convertible into, or substantially similar to, Shares or enter into any transaction with the same economic effect as any of the foregoing.
Further details of these arrangements, which are contained in the Underwriting Agreement, are set out in Section 14.1 (Underwriting Agreement) of Part XVI (Additional Information).
8 Selling and Transfer Restrictions The distribution of this Prospectus and the offer of Shares in certain jurisdictions may be restricted by law and, therefore, persons into whose possession this Prospectus comes should inform themselves about and observe any restrictions, including those set out in the paragraphs that follow. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction.
No action has been or will be taken in any jurisdiction that would permit a public offering of the Shares, or possession or distribution of this Prospectus or any other offering material in any country or jurisdiction where action for that purpose is required. Accordingly, the Shares may not be offered or sold, directly or indirectly, and neither this Prospectus nor any other offering material or advertisement in connection with the Shares may be distributed or published in or from any country or jurisdictions, except in circumstances that will result in compliance with any and all applicable rules and regulations of any such country or jurisdiction. Persons into whose possession this Prospectus comes should inform themselves about and observe any restrictions on the distribution of this Prospectus and the offer of Shares contained in this Prospectus. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction. This Prospectus does not constitute an offer to subscribe for or purchase any of the Shares to any person in any jurisdiction to whom it is unlawful to make such offer or solicitation in such jurisdiction.
European Economic Area In relation to each Member State of the EU which has implemented the Prospectus Directive (each a “Relevant Member State”), an offer to the public of any Shares may not be made in that Relevant Member State, except that the Shares may be offered to the public in that Relevant Member State at any time under
144 the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State: (1) to any legal entity which is a qualified investor as defined under the Prospectus Directive; (2) to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive), subject to obtaining the prior consent of the Joint Global Co-ordinators for any such offer; or (3) in any other circumstances, falling within Article 3(2) of the Prospectus Directive, provided that no such offer of Shares shall result in a requirement for the publication by the Company or any Underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive and each person who initially acquires Shares or to whom any offer is made will be deemed to have represented, warranted and agreed to and with the Underwriters and the Company that it is a qualified investor within the meaning of the law in that Relevant Member State implementing Article 2(1)(e) of the Prospectus Directive.
For the purposes of this provision, the expression “an offer to the public of any Shares”, in relation to any Shares in any Relevant Member State, means the communication in any form and by any means of sufficient information on the terms of the Offer and the Shares to be offered so as to enable an investor to decide to purchase or subscribe for the Shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State. The expression “Prospectus Directive” means Directive 2003/71/EC (and any amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State) and includes any relevant implementing measure in each Relevant Member State, and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.
In the case of any Shares being offered to a financial intermediary as that term is used in Article 3(2) of the Prospectus Directive, each financial intermediary will also be deemed to have represented, warranted and agreed that the Shares acquired by it in the Offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer of any Shares to the public, other than their offer or resale in a Relevant Member State to qualified investors as so defined or in circumstances in which the prior consent of the Joint Global Co-ordinators has been obtained to each such proposed offer or resale.
The Company, the Underwriters and their affiliates and others will rely upon the truth and accuracy of the foregoing representation, acknowledgement and agreement. Notwithstanding the above, a person who is not a qualified investor, and who has notified the Joint Global Co-ordinators of such fact in writing, may, with the consent of the Joint Global Co-ordinators, be permitted to subscribe for or purchase Shares in the Offer.
United States The Shares have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction of the United States, and, subject to certain exceptions, may not be offered or sold within the United States. Accordingly, the Shares may only be offered and sold: (i) through the U.S.-registered broker affiliates of the Underwriters to persons reasonably believed to be QIBs, in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 144A or pursuant to another exemption from, or a transaction not subject to, the registration requirements of the Securities Act; and (ii) outside the United States in offshore transactions in reliance on Regulation S.
In addition, until 40 days after the commencement of the Offer of the Shares, an offer or sale of Shares within the United States by any dealer (whether or not participating in the Offer) may violate the registration requirements of the Securities Act.
Rule 144A transfer restrictions Each purchaser of Shares in the United States will be deemed to have represented and agreed that it has received a copy of this Prospectus and such other information as it deems necessary to make an investment decision and that:
145 (i) it is (a) a QIB, (b) acquiring the Shares for its own account or for the account of one or more QIBs with respect to whom it has the authority to make, and does make, the representations and warranties set forth in this paragraph, (c) acquiring the Shares for investment purposes, and not with a view to further distribution of such Shares and (d) aware, and each beneficial owner of the Shares has been advised, that the sale of the Shares to it is being made in reliance on Rule 144A or in reliance on another exemption from, or in a transaction not subject to, the registration requirements of the Securities Act;
(ii) it understands and agrees that the Shares have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state, territory or other jurisdiction of the United States and may not be offered, resold, pledged or otherwise transferred, except (a)(1) to a person whom the purchaser and any person acting on its behalf reasonably believes is a QIB purchasing for its own account or for the account of a QIB in a transaction meeting the requirements of Rule 144A, (2) in an offshore transaction complying with Rule 903 or Rule 904 of Regulation S, (3) pursuant to an exemption from the registration requirements of the Securities Act provided by Rule 144 thereunder (if available) or (4) pursuant to an effective registration statement under the Securities Act and (b) in accordance with all applicable securities laws of any state, territory or other jurisdiction of the United States;
(iii) it acknowledges that the Shares (whether in physical, certificated form or in uncertificated form held in CREST) are restricted securities within the meaning of Rule 144(a)(3) under the Securities Act, that the Shares are being offered and sold in a transaction not involving any public offering in the United States within the meaning of the Securities Act and that no representation is made as to the availability of the exemption provided by Rule 144 for resales of Shares;
(iv) it understands that in the event Shares are held in certificated form, such certificated Shares will bear a legend substantially to the following effect:
“THE SECURITY EVIDENCED HEREBY HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE “SECURITIES ACT”), ANY STATE SECURITIES LAWS IN THE UNITED STATES OR THE SECURITIES LAWS OF ANY OTHER JURISDICTION AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT: (A) IN A TRANSACTION IN ACCORDANCE WITH RULE 144A UNDER THE SECURITIES ACT TO A PERSON THAT THE HOLDER AND ANY PERSON ACTING ON ITS BEHALF REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER; (B) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT; (C) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY RULE 144 (IF AVAILABLE); OR (D) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT FOR RESALES OF THIS SECURITY. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER AND EACH PURCHASER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO ABOVE. EACH HOLDER, BY ITS ACCEPTANCE OF THIS SECURITY, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS”;
(v) notwithstanding anything to the contrary in the foregoing, it understands that Shares may not be deposited into an unrestricted depositary receipt facility in respect of Shares established or maintained by a depositary bank unless and until such time as such Shares are no longer within the meaning of Rule 144(a)(3) under the Securities Act;
146 (vi) any resale made other than in compliance with the above stated restrictions shall not be recognised by the Company;
(vii) it agrees that it will give to each person to whom it transfers Shares notice of any restrictions on transfer of such Shares; and
(viii) it acknowledges that the Company, the Underwriters and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements and agrees that, if any of such acknowledgements, representations or agreements deemed to have been made by virtue of its purchase of Shares is no longer accurate, it will promptly notify the Company, and if it is acquiring any Shares as a fiduciary or agent for one or more QIBs, it represents that it has sole investment discretion with respect to each such account and that it has full power to make the foregoing acknowledgements, representations and agreements on behalf of each such account.
Regulation S transfer restrictions Each purchaser of Shares outside the United States in accordance with Regulation S will be deemed to have represented, agreed and acknowledged that it has received a copy of this Prospectus and such other information as it deems necessary to make an investment decision and that:
(i) it is authorised to consummate the purchase of the Shares in compliance with all applicable laws and regulations;
(ii) it acknowledges (or, if it is a broker-dealer acting on behalf of a customer, its customer has confirmed to it that such customer acknowledges) that the Shares have not been, and will not be, registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction of the United States;
(iii) it and the person, if any, for whose account or benefit the purchaser is acquiring the Shares is purchasing the Shares in an offshore transaction meeting the requirements of Regulation S; and
(iv) the Company, the Underwriters and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements, and it agrees that if any of such acknowledgements, representations or agreements deemed to have been made by virtue of its purchase of Shares is no longer accurate, it will promptly notify the Company, and if it is acquiring any Shares as a fiduciary or agent for one or more accounts, it represents that it has sole investment discretion with respect to each such account and that it has full power to make the foregoing acknowledgements, representations and agreements on behalf of each such account.
United Kingdom This Prospectus and any other material in relation to the Shares described herein is only being distributed to, and is only directed at, persons in the UK that are qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive (“qualified investors”) that are also: (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”); or (ii) high net worth entities or other persons falling within Articles 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). The Shares are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such Shares will be engaged in only with, relevant persons. This Prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other person in the UK. Any person in the UK that is not a relevant person should not act or rely on this Prospectus or its contents.
Japan The Shares offered by this Prospectus have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (the “Financial Instruments and Exchange Law”). Accordingly, Shares may not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (including Japanese corporations), or to others for reoffering or resale, directly or indirectly, in Japan or to, or for the benefit of, any resident in Japan (including Japanese corporations) except with the prior
147 approval of the Underwriters and pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and relevant regulations of Japan.
Australia This Prospectus does not constitute a disclosure Prospectus under Part 6D.2 of the Corporations Act 2001 of the Commonwealth of Australia (the “Corporations Act”) and will not be lodged with the Australian Securities and Investment Commission. The Shares will be offered to persons who receive offers in Australia only to the extent that such offers of shares for issue or sale do not need disclosure to investors under Part 6D.2 of the Corporations Act. Any offer of shares received in Australia is void to the extent that it needs disclosure to investors under the Corporations Act. In particular, offers for the issue or sale of Shares will only be made in Australia in reliance on various exemptions from such disclosure to investors provided by section 708 of the Corporations Act. Any person to whom Shares are issued or sold pursuant to an exemption provided by section 708 of the Corporations Act must not within 12 months after the issue or sale of those Shares offer those Shares for sale in Australia unless that offer is itself made in reliance on an exemption from disclosure provided by that section.
Canada The Shares may not, directly or indirectly, be offered, sold or distributed within Canada, or to, or for the benefit or account of, any resident of Canada, except in compliance with all applicable securities laws, regulations or rules of the provinces and territories of Canada and with the prior approval of the Joint Global Co-ordinators. This Prospectus, or any other material relating to the Shares, may not be distributed or delivered in Canada except in compliance with all applicable securities laws, regulations or rules of the provinces and territories of Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed upon the Prospectus, the information contained herein, or the merits of the Ordinary Shares.
Switzerland The Shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This Prospectus has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this Prospectus nor any other offering or marketing material relating to the Shares or the Offer may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this Prospectus nor any other offering or marketing material relating to the Offer, the Company or the Shares has been or will be filed with or approved by any Swiss regulatory authority. In particular, this Prospectus will not be filed with, and the offer of Shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (“FINMA”), and the offer of Shares has not been and will not be authorised under the Swiss Federal Act on Collective Investment Schemes (“CISA”). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of Shares.
Hong Kong The Company has not been authorised, nor have the contents of this Prospectus been approved by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the Offer. If you are in any doubt about any of the contents of this Prospectus, you should obtain independent professional advice. Accordingly, please note that (a) the Shares may not be offered or sold in Hong Kong by means of this document or any other document other than to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571) (“SFO”) and any rules made thereunder, or in other circumstances which do not result in the document being a “prospectus” as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance of Hong Kong (Cap. 32) (“CO”) or which do not constitute an offer or invitation to the public for the purposes of the CO or the SFO, and (b)
148 no person shall issue, or possess for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the Shares which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Shares which are or are intended to be disposed of only to persons outside Hong Kong or only to such professional investors.
Singapore This Prospectus has not been registered with the Monetary Authority of Singapore. No action has been or will be taken under the requirements of the legislation or regulations of, or of the legal or regulatory authorities of, Singapore, and no action has been or will be taken to lodge and/or register this Prospectus in Singapore for the purposes of permitting a public offering of the Shares and the public distribution of this Prospectus in Singapore. Accordingly, this Prospectus and any other document or material in connection with the Offer or sale, or invitation for subscription or purchase, of Shares may not be circulated or distributed, nor may Shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (a) to an institutional investor specified in Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (b) to a relevant person, or any person pursuant to Section 275(1A) of the SFA, and in accordance with the conditions, specified in Section 275 of the SFA, or (c) otherwise pursuant to, and in accordance with the conditions of, any applicable provision of the SFA.
When the Shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor, the shares, debentures and units of shares and debentures securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust will not be transferred within six months after that corporation or that trust has acquired the Shares pursuant to an offer made under Section 275 except:
(i) to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;
(ii) where no consideration is or will be given for the transfer;
(iii) where the transfer is by operation of law;
(iv) as specified in Section 276(7) of the SFA; or
(v) as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore.
149 PART XV
TAXATION
1 Overview The taxation summary below is prepared on the basis that the Company is and remains resident in the UK for UK tax purposes.
The comments in this Part XV (Taxation) are of a general nature and are not intended to be exhaustive. Any shareholders or prospective shareholders who are in any doubt about their own tax position should consult their own professional advisers.
Section A 2 UK Taxation The following is a summary of certain UK tax considerations relating to an investment in the Company’s Shares.
The comments set out below are based on current UK tax law as applied in England and Wales and HMRC practice (which may not be binding on HMRC) as at the date of this Prospectus, both of which are subject to change, possibly with retrospective effect. They are intended as a general guide and apply only to shareholders of the Company resident and, in the case of an individual, domiciled for tax purposes in the UK and to whom “split year” treatment does not apply (except insofar as express reference is made to the treatment of non-UK residents), who hold Shares as an investment and who are the absolute beneficial owners thereof. (In particular, shareholders holding their Shares via a depositary receipt system or clearance service should note that they may not always be the absolute beneficial owners thereof.) The discussion does not address all possible tax consequences relating to an investment in the Shares. Certain categories of shareholders, including those carrying on certain financial activities, those subject to specific tax regimes or benefitting from certain reliefs or exemptions, those connected with the Company or Group, those for whom the Shares are employment related securities, those that own (or are deemed to own) 10 per cent. or more of the shares and/or voting power of the Company, and those that hold the Shares in connection with a trade, profession or vocation carried on in the UK (whether through a branch or agency or, in the case of a corporate shareholder, a permanent establishment or otherwise) may be subject to special rules and this summary does not apply to such shareholders.
Shareholders or prospective shareholders who are in any doubt about their tax position, or who are resident or otherwise subject to taxation in a jurisdiction outside the UK, should consult their own professional advisers immediately.
2.1 Taxation of dividends (a) The Company will not be required to withhold amounts on account of UK tax at source when paying a dividend.
(b) A UK resident and domiciled individual shareholder who receives a dividend from the Company will be entitled to a tax credit which may be set off against the shareholder’s total income tax liability. The tax credit will be equal to 10 per cent. of the aggregate of the dividend and the tax credit (the “gross dividend”), which is also equal to one-ninth of the cash dividend received. Such an individual shareholder who is liable to income tax at the basic rate will be subject to tax on the dividend at the rate of 10 per cent. of the gross dividend, so that the tax credit will satisfy in full such shareholder’s liability to income tax on the dividend. In the case of such an individual shareholder who is liable to income tax at the higher rate, the tax credit will be set against but not fully match the shareholder’s tax liability on the gross dividend and such shareholder will have to account for additional income tax equal to 22.5 per cent. of the gross dividend (which is
150 also equal to 25 per cent. of the cash dividend received) to the extent that the gross dividend when treated as the top slice of the shareholder’s income falls above the threshold for higher rate income tax. In the case of such an individual shareholder who is subject to income tax at the additional rate, the tax credit will also be set against but not fully match the shareholder’s liability on the gross dividend and such shareholder will have to account for additional income tax equal to 27.5 per cent. of the gross dividend (which is also equal to approximately 30.6 per cent. of the cash dividend received) to the extent that the gross dividend when treated as the top slice of the shareholder’s income falls above the threshold for additional rate income tax.
(c) A UK resident individual shareholder who is not liable to income tax in respect of the gross dividend and other UK resident taxpayers who are not liable to UK tax on dividends will not be entitled to claim repayment of the tax credit attaching to dividends paid by the Company.
(d) Shareholders who are within the charge to corporation tax will be subject to corporation tax on dividends paid by the Company, unless (subject to special rules for such shareholders that are small companies) the dividends fall within an exempt class and certain other conditions are met. Each shareholder’s position will depend on its own individual circumstances, although it would normally be expected that the dividends paid by the Company would fall within an exempt class. Such shareholders will not be able to claim repayment of tax credits attaching to dividends.
(e) Non-UK resident shareholders will not generally be able to claim repayment from HMRC of any part of the tax credit attaching to dividends paid by the Company. A shareholder resident outside the UK may also be subject to foreign taxation on dividend income under local law. Shareholders who are not resident for tax purposes in the UK should obtain their own tax advice concerning tax liabilities on dividends received from the Company.
2.2 Taxation of capital gains Shareholders who are resident and domiciled in the UK, or, in the case of individuals, who cease to be resident in the UK for a period of five years or less, may, depending on their circumstances (including the availability of exemptions or reliefs), be liable to UK taxation on chargeable gains in respect of gains arising from a sale or other disposal of Shares.
Close Company Special rules apply to certain shareholders in close companies. See Section 2.5 (Close companies) of this Part XV (Taxation) for a discussion of the rules applying to close companies.
2.3 Inheritance tax On the basis that the Share register is to be kept in the UK, the Shares are likely to be assets situated in the UK for the purposes of UK inheritance tax. As such, a gift of such assets by, or the death of, an individual holder of such assets may (subject to certain exemptions and reliefs) give rise to a liability to UK inheritance tax, even if the holder is neither domiciled in the UK nor deemed to be domiciled there (under certain rules relating to long residence or previous domicile). Generally, UK inheritance tax is not chargeable on gifts to individuals if the transfer is made more than seven complete years prior to death of the donor. For inheritance tax purposes, a transfer of assets at less than full market value may be treated as a gift and particular rules apply to gifts where the donor reserves or retains some benefit. Special rules also apply to close companies and to trustees of settlements who hold Shares bringing them within the charge to inheritance tax. Holders of Shares should consult an appropriate professional adviser if they make a gift of any kind or intend to hold any Shares through such a company or trust arrangement. They should also seek professional advice in a situation where there is potential
151 for a double charge to UK inheritance tax and an equivalent tax in another country or if they are in any doubt about their UK inheritance tax position.
2.4 Clearances Clearance has been obtained under Section 748 of the Corporation Tax Act 2010 and Section 701 of the Income Tax Act 2007 in respect of the Offer.
2.5 Close companies The Directors have been advised that the Company is a close company within the meaning of Part 10 of the Corporation Tax Act 2010, and that following the Offer the Company will cease to be close. As a result, certain transactions entered into by the Company or other members of the Group may have tax implications for shareholders in the Company. Shareholders should consult their own professional advisers on the potential impact of the close company rules.
Inheritance Tax One potential implication is that transfers of value by the Company, or any of the companies in which it owns (directly or indirectly) shares or certain other rights, may, in certain circumstances and subject to applicable exemptions, be attributed to and so give rise to inheritance tax for individual Shareholders who are domiciled or deemed to be domiciled in the UK and hold five per cent. or more of the Shares, or for Shareholders whose estate is increased by the transfer.
Capital Gains Tax Certain transfers at an undervalue by the Company or certain members of the Group may result in a reduction in the chargeable gains tax base cost of the shares for certain Shareholders.
2.6 Stamp duty and SDRT The statements in this Section are intended as a general guide to the current UK stamp duty and SDRT position. Investors should note that certain categories of person are not liable to stamp duty or SDRT and others may be liable at a higher rate or may, although not primarily liable for tax, be required to notify and account for SDRT under the Stamp Duty Reserve Tax Regulations 1986.
General Except in relation to depositary receipt systems and clearance services (to which the special rules outlined below apply), no stamp duty or SDRT will arise on the issue of Shares in registered form by the Company.
An agreement to transfer Shares will normally give rise to a charge to SDRT at the rate of 0.5 per cent. of the amount or value of the consideration payable for the transfer. SDRT is, in general, payable by the purchaser.
Instruments transferring Shares will generally be subject to stamp duty at the rate of 0.5 per cent. of the consideration given for the transfer (rounded up to the next £5). The purchaser normally pays the stamp duty. An exemption from stamp duty is available on an instrument transferring the Shares where the amount or value of the consideration is £1,000 or less, and it is certified on the instrument that the transaction effected does not form part of a larger transaction or series of transactions in respect of which the aggregate amount or value of the consideration exceeds £1,000.
If a duly stamped instrument which effects an agreement to transfer is produced within six years of the date on which the agreement is made (or, if the agreement is conditional, the date on which the agreement becomes unconditional) any SDRT already paid is generally repayable, normally with interest, and any SDRT charge yet to be paid is cancelled.
152 CREST Paperless transfers of Shares within the CREST system are generally liable to SDRT, rather than stamp duty, at the rate of 0.5 per cent. of the amount or value of the consideration payable. CREST is obliged to collect SDRT on relevant transactions settled within the CREST system. Deposits of Shares into CREST will not generally be subject to SDRT or stamp duty, unless the transfer into CREST is itself for consideration.
Depositary Receipt Systems and Clearance Services Following the ECJ decision in C-569/07 HSBC Holdings Plc, Vidacos Nominees Limited v The Commissioners of Her Majesty’s Revenue & Customs and the First-tier Tax Tribunal decision in HSBC Holdings Plc and The Bank of New York Mellon Corporation v The Commissioners of Her Majesty’s Revenue & Customs, HMRC has confirmed that they will no longer seek to apply the 1.5 per cent. SDRT charge when new shares are issued to a clearance service or depositary receipt system. HMRC’s view is that the 1.5 per cent. SDRT or stamp duty charge will continue to apply to a transfer of shares or securities to a clearance service or depositary receipt system where the transfer is not an integral part of an issue of share capital. The view is currently being challenged in further litigation. Accordingly, it may be appropriate to seek specific professional advice before incurring a 1.5 per cent. stamp duty or SDRT charge.
Where Shares are transferred (in the case of stamp duty) or issued or transferred (in the case of SDRT) (a) to, or to a nominee or an agent for, a person whose business is or includes the provision of clearance services or (b) to, or to a nominee or an agent for, a person whose business is or includes issuing depositary receipts, stamp duty or SDRT will generally be payable at the higher rate of 1.5 per cent. of the amount or value of the consideration given or, in certain circumstances, the value of the shares.
There is an exception from the 1.5 per cent. charge on the transfer to, or to a nominee or agent for, a clearance service where the clearance service has made and maintained an election under section 97A(1) of the Finance Act 1986, which has been approved by HMRC. In these circumstances, SDRT at the rate of 0.5 per cent. of the amount or value of the consideration payable for the transfer will arise on any transfer of Shares into such an account and on subsequent agreements to transfer such shares within such account.
Any liability for stamp duty or SDRT in respect of a transfer into a clearance service or depositary receipt system, or in respect of a transfer within such a service, which does arise will strictly be accountable by the clearance service or depositary receipt system operator or their nominee, as the case may be, but will, in practice, be payable by the participants in the clearance service or depositary receipt system.
The Offer The transfer of Existing Shares under the Offer will give rise to a liability to stamp duty and/or SDRT as described above. The Selling Shareholders and/or the Company will meet the liability to stamp duty and/or SDRT of purchasers of shares at the normal rate that will arise on such sale under the Offer.
Any person who is in any doubt as to his or her taxation position or who is liable to taxation in any jurisdiction other than the UK should consult his or her professional advisers.
Section B 3 The Proposed Financial Transactions Tax (“FTT”) The European Commission has published a proposal for a Directive for a common FTT in Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the “participating Member States”).
153 The proposed FTT has very broad scope and could, if introduced in its current form, apply to certain dealings in shares in the Company (including secondary market transactions) in certain circumstances.
Under current proposals, the FTT could apply in certain circumstances to persons both within and outside of the participating Member States. Generally, it would apply to certain dealings in shares in the Company where at least one party is a financial institution, and at least one party is established in a participating Member State. A financial institution may be, or be deemed to be, “established” in a participating Member State in a broad range of circumstances, including (a) by transacting with a person established in a participating Member State or (b) where the financial instrument which is subject to the dealings is issued in a participating Member State.
The FTT proposal remains subject to negotiation between the participating Member States and is the subject of legal challenge. It may therefore be altered prior to any implementation, the timing of which remains unclear. Additional Member States may decide to participate. Shareholders and prospective holders of shares in the Company are advised to seek their own professional advice in relation to the FTT.
Section C 4 United States Taxation CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
TO ENSURE COMPLIANCE WITH TREASURY DEPARTMENT CIRCULAR 230, HOLDERS ARE HEREBY NOTIFIED THAT: (A) ANY DISCUSSION OF U.S. FEDERAL TAX ISSUES IN THIS PROSPECTUS IS NOT INTENDED OR WRITTEN TO BE RELIED UPON, AND CANNOT BE RELIED UPON, BY HOLDERS FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON HOLDERS UNDER THE INTERNAL REVENUE CODE; (B) SUCH DISCUSSION IS INCLUDED HEREIN BY THE ISSUER IN CONNECTION WITH THE PROMOTION OR MARKETING (WITHIN THE MEANING OF CIRCULAR 230) BY THE ISSUER OF THE TRANSACTIONS OR MATTERS ADDRESSED HEREIN; AND (C) HOLDERS SHOULD SEEK ADVICE BASED ON THEIR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISER.
* * * * *
The following is a summary of certain U.S. federal income tax consequences of the acquisition, ownership and disposition of Shares by a U.S. Holder (as defined below). This summary deals only with initial purchasers of Shares that are U.S. Holders and that will hold the Shares as capital assets. The discussion does not cover all aspects of U.S. federal income taxation that may be relevant to, or the actual tax effect that any of the matters described herein will have on, the acquisition, ownership or disposition of Shares by particular investors, and does not address state, local, non-U.S. or other tax laws. This summary also does not address tax considerations applicable to investors that own (directly or indirectly) 10 per cent. or more of the voting stock of the Company, nor does this summary discuss all of the tax considerations that may be relevant to certain types of investors subject to special treatment under the U.S. federal income tax laws (such as financial institutions, insurance companies, investors liable for the alternative minimum tax or the net investment income tax, individual retirement accounts and other tax-deferred accounts, tax-exempt organisations, dealers in securities or currencies, investors that will hold the Shares as part of straddles, hedging transactions or conversion transactions for U.S. federal income tax purposes or investors whose functional currency is not the U.S. Dollar).
As used herein, the term “U.S. Holder” means a beneficial owner of Shares that is, for U.S. federal income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation created or organised under the laws of the United States, any State thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income tax without regard to its source, or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial
154 decisions of the trust, or the trust has validly elected to be treated as a domestic trust for U.S. federal income tax purposes.
The U.S. federal income tax treatment of a partner in an entity treated as a partnership for U.S. federal income tax purposes that holds Shares will depend on the status of the partner and the activities of the partnership. Prospective purchasers that are entities treated as partnerships for U.S. federal income tax purposes should consult their tax advisers concerning the U.S. federal income tax consequences to their partners of the acquisition, ownership and disposition of Shares by the partnership.
This summary assumes that the Company will not be a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes for the current year, which the Company expects to be the case. The Company’s possible status as a PFIC must be determined annually and therefore may be subject to change. If the Company were to be a PFIC in any year in which U.S. Holders held shares, materially adverse consequences could result for those U.S. Holders.
This summary is based on the tax laws of the United States, including the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed Treasury Regulations thereunder, published rulings and court decisions, as well as on the income tax treaty between the United States and the United Kingdom (the “Treaty”), all as of the date hereof and all subject to change at any time, possibly with retroactive effect.
THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS FOR GENERAL INFORMATION ONLY. ALL PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISERS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF THE SHARES, INCLUDING THEIR ELIGIBILITY FOR THE BENEFITS OF THE TREATY, THE APPLICABILITY AND EFFECT OF STATE, LOCAL, NON-U.S. AND OTHER TAX LAWS AND POSSIBLE CHANGES IN TAX LAW.
4.1 Dividends
General Distributions paid by the Company out of current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) will generally be taxable to a U.S. Holder as foreign source dividend income, and will not be eligible for the dividends received deduction allowed to corporate U.S. Holders. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of the U.S. Holder’s basis in the Shares and thereafter as capital gain. However, the Company does not maintain calculations of its earnings and profits in accordance with U.S. federal income tax principles. U.S. Holders should therefore assume that any distribution by the Company with respect to Shares will be reported as ordinary dividend income. U.S. Holders should consult their own tax advisers with respect to the appropriate U.S. federal income tax treatment of any distribution received from the Company.
Dividends paid by the Company will generally be taxable to a non-corporate U.S. Holder at the special reduced rate normally applicable to long-term capital gains, provided the Company qualifies for the benefits of the Treaty. The Company believes it will qualify for the benefits of the Treaty. A U.S. Holder will be eligible for this reduced rate only if it has held the Shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. A U.S. Holder will not be able to claim the reduced rate on dividends received from the Company if the Company is treated as a PFIC in the taxable year in which the dividends are received or in the preceding taxable year. See Section 4.4 “Passive foreign investment company considerations” of this Part XV (Taxation) below.
Prospective purchasers should consult their tax advisers concerning the applicability of the foreign tax credit and source of income rules to dividends on the Shares.
155 Foreign currency dividends Dividends paid in pounds sterling will be included in income in a U.S. Dollar amount calculated by reference to the exchange rate in effect on the day the dividends are received by the U.S. Holder, regardless of whether the pounds sterling are converted into U.S. Dollars at that time. If dividends received in pounds sterling are converted into U.S. Dollars on the day they are received, the U.S. Holder generally will not be required to recognise foreign currency gain or loss in respect of the dividend income.
4.2 Sale or other disposition Upon a sale or other disposition of Shares, a U.S. Holder generally will recognise capital gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount realised on the sale or other disposition and the U.S. Holder’s adjusted tax basis in the Shares. This capital gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period in the Shares exceeds one year. Any gain or loss will generally be U.S. source.
A U.S. Holder’s tax basis in a Share will generally be its U.S. Dollar cost. The U.S. Dollar cost of a Share purchased with foreign currency will generally be the U.S. Dollar value of the purchase price on the date of purchase, or the settlement date for the purchase, in the case of Shares traded on an established securities market, within the meaning of the applicable Treasury Regulations, that are purchased by a cash basis U.S. Holder (or an accrual basis U.S. Holder that so elects). Such an election by an accrual basis U.S. Holder must be applied consistently from year to year and cannot be revoked without the consent of the IRS. The amount realised on a sale or other disposition of Shares for an amount in foreign currency will be the U.S. Dollar value of this amount on the date of sale or disposition. On the settlement date, the U.S. Holder will recognise U.S. source foreign currency gain or loss (taxable as ordinary income or loss) equal to the difference (if any) between the U.S. Dollar value of the amount received based on the exchange rates in effect on the date of sale or other disposition and the settlement date. However, in the case of Shares traded on an established securities market that are sold by a cash basis U.S. Holder (or an accrual basis U.S. Holder that so elects), the amount realised will be based on the exchange rate in effect on the settlement date for the sale, and no exchange gain or loss will be recognised at that time.
4.3 Disposition of foreign currency Foreign currency received on the sale or other disposition of a Share will have a tax basis equal to its U.S. Dollar value on the settlement date. Foreign currency that is purchased will generally have a tax basis equal to the U.S. Dollar value of the foreign currency on the date of purchase. Any gain or loss recognised on a sale or other disposition of a foreign currency (including its use to purchase Shares or upon exchange for U.S. Dollars) will be U.S. source ordinary income or loss.
4.4 Passive foreign investment company considerations The Company does not believe that it will for the current taxable year be, or in the foreseeable future will become, a PFIC for U.S. federal income tax purposes, but the Company’s possible status as a PFIC must be determined annually and therefore may be subject to change. If the Company were to be treated as a PFIC, U.S. Holders of Shares would be required (i) to pay a special U.S. addition to tax on certain distributions on, and gains on sale of, Shares and (ii) to pay tax on any gain from the sale of Shares at ordinary income (rather than capital gains) rates in addition to paying the special addition to tax on this gain. Additionally, dividends paid by the Company would not be eligible for the special reduced rate of tax described above under Section 4.1 “Dividends – General”. Prospective purchasers should consult their tax advisers regarding the potential application of the PFIC regime.
4.5 Backup withholding and information reporting Payments of dividends and the proceeds of a sale or other disposition with respect to Shares, by a U.S. paying agent or other U.S. intermediary will be reported to the IRS and to the U.S.
156 Holder as may be required under applicable Treasury Regulations. Backup withholding may apply to these payments if the U.S. Holder fails to provide an accurate taxpayer identification number or certification of exempt status or fails to report all interest and dividends required to be shown on its U.S. federal income tax returns. Certain U.S. Holders are not subject to backup withholding. U.S. Holders should consult their tax advisers as to their qualification for exemption from backup withholding and the procedure for obtaining an exemption.
4.6 Transfer reporting requirements A U.S. Holder who purchases Shares may be required to file Form 926 (or similar form) with the IRS in certain circumstances. A U.S. Holder who fails to file any such required form could be required to pay a penalty equal to 10 per cent. of the gross amount paid for the Shares (subject to a maximum penalty of U.S.$100,000, except in cases of intentional disregard). U.S. Holders should consult their tax advisers with respect to this or any other reporting requirement that may apply to an acquisition of the Shares.
4.7 Foreign financial asset reporting Certain non-corporate U.S. taxpayers that own certain foreign financial assets, including equity of foreign entities, with an aggregate value in excess of $50,000 at the end of the taxable year or $75,000 at any time during the taxable year (or, for certain individuals living outside the United States and married individuals filing joint returns, certain higher thresholds) may be required to file an information report with respect to such assets with their tax returns. The Shares are expected to constitute foreign financial assets subject to these requirements unless the Shares are held in an account at a financial institution (in which case, the account may be reportable if maintained by a foreign financial institution). U.S. Holders should consult their tax advisers regarding the application of the rules relating to foreign financial asset reporting.
157 PART XVI
ADDITIONAL INFORMATION
1 Responsibility The Company and the Directors, whose names and principal functions appear in Part VII (Directors, Management and Corporate Governance), accept responsibility for the information contained in this Prospectus. To the best of the knowledge and belief of the Directors and the Company (each of whom has taken all reasonable care to ensure that such is the case), the information contained in this Prospectus is in accordance with the facts and does not omit anything likely to affect the import of such information.
2 Incorporation (a) The Company was incorporated and registered in England and Wales on 17 April 2014 as a private company limited by shares under the Companies Act 2006 with the name “CF Listco Limited” and with the registered number 9002747.
(b) On 30 April 2014, the Company was re-registered as a public limited company and changed its name to “Card Factory plc”.
(c) The Company’s registered office is at Century House, Brunel Road, Wakefield 41 Industrial Park, Wakefield, WF2 0XG, UK. The Company’s telephone number is 01924 839150.
(d) The principal laws and legislation under which the Company operates and the ordinary shares have been created are the Companies Act 2006 and regulations made thereunder.
(e) The business of the Company, and its principal activity, is to act as the ultimate holding company of the Card Factory Group.
(f) By a resolution of the Directors dated 29 April 2014, KPMG LLP, whose address is 1 The Embankment, Neville Street, Leeds LS1 4DW, United Kingdom, was appointed as the auditors of the Company. KPMG LLP is registered to carry out audit work by the Institute of Chartered Accountants in England and Wales.
3 Share Capital The share capital history of the Company is as follows:
(a) On incorporation, the issued share capital of the Company was £1 consisting of one ordinary share of £1 nominal value, which was issued to Charterhouse.
(b) On 30 April 2014, pursuant to the Pre-IPO Reorganisation, the one ordinary share of £1 was transferred to CCP IX LP No. 2, re-designated as one A ordinary share of £1 and sub-divided into 100 A ordinary shares of £0.01 each.
(c) On 30 April 2014, the Company and the Selling Shareholders transferred all of their shares in CF Topco Limited in consideration for CF Listco Limited issuing and allotting 200,009,900 A ordinary shares of £0.01 each and 45,625,000 B ordinary shares of £0.01 each to the Selling Shareholders resulting in the Company’s total issued share capital amounting to 200,010,000 A ordinary shares and 45,625,000 B ordinary shares.
(d) On 30 April 2014, pursuant to the Pre-IPO Reorganisation, the Company passed resolutions to re-register as a plc, adopt new articles of association and change its name to Card Factory plc.
(e) By resolutions passed at a general meeting of the Company on 14 May 2014, it was resolved that:
(i) the 200,010,000 A ordinary shares be redesignated as 200,010,000 Ordinary Shares and their rights varied accordingly;
158 (ii) the 45,625,000 B ordinary shares be redesignated as 45,625,000 Ordinary Shares and their rights varied accordingly;
(iii) the directors of the Company be generally and unconditionally authorised pursuant to section 551 of the Companies Act 2006, in substitution for all prior authorities conferred upon them, to exercise all of the powers of the Company:
(I) to allot shares in the Company up to a nominal amount of £506,862.35, representing the new Ordinary Shares to be issued by the Company to the Selling Shareholders in exchange for their loan notes in CF Topco Limited;
(II) to allot shares in the Company up to a nominal amount of £400,000.00, representing the new Ordinary Shares proposed to be issued by the Company in respect of the Offer; and
(III) to allot Ordinary Shares at the Offer Price as follows: 146,666 Ordinary Shares to Geoff Cooper; 22,222 Ordinary Shares to Octavia Morley; and 13,333 Ordinary Shares to David Stead;
(iv) subject to Admission, the directors of the Company be authorised pursuant to section 551 of the Companies Act 2006, in substitution for all prior authorities conferred upon them, to exercise all of the powers of the Companyto allot 4,375,000 Ordinary Shares at nominal value, representing the Residual Management Equity to certain current and former members of the Group’s Management;
(v) subject to Admission, the directors of the Company be generally and unconditionally authorised pursuant to section 551 of the Companies Act 2006, in substitution for all prior authorities conferred upon them, to exercise all of the powers of the Company to allot shares in the Company or to grant rights to subscribe for or convert any security into shares in the Company as follows:
(I) up to a further nominal amount of £1,135,654.00 (representing 33.3 per cent. of the nominal share capital of the Company immediately following Admission and the issuance of the Residual Management Equity); and
(II) comprising equity securities (as defined in Section 560(1) of the Companies Act 2006) up to a further amount of £1,135,654.00 (representing 33.3 per cent. of the nominal share capital of the Company immediately following Admission and the issuance of the Residual Management Equity) in connection with an offer by way of a rights issue,
such power expiring at the end of the next annual general meeting of the Company or on 30 June 2015, whichever is the earlier, but, in each case, so that the Company may make offers and enter into agreements during the relevant period which would, or might, require shares to be allotted or rights to subscribe for or to convert any security into Ordinary Shares to be granted after the authority ends;
(vi) the Directors be generally empowered to allot equity securities (as defined in Section 560(1) of the Companies Act 2006) wholly for cash pursuant to the authorities conferred in paragraphs 3(e)(iii) and 3(e)(iv) of this Part XVI (Additional Information) as if section 561(1) of the Companies Act 2006 did not apply to any such allotment, provided that the authority in paragraph 3(d)(v)(i), or where the allotment constitutes an allotment of equity securities by virtue of Section 560(3) of the Companies Act 2006, in each case, is:
(I) in connection with a pre-emptive offer; and
(II) otherwise than in connection with a pre-emptive offer, up to an aggregate nominal amount of £170,348.00 (five per cent. of the nominal share capital of the Company immediately following Admission and the issuance of the Residual Management Equity),
159 such power expiring at the end of the next annual general meeting of the Company or on 30 June 2015, whichever is the earlier, but so that the Company may make offers and enter into agreements during this period which would, or might, require equity securities to be allotted after the power ends;
(vii) subject to Admission, the Company be unconditionally and generally authorised for the purposes of Section 701 of the Companies Act 2006 to make market purchases (as defined in Section 693 of the Companies 2006), subject to the following conditions:
(I) the number of Ordinary Shares authorised to be purchased may not be more than the number equal to 10 per cent. of the nominal amount of the issued share capital of the Company immediately following Admission and the issuance of the Residual Management Equity;
(II) the minimum price which may be paid for an Ordinary Share is £0.01, being the nominal value of an Ordinary Share; and
(III) the maximum price which may be paid for an Ordinary Share shall be the higher of: (a) an amount equal to 105 per cent. of the average of the middle market quotations of an Ordinary Share as derived from the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which an ordinary share is contracted to be purchased; and (b) an amount equal to the higher of the price of the last independent trade of an Ordinary Share and the highest current independent bid for an Ordinary Share as derived from the London Stock Exchange Trading System (SETS) as stipulated by Article 5(1) of Commission Regulation (EC) 22 December 2003 implementing the Market Abuse Directive as regards exemptions for buy-back programmes and stabilisation of financial instruments (No 2273/2003),
such authority expiring on the earlier of the date of the annual general meeting of the Company held in 2015 or, if earlier, on 30 June 2015 (except in relation to the purchase of shares the contract of which was concluded before the expiry of such authority and which might be exceed wholly or partly after such expiry) unless such authority is renewed prior to such time; and
(viii) subject to Admission, new Articles of Association be adopted by the Company, in substitution for, and to the exclusion of, the existing articles of association of the Company as set out in Section 5 (Articles of Association) of this Part XVI (Additional Information).
(f) Immediately following completion of the Offer, the nominal value of the issued share capital of the Company is expected to be £3,363,212.35, comprising 336,321,235 Ordinary Shares, and, following the issuance of the Ordinary Shares referred to in paragraph (iv) above after completion of the Offer, is expected to be £3,406,962.35, comprising 340,696,235 Ordinary Shares.
The Company has no convertible securities, exchangeable securities or securities with warrants in issue.
4 Pre-IPO Reorganisation Prior to Admission, the Group is undertaking a reorganisation of its corporate structure, including a reorganisation of the Company’s share capital (the “Pre-IPO Reorganisation”). The Pre-IPO Reorganisation involves the following principal steps:
(a) On 30 April 2014, the Company and the Selling Shareholders transferred all of their shares in CF Topco Limited in consideration for CF Listco Limited issuing and allotting 200,009,900 A ordinary shares of £0.01 each and 45,625,000 B ordinary shares of £0.01 each to the Selling Shareholders resulting in the Company’s total issued share capital amounting to 200,010,000 A ordinary shares and 45,625,000 B ordinary shares;
(b) on 30 April 2014, the Company was re-registered as a public limited company under the Companies Act 2006 and re-named “Card Factory plc”;
160 (c) prior to Admission, all of the outstanding loan notes (and outstanding interest thereon) issued by CF Midco Limited and held by Selling Shareholders will be exchanged for loan notes issued by CF Topco Limited (the “CF Topco Loan Notes”);
(d) prior to Admission, all of the A ordinary shares and B ordinary shares in the Company will be redesignated on a one for one basis into a single class of Ordinary Shares that represents the value of the A ordinary shares and B ordinary shares previously held by each Shareholder;
(e) prior to Admission, all of the CF Topco Loan Notes held by Selling Shareholders will be exchanged for new Ordinary Shares in the Company. Fractions of Ordinary Shares will not be issued with the proceeds in respect of any fractional entitlements being retained by the Company;
(f) to the extent deemed appropriate by the Directors and Selling Shareholders prior to Admission, a sub- division or consolidation of the Ordinary Shares; and
(g) the adoption of the Articles of Association, containing the rights and restrictions attaching to the Ordinary Shares, subject to and with effect from Admission.
Upon its completion,the Pre-IPO Reorganisation will result in the Company having a single class of issued shares (namely the Ordinary Shares).
As part of the Pre-IPO Reorganisation, the Group has applied for relief from stamp duty under section 77 of the Finance Act 1986 and expects to receive confirmation of such relief prior to or soon after Admission.
Upon completion of the Offer and immediately prior to Admission, the subscription at the Offer Price for New Shares by Geoff Cooper, Octavia Morley and David Stead will take place as referred to in paragraph 3(e)(iii)(II) above.
Immediately following Admission, the Residual Management Equity will be issued in accordance with the Investment Agreement to certain current and former members of the Group’s management.
See paragraph (e) of Section 3 (Share Capital) of this Part XVI (Additional Information) in respect of resolutions and approvals given pursuant to the Pre-IPO Reorganisation and for the issuance of the New Shares.
5 Articles of Association The Company’s objects are not restricted by its Articles. Accordingly, pursuant to section 31 of the Companies Act 2006, the Company’s objects are unrestricted. The Articles, which were adopted on 14 May 2014 subject to and with effect from Admission. include provisions to the following effect:
5.1 Ordinary Shares
5.1.1 Respective rights of different classes of shares Without prejudice to any rights attached to any existing shares, the Company may issue shares with such rights or restrictions as determined by either the Company by ordinary resolution or, if the Company passes a resolution to so authorise them, the Directors. The Company may also issue shares which are, or are liable to be, redeemed at the option of the Company or the holder.
5.1.2 Voting rights At a general meeting, subject to any special rights or restrictions attached to any class of shares:
(a) On a show of hands, every member present in person and every duly appointed proxy present shall have one vote.
161 (b) On a show of hands, a proxy has one vote for and one vote against the resolution, if the proxy has been duly appointed by more than one member entitled to vote on the resolution, and the proxy has been instructed:
(i) by one or more of those members to vote for the resolution and by one or more other of those members to vote against it; or
(ii) by one or more of those members to vote either for or against the resolution and by one or more other of those members to use his discretion as to how to vote.
(c) On a poll, every member present in person or by proxy has one vote for every share held by him.
(d) A proxy shall not be entitled to vote on a show of hands or on a poll where the member appointing the proxy would not have been entitled to vote on the resolution had he been present in person.
(e) Unless the Directors resolve otherwise, no member shall be entitled to vote either personally or by proxy or to exercise any other right in relation to general meetings if any call or other sum due from him to the Company in respect of that share remains unpaid.
5.1.3 Variation of rights (a) Should the share capital of the Company be divided into different classes of shares, the special rights attached to any class may be varied or abrogated either with the written consent of the holders of three quarters in nominal value of the issued shares of the class (excluding shares held as treasury shares) or with the sanction of a special resolution passed at a separate meeting of the holders of the shares of the class (but not otherwise), and may be so varied or abrogated either while the Company is a going concern or during or in contemplation of a winding-up.
(b) The special rights attached to any class of shares will not, unless otherwise expressly provided by the terms of issue, be deemed to be varied by (i) the creation or issue of further shares ranking, as regards participation in the profits or assets of the Company, in some or all respects equally with them but in no respect in priority to them or (ii) the purchase or redemption by the Company of any of its own shares.
5.1.4 Transfer of shares (a) Transfers of certificated shares must be effected in writing, and signed by or on behalf of the transferor and, except in the case of fully paid shares, by or on behalf of the transferee. The transferor shall remain the holder of the shares concerned until the name of the transferee is entered in the Register of Members in respect of those shares. Transfers of uncertificated shares may be effected by means of a relevant system (i.e. CREST) unless the CREST Regulations provide otherwise.
(b) The Directors may decline to register any transfer of a certificated share, unless (i) the instrument of transfer is in respect of only one class of share, (ii) the instrument of transfer is lodged at the transfer office, duly stamped if required and accompanied by the relevant share certificate(s) or other evidence reasonably required by the Directors to show the transferor’s right to make the transfer or, if the instrument of transfer is executed by some other person on the transferor’s behalf, the authority of that person to do so, and (iii) the certificated share is fully paid up.
(c) The Directors may refuse to register an allotment or transfer of shares in favour of more than four persons jointly.
162 5.1.5 Restrictions where notice not complied with If any person appearing to be interested in shares (within the meaning of Part 22 of the Companies Act 2006) has been duly served with a notice under section 793 of the Companies Act 2006 (which confers upon public companies the power to require information as to interests in its voting shares) and is in default for a period of 14 days in supplying to the Company the information required by that notice:
(a) the holder of those shares shall not be entitled to attend or vote (in person or by proxy) at any shareholders’ meeting, unless the Directors otherwise determine; and
(b) the Directors may, in their absolute discretion, where those shares represent 0.25 per cent. or more of the issued shares of a relevant class, by notice to the holder, direct that:
(i) any dividend or part of a dividend (including shares issued in lieu of a dividend), or other money which would otherwise be payable on the shares, will be retained by the Company without any liability for interest and the shareholder will not be entitled to elect to receive shares in lieu of a dividend; and/or
(ii) (with various exceptions set out in the Articles) transfers of the shares will not be registered.
5.1.6 Forfeiture and lien (a) If a member fails to pay in full any sum which is due in respect of a share on or before the due date for payment, then, following notice by the Directors requiring payment of the unpaid amount with any accrued interest and any expenses incurred, such share may be forfeited by a resolution of the Directors to that effect (including all dividends declared in respect of the forfeited share and not actually paid before the forfeiture).
(b) A member whose shares have been forfeited will cease to be a member in respect of the shares, but will remain liable to pay the Company all monies which at the date of forfeiture were presently payable, together with interest. The Directors may, in their absolute discretion, enforce payment without any allowance for the value of the shares at the time of forfeiture or for any consideration received on their disposal, or waive payment in whole or part.
(c) The Company shall have a lien on every share (not being a fully paid-up share) that is not fully paid for all monies called or payable at a fixed time in respect of such share. The Company’s lien over a share takes priority over the rights of any third-party and extends to any dividends or other sums payable by the Company in respect of that share. The Directors may waive any lien which has arisen and may resolve that any share shall for some limited period be exempt from such a lien, either wholly or partially.
(d) A share forfeited or surrendered shall become the property of the Company and may be sold, re-allotted or otherwise disposed of to any person (including the person who was, before such forfeiture or surrender, the holder of that share or entitled to it) on such terms and in such manner as the Directors think fit. The Company may deliver an enforcement notice in respect of any share if a sum in respect of which a lien exists is due and has not been paid. The Company may sell any share in respect of which an enforcement notice, delivered in accordance with the Articles, has been given if such notice has not been complied with. The proceeds of sale shall first be applied towards payment of the amount in respect of the lien to the extent that amount was due on the date of the enforcement notice, and then on surrender of the share certificate for cancellation, to the person entitled to the shares immediately prior to the sale.
163 5.2 General meetings
5.2.1 Annual general meeting An annual general meeting shall be held within each period of six months beginning with the day following the Company’s accounting reference date, at such place or places, date and time as may be decided by the Directors.
5.2.2 Convening of general meetings The Directors may, whenever they think fit, call a general meeting. The Directors are required to call a general meeting once the Company has received requests from its members to do so in accordance with the Companies Act 2006.
5.2.3 Notice of general meetings, etc. (a) Notice of general meetings shall include all information required to be included by the Companies Act 2006 and shall be given to all members other than those members who are not entitled to receive such notices from the Company under the provisions of the Articles. The Company may determine that only those persons entered on the Register of Members at the close of business on a day decided by the Company, such day being no more than 21 days before the day that notice of the meeting is sent, shall be entitled to receive such a notice.
(b) For the purposes of determining which persons are entitled to attend or vote at a meeting, and how many votes such persons may cast, the Company must specify in the notice of the meeting a time, not more than 48 hours before the time fixed for the meeting, by which a person must be entered on the Register of Members in order to have the right to attend or vote at the meeting. The Directors may, in their discretion, resolve that, in calculating such period, no account shall be taken of any part of any day that is not a working day (within the meaning of section 1173 of the Companies Act 2006).
5.2.4 Quorum and voting No business other than the appointment of a chairman shall be transacted at any general meeting unless a quorum is present at the time when the meeting proceeds to business. Two members present in person or by corporate representative or proxy shall be a quorum. At any general meeting, a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is demanded by: (i) the chairman of the general meeting; (ii) not less than five members present in person or by proxy and entitled to vote; (iii) a member or members present in person or by proxy and representing not less than one-tenth of the total voting rights of all members having the right to vote at the meeting; or (iv) a member or members present in person or by proxy and holding Ordinary Shares in the Company conferring a right to vote at the general meeting being Ordinary Shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all Ordinary Shares conferring that right.
5.2.5 Conditions of admission (a) The Directors may require attendees to submit to searches or put in place such arrangements or restrictions as they think fit to ensure the safety and security of attendees at a general meeting. Any member, proxy or other person who fails to comply with such arrangements or restrictions may be refused entry into, or removed from, the general meeting.
(b) The Directors may decide that a general meeting shall be held at two or more locations to facilitate the organisation and administration of such meeting. A member present in person or by proxy at the designated “satellite” meeting place may be counted in the quorum and may exercise all rights that they would have been able to exercise if they had been present at the principal meeting place. The Directors may make and change
164 from time to time such arrangements as they shall, in their absolute discretion, consider appropriate to:
(i) ensure that all members and proxies for members wishing to attend the meeting can do so;
(ii) ensure that all persons attending the meeting are able to participate in the business of the meeting and to see and hear anyone else addressing the meeting;
(iii) ensure the safety of persons attending the meeting and the orderly conduct of the meeting; and
(iv) restrict the numbers of members and proxies at any one location to such number as can safely and conveniently be accommodated there.
5.3 Directors
5.3.1 General powers The Directors shall manage the business and affairs of the Company and may exercise all powers of the Company other than those that are required by the Companies Act 2006 or by the Articles to be exercised by the Company at the general meeting.
5.3.2 Borrowing powers The Directors may exercise all powers of the Company to borrow money, to mortgage or charge all or any part or parts of its undertakings, property and uncalled capital and to issue debentures and other securities, whether outright or as collateral security for any debt, liability or obligations of the Company or any third party. The Directors shall restrict the borrowings of the Company and exercise all voting and other rights, powers of control or rights of influence exercisable by the Company in relation to its subsidiary undertakings so as to secure (so far, as regards subsidiary undertakings, as by such exercise they can secure) that the aggregate amount for the time being remaining outstanding of all monies borrowed by the Group and for the time being owing to persons outside the Group less the aggregate amount of Current Asset Investments (as defined in the Articles) shall not at any time without the previous sanction of an ordinary resolution exceed the higher of:
(i) an amount equal to two times the Adjusted Capital and Reserves (as defined in the Articles); or
(ii) any higher limit fixed by ordinary resolution of the Company which is applicable at the relevant time.
5.3.3 Number of Directors The Directors shall not be less than two nor more than 20 in number, save that the Company may, by ordinary resolution, from time to time vary the minimum number and/or maximum number of Directors.
5.3.4 Share qualification A Director shall not be required to hold any shares of the Company by way of qualification. A Director who is not a member of the Company shall nevertheless be entitled to attend and speak at general meetings.
5.3.5 Directors’ fees (a) Directors’ fees are determined by the Directors from time to time, except that they may not exceed £1 million per annum in aggregate or such higher amount as may from time to time be determined by ordinary resolution of the shareholders.
165 (b) Any Director who holds any executive office (including the office of Chairman or Deputy Chairman), or who serves on any committee of the Directors, or who otherwise performs services which in the opinion of the Directors are outside the scope of the ordinary duties of a Director, may be paid extra remuneration by way of salary, commission or otherwise or may receive such other benefits as the Directors may determine.
5.3.6 Executive Directors The Directors may from time to time appoint one or more of their number to be the holder of any executive office and may confer upon any Director holding an executive office any of the powers exercisable by them as Directors upon such terms and conditions, and with such restrictions, as they think fit. They may from time to time revoke, withdraw, alter or vary all or any of such delegated powers.
5.3.7 Directors’ retirement (a) Each Director shall retire at the annual general meeting held in the third calendar year following the year in which he was elected or last re-elected by the Company. In addition, each Director (other than the Chairman and any Director holding an executive office) shall also be required to retire at each annual general meeting following the ninth anniversary of the date on which he was elected by the Company. A Director who retires at any annual general meeting shall be eligible for election or re-election unless the Directors resolve otherwise not later than the date of the notice of such annual general meeting.
(b) When a Director retires at an annual general meeting in accordance with the Articles, the Company may, by ordinary resolution at the meeting, fill the office being vacated by re- electing the retiring Director. In the absence of such a resolution, the retiring Director shall nevertheless be deemed to have been re-elected, except in the cases identified by the Articles.
5.3.8 Removal of a Director by resolution of Company The Company may, by ordinary resolution of which special notice is given, remove any Director before the expiration of his period of office in accordance with the Companies Act 2006, and elect another person in place of a Director so removed from office. Such removal may take place notwithstanding any provision of the Articles or of any agreement between the Company and such Director, but is without prejudice to any claim the Director may have for damages for breach of any such agreement.
5.3.9 Proceedings of the Board (a) Subject to the provisions of the Articles, the Directors may meet for the despatch of business and adjourn and otherwise regulate its proceedings as they think fit.
(b) The quorum necessary for the transaction of business of the Directors may be fixed from time to time by the Directors and, unless so fixed at any other number, shall be two. A meeting of the Directors at which a quorum is present shall be competent to exercise all powers and discretions for the time being exercisable by the Directors.
(c) The Directors may elect from their number a Chairman and a Deputy Chairman (or two or more Deputy Chairmen) and decide the period for which each is to hold office.
(d) Questions arising at any meeting of the Directors shall be determined by a majority of votes. The chairman of the meeting shall not have a casting vote.
166 5.3.10 Directors’ interests (a) For the purposes of section 175 of the Companies Act 2006, the Directors shall have the power to authorise any matter which would or might otherwise constitute or give rise to a breach of the duty of a Director to avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the Company.
(b) Any such authorisation will be effective only if:
(i) the matter in question was proposed in writing for consideration at a meeting of the Directors, in accordance with the Board’s normal procedures or in such other manner as the Directors may resolve;
(ii) any requirement as to the quorum at the meeting at which the matter is considered is met without counting the Director in question or any other interested Director; and
(iii) the matter was agreed to without such interested Directors voting or would have been agreed to if their votes had not been counted.
(c) The Directors may extend any such authorisation to any actual or potential conflict of interest which may arise out of the matter so authorised and may (whether at the time of the giving of the authorisation or subsequently) make any such authorisation subject to any limits or conditions they expressly impose, but such authorisation is otherwise given to the fullest extent permitted. The Directors may also terminate any such authorisation at any time.
5.3.11 Restrictions on voting (a) Except as provided below, a Director may not vote in respect of any contract, arrangement or any other proposal in which he, or a person connected to him, is interested. Any vote of a Director in respect of a matter where he is not entitled to vote shall be disregarded.
(b) Subject to the provisions of the Companies Act 2006, a Director is entitled to vote and be counted in the quorum in respect of any resolution concerning any contract, transaction or arrangement, or any other proposal (inter alia):
(i) in which he has an interest, of which he is not aware or which cannot reasonably be regarded as likely to give rise to a conflict of interest;
(ii) in which he has an interest only by virtue of interests in the Company’s shares, debentures or other securities or otherwise in or through the Company;
(iii) which involves the giving of any security, guarantee or indemnity to the Director or any other person in respect of obligations incurred by him and guaranteed by the Company (or vice versa);
(iv) concerning an offer of securities by the Company or any of its subsidiary undertakings in which he is or may be entitled to participate as a holder of securities or as an underwriter or sub-underwriter;
(v) concerning any other body corporate, provided that he and any connected persons do not own or have a beneficial interest in 1 per cent. or more of any class of share capital of such body corporate, or of the voting rights available to the members of such body corporate;
167 (vi) relating to an arrangement for the benefit of employees or former employees which does not award him any privilege or benefit not generally awarded to the employees or former employees to whom such arrangement relates;
(vii) concerning the purchase or maintenance of insurance for any liability for the benefit of Directors;
(viii) concerning the giving of indemnities in favour of the Directors; or
(ix) concerning the funding of expenditure by any Director or Directors (A) on defending criminal, civil or regulatory proceedings or actions against him or them, (B) in connection with an application to the court for relief, (C) on defending him or them in any regulatory investigations or (D) incurred doing anything to enable him to avoid incurring such expenditure.
5.3.12 Confidential information If a Director, otherwise than by virtue of his position as Director, receives information in respect of which he owes a duty of confidentiality to a person other than the Company, he shall not be required to disclose such information to the Company or otherwise use or apply such confidential information for the purpose of or in connection with the performance of his duties as a Director, provided that such an actual or potential conflict of interest arises from a permitted or authorised interest under the Articles. This is without prejudice to any equitable principle or rule of law which may excuse or release the Director from disclosing the information in circumstances where disclosure may otherwise be required under the Articles.
5.3.13 Powers of the Directors (a) The Directors may delegate any of their powers or discretions, including those involving the payment of remuneration or the conferring of any other benefit to the Directors, to such person or committee and in such manner as they think fit. Any such person or committee shall, unless the Directors otherwise resolve, have the power to sub-delegate any of the powers or discretions delegated to them. The Directors may make regulations in relation to the proceedings of committees or sub-committees.
(b) The Directors may establish any local boards or appoint managers or agents to manage any of the affairs of the Company, either in the UK or elsewhere, and may:
(i) appoint persons to be members or agents or managers of such local board and fix their remuneration;
(ii) delegate to any local board, manager or agent any of the powers, authorities and discretions vested in the Directors, with the power to sub-delegate;
(iii) remove any person so appointed, and annul or vary any such delegation; and
(iv) authorise the members of any local boards, or any of them, to fill any vacancies on such boards, and to act notwithstanding such vacancies.
(c) The Directors may appoint any person or fluctuating body of persons to be the attorney of the Company with such purposes and with such powers, authorities and discretions, for such periods and subject to such conditions as they may think fit.
(d) Any Director may at any time appoint any person (including another Director) to be his alternate Director and may at any time terminate such appointment.
5.3.14 Directors’ liabilities (a) So far as may be permitted by the Companies Act 2006, every Director, former Director or Secretary of the Company or of an Associated Company (as defined in section 256 of
168 the Companies Act 2006) of the Company may be indemnified by the Company out of its own funds against any liability incurred by him in connection with any negligence, default, breach of duty or breach of trust by him or any other liability incurred by him in the execution of his duties, the exercise of his powers or otherwise in connection with his duties, powers or offices.
(b) The Directors may also purchase and maintain insurance for or for the benefit of:
(i) any person who is or was a Director or Secretary of a Relevant Company (as defined in the Articles); or
(ii) any person who is or was at any time a trustee of any pension fund or employees’ share scheme in which employees of any Relevant Company are interested,
including insurance against any liability (including all related costs, charges, losses and expenses) incurred by or attaching to him in relation to his duties, powers or offices in relation to any Relevant Company, or any such pension fund or employees’ share scheme.
(c) So far as may be permitted by the Companies Act 2006, the Company may provide a Relevant Officer (as defined in the Articles) with defence costs in relation to any criminal or civil proceedings in connection with any negligence, default, breach of duty or breach of trust by him in relation to the Company or an Associated Company of the Company, or in relation to an application for relief under section 205(5) of the Companies Act 2006. The Company may do anything to enable such Relevant Officer to avoid incurring such expenditure.
5.4 Dividends (a) The Company may, by ordinary resolution, declare final dividends to be paid to its shareholders. However, no dividend shall be declared unless it has been recommended by the Directors and does not exceed the amount recommended by the Directors.
(b) If the Directors believe that the profits of the Company justify such payment, they may pay dividends on any class of share where the dividend is payable on fixed dates. They may also pay interim dividends on shares of any class in amounts and on dates and periods as they think fit. Provided the Directors act in good faith, they shall not incur any liability to the holders of any shares for any loss they may suffer by the payment of dividends on any other class of shares having rights ranking equally with or behind those shares.
(c) Unless the share rights otherwise provide, all dividends shall be declared and paid according to the amounts paid up on the shares on which the dividend is paid, and apportioned and paid pro rata according to the amounts paid on the shares during any portion or portions of the period in respect of which the dividend is paid.
(d) Any unclaimed dividends may be invested or otherwise applied for the benefit of the Company until they are claimed. Any dividend unclaimed for 12 years from the date on which it was declared or became due for payment shall be forfeited and shall revert to the Company.
(e) The Directors may, if authorised by ordinary resolution, offer to ordinary shareholders the right to elect to receive, in lieu of a dividend, an allotment of new ordinary shares credited as fully paid.
5.5 Failure to supply an address A shareholder who has no registered address within the UK and has not supplied to the Company an address within the UK for the service of notices will not be entitled to receive notices from the Company.
169 5.6 Disclosure of shareholding ownership The Disclosure and Transparency Rules require a member to notify the Company if the voting rights held by such member (including by way of certain financial instruments) reach, exceed or fall below three per cent. and each one per cent. threshold thereafter up to 100 per cent. Under the Disclosure and Transparency Rules, certain voting rights in the Company may be disregarded.
5.7 Changes in capital The provisions of the Articles governing the conditions under which the Company may alter its share capital are no more stringent than the conditions imposed by the Companies Act 2006.
6 Directors and Management (a) The Directors and members of Management, their functions within the Group and brief biographies are set out in Part VII (Directors, Management and Corporate Governance).
(b) The business address of each of the Directors (other than Graeme Coulthard) and of each member of Management is the Company’s Head Office address at Century House, Brunel Road, Wakefield 41 Industrial Park, Wakefield, WF2 0XG. The business address of Graeme Coulthard is Charterhouse Capital Partners LLP, Warwick Court, Paternoster Square, London EC4M 7DX.
(c) The table below sets out the interests of the Directors and Management in the share capital of the Company (all of which, unless otherwise stated, are beneficial and include the interests of persons connected with them) as at 15 May 2014 and following Admission and the issuance of the Residual Management Equity:
Following the Pre-IPO Immediately following Reorganisation and immediately Admission and issuance of the prior to Admission Residual Management Equity –––––––––––––––––––––––––– –––––––––––––––––––––––––– Number of Percentage of Number of Percentage of Ordinary issued share Ordinary issued share Name of Director Shares capital Shares capital –––––––––––––– ––––––––– –––––––––– ––––––––– ––––––––– Geoff Cooper – – 146,666 0.0% Richard Hayes 20,794,251 7.0% 14,555,976 4.3% Darren Bryant 8,260,866 2.8% 7,095,107 2.1% Octavia Morley – – 13,333 0.0% David Stead – – 22,222 0.0% Graeme Coulthard(1) – – – – Name of Senior Manager –––––––––––––––––––– Christopher Beck 8,095,627 2.7% 6,104,439 1.8% Andy Garbutt 2,500,000 0.8% 2,187,500 0.6% Helen Lockwood 1,115,264 0.4% 780,685 0.2% Ian McEvoy 2,951,245 1.0% 2,065,872 0.6% Gavin Peck – – 312,500 0.1% Stuart Middleton 32,206,205 10.9% 22,544,344 6.6% John Smith 749,650 0.3% 524,755 0.2% Andrew Wasley 1,250,000 0.4% 875,000 0.3% Anthony Barraclough 16,445,131 5.5% 8,222,566 2.4%
Note: (1) Graeme Coulthard has an interest of approximately 6.5 per cent. in CCP IX Co-Investment LP. CCP IX Co-Investment LP has an interest of 2,934,456 Ordinary Shares immediately prior to Admission and 2,077,884 Ordinary Shares immediately following Admission and issuance of the Residual Management Equity (assuming no exercise of the Over- allotment Option). Were the Over-allotment Option to be exercised in full on Admission, CCP IX Co-Investment LP would have an interest of 1,883,063 Ordinary Shares immediately following Admission and issuance of the Residual Management Equity.
170 (d) The Company intends to issue Ordinary Shares to Geoff Cooper, Octavia Morley and David Stead upon Admission alongside the Offer at the Offer Price. The table set out above shows the shareholdings immediately following Admission and issuance of the Residual Management Equity assuming that this issue has taken place.
(e) The interests of the Directors and Management together represent 31.8 per cent. of the issued share capital of the Company as at the date of this Prospectus and are expected to represent approximately 19.2 per cent. of the issued share capital of the Company immediately following Admission and following issuance of the Residual Management Equity.
(f) Save as set out in this Section 6 and in Part XII (Historical Financial Information), none of the Directors has any interests in the share or loan capital of the Company or any of its subsidiaries.
(g) Save as set out in this Section 6 and in Section 13 (Relationship with the Principal Shareholders) of Part XVI (Additional Information), no Director has or has had any interest in any transaction which is or was unusual in its nature or conditions or is or was significant to the business of the Group and was effected by the Company in the current or immediately preceding financial year or was effected during an earlier financial year and remains in any respect outstanding or unperformed.
(h) As at 15 May 2014, there were no outstanding loans granted by any member of the Group to any Director or member of Management, nor by any Director or member of Management to any member of the Group, nor was any guarantee which had been provided by any member of the Group for the benefit of any Director or member of Management, or by any Director or member of Management for the benefit of any member of the Group, outstanding.
(i) The companies and partnerships of which the Directors are, or have been within the past five years, members of the administrative, management or supervisory bodies or partners (excluding the Company and its subsidiaries and also excluding the subsidiaries of the companies listed below) are as follows:
Position still held Name Current or former directorships/partnerships (Y/N) ––––––––––– –––––––––––––––––––––––––––––––––––– ––––––– Director Geoff Cooper Bourne Leisure Holdings Ltd Y Construction Products Association N Dunelm Group plc Y Informa plc Y Travis Perkins plc N Truth Corps Ltd Y Toolstation Europe Limited Y Richard Hayes N/A N/A Darren Bryant N/A N/A Octavia Morley John Menzies plc Y Crew Clothing Co. Limited Y LighterLife UK Limited N David Stead Dunelm Group plc Y Graeme Coulthard Charterhouse Capital Partners LLP Y Novartex SCA Y Watling Street Capital Partners LLP Y
171 Position still held Name Current or former directorships/partnerships (Y/N) ––––––––––– –––––––––––––––––––––––––––––––––––– ––––––– Senior Manager Christopher Beck N/A N/A Stuart Middleton Livbeth Investco Limited Y Andy Garbutt N/A N/A Ian McEvoy N/A N/A Gavin Peck N/A N/A Helen Lockwood N/A N/A Andrew Wasley Chequerboard Cards Limited N AWJP Limited N John Smith Techno Direct LLP N Anthony Barraclough N/A N/A
(j) Save as set out above and in Section 13 (Relationship with the Principal Shareholders) of this Part XVI (Additional Information), none of the Directors, the Management or the Company Secretary has any business interests, or performs any activities, outside the Group which are significant with respect to the Group.
(k) The Company and the Directors are not aware of any arrangements the operation of which may at a subsequent date result in a change in control of the Company.
(l) At the date of this Prospectus, none of the Directors or Management has at any time within the last five years:
(i) had any convictions in relation to fraudulent offences;
(ii) been declared bankrupt or been the subject of any individual voluntary arrangement;
(iii) been associated with any bankruptcy, receivership or liquidation in his or her capacity as director or senior manager;
(iv) been the subject of any official public incrimination and/or sanctions by statutory or regulatory authorities (including designated professional bodies);
(v) been disqualified by a court from acting as a director;
(vi) been disqualified by a court from acting as a member of the administrative, management or supervisory bodies of any company or from acting in the management or conduct of the affairs of any company;
(vii) been a partner or senior manager in a partnership which, while he or she was a partner or within 12 months of his or her ceasing to be a partner, was put into compulsory liquidation or administration or which entered into any partnership voluntary arrangement;
(viii) owned any assets which have been subject to a receivership or been a partner in a partnership subject to a receivership where he or she was a partner at that time or within the 12 months preceding such event; or
(ix) been an executive director or senior manager of a company which has been placed in receivership, compulsory liquidation, creditors’ voluntary liquidation or administration or which entered into any company voluntary arrangement or any composition or arrangement with its creditors generally or any class of creditors, at any time during which he or she was an executive director or senior manager of that company or within 12 months of his or her ceasing to be an executive director or senior manager.
172 (m) Save for their capacities as persons legally and beneficially interested in Ordinary Shares as set out in paragraph 6(c) above and save for the appointment of Graeme Coulthard pursuant to the terms of the Relationship Agreement (see Section 13 (Relationship with the Principal Shareholders) of this Part XVI (Additional Information)) there are:
(i) no potential conflicts of interest between any duties to the Company of the Directors and members of Management and their private interests and/or other duties; and
(ii) no arrangements or understandings with the Principal Shareholders, members, suppliers or others pursuant to which any Director or member of Management was selected.
(n) Save as set out in Section 14.1 (Underwriting Agreement) of this Part XVI (Additional Information), there are no restrictions agreed by any Director or member of the Management on the disposal within a certain time of their holdings in the Company’s securities.
7 Interests of Significant Shareholders Other than the interests of the Directors and members of the Management disclosed in Section 6 (Directors and Management) of this Part XVI (Additional Information) and other than any interest that may arise under the Underwriting Agreement (and assuming no exercise of the Over-allotment Option), insofar as the Directors are aware, the following persons as at 15 May 2014 are interested, and will following Admission and issuance of the Residual Management Equity be interested, in 3 per cent. or more of the Company’s issued ordinary share capital:
Following Pre-IPO Immediately following Reorganisation and immediately Admission and issuance of the prior to Admission Residual Management Equity(1) –––––––––––––––––––––––– –––––––––––––––––––––––– Number of Percentage of Number of Percentage of Ordinary issued share Ordinary issued share Shareholder Shares capital Shares capital –––––––––––––––––––––––––––– ––––––––– –––––––––– ––––––––– ––––––––– CCP IX LP No. 1 106,712,099 36.0% 75,562,716 22.2% CCP IX LP No. 2 88,927,346 30.0% 62,969,353 18.5% CCP IX Co-Investment LP 2,934,456 1.0% 2,077,884 0.6%
Note: (1) Assuming no exercise of the Over-allotment Option. Were the Over-allotment Option to be exercised in full upon Admission, CCP IX LP No.1 would have an interest of 68,478,056 Ordinary Shares, CCP IX LP No.2 would have an interest of 57,065,430 Ordinary Shares and CCP IX Co-Investment LP would have an interest of 1,883,063 Ordinary Shares, representing 20.1 per cent., 16.7 per cent. and 0.6 per cent. of the issued share capital of the Company, respectively, following Admission and issuance of the Residual Management Equity. Save as set out above, the Company is not aware of any person who has, or will immediately following Admission and issuance of the Residual Management Equity have, a notifiable interest of 3 per cent. or more of the issued share capital of the Company.
The Principal Shareholders do not have and will not have different voting rights attached to the Ordinary Shares they hold to those held by the other Shareholders.
8 Directors’, CEO and CFO Service Agreements, Letters of Appointment, Remuneration and Other Matters
Directors
Chief Executive Officer Richard Hayes is employed by the Company pursuant to a service agreement dated 30 April 2014 in respect of his services as CEO to the Group. He receives a salary of £450,000 per annum and is entitled to a bonus based on the Group’s meeting and exceeding specified financial performance metrics.
173 Under the terms of his service agreement, Richard Hayes is also entitled to: (i) life assurance equivalent to six times his annual basic salary, subject to any lifetime allowance limits; (ii) private medical insurance for himself, his spouse and any children under the age of 21; (iii) participate in the Group’s permanent health insurance scheme at the Group’s expense; and (iv) a car with a value of up to £60,000 for his business and private use or, at the Board’s discretion, an annual car allowance of £8,000. Richard Hayes is also entitled to participate in the Company’s pension scheme.
The service agreement can be terminated by either party on service of not less than 12 months’ prior written notice. The Group has the ability to make a payment in lieu of notice equal to the basic salary element of Richard Hayes’s service agreement for any unexpired portion of the notice period, less any deductions the Company is required by law to make. The Group also reserves the right to place Richard Hayes on garden leave during the notice period. The Group may terminate Richard Hayes’s appointment with immediate effect without notice in certain specified circumstances such as gross misconduct or following any serious or persistent breaches of his service agreement.
Richard Hayes’s service agreement contains confidentiality provisions which are indefinite and restrictive covenants as to non-compete and non-solicitation obligations lasting for a period of six months.
Chief Financial Officer Darren Bryant is employed by the Group pursuant to a service agreement dated 30 April 2014 in respect of his services as CFO to the Group. He receives a salary of £340,000 per annum and is entitled to a bonus based on the Group’s meeting and exceeding specified financial performance metrics.
Under the terms of his service agreement, Darren Bryant is also entitled to: (i) life assurance equivalent to six times his annual basic salary, subject to any lifetime allowance limits; (ii) private medical insurance for himself, his spouse and any children under the age of 21; (iii) participate in the Group’s permanent health insurance scheme at the Group’s expense; and (iv) an annual car allowance of £8,000. Darren Bryant is also entitled to participate in the Company’s pension scheme.
The service agreement can be terminated by either party on service of not less than 12 months’ prior written notice. The Group has the ability to make a payment in lieu of notice equal to the basic salary element of Darren Bryant’s service agreement for any unexpired portion of the notice period, less any deductions the Company is by law required to make. The Group also reserves the right to place Darren Bryant on garden leave during the notice period. The Group may terminate Darren Bryant’s appointment with immediate effect without notice in certain specified circumstances such as gross misconduct or following any serious or persistent breaches of his service agreement.
Darren Bryant’s service agreement contains confidentiality provisions which are indefinite and restrictive covenants as to non-compete and non-solicitation obligations lasting for a period of six months.
Chairman Geoff Cooper’s appointment as Chairman is subject to the terms of a letter of appointment agreed between him and the Company dated 30 April 2014. His annual fee is £125,000 and he is required to commit the equivalent of two to three days per month to the role. Geoff may resign from his position at any time upon service of six months’ written notice to the Board.
Geoff has the option to invest £330,000 in the Company by means of an acquisition of Ordinary Shares as part of, or alongside, the Offer at the Offer Price. He has taken up this option and agreed to acquire 146,666 Ordinary Shares. Subject to the completion of this investment, on the date falling two years after the date of Admission, Geoff shall be entitled to make a further investment of £330,000 in the Company by purchasing 146,666 Ordinary Shares at the Offer Price. On the date falling three years after the date of Admission, Geoff shall be entitled to make a final investment of £330,000 in the Company by purchasing 146,666 Ordinary Shares at the Offer Price. The Company has agreed to procure these issues and allotments of Ordinary Shares to Geoff at the Offer Price. Geoff’s entitlement to make such purchases shall be conditional upon and subject to his remaining as Chairman of the Company on such date.
174 Other Non-Executive Directors The Non-Executive Directors do not have service contracts, although they each have a letter of appointment reflecting their responsibilities and commitments, which are terminable on one month’s notice. Under the Articles, all Directors must retire by rotation and seek re-election by Shareholders every three years; however, it is intended that the Directors shall each retire and submit themselves for re-election by Shareholders annually.
The terms of the Non-Executive Directors’ letters of appointment are summarised below:
Appointment Fee per Name of Director Title Letter Date Annum –––––––––––––– ––––––––––––––––––––––––––––––––––– ––––––––––– ––––––– Octavia Morley Senior Independent Non-Executive Director 30 April 2014 £49,000 David Stead Independent Non-Executive Director 30 April 2014 £45,000 Graeme Coulthard(1) Non-Executive Director 30 April 2014 £45,000
Note: (1) As Graeme has been nominated by the Principal Shareholders, his fee will be paid to a Charterhouse entity, rather than to him in his personal capacity. Octavia Morley is entitled to an additional fee of £8,000 per annum as Chair of the Remuneration Committee. David Stead is entitled to an additional fee of £8,000 as Chair of the Audit and Risk Committee.
Management The aggregate remuneration paid (including salary and other benefits) to the Senior Managers of the Company and its subsidiaries for the financial year ended 31 January 2014 was £3.5 million, all of which comprised salaries and short term benefits.
9 Pensions The Group operates an auto-enrolment pension scheme, which was introduced in 2013. As at 31 January 2014, 3,034 employees have been enrolled in the scheme. Other than contributions for those Directors and members of Management who have enrolled in the auto-enrolment pension scheme, no amounts have been set aside by the Group to provide pension, retirement or similar benefits for the Directors or Management.
The Group does not operate a defined benefit scheme.
10 Employee Share Plans and Share Options and Awards The Company has adopted the Card Factory Long Term Incentive Plan (the “LTIP”).
Eligibility Employees and Executive Directors of the Company and designated subsidiaries and joint ventures are eligible to participate in the LTIP.
Grant of awards The Directors or, in the case of Executive Directors, the Remuneration Committee will decide who will participate and how many Ordinary Shares they can receive.
Selected employees are granted a right to receive Ordinary Shares in the Company in the future subject to remaining in employment and subject to the satisfaction of any performance conditions. The right (referred to as an award) can take the form of:
(a) a conditional right to free Ordinary Shares on vesting;
(b) an option to acquire Ordinary Shares, from the date of vesting, at an exercise price set at the time of grant (which may be zero); or
(c) Ordinary Shares transferred on grant which are forfeited to the extent the award lapses.
175 When the participant becomes entitled to the shares the award is said to have vested.
Awards will normally only be granted within 42 days of the announcement of the Company’s results for any period or the annual general meeting. No awards can be granted more than 10 years after the Offer. It is intended to make the first awards under the LTIP at the time of the Offer.
Performance conditions Vesting of an award may be subject to a performance condition set by the Remuneration Committee at the time of grant which will normally be tested over at least three financial years. Awards made to Directors of the Company will be subject to performance conditions as described in the Company’s remuneration policy from time to time. It is intended that the performance conditions for awards made at the time of the Offer will be linked to growth in earnings per share with an underpin linked to return on invested capital. Details will be set out in the remuneration report.
Individual limit The value of Ordinary Shares subject to awards granted to a Director in any financial year will be limited to 150 per cent. of basic salary (except in relation to the CEO in which case the limit shall be 175 per cent. of basic salary) using an average share price over a period determined by the Remuneration Committee, being not less than three months (except in the case of the first awards made at the time of the Offer when the awards will be made by reference to the Offer Price). This limit is subject to any higher percentage approved by the Shareholders in respect of the Company’s remuneration policy.
Vesting of awards Awards will normally only vest to the extent any performance condition is met. To the extent the award vests, shares will be issued or transferred to the participant or, in the case of an option, the option will become exercisable for up to 10 years from the date of grant. Instead of issuing or transferring shares on vesting/exercise, the Remuneration Committee can decide to pay a cash amount equal to the value of those shares (less any exercise price in the case of an option).
An award can be granted on the basis that the participant will receive an additional amount on vesting based on the dividends paid on the number of Ordinary Shares in respect of which the award vests or is exercised. This may be paid in cash or additional Ordinary Shares.
Holding period An award can be granted on the basis that some or all of the Ordinary Shares in respect of which it vests must be held for a further period, subject to malus. The award will not normally lapse if the participant leaves employment during the holding period.
Malus The Remuneration Committee can reduce or delay vesting in certain circumstances such as an error in, or restatement of, results or misconduct by the participant.
Leaving employment If a participant leaves employment, his award will normally lapse. However, if the participant leaves because of disability, ill-health or injury; redundancy; retirement; sale of his employer; or in other circumstances if the Remuneration Committee allows, his award will continue in effect and vest on the original vesting date. On death, or in other circumstances if the Remuneration Committee so decides, the award will vest early. An award will only vest in these circumstances to the extent that any performance condition is satisfied at the date of vesting and, unless the Remuneration Committee decides otherwise, the number of Ordinary Shares in respect of which it vests will be reduced to reflect the fact that the participant left early. The Remuneration Committee can decide that any holding period will not apply where the participant leaves before it starts and his award does not lapse.
176 Takeovers, mergers and other corporate events Awards will generally vest early on a takeover, merger or other corporate event to the extent determined by the Remuneration Committee to the extent that any performance condition is then satisfied. Where an award vests in these circumstances, the number of Ordinary Shares in respect of which it vests will, unless the Remuneration Committee decides otherwise, be reduced to reflect the fact that it is vesting early. Alternatively, participants may be allowed or required to exchange their awards for awards over shares in the acquiring company.
Deferred bonus arrangements Awards under the LTIP can also be made in respect of arrangements under which any cash bonus is to be deferred into Ordinary Shares. Such awards will not count towards the LTIP individual limits referred to above.
Plan limit In any 10 year period, not more than 10 per cent. of the issued ordinary share capital of the Company may be issued or issuable under the LTIP and all other employees’ share plans operated by the Company. In any 10 year period, not more than five per cent. of the issued ordinary share capital of the Company may be issued or issuable under the LTIP and all other discretionary employees’ share plans adopted by the Company. These limits do not include options or awards which lapse or those granted on the date of or before Admission (including the Residual Management Equity) but does include treasury shares as if they were newly issued for so long as it is best practice to do so.
Changes to the LTIP The Remuneration Committee can amend the LTIP in any way. However, subject to the following, shareholder approval will be required to amend certain provisions to the advantage of participants. These provisions relate to: (a) eligibility; (b) individual and plan limits; (c) exercise price; (d) rights attaching to options, awards and Ordinary Shares; (e) adjustments on variation in the Company’s share capital; and (f) the amendment power.
The Remuneration Committee can, without shareholder approval, change the Plans to obtain or maintain favourable tax treatment, make certain minor amendments e.g. to benefit the administration of the LTIP or change any performance condition in accordance with its terms or if anything happens which causes the Remuneration Committee reasonably to consider it appropriate to do so.
General Any Ordinary Shares issued on the vesting of awards or exercise of options will rank equally with Ordinary Shares of the same class in issue on the date of allotment except in respect of rights arising by reference to a prior record date.
The option price or number of shares subject to options or awards may be adjusted following a demerger, rights issue or other variation in the share capital of the Company.
Options and awards are not pensionable or transferable.
177 All employee plans The Company is also considering the introduction of an all employee “save as you earn” plan intended to qualify for favourable tax treatment.
11 Principal Subsidiaries The Company is the holding company of the Group. The following table shows details of the Company’s significant subsidiaries. The issued share capital of each of these companies is fully paid and each will be included in the consolidated accounts of the Group.
Country of Percentage of incorporation and shares held as Name registered office at 15 May 2014 Principal Activity ––––––––––––––––––––– –––––––––––––– –––––––––––– ––––––––––––––––– Sportswift Limited England 100 Operating Company Printcraft Limited England 100 Manufacturing Getting Personal Limited England 100 Online Retail
12 Principal Establishments The table below summarises the key terms of the principal establishments of the Group:
Name and Location Type of Facility Tenure –––––––––––––––––––––—————————————— ––––––––––––——————— ––––––––– Enterprise House, Wakefield 41 Industrial Estate, Office Leasehold Wakefield, West Yorkshire, WF2 0XG, United Kingdom Gate 1, Wakefield 41 Industrial Estate, Wakefield, Warehouse and Distribution Freehold West Yorkshire, WF2 0XG, United Kingdom Centre Gate 2, Wakefield 41 Industrial Estate, Wakefield, Warehouse and Distribution Leasehold West Yorkshire, WF2 0XG, United Kingdom Centre Gate 3, Wakefield 41 Industrial Estate, Wakefield, Warehouse and Distribution Freehold West Yorkshire, WF2 0XG, United Kingdom Centre Gate 4, Wakefield 41 Industrial Estate, Wakefield, Warehouse and Distribution Freehold West Yorkshire, WF2 0XG, United Kingdom Centre Century House, Wakefield 41 Industrial Estate, Head Office Freehold Wakefield, West Yorkshire, WF2 0XG, United Kingdom 37 Otley Road, Charlestown, Shipley, BD17 7EX, Manufacturing, Warehousing Freehold United Kingdom and Distribution Centre 14 Roundthorn Industrial Estate, Wythenshawe, Manufacturing, Warehousing Leasehold Manchester, M23 9DS, United Kingdom and Distribution Centre
13 Relationship with the Principal Shareholders The Principal Shareholders are CCP IX LP No.1, CCP IX LP No.2 and CCP IX Co-Investment LP, whose business addresses are all at Warwick Court, Paternoster Square, London EC4M 7DX. The Company is, and prior to Admission will continue to be, a wholly owned subsidiary of the Principal Shareholders. See Section 14.2 (Relationship Agreement) of this Part XVI (Additional Information) for details regarding the relationship agreement entered into between the Company and the Principal Shareholders.
14 Material Contracts The following are the only contracts (not being contracts entered into in the ordinary course of business) which have been entered into by members of the Group within two years immediately preceding the date of this Prospectus or which are expected to be entered into prior to Admission and which are, or may be, material or which have been entered into at any time by members of the Group and which contain any
178 provision under which any member of the Group has any obligation or entitlement which is, or may be, material to the Group as at the date of this Prospectus:
14.1 Underwriting Agreement On 15 May 2014, the Company, the Directors, the Selling Shareholders and the Underwriters entered into the Underwriting Agreement pursuant to which each of the Underwriters has severally agreed, subject to certain exceptions, to procure subscribers or purchasers, as the case may be, for the Shares.
Each Underwriter has agreed, subject to certain exceptions, to the extent that it fails to procure subscribers or purchasers for all of the Shares, to purchase for a fixed proportion of those Shares itself at the Offer Price. The Underwriting Agreement contains, among others, the following further provisions:
(a) Morgan Stanley and UBS are acting as Joint Sponsors and Joint Global Co-ordinators in connection with the Offer; Morgan Stanley, UBS and Nomura are acting as Joint Bookrunners; and Morgan Stanley, UBS, Nomura and Investec are acting as Underwriters.
(b) The Company has agreed, subject to certain conditions, to allot and issue, at the Offer Price, the New Shares to be issued in connection with the Offer.
(c) Each of the Selling Shareholders has agreed, subject to certain conditions, to sell, at the Offer Price, the Existing Shares to be sold by it in connection with the Offer.
(d) Morgan Stanley Securities Limited, as Stabilising Manager, has been granted the Over-allotment Option by the Principal Shareholders pursuant to which it may procure purchasers for or purchase up to 13,183,404 Over-allotment Shares at the Offer Price for the purposes of covering short positions arising from over-allocations, if any, in connection with the Offer and/or any sales of Shares made during the stabilisation period. Save as required by law or regulation, neither Morgan Stanley Securities Limited, as Stabilising Manager, nor any of its agents intends to disclose the extent of any over-allotments and/or stabilisation transactions under the Offer. The number of Over-allotment Shares to be issued pursuant to the Over-allotment Option, if any, will be determined not later than 13 June 2014.
(e) The Company has agreed to pay to the Underwriters a base commission which, in aggregate, amounts to 1.75 per cent. of the Offer Price multiplied by the aggregate number of New Shares issued pursuant to the Offer, together with any applicable value added tax thereon.
(f) The Selling Shareholders have agreed to pay the Underwriters a base commission which, in aggregate, amounts to 1.75 per cent. of the Offer Price multiplied by the aggregate number of Existing Shares sold pursuant to the Offer (together with any Over-allotment Shares sold pursuant to any exercise of the Over-allotment Option), together with any applicable value added tax thereon. (g) The Company has also agreed, in its absolute discretion, to pay a discretionary commission to some or all of the Underwriters of up to 1.25 per cent. of an amount equal to the Offer Price multiplied by the aggregate number of New Shares issued pursuant to the Offer, together with any applicable value added tax thereon, within 30 days after the completion of the Offer. (h) The Selling Shareholders have also agreed, in their absolute discretion, to pay a discretionary commission to some or all of the Underwriters of up to 1.25 per cent. of an amount equal to the Offer Price multiplied by the aggregate number of Existing Shares sold pursuant to the Offer (together with any Over-allotment Shares sold pursuant to any exercise of the Over- allotment Option), together with any applicable value added tax thereon, within 30 days after the completion of the Offer. (i) The obligations of the parties pursuant to the Underwriting Agreement are subject to certain conditions, including, among others, that Admission occurs by not later than 8.00 a.m. on 20 May 2014 or such later time and/or date as the Joint Global Co-ordinators may agree with
179 the Company. The Joint Bookrunners shall be entitled to terminate the Underwriting Agreement in certain circumstances prior to Admission, including the occurrence of certain material changes in the condition (financial or otherwise) or prospects of the Company and certain changes in financial, political or economic conditions. (j) The Company has agreed to pay or cause to be paid (together with any applicable VAT) all costs, charges, fees and expenses of or arising in connection with, or incidental to, the Offer, which are estimated to amount to £10 million in total. (k) The aggregate net proceeds receivable by the Company after payment of commissions, expenses and applicable taxes are expected to be £80 million. (l) The Company, the Directors and the Selling Shareholders have given certain customary representations, warranties and undertakings to the Underwriters. In addition, the Company has given certain indemnities to the Underwriters. The liabilities of the Directors and the Selling Shareholders are limited as to time and amount. (m) The Company has given certain customary indemnities to the Underwriters, their affiliates (as defined in Rule 405 under the Securities Act) and their respective directors, officers, employees and agents which, subject to certain exceptions, indemnify the Underwriters against, inter alia, claims made against them or losses incurred by them, in connection with the Offer.
Lock-up agreements pursuant to the Underwriting Agreement (a) The Company has agreed that, subject to certain exceptions, during the period of 180 days from the date of Admission, it will not, without the prior written consent of the Joint Bookrunners, (as applicable) issue, lend, mortgage, assign, charge, offer, sell or contract to sell, or otherwise dispose of any Ordinary Shares (or any interest therein or in respect thereof) or enter into any transaction with the same economic effect as the foregoing.
(b) The Principal Shareholders, Anthony Barraclough and certain former members of the Group’s Management who are Selling Shareholders have agreed that, subject to certain exceptions, during the period of 180 calendar days from the date of Admission, they will not, without the prior written consent of the Joint Bookrunners, sell or contract to sell, grant or sell any option over, charge, pledge or otherwise dispose of any Ordinary Shares (or any interest therein or in respect thereof) or enter into any transaction with the same economic effect as the foregoing.
(c) The Directors and members of Management (excluding Anthony Barraclough) have agreed that, subject to certain exceptions, during the period of 365 calendar days from the date of Admission, they will not, without the prior written consent of the Joint Bookrunners, sell or contract to sell, grant or sell any option over, charge, pledge or otherwise dispose of any Ordinary Shares (or any interest therein or in respect thereof) or enter into any transaction with the same economic effect as the foregoing.
14.2 Relationship Agreement On 15 May 2014, the Company entered into a relationship agreement (the “Relationship Agreement”) with the Principal Shareholders that will come into force on Admission. The Principal Shareholders are set out in Section 13 (Relationship with the Principal Shareholders) of this Part XVI (Additional Information). The principal purpose of the Relationship Agreement is to ensure that the Company is capable at all times of carrying on its business independently of the Principal Shareholders. The Relationship Agreement will stay in effect until the earlier of the Principal Shareholders and any members of their group ceasing to own in aggregate an interest, direct or indirect, of at least 20 per cent. or more of the issued Ordinary Shares in the Company and the Ordinary Shares ceasing to be listed on the premium listing segment of the Official List. The Relationship Agreement is intended to ensure that the Company can meet, from Admission, the requirements of the proposed amendments to the Listing Rules, as published in the FCA’s Consultation Paper CP 13/15, “Feedback on CP 12/25: Enhancing the effectiveness of the Listing Regime and further consultation” (the “Proposed Rules”). The Proposed Rules are expected to be brought into force during 2014. If the Proposed Rules are
180 amended prior to being brought into force, the Company and the Principal Shareholders have undertaken to discuss and seek to agree such amendments to the Relationship Agreement as may be required to ensure that the Company complies with its obligations under the Listing Rules.
The Relationship Agreement includes provisions to ensure that the Group is able to do business independently of the Principal Shareholders. The Relationship Agreement provides that the Principal Shareholders shall, and shall procure that their associates will:
(a) conduct all transactions with the Company and any member of its Group on arm’s length terms and on a normal commercial basis and abstain from voting, and procure that their representative on the Board abstains from voting, on any resolution to approve a related party transaction involving it or its associates;
(b) not take any action that would be reasonably likely to have the effect of preventing the Company from complying with its obligations under the Listing Rules nor propose or procure the proposal of a shareholder resolution of the Shareholders of the Company which is intended or appears to intend to circumvent the proper application of the Listing Rules;
(c) not take any action that would, or which would be reasonably likely to: (a) have the effect of preventing any member of the Group from carrying on its business independently of the Principal Shareholder, or any of their associates, and for the benefit of its Shareholders as a whole; or (b) have the effect of prejudicing the Company’s listing on the Official List save that the Principal Shareholders and their associates may: (i) accept, or provide an irrevocable undertaking to accept, a takeover offer made in accordance with the Takeover Code in relation to their respective interests in the Company or, where such takeover offer is made by way of a scheme of arrangement under sections 895 to 899 of the Companies Act 2006 (a “Scheme”), vote in favour of such Scheme at the court and related shareholder meetings or otherwise agree to sell their shares in connection with a takeover offer; (ii) make a takeover offer by way of a general offer for all of the outstanding Ordinary Shares or by way of a Scheme and de-listing the Company after such takeover offer has become wholly unconditional or, in the case of a Scheme, after it has become effective; (iii) dispose of Ordinary Shares pursuant to a scheme of reconstruction under section 110 of the Insolvency Act 1986 in relation to the Company; (iv) dispose of Ordinary Shares pursuant to a compromise or arrangement under section 896 of the Companies Act 2006 providing for the acquisition by any person (or group of persons acting in concert, as such expression is defined in the Takeover Code) of 50 per cent. or more of the Ordinary Shares; (v) choose to accept or not to accept any offer by the Company to purchase its own Ordinary Shares which is made on identical terms to the holders of Ordinary Shares of the same class; or (vi) choose to take up or not to take up any Ordinary Shares offered to them under a rights issue of the Company;
(d) so far as they are able, to the extent required by law, and save as disclosed in this Prospectus or in the annual report of the Company from time to time, exercise their powers so that the Company is managed in accordance with the UK Corporate Governance Code;
(e) not exercise any of their voting or other rights and powers to procure any amendment to the Articles which would be inconsistent or which would undermine or breach any provision of the Relationship Agreement;
(f) treat as confidential all documents and other information which it may obtain from the Group or its officers, employees or agents and which in any way relates to the Group or the customers, business and affairs of the Group, subject to certain exceptions set out in the Relationship Agreement; (g) have the right to appoint one Non-Executive Director to the Board, provided that the Principal Shareholders hold, in aggregate, at least 20 per cent. of the Ordinary Shares of the Company; and
181 (h) inform the Chairman a reasonable period in advance of any disposal or transfer (or a series of connected disposals or transfers) of an interest in 3 per cent. or more of the issued share capital of the Company by the Principal Shareholders or any member of the Principal Shareholders’ Group to a third party and, upon request from a Principal Shareholder, the Company shall provide reasonable assistance to the Principal Shareholders in connection with such a disposal or transfer.
The Board believes that the terms of the Relationship Agreement will enable the Company to carry on its business independently from the Principal Shareholders and their affiliates, and ensure that all transactions and relationships between the Company and the Principal Shareholders are, and will be, at arm’s length and on a normal commercial basis.
14.3 Stock Lending Agreement In connection with the Over-allotment Option, the Stabilising Manager has entered into the stock lending agreement with the Principal Shareholders (the “Stock Lending Agreement”), pursuant to which the Stabilising Manager, on Admission, will be able to borrow up to a maximum of 10 per cent. of the total number of Shares comprised in the Offer for the purpose, among other things, of allowing the Stabilising Manager to settle, at Admission, over-allotments, if any, made in connection with the Offer. If the Stabilising Manager borrows any Shares pursuant to the Stock Lending Agreement, it will be required to return equivalent securities to the Principal Shareholders in accordance with the terms of the Stock Lending Agreement.
14.4 Senior Facilities Agreement The Group entered into the Senior Facilities Agreement on 28 May 2010 with The Royal Bank of Scotland acting as agent. The Senior Facilities Agreement was amended on 1 June 2010 and subsequently amended and restated pursuant to an amendment and restatement agreement dated 10 October 2013.
The following facilities are made available to the Group under the Senior Facilities Agreement: a term loan of £85 million, which terminates in May 2016 (“Facility A”); a term loan of £85 million, which terminates in June 2017 (“Facility B”); a term loan of £165 million, which terminates in October 2018 (“Facility C”); a revolving facility of £15 million, which terminates in May 2016 (“Revolving Facility 1”); and a revolving facility of £10 million (available only from 28 April 2016), which terminates in October 2018 (“Revolving Facility 2”) (together, the “Senior Facilities”).
Drawings under the Senior Facilities bear interest at the aggregate of (i) a margin, (ii) LIBOR and (iii) a potential mandatory cost relating to costs of compliance with the requirements of the Bank of England and/or the Financial Conduct Authority or the requirements of the European Central Bank. The applicable margin starts at: (i) 4.50 per cent. per annum in relation to Facility A, Revolving Facility 1 and Revolving Facility 2; and (ii) 5.00 per cent. per annum in relation to Facility B and Facility C. If certain leverage ratios are met, the applicable margin can be reduced as follows:
(a) if the leverage ratio is greater than or equal to 2.50, the applicable margin will be 4.50 per cent. per annum for Facility A, Revolving Facility 1 and Revolving Facility 2 and 5.00 per cent. per annum for Facility B and Facility C;
(b) if the leverage ratio is less than 2.50:1 but greater than or equal to 2.00:1, the applicable margin will be 4.25 per cent. for Facility A, Revolving Facility 1 and Revolving Facility 2 and 5.00 per cent. per annum for Facility B and Facility C;
(c) if the leverage ratio is less than 2.00:1 but greater than or equal to 1.50:1, the applicable margin will be 4.00 per cent. per annum for Facility A, Revolving Facility 1 and Revolving Facility 2 and 4.75 per cent. per annum for Facility B and Facility C; and
182 (d) if the leverage ratio is less than 1.50:1, the applicable margin will be 3.75 per cent. per annum for Facility A, Revolving Facility 1 and Revolving Facility 2 and 4.50 per cent. per annum for Facility B and Facility C.
Under the terms of the Senior Facilities Agreement, the Group may not incur financial indebtedness of an amount greater than £1.25 million unless it is incurred in certain permitted circumstances, which include through arrangements and facilities in place before the closing date of the Senior Facilities Agreement, under shareholder loans, under local working capital facilities of up to £1 million and under financing arrangements made available by the seller in certain permitted acquisitions.
The Senior Facilities Agreement also contains a negative pledge clause which, subject to certain exceptions, restricts each borrower from creating or permitting the creation of any security over its assets.
The Senior Facilities Agreement contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants include the following: limitations on mergers, changes of business, acquisitions and investments, joint ventures, creation of security, disposal of assets, incurrence of financial indebtedness and issuance of dividends. Financial covenants, which are tested as at 30 April, 31 July, 31 October and 31 January, in each year, include the following: maintaining a ratio of cash flow to total debt service of no less than 1:1, maintaining a ratio of consolidated EBITDA to net interest payable within agreed parameters, maintaining a ratio of total net debt to consolidated EBITDA within agreed parameters and maintaining an aggregate capital expenditure within agreed parameters.
Upon the occurrence of a change of control or a sale of all or substantially all of the assets of the Group, all amounts outstanding under the Senior Facilities Agreement become immediately due and payable. Prior to an initial public offering, a change of control occurs if Charterhouse ceases to hold legally and beneficially at least 50 per cent. of the voting shares of the Company and the power to direct the management and policies of the Company. After any initial public offering, a change of control occurs if Charterhouse ceases to hold legally and beneficially at least 30 per cent. of the voting shares of the Company. The following events, among others, trigger an event of default under the Senior Facilities Agreement: a cross-default on any financial indebtedness of any member of the Group, enforcement of any security over the assets of the Group with a value of £750,000 and any litigation which is reasonably likely to be decided against the Group, and if so decided would be reasonably likely to have a material adverse effect.
In the event of an initial public offering that does not constitute a change of control, certain proceeds of the initial public offering received by the Company pursuant to the issue of new shares may be required to be applied to prepay outstanding amounts under the Senior Facilities as follows: (i) if leverage prior to the initial public offering exceeds 3.00:1, 100 per cent. of the initial public offering proceeds must be applied in prepayment of the Senior Facilities until leverage is reduced to 3.00:1; and (ii) to the extent that leverage prior to the initial public offering exceeds 2.50:1 but is less than or equal to 3.00:1 (taking into account applicable prepayments), 50 per cent. of the remaining initial public offering proceeds must be applied in prepayment of the Senior Facilities until leverage is reduced to 2.50:1.
The sums owed pursuant to the Senior Facilities Agreement are secured by means of a fixed charge the Group’s real property assets, investments, contracts, claims against third parties, cash, intellectual property, hedging agreements, goodwill and uncalled capital and certain other assets and by a floating charge on the Group’s assets and undertakings.
14.5 New Facilities Agreement CF Bidco Limited (a wholly owned subsidiary of the Company) entered into the New Facilities Agreement on 17 April 2014 with The Royal Bank of Scotland plc acting as agent. The Company and certain other members of the Group being required to accede to the New Facilities Agreement as guarantors on or before the closing date of the New Facilities Agreement.
183 The following facilities are made available to the Group under the New Facilities Agreement: a term loan of £180 million, which terminates in April 2019 (“New Facility A”); a revolving facility of £20 million, which terminates in April 2019 (“New Revolving Facility”); and an uncommitted accordion facility which, upon commitment, will terminate in April 2019 (“Accordion Facility”) (together, the “New Facilities”). The availability of the New Facilities is conditional upon, inter alia, Admission.
The New Facilities may be used for the following purposes:
(a) in respect of New Facility A, the repayment or prepayment of the existing Senior Facilities Agreement and any fees, costs and expenses in connection with such repayment or prepayment; and
(b) in respect of New Revolving Facility, general corporate and working capital purposes; and.
(c) in respect of the Accordion Facility, general corporate purposes, including, for the avoidance of doubt, any acquisitions and distributions (permitted or not prohibited under the New Facilities Agreement).
Drawings under the New Facilities bear interest at the aggregate of (i) a margin and (ii) LIBOR or, in relation to any loan in Euro, EURIBOR. The applicable margin depends on the relevant leverage ratio, as follows:
(a) if the leverage ratio is greater than or equal to 2.50, the applicable margin will be 2.50 per cent. per annum for New Facility A and 2.25 per cent. per annum for New Revolving Facility;
(d) if the leverage ratio is less than 2.50:1 but greater than or equal to 2.00:1, the applicable margin will be 2.25 per cent. for New Facility A and 2.00 per cent. per annum for New Revolving Facility;
(e) if the leverage ratio is less than 2.00:1 but greater than or equal to 1.50:1, the applicable margin will be 2.00 per cent. per annum for New Facility A and 1.75 per cent. per annum for New Revolving Facility;
(f) if the leverage ratio is less than 1.50:1 but greater than or equal to 1.00:1, the applicable margin will be 1.75 per cent. per annum for New Facility A and 1.50 per cent. per annum for New Revolving Facility; and
(g) if the leverage ratio is less than 1.00:1, the applicable margin will be 1.50 per cent. per annum for New Facility A and 1.25 per cent. per annum for New Revolving Facility.
The New Facilities Agreement contains customary representations and warranties.
Under the terms of the New Facilities Agreement, the Group may not incur financial indebtedness unless it is incurred in certain permitted circumstances, which include, but are not limited to, under the existing Senior Facilities Agreement (provided it is repaid when it becomes due), under unsecured subordinated loans, arising under permitted derivative transactions, under local working capital facilities of up to £1 million, under financing arrangements made available by a seller in certain acquisitions permitted (or not prohibited) under the New Facilities Agreement and, if not otherwise permitted, where the outstanding principal amount of financial indebtedness does not exceed in aggregate £30 million for the Group at any time.
The New Facilities Agreement also contains a negative pledge clause which, subject to certain exceptions, restricts each borrower or guarantor from creating or granting any security over its assets.
The New Facilities Agreement also contains other customary affirmative, financial and negative covenants. Such other negative covenants include the following: limitations on mergers, changes of business, disposal of assets and certain specific acquisitions and joint ventures. The financial covenants, which are tested as at 31 January and 31 July, in each year (commencing 31 January 2015),
184 are the following: maintaining a ratio of adjusted consolidated EBITDA to adjusted net interest payable above an agreed level and maintaining a ratio of total net debt to consolidated EBITDA below an agreed level.
The New Facilities will be required to be repaid in full with respect to a lender under a New Facility if any person or group of persons acting in concert (other than Charterhouse Capital Partners LLP, any funds managed or advised by Charterhouse Capital Partners LLP or any subsequent successors) beneficially own (directly or indirectly) issued share capital having the right to cast more than 50 per cent. of the votes capable of being cast at a general meeting of the Company, and such lender requests prepayment.
The following events, among others, trigger an event of default under the New Facilities Agreement: a cross-default on any financial indebtedness of any member of the Group equal to or above £10 million (unless it is intra-Group debt), enforcement of any security over the assets of a borrower, guarantor or material company with a value of £10 million in aggregate and any borrower, guarantor or material company is unable or admits inability to pay its debts as they fall due.
The sums owed pursuant to the New Facilities Agreement are unsecured.
15 Litigation There are no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Group is aware) during the 12 months preceding the date of this Prospectus, nor any regulatory actions imposed within the three years preceding the date of this Prospectus, which may have, or have had, a significant effect on the Company’s or the Group’s financial position or profitability.
16 Related Party Agreements Details of related party transactions entered into by members of the Group during the period covered by the financial information and up to the date of this Prospectus are set out in note 26 to the combined financial information contained in Section B (Historical financial information for the three years ended 31 January 2012, 2013 and 2014) of Part XII (Historical Financial Information). See also Section 13 (Relationship with the Principal Shareholders) and Section 14.2 (Relationship Agreement) of this Part XVI (Additional Information) and Part V (Business of the Group).
Save as set out above, and for the related party transactions set out in the financial information in note 26 to the combined financial information contained in Part XII (Historical Financial Information) and the information contained in Part V (Business of the Group), there are no related party transactions that were entered into during the period covered by the Financial Information and during the period from 31 January 2014 to 15 May 2014.
17 Working Capital In the opinion of the Company, after taking into consideration the net proceeds receivable by the Company from the Offer, the Senior Facilities and the New Facilities available to the Group, the working capital available to the Group is sufficient for the Group’s present requirements, that is for at least the next 12 months following the date of publication of this Prospectus.
18 No Significant Change There has been no significant change in the financial or trading position of the Group since 31 January 2014, the date to which the annual financial information for the Group in Section B (Historical financial information for the three years ended 31 January 2012, 2013 and 2014) of Part XII (Historical Financial Information) was prepared.
185 19 Consents KPMG LLP has given and has not withdrawn its written consent to the inclusion in this Prospectus of its reports and references to it in the form and context in which they appear being made and has authorised the contents of those parts of this Prospectus which comprise its reports for the purposes of Rule 5.5.3R(2)(f) of the Prospectus Rules. As the offered Shares have not been and will not be registered under the Securities Act, the Auditors have not filed and will not be required to file a consent under the Securities Act.
20 Takeover Code and Compulsory Acquisitions The Takeover Code is issued and administered by the Takeover Panel. The Company is subject to the Takeover Code and therefore its Shareholders are entitled to the protections afforded by the Takeover Code.
20.1 Mandatory bids Rule 9 of the Takeover Code provides that, except with the consent of the Takeover Panel, when: (a) any person acquires, whether by a series of transactions over a period of time or not, an interest in shares which (taken together with shares in which persons acting in concert with him are interested) carry 30 per cent. or more of the voting rights of a company; or (b) any person, together with persons acting in concert with him, is interested in shares which in the aggregate carry not less than 30 per cent. of the voting rights of a company but does not hold shares carrying more than 50 per cent. of such voting rights and such person, or any person acting in concert with him, acquires an interest in any other shares which increases the percentage of shares carrying voting rights in which he is interested, then, in either case, that person, together with the person acting in concert with him, is normally required to extend offers in cash, at the highest price paid by him (or any persons acting in concert with him) for shares in the company within the preceding 12 months, to the holders of any class of equity share capital, whether voting or non-voting, and also to the holders of any other class of transferable securities carrying voting rights.
As at the date of this Prospectus, the Principal Shareholders and members of their group (the “Charterhouse Group”) and companies in which the Charterhouse Group control 20 per cent. or more of the equity share capital (“Controlled Entities”) are deemed by the Takeover Panel to be parties who are acting in concert for the purposes of the Takeover Code. Following Admission, and the issuance of the Residual Management Equity, the Principal Shareholders will hold approximately 41.3 per cent. of the Company’s share capital, assuming the Over-allotment Option is not exercised, and 37.4 per cent., assuming the Over-allotment Option is exercised in full. No members of the Charterhouse Group or their Controlled Entities, other than the Principal Shareholders currently own, or will own immediately following Admission, any Ordinary Shares.
20.2 Squeeze-out Under the Companies Act 2006, if a takeover offer (as defined in section 974 of the Companies Act 2006) is made for the Ordinary Shares and the offeror were to acquire, or unconditionally contract to acquire, not less than 90 per cent. in value of the shares to which the takeover offer relates (the “Takeover Offer Shares”) and not less than 90 per cent. of the voting rights attached to the Takeover Offer Shares within three months of the last day on which its offer can be accepted, it could acquire compulsorily the remaining 10 per cent. It would do so by sending a notice to outstanding shareholders telling them that it will acquire compulsorily their Takeover Offer Shares and then, six weeks later, it would execute a transfer of the outstanding Takeover Offer Shares in its favour and pay the consideration to the Company, which would hold the consideration on trust for outstanding shareholders. The consideration offered to the shareholders whose Takeover Offer Shares are acquired compulsorily under the Companies Act 2006 must, in general, be the same as the consideration that was available under the takeover offer.
20.3 Sell-out The Companies Act 2006 also gives minority shareholders a right to be bought out in certain circumstances by an offeror who has made a takeover offer. If a takeover offer related to all the
186 Ordinary Shares and, at any time before the end of the period within which the offer could be accepted, the offeror held or had agreed to acquire not less than 90 per cent. of the Ordinary Shares to which the offer relates, any holder of Ordinary Shares to which the offer related who had not accepted the offer could by a written communication to the offeror require it to acquire those Ordinary Shares. The offeror is required to give any shareholder notice of his or her right to be bought out within one month of that right arising. The offeror may impose a time limit on the rights of the minority shareholders to be bought out, but that period cannot end less than three months after the end of the acceptance period. If a shareholder exercises his or her rights, the offeror is bound to acquire those Ordinary Shares on the terms of the offer or on such other terms as may be agreed.
21 Miscellaneous (a) The expenses of the Offer and Admission, whether incidental or otherwise, payable by the Company, including the London Stock Exchange fee, the FCA’s listing fee, professional fees and the costs of preparation, printing and distribution of documents, are estimated to amount to approximately £10.0 million (exclusive of recoverable VAT).
(b) Each Share will be offered at a premium of £2.24 to its nominal value of £0.01 each.
(c) No Shares have been marketed to, nor are available for purchase in whole or in part by, the public in the UK or elsewhere in conjunction with the Offer. This Prospectus does not constitute an offer or the solicitation of an offer to the public in the UK to subscribe for or buy any securities in the Company or any other entity.
(d) There are no arrangements in existence under which future dividends are to be waived or agreed to be waived.
(e) The information set out in this Prospectus that has been sourced from third-parties has been accurately reproduced and, so far as the Company is aware and has been able to ascertain from that published information, no facts have been omitted which would render the reproduced information inaccurate or misleading. Where third-party information has been used in this Prospectus, the source of such information has been identified.
22 Documents Available for Inspection Copies of the following documents are available for inspection during usual business hours on any weekday (Saturdays, Sundays and public holidays excepted) for the life of this Prospectus at the offices of Linklaters LLP at One Silk Street, London EC2Y 8HQ:
(a) the Articles;
(b) the reports from KPMG LLP which are set out in Section A (Accountant’s report on Historical Financial Information) of Part XII (Historical Financial Information);
(c) the letters of consent referred to in Section 19 (Consents) above; and
(d) this Prospectus.
Dated: 15 May 2014
187 PART XVII
DEFINITIONS
The following definitions apply throughout this Prospectus unless the context requires otherwise:
£ or pounds sterling the lawful currency of the UK. 2010 PD Amending Directive the 2010 EU directive which amended the Prospectus Directive (2010/73/EU). ABV average basket value. Admission the admission of the Ordinary Shares to the Official List and to trading on the London Stock Exchange’s main market for listed securities becoming effective in accordance with, respectively, the UK Listing Rules and the Admission and Disclosure Standards. Articles of Association or Articles the articles of association of the Company to take effect from, and conditional upon, Admission. Audit and Risk Committee the audit and risk committee of the Board. Auditors KPMG LLP. Board or Directors the board of directors of the Company. Business the design, production and sale of greeting cards, dressings and related gift items by the Group. CAGR compound annual growth rate. Card Crazy Card Crazy City Ltd. Cards Galore Cards Galore Limited. Cash Conversion EBITDA less capital expenditures less changes in working capital, divided by EBITDA. Cash Generation EBITDA less capital expenditures less changes in working capital. Celebration Cards Celebration Cards Limited. CEO the Group’s Chief Executive Officer, Richard Hayes. CFO the Group’s Chief Financial Officer, Darren Bryant. Chairman the chairman of the Group, Geoff Cooper. Charterhouse Charterhouse General Partners (IX) Limited. CISA Swiss Federal Act on Collective Investment Schemes. Clintons AG Retail Cards Limited trading as Clintons. Closing Date 20 May 2014. Companies Act 2006 the UK Companies Act 2006, as such act may be amended, modified or re-enacted from time to time. Company Card Factory plc. CREST the UK-based system for the paperless settlement of trades in listed securities, of which CRESTCo Limited is the operator.
188 CRESTCo Euroclear UK and Ireland Limited, the operator (as defined in the CREST Regulations) of CREST. CREST Regulations the Uncertificated Securities Regulations 2001 (SI 2001/3755). Design Studio the Group’s in-house design function. Directors the Executive Directors and Non-Executive Directors. Disclosure and Transparency Rules the disclosure rules and transparency rules produced by the FCA and forming part of the handbook of the FCA through which a manager derives its status as an authorised person under the FSMA of rules and guidance, as, from time to time, amended. EBITDA earnings before interest, tax, depreciation and amortisation. ECJ European Court of Justice. EPOS electronic point of sales. ERP enterprise resource planning system. EU the European Union. EU IFRS International Financial Reporting Standards, as adopted by the European Union. EURIBOR the Euro Interbank Offered Rate. European Economic Area or EEA the EU, Iceland, Norway and Liechtenstein. Exchange Act the United States Securities Exchange Act of 1934, as amended. Executive Directors the executive directors of the Company. Existing Shares the existing shares in the capital of the Company to be sold as part of the Offer by the Selling Shareholders. FCA the UK Financial Conduct Authority. Financial Instruments and Financial Instruments and Exchange Law of Japan. Exchange Law FINMA Swiss Financial Market Supervisory Authority FINMA. FSMA the Financial Services and Markets Act 2000, as amended. FTT financial transactions tax. Funky Pigeon Spilt Ink Studio Limited trading as Funky Pigeon. Getting Personal Getting Personal Limited. Government Her Majesty’s Government. Group the Company and its consolidated group companies from time to time and, in relation to the period prior to Admission, the Company and each of the companies and undertakings which will be subsidiaries or subsidiary undertakings of the Company at Admission. Hallmark Hallmark Cards plc. Head Office Century House, Brunel Road, Wakefield West Yorkshire, WF2 OXG United Kingdom. HMRC HM Revenue & Customs.
189 Home Bargains T.J. Morris Limited trading as Home Bargains. ICT information and communications technology. IFRS International Financial Reporting Standards. Independent Non-Executive the independent non-executive directors of the Company within the Directors meaning of the UK Corporate Governance Code. Investec Investec Bank plc. Investment Agreement the investment agreement entered into between, inter alia, the Selling Shareholders in April 2010 in relation to the investment by the Principal Shareholders into the Group which will terminate upon Admission. IRS the U.S. Internal Revenue Service. ISIN International Securities Identification Number. Joint Bookrunners Morgan Stanley, UBS and Nomura. Joint Global Co-ordinators Morgan Stanley and UBS. Joint Lead Manager Investec Bank plc. Joint Sponsors Morgan Stanley and UBS. LIBOR the London Interbank Offered Rate. Listing Rules the rules relating to admission to the Official List made in accordance with section 73A(2) of the FSMA. London Stock Exchange London Stock Exchange plc. Management members of the Company’s management team, details of whom are set out in Part VII (Directors, Management and Corporate Governance). MBO management buy-out. Member States member States of the EU. Model Code the Model Code in the Listing Rules. Moonpig Moonpig Limited. Morgan Stanley Morgan Stanley Securities Limited or Morgan Stanley & Co. International plc, as applicable. National Distribution Centre the Group’s storage and distribution centre in Wakefield, Yorkshire, which extends across four separate warehouse facilities. National Insurance system of contributors paid by the UK employees to build up entitlement to certain state benefits, including the State Pension. New Facilities the facilities made available pursuant to the New Facilities Agreement. New Facilities Agreement the senior facilities agreement entered into by CF Bidco Limited with The Royal Bank of Scotland plc acting as agent, dated 17 April 2014 and conditional upon Admission. New Shares the new shares in the capital of the Company to be allotted and issued under the Offer.
190 Nomination Committee the nomination committee of the Board. Nomura Nomura International plc. Non-Executive Directors the non-executive directors of the Company. OC&C OC&C Strategy Consultants LLP. Offer or Offering the offer of Ordinary Shares by the Company to institutional and other investors in the UK and elsewhere described in Part XIV (Details of the Offer). Offer Price the price at which each Share is to be issued or sold under the Offer, being 225 pence. Official List the Official List of the UK Listing Authority. Ordinary Shares the ordinary shares in the capital of the Company, issued and to be issued, to be admitted to the premium listing segment of the Official List and to the London Stock Exchange’s main market for listed securities. Over-allotment Option the option granted to the Stabilising Manager by the Principal Shareholders to purchase, or procure purchasers for, up to 13,183,404 additional Ordinary Shares, as more particularly described in Part XIV (Details of the Offer). Over-allotment Shares the Ordinary Shares to be offered pursuant to the Over-allotment Option. Paperchase Paperchase Limited. PFIC a passive foreign investment company for U.S. federal income tax purposes. Poundland Poundland Group plc. Pre-IPO Reorganisation the pre-IPO reorganisation described in Section 4 (Pre-IPO Reorganisation) of Part XVI (Additional Information). Principal Shareholders CCP IX LP No.1, CCP IX LP No.2 and CCP IX Co-Investment LP each acting through its general partner, Charterhouse General Partners (IX) Limited. Printcraft Printcraft Limited. Pro Forma Financial Information pro forma financial information which has been extracted without material adjustment from the unaudited pro forma financial information contained in Part XIII (Unaudited Pro Forma Financial Information). Prospectus this document, which constitutes the prospectus used in connection with the application for admission by way of a premium segment of the Official List of the FCA and admission to trading on the London Stock Exchange’s main market for listed securities. Prospectus Directive the EU Prospectus Directive (2003/71/EC), including any relevant implementing measure in each member state of the European Economic Area that has implemented Directive 2003/71/EC. Prospectus Rules the rules for the purposes of Part VI of the FSMA in relation to offers of securities to the public and the admission of securities to trading on a regulated market.
191 qualified institutional buyers or has the meaning given by Rule 144A under the Securities Act. QIBs Register of Members the register of members of the Company. Registrar Equiniti Limited. Regulation S Regulation S under the Securities Act. Relationship Agreement the relationship agreement between the Company and the Principal Shareholders dated 15 May 2014. Relevant Member State a Member State which has implemented the Prospectus Directive. Remuneration Committee the remuneration committee of the Board. Reporting Accountants KPMG LLP. Residual Management Equity an aggregate of 4,375,000 Ordinary Shares expected to be issued and allotted to certain current and former members of Management soon after Admission, relating to management entitlements set out in the Investment Agreement. ROCE return on capital employed. Royal Mail Royal Mail plc. Rule 144A Rule 144A under the Securities Act. SDRT UK stamp duty reserve tax. Seasonal Workers temporary seasonal sales assistants. SEC the United States Securities and Exchange Commission. Securities Act the United States Securities Act of 1933, as amended. SEDOL Stock Exchange Daily Official List. Selling Shareholders the Principal Shareholders and certain individual shareholders comprising current and former members of Management to the extent that such persons elect to dispose of their Shares as part of the Offer. Senior Facilities the existing facilities made available pursuant to the Senior Facilities Agreement to be repaid in full within four weeks of Admission. Senior Facilities Agreement the senior facilities agreement entered into by CF Bidco Limited with The Royal Bank of Scotland plc acting as agent, originally dated 28 May 2010, amended on 1 June 2010 and amended and restated pursuant to an amendment and restatement agreement dated 10 October 2013. Shareholders the holders of Ordinary Shares in the capital of the Company. Shares the New Shares and the Existing Shares. SIX SIX Swiss Exchange. Stabilising Manager Morgan Stanley Securities Limited. subsidiary has the meaning given to it in section 1159 of the Companies Act 2006 and includes group companies included in the consolidated financial statements of the Group from time to time.
192 Takeover Code the UK Takeover Code on Takeover and Mergers (as amended from time to time). Takeover Panel or Panel the Panel on Takeovers and Mergers. Treasury Regulations Treasury (Tax) Regulations, which provide the official interpretation of all the Internal Revenue Code by the U.S. Department of the Treasury. Treaty the income tax treaty between the United States and the UK. UBS or UBS Investment Bank UBS Limited. UK Corporate Governance Code the UK Corporate Governance Code published by the Financial Reporting Council in September 2012. UK GAAP UK generally accepted accounting principles. UK Listing Authority or UKLA the FCA in its capacity as the competent authority for the purposes of Part VI of the FSMA. Underwriters Morgan Stanley, UBS, Nomura and Investec. Underwriting Agreement the underwriting agreement expected to be entered into between the Company, the Directors, the Selling Shareholders and the Underwriters described in Section 14.1 (Underwriting Agreement) of Part XVI (Additional Information). UK the United Kingdom of Great Britain and Northern Ireland. United States or U.S. the United States of America, its territories and possessions, any State of the United States of America, and the District of Columbia. U.S. Holder a beneficial owner of Ordinary Shares that is, for U.S. federal income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation created or organised under the laws of the United States or any state thereof, (iii) an estate the income of which is subject to U.S. federal income tax without regard to its source or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or the trust has elected to be treated as a domestic trust for U.S. federal income tax purposes. U.S.$, $ or U.S. Dollars the lawful currency of the United States. VAT value added tax. WH Smith WH Smith plc. Wilkinsons Wilkinson Hardware Stores Limited.
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