Carphone Warehouse Group plc (formerly New Carphone Warehouse PLC) Company registration No. 07105905 Summary Financial Information for the year ended 31 March 2010
Carphone Warehouse Group plc (“the Group”) is not required to produce full financial statements for the year ended 31 March 2010.
For the purpose of providing comparative information for the Group’s first full year to 31 March 2011, non-statutory consolidated results for the Group for the year ended 31 March 2010 have been produced. The Summary Financial Information for the year ended 31 March 2010 has been extracted without material adjustment from those consolidated results. The consolidated results have been audited by the Group’s auditors, Deloitte LLP. The Summary Financial Information has been produced using the accounting policies detailed in Appendix 1. Various terms used in this document are defined in Appendix 2.
Carphone Warehouse Group plc
Consolidated Income Statement For the years ended 31 March 2010 and 31 March 2009
Before After amortisation Amortisation amortisation of acquisition of acquisition of acquisition intangibles intangibles intangibles and and and Before After exceptional exceptional exceptional exceptional Exceptional exceptional items items* items items items* items
2010 2010 2010 2009 2009 2009
Notes £m £m £m £m £m £m
Revenue 1 5.5 - 5.5 5.1 - 5.1 Cost of sales ------Gross profit 5.5 - 5.5 5.1 - 5.1
Operating expenses 2 (6.0) - (6.0) (4.8) (5.5) (10.3) Share of results of joint ventures 1,2,5 39.1 (0.6) 38.5 20.2 (23.1) (2.9) Profit (loss) before investment income, interest and taxation 38.6 (0.6) 38.0 20.5 (28.6) (8.1) Investment income 2 - 182.0 182.0 - - - Interest expense (5.3) - (5.3) (16.4) - (16.4) Interest income 3.7 - 3.7 13.2 - 13.2 Profit (loss) before taxation 37.0 181.4 218.4 17.3 (28.6) (11.3) Taxation 0.4 - 0.4 1.0 - 1.0
Net profit (loss) for the year 37.4 181.4 218.8 18.3 (28.6) (10.3)
All amounts relate to continuing operations. * A reconciliation of Headline results to statutory results is provided in note 3.
Earnings per share
Basic 4 8.3p 48.7p 4.1p (2.3)p
Diluted 4 8.2p 47.8p 4.0p (2.3)p
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Consolidated Statement of Comprehensive Income For the years ended 31 March 2010 and 31 March 2009
2010 2009 £m £m Net profit (loss) for the year 218.8 (10.3) Currency translation 4.2 22.1 Net change in available-for-sale investments - 1.5 Total recognised income and expenses for the year 223.0 13.3
Consolidated Statement of Changes in Equity For the year ended 31 March 2010
Share Share premium Accumulated Translation Demerger capital reserve profits reserve reserve Total £m £m £m £m £m £m At the beginning of the year - - 457.8 7.9 (51.8) 413.9 Total recognised income and expenses for the year - - 218.8 4.2 - 223.0 Issue of share capital 0.5 754.0 - - (754.5) - Net movements in relation to share schemes - - (1.5) - - (1.5) Movements in demerger reserve - - - - 55.1 55.1 At the end of the year 0.5 754.0 675.1 12.1 (751.2) 690.5
For the year ended 31 March 2009
Share Share premium Accumulated Translation Demerger capital reserve profits reserve reserve Total £m £m £m £m £m £m At the beginning of the year - - 464.1 (14.2) (24.0) 425.9 Total recognised income and expenses for the year - - (8.8) 22.1 - 13.3 Net movements in relation to share schemes - - 1.0 - - 1.0 Share of other reserve movements in joint ventures - - 1.5 - - 1.5 Movements in demerger reserve - - - - (27.8) (27.8) At the end of the year - - 457.8 7.9 (51.8) 413.9
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Consolidated Balance Sheet As at 31 March 2010 and 31 March 2009
Notes 2010 2009 £m £m
Non-current assets Property, plant and equipment 65.9 65.8 Non-current asset investments 0.1 0.2 Interests in joint ventures 5 541.8 469.7 Loans to related parties 6 - 293.3 Deferred tax assets 0.8 0.2 608.6 829.2
Current assets Trade and other receivables 5.6 1.5 Cash and cash equivalents 100.0 - 105.6 1.5 Total assets 714.2 830.7
Current liabilities Trade and other payables (10.1) (3.2) Provisions (13.6) (16.2) (23.7) (19.4)
Non-current liabilities Loans from related parties 6 - (397.4) - (397.4) Total liabilities (23.7) (416.8) Net assets 690.5 413.9
Equity Share capital 0.5 - Share premium reserve 754.0 - Accumulated profits 675.1 457.8 Translation reserve 12.1 7.9 Demerger reserve (751.2) (51.8) Funds attributable to equity shareholders 690.5 413.9
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Consolidated Cash Flow Statement For the years ended 31 March 2010 and 31 March 2009
Notes 2010 2009 £m £m Operating activities
Profit (loss) before investment income, interest and taxation 38.0 (8.1) Adjustments for non-cash items: Share-based payments 2.4 1.0 Non-cash movements on joint ventures (38.5) 2.9 Depreciation 0.7 0.8 Impairment of non-current asset investments 0.1 5.5 Operating cash flows before movements in working capital 2.7 2.1
Increase in trade and other receivables (0.6) (1.2) Increase in trade and other payables 3.0 1.2 Decrease in provisions (2.6) - Cash flows from operating activities 2.5 2.1
Investing activities
Dividends received 182.0 - Interest received 3.7 13.2 Acquisition of property, plant and equipment (0.8) (1.0) Investment in joint ventures (32.4) (47.2) Cash flows from investing activities 152.5 (35.0)
Financing activities
Movement on loans from TalkTalk Group 6 (397.4) 384.2 Movement on loans to / from Best Buy Europe 6 293.3 (360.3) Interest paid (5.3) (16.4) Cash flows relating to movements in the demerger reserve 54.4 25.4 Cash flows from financing activities (55.0) 32.9
Net increase in cash and cash equivalents 100.0 - Cash and cash equivalents at the start of the year - - Cash and cash equivalents at the end of the year 100.0 -
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1 Segmental reporting Segmental results are analysed as follows:
Investment Virgin Mobile properties and Best Buy Europe France central functions Total (see note 5) (see note 5) £m £m £m £m 2010 Revenue - - 5.5 5.5 Headline EBIT before share of results of joint ventures - - (0.5) (0.5) Headline share of results of joint ventures 47.3 (8.2) - 39.1 Headline EBIT 47.3 (8.2) (0.5) 38.6 Amortisation of acquisition intangibles - (0.6) - (0.6) Statutory EBIT (segment results) 47.3 (8.8) (0.5) 38.0
Investment Virgin Mobile properties and Best Buy Europe France central functions Total (see note 5) (see note 5) £m £m £m £m 2009 Revenue - - 5.1 5.1 Headline EBIT before share of results of joint ventures - - 0.3 0.3 Headline share of results of joint ventures 28.6 (8.4) - 20.2 Headline EBIT 28.6 (8.4) 0.3 20.5
Exceptional items (see note 2) (23.1) - (5.5) (28.6) Statutory EBIT (segment results) 5.5 (8.4) (5.2) (8.1)
2 Exceptional items The following items have been disclosed separately given their size and one-off nature:
2010 2009 £m £m Operating expenses - (5.5) Share of results of joint ventures - (23.1) Investment income 182.0 -
During the year ended 31 March 2010, as part of the Demerger, the Group received dividends of £182.0m from CPWG. These dividends do not reflect the ongoing operations of the Group and have therefore been disclosed separately. During the year ended 31 March 2009, the Group’s wireless internet investments were fully impaired, resulting in a charge of £5.5m through operating expenses. Additionally in the year ended 31 March 2009, Best Buy Europe undertook various reorganisation programmes, which resulted in store disposal costs, stock de-ranging costs, and various redundancy and other restructuring costs, together totalling £57.3m. A tax credit of £11.0m was recognised against these costs, and the Group’s share of the post-tax cost was £23.1m.
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3 Reconciliation of Headline results to statutory results
2010
Profit before investment Profit income, interest before Net profit and taxation taxation for the year £m £m £m Headline results 38.6 37.0 37.4 Amortisation of acquisition intangibles (0.6) (0.6) (0.6) Exceptional items (see note 2) - 182.0 182.0 Statutory results 38.0 218.4 218.8
2009
Profit (loss) before investment Profit (loss) Net profit income, interest before (loss) and taxation taxation for the year £m £m £m Headline results 20.5 17.3 18.3 Exceptional items (see note 2) (28.6) (28.6) (28.6) Statutory results (8.1) (11.3) (10.3)
Headline information is provided because the Directors consider that it provides assistance in understanding the Group’s underlying performance.
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4 Earnings per share
2010 2009
Headline earnings (£m) 37.4 18.3 Statutory earnings (£m) 218.8 (10.3)
Weighted average number of shares (millions) Average shares in issue 457.1 457.1 Less average holding by Group ESOT (see note 8) (7.8) (11.0) For basic earnings per share 449.3 446.1 Dilutive effect of share options 8.4 9.9 For diluted earnings per share 457.7 456.0
Basic pence per share 2010 2009
Headline 8.3 4.1 Statutory 48.7 (2.3)
Diluted pence per share 2010 2009
Headline 8.2 4.0 Statutory 47.8 (2.3)
The number of shares that could be issued under share option schemes but that are not considered to be dilutive at 31 March 2010 was 5.9m (2009: 10.6m). No dilution has been assumed in relation to the VES (see note 7), as ultimate performance cannot yet be determined. As the Company did not exist during the years ended 31 March 2010 and 31 March 2009 in the form that arose on Demerger, the average actual shares in issue during this period do not provide a meaningful basis for calculating EPS. EPS has therefore been calculated based on the number of CPWG shares in issue and the shareholding of the Old Carphone Warehouse ESOT during these years, adjusted for the fact that following the Demerger two shares in CPWG were replaced with one share in the Company. Diluted EPS has been calculated based on options held over CPWG shares during these years and the Old Carphone Warehouse share price, adjusted for the two to one ratio noted above.
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5 Interests in joint ventures Interests in joint ventures are as follows:
2010 2009 Business Principal activities Country of incorporation interest interest Best Buy Europe Retail, distribution, insurance, MVNO England and Wales 50.0% 50.0% Virgin Mobile France MVNO England and Wales 47.5% 48.5%
The Group’s interests in joint ventures are analysed as follows:
2010
Net assets Goodwill Loans Total £m £m £m £m Opening balance 339.5 108.5 21.7 469.7 Additions 2.6 - - 2.6 Loans provided (net) - - 29.8 29.8 Share of results 38.5 - - 38.5 Foreign exchange 4.1 (2.2) (0.7) 1.2 Closing balance 384.7 106.3 50.8 541.8
Best Buy Europe 406.3 106.3 - 512.6 Virgin Mobile France (21.6) - 50.8 29.2 Closing balance 384.7 106.3 50.8 541.8
2009
Net assets Goodwill Loans Total £m £m £m £m Opening balance 332.7 95.7 12.1 440.5 Additions 38.4 - - 38.4 Loans provided (net) - - 8.8 8.8 Share of results (2.9) - - (2.9) Share of movements in demerger reserve (36.6) - - (36.6) Share of movements in other reserves 1.5 - - 1.5 Foreign exchange 6.4 12.8 0.8 20.0 Closing balance 339.5 108.5 21.7 469.7
Best Buy Europe 355.0 108.5 - 463.5 Virgin Mobile France (15.5) - 21.7 6.2 Closing balance 339.5 108.5 21.7 469.7
A revolving credit facility of £125m is provided to Best Buy Europe equally by the Company and Best Buy; at 31 March 2010 no amounts were drawn under this facility. The Company and Best Buy provide further financial support to Best Buy Europe under a letter of support where both companies are committed to providing further funding to a maximum of £50m each. Prior to the Demerger, loans were provided by the Company to Best Buy Europe under a £475m RCF. Loans are provided to Virgin Mobile France under a shareholder agreement; funding requirements are agreed between the shareholders on a regular basis and are provided in proportion to each party’s shareholding.
On 10 December 2009, Financom S.A.S. subscribed for new shares to take its shareholding in Virgin Mobile France from 3.0% to 5.0%. As a result, the Company’s share in Virgin Mobile France was reduced to 47.5%. On 14 December 2009, Virgin Mobile France completed the acquisition of Tele2 France for net cash consideration of £43.8m, giving rise to acquisition intangibles of £17.4m and goodwill of £45.9m.
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The Group’s share of the results of its joint ventures is as follows:
Best Buy Europe 2010 2009 £m £m
Revenue 3,528.8 3,562.6 Headline EBITDA 231.7 185.3 Depreciation and amortisation (91.9) (87.3) Headline EBIT 139.8 98.0 Net interest expense (16.3) (11.9) Taxation on Headline results (28.9) (28.9) Headline profit after taxation 94.6 57.2 Exceptional items - (57.3) Taxation on exceptional items - 11.0 Profit after taxation 94.6 10.9
Group share of Best Buy Europe profit after taxation 47.3 5.5
Virgin Mobile France 2010 2009 £m £m
Revenue * 232.8 138.9 Headline EBITDA (19.3) (20.2) Depreciation and amortisation (2.9) (2.5) Headline EBIT (22.2) (22.7) Net interest expense (1.5) (1.4) Taxation on Headline results 5.1 6.7 Headline loss after taxation (18.6) (17.4) Amortisation of acquisition intangibles (1.2) - Loss after taxation (19.8) (17.4)
Group share of Virgin Mobile France loss after taxation before change in share ownership (9.6) (8.4) Gain on reduction of % share ownership 0.8 - Group share of Virgin Mobile France loss after taxation (8.8) (8.4)
Total Group share of results of joint ventures 38.5 (2.9)
* The revenue figures above exclude contributions towards subscriber acquisition costs from network operators and customers, to simplify presentation. These items, which have a value of £41.6m in the year ended 31 March 2010 (2009: £70.9m), are netted off against acquisition costs within EBITDA.
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The Group’s share of the assets and liabilities of its joint ventures is as follows:
Best Buy Europe 2010 2009 £m £m
Non-current assets 559.6 583.4 Cash and overdrafts (net) 175.3 246.3 Loans from the Group - (293.3) Other borrowings (117.9) - Other assets and liabilities (net) 195.5 173.5 Net assets 812.5 709.9
Group share of Best Buy Europe net assets 406.3 355.0
Virgin Mobile France 2010 2009 £m £m
Non-current assets 100.8 36.4 Cash and overdrafts (net) 17.4 16.0 Loans from the Group (50.8) (21.7) Other borrowings (54.8) (23.0) Other assets and liabilities (net) (58.0) (39.7) Net liabilities (45.4) (32.0)
Group share of Virgin Mobile France net liabilities (21.6) (15.5)
Total Group share of net assets of joint ventures 384.7 339.5
There are no material contingent liabilities in relation to the Group’s joint ventures. Best Buy Europe had capital commitments at 3 April 2010 of £11.0m (2009: £8.0m). Within the cash and overdrafts of Best Buy Europe, £65.0m (2009: £108.0m) is held by its insurance business to cover regulatory reserve requirements; these funds are not available to offset other Best Buy Europe borrowings.
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6 Analysis of changes in Group funding
2010 Opening Cash flows Closing £m £m £m
Cash and cash equivalents - 100.0 100.0 Loans from TalkTalk Group (397.4) 397.4 - Loans to Best Buy Europe 293.3 (293.3) - (104.1) 204.1 100.0
2009 Opening Cash flows Closing £m £m £m
Loans from TalkTalk Group (13.2) (384.2) (397.4) Loans (from) to Best Buy Europe (67.0) 360.3 293.3 (80.2) (23.9) (104.1)
£50m revolving credit facility The Group has a committed RCF of £50m, which matures in July 2012. The interest rate payable in respect of drawings under this facility is at a margin over LIBOR for the relevant period. A commitment fee is payable in respect of amounts available but undrawn under this facility. Although no covenants based on Group performance are included in the RCF, it is a requirement of the facility that certain covenants relating to BBED’s £350m Receivables Financing Agreement have been achieved; this was the case at the year end. This facility was undrawn at 31 March 2010.
7 Share options and other incentive plans In the years prior to the Demerger, CPWG issued equity settled share-based payments to certain employees of Best Buy Europe, TalkTalk Group and the Group, and since the Demerger the Company has issued equity settled share-based payments to certain employees of the Group. With the exception of share schemes which lapsed due to the Demerger, following the Demerger all shares and share options in CPWG were cancelled and replaced with shares and share options in the Company and TalkTalk. Share and option holders received 2 shares or share options in TalkTalk and 1 share or share option in the Company for every 2 shares or share options previously held in CPWG. The following analysis includes options in the Company held by employees and former employees of Best Buy Europe, TalkTalk Group and the Group. The WAEP for each scheme has been restated to reflect the Demerger, with the WAEP for CPWG allocated between the Company and TalkTalk based on their respective market capitalisations in the 60 days following the Demerger. Share options on material schemes that remained unexercised at 31 March 2010 were as follows:
Weighted average Vested but remaining Unvested unexercised WAEP contractual life
million million £ Years
Performance Share Plan 3.6 3.1 - 6.6
Executive Share Option Scheme - 2.6 0.95 1.8
Other CPWG schemes 3.6 - 0.74 8.7
Carphone Warehouse Group plc Long-Term Incentive Plan 1.4 - 1.35 10.0
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Performance Share Plan CPWG had a Performance Share Plan which used share options to provide long-term incentives to senior management of Old Carphone Warehouse. Awards made under the Performance Share Plan in the years ended 31 March 2007 and 29 March 2008 are subject to TSR performance targets and are measured over an initial performance period to 4 June 2010 and a subsequent performance period to 4 June 2011. Executive Share Option Scheme CPWG had an Executive Share Option Scheme under which share options were issued at market value in previous years. All Executive Share Option Scheme options have already vested. Other CPWG schemes Market priced options were granted during the year ended 31 March 2009 by CPWG to certain senior employees within Old Carphone Warehouse. These awards are subject to internal performance conditions, principally in relation to earnings and cash generation, over a period to March 2010. Carphone Warehouse Group plc Long-Term Incentive Plan 2010 In March 2010 the Group made awards under a Long-Term Incentive Plan, which uses share options to provide long-term incentives to employees of the Group. The options were granted at market price and are subject to TSR performance targets and are measured over a performance period to 29 March 2013. An average annual TSR of at least 20% is required for all options in the scheme to vest. Subject to performance, 60% of options will vest on 29 March 2013, with the remaining 40% vesting on 29 March 2014.
Value enhancement schemes Prior to the Demerger, CPWG introduced two value enhancement schemes to provide long-term incentives to its senior management group in relation to its principal businesses, TalkTalk Group and Best Buy Europe. CPWG Best Buy Europe VES The CPWG Best Buy Europe VES enables participants to share in up to 2.24% of any increase in the value of Best Buy Europe over an opening valuation determined by the CPWG board as at 1 April 2009. The incremental value is measured after a minimum annual rate of return of 7% on this valuation. The Group advanced loans totalling £4.9m to participants to enable them to purchase A shares in CPW Retail Holdings Limited, which holds part of the Group’s investment in BBED. The value of the VES pool is adjusted on vesting for any change in the Company’s share price since 6 April 2009. The Company’s opening share price for this purpose represents an allocation of the share price of CPWG at that date, based on the market capitalisations of the Company and TalkTalk in the 5 days following Demerger. The Company has an obligation to acquire these shares if performance conditions are met, to provide participants with the share of value described above. It is intended that the Company’s shares would be used as consideration for this purpose. Performance is measured over an initial performance period to July 2013, at which point participants have a put option over 60% of their shares, and a subsequent performance period to July 2014, at which point participants have a put option over the remainder of their shares. On a change of control, VES shares may vest early if the relevant performance conditions have been achieved. Loans are ordinarily repayable in full if performance conditions are met. If performance conditions are not met or a participant leaves the scheme before vesting, the VES shares are transferred to the Group for the lower of market value at that date and the value of the participant’s outstanding loan. If market value at the date of transfer is lower than the value of the loan, the participant will ordinarily be required to repay 20% of the difference. At 31 March 2010, all of the shares in the CPWG Best Buy Europe VES pool had been issued to senior management. CPWG TalkTalk Group VES The Group also advanced loans totalling £2.6m to certain participants in the CPWG TalkTalk Group VES. This scheme has a similar structure to the CPWG Best Buy Europe VES, but the value of the scheme is dependent on the performance of the TalkTalk Group, and the obligation to acquire the VES shares lies with TalkTalk rather than the Company.
Joint venture incentive schemes BBED VES BBED also introduced a VES during the year, to provide long-term incentives to senior management. The scheme enables participants to share in incremental profits generated by Best Buy Europe over a base defined in respect of the year to 3 April 2010, with the percentage of incremental profits varying by Best Buy Europe division. Participants acquired A and B shares in BBED. The Company and Best Buy jointly have an obligation to acquire these shares if certain performance conditions are met. These performance conditions are measured over a performance period to March 2014. Virgin Mobile France share schemes Senior management of Virgin Mobile France hold warrants that give them the right to acquire up to an additional 8.5% of the issued share capital of the business, at a price based on the value of existing shareholder funding and an additional amount which increases with the quantity of shares being acquired. Virgin Mobile France has also issued market priced share options to certain employees of the business, which would be settled with ordinary shares in Virgin Mobile France if exercised.
8 Employee Share Ownership Trust The Group has an ESOT which held 5.2m shares in the Company at 31 March 2010 (2009: 11.1m) for the benefit of the employees of the Group and Old Carphone Warehouse. The ESOT has waived its rights to receive dividends and none of its shares has been allocated to specific schemes. At 31 March 2010 the shares had a market value of £8.3m (2009: £11.6m).
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Appendix 1 – Basis of preparation and accounting policies a) Basis of preparation The Company is incorporated in the United Kingdom. The Company was incorporated on 15 December 2009, and will be preparing its first annual report for the period ending 31 March 2011. The information herein will be used for the purposes of the comparative financial information in the Group’s first annual report. The consolidated non-statutory financial statements of the Group have been prepared on a going concern basis in accordance with IFRS as applied in accordance with the provisions of the Companies Act 2006 and Article 4 of the IAS Regulation as if they were statutory financial statements. The consolidated financial information has been prepared on the historical cost basis, except for the revaluation of certain financial instruments and investments. The financial information is presented in UK Sterling. The principal accounting policies adopted are set out below. Going Concern At 31 March 2010, the Group had cash and cash equivalents of £100m and undrawn committed borrowing facilities of £50m. The Directors have reviewed the future cash forecasts and financial projections of the Group, which they consider to be based on prudent market data and past experience. The Directors are of the opinion that the forecasts and projections, which reflect both the current uncertain economic outlook and reasonably possible changes in trading performance, show that the Group should be able to operate within its facilities and comply with its banking covenants. In arriving at this conclusion the Directors were mindful that the Group has significant cash and cash equivalents, and borrowing facilities which are committed to until 2012. Accordingly the Directors have a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future and consequently the Directors continue to adopt the going concern basis in the preparation of the financial information. Presentation of the Group – general On 26 March 2010, the Demerger of Old Carphone Warehouse was effective, resulting in the formation of the Group and TalkTalk Group. Following the Demerger, the Group comprised investments in two joint ventures, Best Buy Europe and Virgin Mobile France, and various other investments, including freehold properties.
The consolidated financial information has been prepared with the objective of presenting the results, net assets and cash flows of the Group in the form that arose on completion of the Demerger, as if it had been a standalone business during the year ended 31 March 2010.
The consolidated financial information has been prepared by aggregating the financial accounts of the companies and assets that comprised the Group following the Demerger. Any assets and liabilities held within the consolidation of Old Carphone Warehouse that relate to the Group have been reflected in this financial information, as though they had always formed part of the Group. The principles of IAS 27 ‘Consolidated and Separate Financial Statements’ and SIC 12 ‘Consolidation — Special Purpose Entities’ have been applied in determining the companies and assets to be combined and the principles to be followed.
Certain operating expenses relating to the operations of the Group arose in companies that did not form part of the Group on completion of the Demerger. Included within such costs are certain central operating expenses that were borne during the year by CPWG, which formed part of TalkTalk Group following the Demerger. A proportion of these costs has been allocated to the Group using a basis of allocation consistent with the nature of the cost. In particular, the costs of the CPWG board and key management have been allocated between TalkTalk Group and the Group to reflect as far as possible the split of management responsibilities following the Demerger. These allocations do not necessarily reflect the results that the Group might have had if it had been a separate, standalone group during this time. As any such cost allocations did not result in cash payments, they are offset by an entry in the demerger reserve, and are reflected in the cash flow statement within “cash flows relating to movements in the demerger reserve”.
Additionally, as the Group was not a standalone business during the year, certain cash flows that relate to the operations of the Group actually arose in companies that formed part of TalkTalk Group following the Demerger. As such cash flows are not reflected in the companies that comprise the Group, they are reflected within “cash flows relating to movements in the demerger reserve” in the cash flow statement.
Presentation of the Group — financing arrangements During the year, CPWG provided funding to various companies within the Group. This financial information reflects the historical loans and deposits within the Group, adjusted where necessary for transactions required to form the Group. Adjustments have also been made to present the funding of the Group’s joint ventures as though it had been made via the Company, to reflect the ongoing structure of their funding, although the funding was in fact provided directly by CPWG. Where such adjustments have been made, interest income and expense has been adjusted for the interest on joint venture loans so as to recognise this in the Group, and will therefore not necessarily be representative of the interest income and expense that would have arisen had the Group been a separate, standalone group during this time.
Presentation of the Group — other In the years prior to the Demerger, CPWG issued equity settled share-based payments to certain employees of its subsidiaries and of Best Buy Europe. The financial information reflects a share-based payment charge where employees of the Group benefited from the incentives.
Taxation has been allocated in the income statement to reflect as far as possible the underlying tax position in each business. Any group relief provided between companies in the Old Carphone Warehouse corporation tax group is therefore treated as having been charged, even if such charges were not made. As the Group did not exist in the year on a separate, standalone basis, the taxation reflected in the financial information is not necessarily representative of the position if it had been, or of the position in the future.
Following the Demerger, shareholders of CPWG received two shares in TalkTalk and one share in the Company for every two shares in CPWG. As the Group received no compensation for the issue of these shares, the recognition of the share capital and share premium has been offset by an entry in the demerger reserve.
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As the Company did not exist during the years ended 31 March 2010 and 31 March 2009 in the form that arose on Demerger, the average actual shares in issue during the period do not provide a meaningful basis for calculating EPS. EPS has therefore been calculated based on the number of CPWG shares in issue and the shareholding of the Old Carphone Warehouse ESOT during these years, adjusted for the fact that following the Demerger two shares in Old Carphone Warehouse were replaced with one share in the Company. Diluted EPS has been calculated based on options held over CPWG shares during the period and the Old Carphone Warehouse share price, adjusted for the two to one ratio noted above. The analysis of share options and ESOT holdings in this financial information also reflects this share consolidation.
Joint ventures Where necessary, adjustments are made to the financial statements of joint ventures to bring accounting policies used into line with those used by the Group. The accounting policies below also relate to those used by joint ventures of the Group. b) Basis of consolidation The financial information reflects the Group’s results for the year from 1 April 2009 to 31 March 2010 and comparative information for the period from 30 March 2008 to 31 March 2009. Best Buy Europe reports to a retail calendar, whereby its year end date is the Saturday closest to 31 March. As such its results for the year ended 31 March 2010 cover the 52 weeks ended 3 April 2010 and its results for the year ended 31 March 2009 cover the 53 weeks ended 4 April 2009. The results of subsidiaries and joint ventures acquired or sold during the year are included from or to the date on which control or significant influence passed, except as described above in relation to accounting for the Demerger. Intercompany transactions and balances between subsidiaries are eliminated on consolidation. In accordance with UITF 38 ‘Accounting for Employee Share Ownership Plan (ESOP) Trusts’, shares in the Company held by the Group’s ESOT are shown as a reduction in shareholders’ funds. Other assets and liabilities held by the Group’s ESOT are consolidated with the assets of the Group. c) Foreign currency translation and transactions Material transactions in foreign currencies are hedged using forward purchases or sales of the relevant currencies and are recognised in the financial information at the exchange rates thus obtained. Unhedged transactions are recorded at the exchange rate on the date of the transaction. Material monetary assets and liabilities denominated in foreign currencies are hedged, mainly using forward foreign exchange contracts to create matching liabilities and assets, and are retranslated at each balance sheet date. Hedge accounting as defined by IAS 39 ‘Financial Instruments: Recognition and Measurement’ has been applied by marking to market the relevant financial instruments at the balance sheet date and recognising the gain or loss in reserves in respect of cash flow hedges, and through the income statement in respect of fair value hedges. Financial instruments are also used for the purposes of net investment hedging. Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges in that the gain or loss on the effective portion of the hedges is recognised in equity, while any gains or losses on any ineffective portion is recognised immediately in the income statement. In May 2010 the Group discontinued net investment hedging in order to avoid exposure to potential cash volatility on the associated hedges. The results of overseas operations are translated at the average foreign exchange rates for the year, and their balance sheets are translated at the rates prevailing at the balance sheet date. Exchange differences arising on the translation of opening net assets, goodwill and results of overseas operations are recognised in the translation reserve. All other exchange differences are included in the income statement. The principal exchange rates against UK Sterling used in this financial information are as follows:
Average Closing 2010 2009 2010 2009 Euro 1.13 1.21 1.12 1.08 Swiss Franc 1.69 1.89 1.60 1.63 United States Dollar 1.60 1.73 1.52 1.43 Swedish Krona 11.65 12.08 10.92 11.85
If a foreign operation is sold, the gain or loss on disposal recognised in the income statement is determined after taking into account the cumulative currency translation differences that are attributable to the operation. d) Revenue Revenue comprises rental income on investment properties and is stated net of VAT and other sales related taxes. All such revenue is recognised as the services are provided. The following accounting policies are applied to revenue arising in the Group’s joint ventures: • revenue arising on the sale of mobile and other products and services is recognised when the relevant products or services are provided; • commission receivable on sales, being commission which is contractually committed, and for which there are no ongoing performance criteria, is recognised when the sales to which the commission relates are made, net of any provision for promotional offers and network operator performance penalties. Commission includes a share of customer airtime spend, to the extent that it can be reliably measured and there are no ongoing service obligations. Where the time value of money has a material impact, an appropriate discount is applied such that revenue is recognised at an amount equal to the present value of the future consideration received. The unwinding of this discount is recognised within EBITDA; • other ongoing revenue, including customer retention and customer spend bonuses, is recognised as it is earned over the lives of the relevant customers; • volume bonuses receivable from network operators are recognised when the conditions on which they are earned have been met; • volume bonuses received from suppliers of products are recognised as an offset to product cost when the conditions on which they are earned have
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been met, and are recognised within cost of sales when the products to which the volume bonuses relate have been sold; • insurance premiums are typically paid monthly or quarterly in advance. Initial administration fees, which are specified in the contract, are recognised at the point of sale; insurance premium income is recognised over the lives of the relevant policies; • revenue from the sale of prepaid credits is deferred until the customer uses the airtime or the credit expires; • revenue generated from the provision of fixed and mobile network services is recognised as it is earned over the lives of the relevant customers; • all other revenue is recognised when the relevant goods or services are provided. e) Share-based payments In the years prior to the Demerger, CPWG issued equity settled share-based payments to certain employees of Best Buy Europe, TalkTalk Group and the Group, and since the Demerger the Company has issued equity settled share-based payments to certain employees of the Group. Equity settled share-based payments are measured at fair value at the date of grant, and expensed over the vesting period, based on an estimate of the number of shares that will eventually vest. Fair value is measured by use of a Binomial model for share-based payments with internal performance criteria (such as EPS targets) and a Monte Carlo model for those with external performance criteria (such as TSR targets). For schemes with internal performance criteria, the number of options expected to vest is recalculated at each balance sheet date, based on expectations of performance against target and of leavers prior to vesting. The movement in cumulative expense since the previous balance sheet is recognised in the income statement, with a corresponding entry in reserves. For schemes with external performance criteria, the number of options expected to vest is adjusted only for expectations of leavers prior to vesting. The movement in cumulative expense since the previous balance sheet is recognised in the income statement, with a corresponding entry in reserves. If a share-based payment scheme is cancelled, any remaining part of the fair value of the scheme is expensed through the income statement. If a share- based payment scheme is forfeited, no further expense is recognised and any charges previously recognised through the income statement are reversed. Share-based payment charges are also recognised on loans that are provided to employees to settle personal tax liabilities; the cost of such loans is expensed on grant. Charges also arise on loans that are provided to employees to fund the purchase of shares in the Group as part of long-term incentives plans, to the extent to which the loans are not, in certain circumstances, repayable; the cost of the relevant part of such loans is expensed over the course of the relevant incentive plans. f) Pensions Contributions to defined contribution schemes are charged to the income statement as they become payable in accordance with the rules of the schemes. g) Dividends Dividend income is recognised when payment has been received. Final dividend distributions are recognised as a liability in the financial information in the year in which they are approved by the shareholders. Interim dividends are recognised in the year in which they are paid. h) Leases Rental payments under operating leases are charged to the income statement on a straight-line basis over the period of the lease. Lease incentives and rent- free periods are amortised through the income statement over the period of the lease. i) Taxation Current tax, including United Kingdom corporation tax and overseas tax, is provided at amounts expected to be paid or recovered using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is provided in full on temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Deferred tax liabilities represent tax payable in future periods in respect of taxable temporary differences. Deferred tax assets represent tax recoverable in future periods in respect of deductible temporary differences, and the carry-forward of unused tax losses and credits. Deferred tax is determined using the tax rates that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset is realised or the deferred tax liability is settled. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Current and deferred tax is recognised in the income statement except where it relates to an item recognised directly in reserves, in which case it is recognised directly in reserves. Deferred tax assets and liabilities are offset where there is a legal right to do so in the relevant jurisdictions. j) Intangible assets Goodwill Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing the excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is recognised initially as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. At the acquisition date, goodwill is allocated to each of the CGUs expected to benefit from the combination and held in the currency of the operations to which the goodwill relates. Goodwill is reviewed at least annually for impairment, or more frequently where there is an indication that goodwill may be impaired. Impairment is determined by assessing the future cash flows of the CGUs to which the goodwill relates. Where the future cash flows are less than the carrying value of goodwill, an impairment charge is recognised in the income statement. On disposal of a subsidiary undertaking, the relevant goodwill is included in the calculation of the profit or loss on disposal. Software and licences Software and licences includes internal infrastructure and design costs incurred in the development of software for internal use. Internally generated software is recognised as an intangible asset only if it can be separately identified, it is probable that the asset will generate future economic benefits, and the development cost can be measured reliably. Where these conditions are not met, development expenditure is recognised as an expense in the year in which it is incurred. Software and licences are amortised on a straight-line basis over their estimated useful economic lives of up to 8 years.
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Key money Key money paid to enter a property is stated at cost, net of amortisation and any provision for impairment. Amortisation is provided on key money at rates calculated to write off the cost, less estimated residual value, on a straight-line basis over 10 years or the lease term if less. Acquisition intangibles Acquisition intangibles are amortised over their expected useful lives of up to 5 years on a straight-line basis. The value attributed to such assets is based on the future economic benefit that is expected to be derived from them, calculated as the present value of future cash flows after a deduction for contributory assets. k) Property, plant and equipment Property, plant and equipment, principally for the Group comprising investment property (property held to earn rental income and/or for capital appreciation) is stated at cost, net of depreciation and any provision for impairment. Depreciation is provided on all property, plant and equipment, except for land, at rates calculated to write off the cost, less estimated residual value, of each asset on a straight-line basis over its expected useful life from the date it is brought into use, as follows: Freehold buildings (including investment property) 2-4% per annum Rates applied by joint ventures: Short leasehold costs 10% per annum or the lease term if less Network equipment and computer hardware 12.5-50% per annum Fixtures and fittings 20-25% per annum Motor vehicles 25% per annum l) Recoverable amount of non-current assets At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of the asset’s recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered to be impaired and is written down through an accelerated amortisation charge to its recoverable amount. The recoverable amount is the higher of an asset’s or CGU’s fair value less costs to sell and its value in use, and is determined for an individual asset, unless the asset does not generate cash flows that are largely independent of those from other assets or groups of assets. m) Investments Investments, other than subsidiaries and joint ventures, are initially recognised at cost, being the fair value of the consideration given plus any transaction costs associated with the acquisition. Investments are categorised as available-for-sale and are then recorded at fair value. Changes in fair value, together with any related taxation, are taken directly to reserves, and recycled to the income statement when the investment is sold or determined to be impaired. n) Interests in joint ventures Interests in joint ventures are accounted for using the equity method. The consolidated income statement includes the Group’s share of the post-tax profits or losses of the joint ventures based on their financial statements for the year. In the consolidated balance sheet, the Group’s interests in joint ventures are shown as a non-current asset in the balance sheet, representing the Group’s investment in the share capital of the joint ventures, as adjusted by post- acquisition changes in the Group’s share of the net assets or liabilities less provision for any impairment. Any associated goodwill is included within the carrying value of the investment and is assessed for impairment as part of that investment. Where a joint venture has net liabilities, any loans advanced to it are included in the Group’s equity-accounted investment in it. Where a joint venture has net assets, any loans advanced to it are shown separately in the balance sheet, as a receivable to the Group. o) Stock Stock is stated at the lower of cost and net realisable value. Cost, net of discounts and volume bonuses from product suppliers (see note d), includes all direct costs incurred in bringing stock to its present location and condition and represents finished goods and goods for resale. Net realisable value is based on estimated selling price, less further costs expected to be incurred to disposal. Provision is made for obsolete, slow-moving or defective items where appropriate. p) Cash and cash equivalents Cash and cash equivalents represent cash on hand, demand deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash. q) Loans and other borrowings Loans represent loans to and from related parties, while other borrowings in the balance sheets of joint ventures represent committed and uncommitted bank loans, and bank overdrafts, and loans from shareholders other than the Group. Bank fees and legal costs associated with the securing of external financing are ordinarily capitalised and amortised over the term of the relevant facility. Borrowing costs associated with qualifying assets are included in the cost of the asset. All other borrowing costs are recognised in the income statement in the period in which they are incurred. r) Provisions Provisions are recognised when a legal or constructive obligation exists as a result of past events and it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are discounted where the time value of money is considered to be material. Provisions in the Group relate primarily to tax and other warranties provided in relation to the Best Buy Europe Joint Venture Transaction. Provisions in Best Buy Europe and Virgin Mobile France include the following categories:
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Sales Sales provisions relate to "cash-back" and similar promotions, product warranties, product returns, and network operator performance penalties. The anticipated costs of these items are assessed by reference to historical trends and any other information that is considered to be relevant. Insurance Full provision is made for the estimated cost of all claims notified but not settled at the balance sheet date. Provision is also made for the estimated cost of claims incurred but not reported at the balance sheet date, based on historical experience of the value of such claims. Any differences between original claims provisions and subsequent settlements are reflected in the income statement in the relevant year. Reorganisation Reorganisation provisions relate principally to redundancy costs and are only recognised where plans are demonstrably committed and where appropriate communication to those affected has been undertaken at the balance sheet date. Provisions are not recognised in respect of future operating losses. Other Other provisions relate to dilapidations and similar property costs, and all other provisions, principally being the anticipated costs of unresolved tax issues and legal disputes, and costs associated with onerous contracts. All such provisions are assessed by reference to the best available information at the balance sheet date. s) Headline results Headline results are stated before the amortisation of acquisition intangibles and any exceptional items that are considered to be one-off and so material that they require separate disclosure to avoid distortion of underlying performance. t) Use of critical accounting estimates and assumptions Estimates and assumptions used in the preparation of the financial statements are continually reviewed and revised as necessary. Whilst every effort is made to ensure that such estimates and assumptions are reasonable, by their nature they are uncertain, and as such changes in estimates and assumptions may have a material impact. The principal items in the financial statements where changes in estimates and assumptions may have a material impact are as follows: Recoverable amount of non-current assets All non-current assets, including goodwill and other intangible assets, are reviewed for potential impairment using estimates of the future economic benefits attributable to them. Any estimates of future economic benefits made in relation to non-current assets may differ from the benefits that ultimately arise, and materially affect the recoverable value of the asset. Trade and other receivables Provisions for irrecoverable receivables are based on extensive historical evidence, and the best available information in relation to specific issues, but are unavoidably dependent on future events. Revenue recognition Commission receivable within Best Buy Europe depends for certain transactions on customer behaviour after the point of sale. Assumptions are therefore required, particularly in relation to levels of customer default within the contract period, and minimum levels of customer spend. Such assumptions are based on extensive historical evidence, and provision is made for the risk of potential changes in customer behaviour, but they are nonetheless inherently uncertain. Current taxation The complex nature of tax legislation across the tax jurisdictions in which the Group and its joint ventures operate necessitates the use of many estimates and assumptions, where the outcome may differ from that assumed. Deferred taxation The extent to which tax losses can be utilised depends on the extent to which taxable profits are generated in the relevant jurisdictions in the foreseeable future, and on the tax legislation then in force, and as such the value of associated deferred tax assets is uncertain. Provisions The Group’s provisions are based on the best information available to management at the balance sheet date. However, the future costs assumed are inevitably only estimates, which may differ from those ultimately incurred. u) Recent accounting developments The only standard or interpretation which has become effective during the year ended 31 March 2010 which has affected the Group is as follows: • IAS 1 (Amendment) ‘Presentation of Financial Statements’ has changed the presentation of the statement of changes in equity and introduced a statement of comprehensive income.
Standards or interpretations which have become effective during the year ended 31 March 2010 but which do not have a material impact on the Group are as follows: • IFRS 2 (Amendment) ‘Share Based Payment’ clarifies the treatment of certain conditions when accounting for share-based payments. • IFRS 7 (Amendment) ‘Financial Instruments: Disclosures’ has changed the disclosures required in respect of fair value measurement and liquidity risk. • IFRS 8 ‘Operating Statements’ updates segmental reporting requirements. • IAS 23 (Amendment) ‘Borrowing Costs’ requires the Group to capitalise borrowing costs directly attributable to a qualifying asset as part of the cost of that asset.
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• IAS 32 (Amendment) ‘Financial instruments: Presentation’ and IAS 1 (Amendment) ‘Presentation of financial statements’ on ‘Puttable financial instruments and obligations arising on liquidation’ amends the criteria for debt/equity classification by permitting certain instruments to be classified as equity. • Amendment to IAS 39 ‘Financial instruments: Recognition and measurement’, and IFRS 7, ‘Financial instruments: Disclosures’, on the ‘Reclassification of financial assets’ permits certain non-derivative financial assets to be reclassified out of the ‘fair value through profit or loss’ and ‘available-for-sale’ categories in limited circumstances. • IFRIC 12 ‘Service Concession Arrangements’ applies to contractual arrangements whereby a private sector operator provides services in relation to the infrastructure of public sector services. • IFRIC 13 ‘Customer Loyalty Programmes’ requires that where customer loyalty incentives exist, the consideration receivable from the customer is allocated between the components of the arrangement in proportion to their fair values. • IFRIC 14 ‘IAS 19 – The Limit on a Defined Benefit Assets, Minimum Funding Requirements and their interaction’ provides guidance on the application of IAS 19 ‘Employee Benefits’ regarding defined benefit assets and the impact of minimum funding requirement. • ‘Improvements to IFRSs 2008’ amends existing standards, resulting in changes to presentation, recognition and measurement, as well as terminology and editorial changes.
At the date of authorisation of the consolidated financial information, the following standards, amendments and interpretations had been adopted by the European Union but will not be applied by the Group until the year ending 31 March 2011 unless otherwise noted: • IFRS 1 (Revised) ‘First-time adoption of IFRS’. • IFRS 1 (Amendment) ‘First time adoption of IFRS’ and IAS 27 (Amendment) ‘Consolidated and separate financial statements’ on the ‘Cost of an investment in a subsidiary, jointly controlled entity or associate’. • IFRS 2 (Amendment) ‘Share Based Payment’ on ‘Group cash-settled transactions’. • IFRS 3 (Revised) ‘Business Combinations’. • IAS 27 (Revised) ‘Consolidated and Separate Financial Statements’. • IAS 32 (Amendment) ‘Financial instruments: Presentation’ on ‘Classification or rights issues’. • IAS 39 (Amendment) ‘Financial instruments: Recognition and measurement’ on ‘Eligible hedged items’. • IFRIC 15 ‘Agreements for construction of real estate’. • IFRIC 16 ‘Hedges of a net investment in a foreign operation’. • IFRIC 17 ‘Distributions of non-cash assets to owners’. • IFRIC 18 ‘Transfer of assets from customers’. • ‘Improvements to IFRSs 2009’.
The following standards, amendments and interpretations are not yet approved by the European Union and as such cannot be adopted early by the Group: • IFRS 1 (Amendment) ‘First-time adoption of IFRS’ on ‘Additional exemptions’ expected to be effective for the year ending 31 March 2011. • IFRS 1 (Amendment) ‘First-time adoption of IFRS’ on ‘Financial instrument disclosures’ expected to be effective for the year ending 31 March 2012. • IFRS 9 ‘Financial Instruments’ on ‘Classification and measurement’ expected to be effective for the year ending 31 March 2014. • IAS 24 (Amendment) ‘Related Party Disclosures’ expected to be effective for the year ending 31 March 2012. • IFRIC 14 (Amendment) ‘Prepayments of a Minimum Funding Requirement’ expected to be effective for the year ending 31 March 2012. • IFRIC 19 ‘Extinguishing Financial Liabilities with Equity Instruments’ expected to be effective for the year ending 31 March 2011.
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Appendix 2 – Definitions
The following definitions apply throughout this financial information unless the context otherwise requires:
Acquisition intangibles Acquired intangible assets such as customer bases, brands and other intangible assets acquired through a business combination capitalised separately from goodwill BBED Best Buy Europe Distributions Limited (incorporated in England and Wales) Best Buy Best Buy Co., Inc. (incorporated in the United States) and its subsidiaries and interests in joint ventures and associates from time to time Best Buy Europe BBED and its subsidiaries and interests in joint ventures and associates from time to time, jointly owned by Best Buy and the Group Best Buy Europe Joint Venture Old Carphone Warehouse’s disposal of a 50% interest in its mobile retail and distribution business (Best Buy Transaction Europe), including its economic interests in Best Buy Mobile, in June 2008 Board The Board of Directors of the Company CGU Cash generating unit Company Carphone Warehouse Group plc (formerly “New Carphone Warehouse PLC”) (incorporated in England and Wales) CPWG TalkTalk Telecom Holdings Limited (formerly “The Carphone Warehouse Group PLC”) (incorporated in England and Wales) Demerger The demerger of Old Carphone Warehouse into the Group and TalkTalk Group, effective on 26 March 2010. Following the Demerger the Group held joint venture interests in Best Buy Europe and Virgin Mobile France as well as freehold properties and a number of minority investments in certain other businesses Director Any member of the Board EBIT Earnings before investment income, interest and taxation EBITDA Earnings before investment income, interest, taxation, depreciation and amortisation EPS Earnings per share ESOT Employee share ownership trust Group The Company and its subsidiaries and interests in joint ventures and associates from time to time, which following the Demerger included joint venture investments in Best Buy Europe and Virgin Mobile France as well as certain investments including freehold properties Headline results Results before the amortisation of acquisition intangibles, and before exceptional items which are considered to be one-off and so material that they require separate disclosure to avoid distortion of underlying performance. The phrases “Headline earnings”, “Headline EBIT” and “Headline EBITDA” should be interpreted in the same way HMRC HM Revenue and Customs IFRS International Financial Reporting Standards as adopted by the European Union MVNO Mobile virtual network operator Old Carphone Warehouse CPWG and its subsidiaries and interests in joint ventures and associates prior to the Demerger RCF Revolving credit facility TalkTalk TalkTalk Telecom Group PLC (incorporated in England and Wales) Talk Talk Business The UK fixed line telecommunications division of Old Carphone Warehouse which following the Demerger was owned by TalkTalk. TalkTalk Group TalkTalk and its subsidiaries from time to time TSR Total shareholder return VES Value enhancement scheme Virgin Mobile France The joint venture operating an MVNO in France, between Bluebottle UK Limited (incorporated in England and Wales), the Company and Financom S.A.S. (incorporated in France) WAEP Weighted average exercise price
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