Global Offer CITIGROUP UBS

Transcription

1 Global Offer CITIGROUP UBS

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3 This document comprises a prospectus relating to Xchanging plc (the Company ) prepared in accordance with the Prospectus Rules of the Financial Services Authority (the FSA ) made under section 73A of the Financial Services and Markets Act 2000, as amended ( Prospectus Rules and FSMA respectively) and has been prepared in connection with the offer to certain institutional and certain other investors described in Part 3: The Global Offer (the Global Offer ) of ordinary shares of 5 pence each (the Shares ). Application has been made to the FSA and to the London Stock Exchange plc (the London Stock Exchange ) respectively for admission of all of the Shares issued and to be issued: (i) to the Official List of the FSA (the Official List and Admission to Listing respectively) and (ii) to the London Stock Exchange s main market for listed securities ( Admission to Trading ). Conditional dealings in the Shares are expected to commence on the London Stock Exchange on 25 April It is expected that Admission (as defined in Part 9: Definitions and Glossary) will become effective and that unconditional dealings in the Shares will commence on the London Stock Exchange at 8.00 a.m. on 30 April All dealings in the Shares before the commencement of unconditional dealings will be on a when issued basis and will be of no effect if Admission does not take place. 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 Shares to be admitted to listing or dealt with on any other stock exchange. The Company and its Directors, whose names appear in the section entitled Directors, Company Secretary, Registered Office and Advisers on page 26 of this document, accept responsibility for the information contained in this document. To the best of the knowledge of the Company and the Directors, who have taken all reasonable care to ensure that such is the case, the information contained in this document is in accordance with the facts and contains no omission likely to affect its import. Prospective investors should read the entire document and, in particular, the Risk Factors set out on pages 11 to 20, when considering an investment in the Company. 5APR (Incorporated and registered in England and Wales under the Companies Act 1985 with registered no ) Global Offer of 84,186,874 Shares of 5p each and admission to listing on the Official List and to trading on the London Stock Exchange at an Offer Price of 240p per Share Share capital immediately following Admission Authorised Issued and fully paid Nominal Nominal Value Number Value Number 17,500, ,000,000 Shares of 5p each 10,278, ,578,408 Citigroup Joint Global Co-ordinators and Joint Bookrunners Sponsor Citigroup UBS Investment Bank Bridgewell Limited Co-Lead Managers Jefferies International Limited The Company is offering 31,250,000 new Shares (the New Shares ) and the Selling Shareholders are offering an aggregate of 52,936,874 existing Shares (the Existing Shares ) under the Global Offer. The Company will not receive any of the proceeds of the sale of the Existing Shares, all of which will be paid to the Selling Shareholders. The Shares to be issued pursuant to the Global Offer will, following Admission, rank pari passu in all respects with the other issued Shares and will carry the right to receive all dividends and distributions declared, made or paid on or in respect of the issued Shares after Admission. Each of Citigroup, UBS, Bridgewell Limited and Jefferies International Limited (together the Underwriters ) are acting for Xchanging plc and no one else in connection with the Global Offer and will not regard any other person as its customer in relation to the Global Offer and will not be responsible to anyone other than Xchanging plc for providing the protections afforded to their respective customers, nor for providing advice in relation to the Global Offer or any transaction or arrangement referred to in this document. The distribution of this document and the offer of the Shares in certain jurisdictions may be restricted by law. 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 document (or any other offering or publicity materials relating to the Shares) in any jurisdiction

4 (other than the United Kingdom) where action for that purpose may be required. Accordingly, neither this document 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 document comes should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities law of any such jurisdictions. The Global Offer and the distribution of this document are subject to the restrictions set out in paragraph 14 of Part 8: Additional Information. Apart from the responsibilities and liabilities, if any, which may be imposed on the Underwriters by FSMA or the regulatory regime established thereunder, none of the Underwriters accepts any responsibility whatsoever for the contents of this document 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 Global Offer. The Underwriters accordingly each disclaim all and any liability whether arising in tort, contract or otherwise (save as referred to above) which they might otherwise have in respect of such document or any such statement. Investors should rely only on the information in this document. No person has been authorised to give any information or make any representations other than those contained in this document and, if given or made, such information or representations must not be relied on as having been authorised by the Company, the Selling Shareholders or any of the Underwriters. Without prejudice to any obligation of the Company to publish a supplementary prospectus pursuant to section 87G of FSMA and paragraph 3.4 of the Prospectus Rules, neither the delivery of this document nor any subscription or purchase of Shares made pursuant to this document shall, under any circumstances, create any implication that there has been no change in the affairs of the Group since, or that the information contained herein is correct at any time subsequent to, the date of this document. The contents of this document are not to be construed as legal, financial, business or tax advice. Each prospective investor should consult his, her or its own legal adviser, financial adviser or tax adviser for legal, financial or tax advice. In connection with the Global Offer, the Underwriters and any of their respective affiliates acting as an investor for its or their own account(s) may subscribe for or purchase Shares and, in that capacity, may retain, purchase, sell, offer to sell or otherwise deal for its or their own account(s) in such securities, any other securities of the Company or other related investments in connection with the Global Offer or otherwise. Accordingly, references in this document to the Shares being issued, offered, subscribed or otherwise dealt with should be read as including any issue or offer to, or subscription or dealing by, the Underwriters or any of them and any of their affiliates acting as an investor for its or their own account(s). The Underwriters do not intend to disclose the extent of any such investment or transactions otherwise than in accordance with any legal or regulatory obligation to do so. Notice in connection with the United States, Australia, Canada and Japan This document does not constitute an offer to sell, or the solicitation of an offer to subscribe for or buy, Shares in any jurisdiction in which such offer or solicitation is unlawful and is not for distribution in or into the United States, Australia, Canada or Japan. In particular, the Shares offered by this document have not been and will not be registered under the Securities Act, under the applicable state securities laws of the United States or under the applicable securities laws of Australia, Canada or Japan and, subject to certain exceptions, may not be offered or sold, directly or indirectly, in or into the United States, Australia, Canada or Japan, or to or for the account or benefit of or any person resident in Australia, Canada or Japan. The Underwriters may arrange for the offer and sale of Shares in the United States only to persons reasonably believed to be Qualified Institutional Buyers (as defined in Rule 144A of the Securities Act) in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 144A or another exemption from, or transaction not subject to, the registration requirements of the Securities Act. Prospective purchasers are hereby notified that the Selling Shareholders may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. For a description of these and certain further restrictions on the offer, sale and transfer of the Shares and distribution of this document, see paragraph 14 of Part 8: Additional Information. No US federal or state securities commission or regulatory authority has approved or disapproved of the Shares or passed upon the adequacy or accuracy of this document. Any representation to the contrary is a criminal offence in the United States. The Shares are subject to the restrictions on resale and transfer contained in the section entitled Transfer Restrictions in paragraph 14 of Part 8: Additional Information. By subscribing for or purchasing any Shares, you will be deemed to have made certain acknowledgements, representations and agreements as described in that section of this document. You may be required to bear the financial risks of investing in the Shares for an indefinite period of time. The discussion in paragraph 13 in Part 8: Additional Information under the heading Taxation of US Resident Shareholders is not intended or written to be used, and cannot be used by any person, for the purpose of avoiding United States federal tax penalties, and was written to support the promotion or marketing of the Global Offer. Each prospective investor should seek advice based on its particular circumstances from an independent tax adviser. The Global Offer and the associated tax strategies are not confidential, proprietary or exclusive. Notwithstanding anything to the contrary herein, there is no limitation on the disclosure by any recipient of this document of the tax treatment or tax structure of the Global Offer described therein. Notice in connection with Member States of the European Economic Area This document has been prepared on the basis that all offers of Shares will be made pursuant to an exemption under the Prospectus Directive, as implemented in member states of the European Economic Area ( EEA ), from the requirement to produce a prospectus for offers of Shares. Accordingly any person making or intending to make any offer within the EEA of Shares which are the subject of the Global Offer contemplated in this document should only do so in circumstances in which no obligation arises for the Company, the Selling Shareholders or any of the Underwriters to produce a prospectus for such offer. Neither the Company, the Selling Shareholders nor the Underwriters have authorised, nor do they authorise, the making of any offer of Shares through any financial intermediary, other than offers made by Underwriters which constitute the final placement of Shares contemplated in this document. No Incorporation of Website Information The contents of the Group s website or any website directly or indirectly linked to the Group s website do not form part of this document. References to Time and Other Important Information All references to time are references to London time. Other important information can be found on pages 21 and 22.

5 CONTENTS Summary Information... 5 Risk Factors Other Important Information Presentation of Financial and Other Information Global Offer Statistics Expected Timetable For The Global Offer Directors, Company Secretary, Registered Office And Advisers Part 1: Information On The Group Company Overview History Of The Group Key Strengths Growth Strategy Market Environment Business Model Operating Structure Sales Methodology Execution Approach Information Systems Intellectual Property Data Protection Dividend Policy Part 2: Directors, Senior Managers, Employees And Corporate Governance Directors Senior Managers Compensation Employees Corporate Governance Model Code Part 3: The Global Offer The Global Offer Reasons For The Global Offer And Use Of Proceeds Allocation And Pricing Over-Allotment And Stabilisation Dealing Arrangements CREST Underwriting Arrangements And Lock-Up Arrangements Part 4: Operating And Financial Review Part 5: Accountants Reports and Financial Information

6 Part 6: Unaudited Pro Forma Financial Information Part 7: Regulation Regulated Entities In The Group Regulation Applicable To Customers Of The Group In Relation To The Outsourcing Of Their Activities Part 8: Additional Information Responsibility Information Share Capital Memorandum And Articles Of Association Other Directorships Directors And Other Interests Directors Service Agreements And Letters Of Appointment Employee Share Plans Property Subsidiaries Pensions United Kingdom Taxation Taxation Of US Resident Shareholders Securities Laws Working Capital Significant Change Litigation Material Contracts Selling Shareholders Related Party Transactions Consents General Documents For Inspection Part 9: Definitions And Glossary

7 SUMMARY INFORMATION The following summary information should be read as an introduction to this Prospectus. Any decision by a prospective investor to invest in Shares should be based on consideration of the document as a whole and not solely on this summarised information. Following the implementation of the relevant provisions of the Prospectus Directive (Directive 2003/71/EC) in each member state of the European Economic Area, civil liability attaches to those persons who are responsible for the summary, including any persons responsible for any translation of the summary, but only if this summary is misleading, inaccurate or inconsistent when read together with the other parts of this document. Where a claim relating to the information contained in this document is brought before a court in a member state of the European Economic Area, the claimant may, under the national legislation of that member state where the claim is brought, be required to bear the costs of translating this document before legal proceedings are initiated. 1. INFORMATION ON THE GROUP The Group is one of the leading international, pure play BPO providers. It has more than 3,800 employees operating in seven countries and services blue-chip customers in 34 countries, with a focus on the UK and Continental Europe. The Group provides industry specific processing and other services to the banking and insurance industries and also provides procurement, finance and accounting and human resources services to customers across industries. The Group s customers include Aon Limited ( Aon ), BAE Systems, Boots the Chemists, Citibank, Deutsche Bank, the International Underwriting Association ( IUA ), Lloyd s, National Australia Group, Sal. Oppenheim, United Biscuits and University Hospital Birmingham. The Group performs complex, large-scale processing on behalf of its customers, providing them with better service at a lower cost than when these functions were performed internally. Operating customers non-core functions is the Group s core business. Examples of the Group s services in 2006 included: settling an estimated 15% of securities transactions in the German market, settling 11.4 billion of insurance claims in the Lloyd s insurance market, providing human resource and payroll services and support to 1.5 million staff and their dependants, procuring 390 million of indirect spend and paying over 800 million of invoices. The Group offers a full suite of BPO services including large-scale partnering, outsourcing, software products and solutions, Straight Through Processing ( STP ) and business support. At the heart of the Group s business strategy is a unique partnering approach. The Group takes over a customer s back office and creates a jointly owned business with its customer called an Enterprise Partnership or EP. Enterprise Partnerships provide the Group with scalable platforms from which it can also offer its services to other customers. A key component of the Group s partnering and procurement outsourcing arrangements is its gain-share approach. This gain-sharing approach is a step beyond that of a traditional outsourcing arrangement where a customer outsources services in return for payment of an agreed fee. The nature of the gain-sharing relationship provides transparency for all parties, shortens decision-making time and engenders an environment of trust. The Group uses a distinctive execution approach to deliver its services in a standardised and repeatable way. The Group delivers its services through a balance of on-shore and offshore operations, seeking to provide the lowest cost solution consistent with its customers requirements. The Group recorded revenues of million for the year ended 31 December 2006, an increase from million in 2005 and million in 2004 (a CAGR of 24%). 2. KEY STRENGTHS The Group s key strengths include: Strong competitive position the Group believes its unique partnering approach and full suite of BPO offerings provide a competitive advantage and enable the Group to manage complex processes across a range of industries. 5

8 High growth markets according to IDC, the combined value of the BPO markets in the Western European, Asian Pacific and US Regions (excluding industry-specific BPO revenue) was approximately US$49 billion in 2005 and is forecast to continue to grow at a CAGR of 13.8% from 2005 to (1) High revenue visibility due to the long term nature of the Group s contracts and the relationships it builds with major customers. Established profitability with the opportunity for further margin enhancement demonstrated by achieving a 67% CAGR of XPAT from , with XPAT margins increasing from 2.4% in 2004 to 4.4% in Proven entrepreneurial management the management team has extensive experience in executing complex BPO contracts. 3. STRATEGY The Group has a clear strategy of: Expanding existing business platforms through offering processing services and products to new and existing customers, based on the Group s in-depth industry and domain expertise. Developing new service platforms via partnerships entering into additional partnerships across new industries and new geographic areas to develop platforms undertaking new processing functions. Achieving a low cost production position providing the Group s services for the lowest cost possible consistent with its customers needs and constraints. Making selective acquisitions to enhance the expertise or the scale of existing operations (either vertically, geographically, or in terms of technological capability). Buying out partners shares in EPs where appropriate, the Group seeks to buy out partners interests in EPs. 4. SUMMARY FINANCIAL INFORMATION The table below sets out the Group s summary financial information for the periods indicated. The data has been extracted from Part 5: Accountants Reports and Financial Information of this document which has been prepared in accordance with IFRS as adopted by the European Union ( IFRS ). Summary Financial Information Year ended 31 December (in millions) Revenue Cost of sales... (222.8) (302.6) (348.7) Gross profit (2) Administrative expenses (pre-exceptional items)... (12.8) (13.2) (13.7) Operating profit (pre-exceptional items) (2) Net exceptional items... (2.2) (6.9) Operating profit Net finance (costs)/income... (0.3) (0.3) 0.7 Profit before tax Taxation... (5.7) (11.3) (7.5) Profit for the year Profit attributable to minority interests Profit attributable to equity holders of the Group (1) Source: IDC Doc # , Doc #BP01N, and Doc #AP224107N. (2) The results of the business were affected by a number of factors during 2006 including investment costs in India and sales infrastructure, and transferring the BAE Systems procurement contract from a profit share mechanism to a gain-share mechanism, all of which suppressed the gross profit and operating profit of the Group. 6

9 Key Performance Indicators ( KPIs ) The Directors use two non-gaap measures as KPIs (XEBIT and XPAT) to monitor the business and the results generated for the Group s shareholders. The Group believes these provide important measures of historical performance due to the Group s significant minority interests. XEBIT is the Group s shareholders share of the operating profit (pre-exceptional items), following the add back of certain non-cash items (1). XPAT is the Xchanging shareholders share of the profit after tax (preexceptional items), following the add back of certain non-cash items (2). Revenue, XEBIT and XPAT are set out in the following table: Year ended 31 December CAGR (in millions) Revenue % XEBIT % XPAT % m XEBIT 5APR m XPAT 5APR These KPIs are not intended to comply with SEC reporting requirements. Compliance with such requirements would require the modification or exclusion of certain financial measures, including XEBIT and XPAT and their related ratios and the presentation of certain other financial information not included herein. The tables below show the reconciliation of the Group profit to XEBIT and XPAT: Year ended 31 December (in millions) XEBIT Adjusted operating profit attributable to minority interests Adjusted operating profit Less Net exceptional items (3)... (2.2) (6.9) Other add backs (4)... (0.5) (0.7) (1.2) Operating profit (1) Add backs to operating profit comprise amortisation of intangible assets previously unrecognised by an acquired entity and share based payment charges. (2) Add backs to profit for the year comprise amortisation of intangible assets previously unrecognised by an entity acquired by the Group, share based payment charges, imputed interest on the historic financing structure of the Group which will fall away on Admission, imputed interest on put options and the related tax thereon. (3) Net exceptional items comprise exceptional costs of 6.9 million and an exceptional gain of 4.7 million for 2004 and exceptional costs of 6.9 million for (4) Add backs to operating profit comprise amortisation of intangible assets previously unrecognised by an acquired entity and share based payment charges. 7

10 Year ended 31 December (in millions) XPAT Adjusted profit after taxation attributable to minority interests Adjusted profit after taxation Less Net exceptional items... (2.2) (6.9) Other add backs (1)... (1.7) (2.1) (2.5) Tax effect of above Profit for the year CURRENT TRADING AND PROSPECTS In early 2007, the Group completed the buy-out of BAE Systems interests in the Xchanging Human Resources Services ( XHRS ) and Xchanging Procurement Services ( XPS ) partnerships for 57 million (a net cash price of 54 million). This will allow the Group to achieve full strategic control over the operations of these partnerships and, in the Group s opinion, will lead to enhanced contribution from those businesses. With respect to current trading and the prospects for the remainder of 2007, trading remains in line with management expectations. The Group anticipates further growth through additional revenue from existing operations, new EPs and acquisitions. 6. DIVIDEND POLICY The Company intends to adopt a dividend policy which reflects the growth prospects and cash flow generation of the Group, whilst maintaining an appropriate level of dividend cover. 7. MAJOR SHAREHOLDER On Admission, General Atlantic will control approximately 34.3% of the rights to vote at general meetings of the Group (or approximately 28.2% if the Over-allotment Option is exercised in full). The relationship deed between General Atlantic and the Company, includes an undertaking from General Atlantic to exercise voting rights in relation to the Group to ensure that the Group is capable of carrying on its business independently of General Atlantic. If General Atlantic holds 30% or more of the Group s Shares following Admission, any further increase in its interest in Shares will be subject to the provisions of Rule 9 of the Takeover Code. 8. LOCK-UP ARRANGEMENTS Each of the Company, the Selling Shareholders (other than BAE Systems which has agreed to sell all of its Existing Shares as part of the Global Offer), the Directors and certain of the Senior Managers has agreed to certain lock-up arrangements. 9. SUMMARY OF THE GLOBAL OFFER Under the Global Offer, the Company will issue 31,250,000 New Shares and the Selling Shareholders will sell 52,936,874 Existing Shares. In addition, General Atlantic has granted UBS, as stabilising manager, the Over-allotment Option, which is exercisable in whole or in part during the period commencing on the date of publication of the Offer Price and ending 30 days thereafter, to purchase, or procure purchasers for, up to an additional 12,628,031 Existing Shares, inter alia, to cover over-allotments made (if any) in connection with the Global Offer and/or to cover short positions relating to stabilisation transactions. The Global Offer is being made by way of an offering of Shares in the United States only to QIBs in transactions meeting the requirements of Rule 144A or other transactions exempt from the (1) Add backs to profit for the year comprise amortisation of intangible assets previously unrecognised by an entity acquired by the Group, share based payment charges, imputed interest on the historic financing structure of the Group which will fall away on Admission, imputed interest on put options and the related tax thereon. 8

11 registration requirements of the Securities Act and to persons in the United Kingdom and the rest of the world in offshore transactions meeting the requirements of Regulation S. It is expected that Admission will take place and unconditional dealings in the Shares will commence on the London Stock Exchange at 8.00 a.m. on 30 April Prior to Admission, 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 25 April REASONS FOR THE GLOBAL OFFER AND USE OF PROCEEDS The Global Offer, Admission and issue of New Shares will allow the Group to fund its future growth through establishing new Enterprise Partnerships, developing its existing businesses and selectively acquiring businesses. The Group believes it will also further raise the profile of the Group and assist in incentivising employees. In addition, the Selling Shareholders will realise part of, and in the case of BAE Systems all of, their investment in the Group. Pursuant to the Global Offer, which is fully underwritten subject to the terms of the Underwriting Agreement, by the Underwriters, the Group is expected to receive approximately 75 million from the subscription of New Shares, net of underwriting commissions and other fees and expenses of approximately 65 million (1). The Group will not receive any proceeds from the sale of Existing Shares by the Selling Shareholders. 11. RISK FACTORS The Group s business is subject to certain risks including but not limited to the following: The Group could fail to accurately forecast its ability to deliver outsourcing services efficiently. Contracts may not be implemented within appropriate timescales or could be implemented poorly and fail to deliver savings to the customers. Volumes anticipated under contracts may not be achieved or the nature of required services may change. Growth is dependent on attracting new customers. The scale of major contracts requires long lead time and significant input of resources. Customers may have rights to put their shares in the EPs under certain circumstances. Some agreements give customers the right under certain circumstances to call the Group s shares in EPs for no or nominal consideration. Contracts may be terminated before their full term or may not be renewed. The Group is exposed to operational risks after the establishment of its EPs. Customers may seek to dispose of their shares in EPs. It may take several months before the Group begins to recognise revenue from major procurement contracts. A number of the Group s major contracts contain provisions for benchmarking services against the market for comparable services. The Group is dependent on a few major customers and, in particular, on customers in the banking and insurance industries. The Group faces competition from a variety of sources. The Senior management team and other key team members are critical to its continued success. Attracting skilled personnel is competitive and the Group may fail to attract enough such personnel to support its operations. With operations in several countries, the Group is exposed to a variety of employment issues. The Group has two large defined benefit pension schemes that are currently underfunded on an IAS 19 basis. (1) This assumes that the full discretionary fee is paid to the Underwriters. 9

12 The Group could be exposed to a certain amount of volatility associated with pension deficits and employer contributions. The Group is exposed to risks associated with pensions schemes run by other organisations. The Group could be subject to risks posed by the Pensions Act The BPO industry is relatively new and its growth may not be sustained. The Group may be unable to effectively manage its rapid growth. Disruptions to customers businesses or inadequate service, may cause claims for damages that insurance coverage may be inadequate to cover. The Group is liable to its customers for damages caused by unauthorised disclosure of sensitive and confidential information. Business may be adversely affected by disruptions to IT systems. The Group may fail to develop systems, technology and products that satisfy customer s needs. Third-party suppliers are key to business operations; quality issues or supply disruptions may negatively affect the Group. The Group may be exposed to changes in law and regulations, which could increase regulatory costs and prevent services from being provided. The Group may be adversely affected by negative reactions to offshore outsourcing. Finding suitable acquisition opportunities may be difficult. The international nature of the Group s business exposes it to risks. The Group may be unable to protect its proprietary rights. A significant change in certain exchange rates may have an adverse effect on the Group. By virtue of its significant shareholding, General Atlantic may be able to influence shareholder decisions. Substantial future sales of Shares could impact the market price of the Shares. There has been no public trading market for the Shares and an active trading market may not develop. The Shares may be subject to market price volatility and the market price for the Shares may decline disproportionately in response to adverse developments unrelated to the Group s operating performance. The Company may not be able to pay dividends. Exchange rate fluctuations may expose an investor whose principal currency is not pounds sterling to foreign currency rate risk. US and other non-uk holders of shares may not be able to exercise pre-emption rights. There is doubt as to the enforceability in England and Wales of claims based on federal securities laws of the United States. 10

13 RISK FACTORS Before investing in Shares, prospective investors should carefully consider the following risk factors in addition to the other information contained in this document. If any of the risks described below were to occur, it could have a material adverse effect on the Group s business, results of operations or financial condition. If this were to lead to a decline in the trading price of the Shares, prospective investors may lose all or part of their investment. The risks and uncertainties described below are not the only ones faced by the Group. Additional risks and uncertainties not presently known or currently deemed by the Directors to be immaterial may also have a material adverse effect on the Group s business, results of operations or financial condition. These risks are not set out in any particular order of priority. This document also contains forward-looking statements that involve risks and uncertainties. See Forward- Looking Statements on page 21 of this document. The Group s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by the Group set out below and elsewhere in this document. Prospective investors should read this document as a whole and not rely solely on the information set out in this section. The financial information set out in this section has been extracted without material adjustment from Part 5: Accountants Reports and Financial Information and from Part 6: Unaudited Pro Forma Financial Information. Prospective investors should read this section in conjunction with Part 5: Accountants Reports and Financial Information and Part 6: Unaudited Pro Forma Financial Information and the other detailed information contained elsewhere in this document. Risks relating to the Group s business Failure by the Group to accurately forecast its ability to deliver outsourcing services efficiently could result in losses under major contracts. The Group s major contracts with its customers provide for the establishment by the parties of a cost baseline an estimate of the pre-outsourcing cost incurred by the customer to provide the relevant goods or services. These baselines are the result of intensive studies undertaken by the Group, generally over a number of months and are agreed with the customer. The baseline costs form the day one service charge to be paid by the customer for the outsourced services. Based on this, there is a projected cost savings profile which is shared with the customer. The Group commits to the customer to deliver at least part of this cost savings profile, by means of guaranteed service charge discounts. If the Group underestimates the baseline costs or if it overestimates achievable savings, it may incur losses. Discounts that increase over time will require either further increases in efficiency or the addition of third party revenues in order to maintain profitability, neither of which may be attainable. Any of the foregoing could have a material adverse affect on the Group s results of operations, financial condition and cash flows. The Group may not be able to implement its contracts within appropriate time frames or could implement them poorly and fail to deliver savings to the customer. The gain-sharing model, used in certain of the Group s major contracts, requires the Group to generate savings from the baseline estimate of the pre-outsourcing cost incurred by the customer. If the Group encounters difficulties or delays in implementing the methodologies through which the Group plans to generate the required savings, these savings may be delayed or may never materialise. Such delays or failures may have a material adverse effect on the Group s business, results of operations, financial condition, cash flows and on its reputation as an outsourcing provider. The Group may not achieve volumes anticipated under its contracts or the nature of required services may change over the course of the contract. The service fees paid to the Group under certain of its major contracts may be affected by the volume of transactions or services that are provided or undertaken pursuant to the contract. Under these contracts the customer typically pays a fixed fee and grants the Group exclusivity in providing particular goods or services but generally does not commit to a minimum transaction or expenditure level. Therefore, actual volumes achieved under the contracts may be materially less than anticipated volumes when the contract was agreed and there may be no right of recovery under the contract for any additional expense incurred. Further, the customers needs may change during the course of the contracts (EP service contracts generally last 10 to 12 years) and it may be that alterations are required to meet those needs. If customers do not require the volume of services or transactions anticipated under the contracts, it will limit the Group s ability to achieve its own targets and could result in lower than anticipated profitability of the contracts. 11

14 The Group s growth is largely dependent on its ability to attract new customers, whilst the scale of the Group s major contracts requires long relationship building and development lead times and significant input of Group resources. The Group s growth is dependent upon its ability to attract additional EP or major Outsourcing customers. If the Group does not succeed in continuing to attract and retain such customers, it could have a material adverse affect on its results of operations, financial condition and cash flows. Moreover, there can be no guarantee that the Group will continue to achieve its historic rates of growth. The development of the large and complex arrangements that the Group targets requires time and expenditure by the Group and its personnel. Potential customers may be reluctant to turn over important back-office operations to a third party and may first require the Group to build a relationship of trust with them. Group personnel work closely with potential customers over several months (or longer) to create and refine potential arrangements and to alleviate possible concerns about reliability of the services to be provided. Following preliminary approval of an arrangement by the potential customer, further substantial planning and development are necessary and typically require the devotion of expert resources by the Group. After preliminary approval of an arrangement by a customer, there is a risk that arrangements may be aborted or delayed by customers due to factors over which the Group has little or no control (such as the performance of the customers underlying businesses or changes in customers budgetary priorities) or as a result of the parties failing to agree detailed commercial terms. The failure to convince potential customers of the viability of arrangements, or the failure to successfully conclude such arrangements once tentatively approved can result in unrecovered costs and impede the growth of the Group. Some of the Enterprise Partnership agreements give the partner rights, under certain circumstances, to put their shares to the Group creating a cash requirement for the Group. Under some of the Group s contracts for its Enterprise Partnerships, the partners have the right, in defined circumstances or at certain times, to put their shares in the EP to the Group based on a valuation in accordance with specified rules, and in some cases these valuations are subject to minimum values. The valuations are not capped and could place significant cash demands upon the Group. Some of the Enterprise Partnership agreements give the partner the right, under certain circumstances, to call the Group s shares for no or nominal consideration. Under some of the Group s contracts, in circumstances such as insolvency, material default, performance failure, serious regulatory interventions or change of control of the Group, the partner may (in some cases up to a specified point in the contract, often the fifth anniversary), call for the transfer of the Group s shares in the Enterprise Partnership for a nominal value. This would lead to the loss by the Group of its entire shareholding interest in and the associated revenue from that Enterprise Partnership. In these circumstances, the assets and employees of the EP remain within the EP (now wholly-owned by the EP partner) and the Group s contractual commitments to provide people, software and intellectual property (apart from certain licences) fall away and any assets and employees provided under these arrangements remain with the Group. Any such transfer would have a material adverse effect on the Group s results of operations, financial condition and cash flows. The Group s contracts may be terminated before their full term or may not be renewed. The service contracts provided by the Group s Enterprise Partnerships to its partners have terms in the range of 10 to 12 years. The Group s major Outsourcing contracts generally have terms in the range of five to seven years. These service contracts and Outsourcing contracts may include rights for the customer to terminate for cause, change of control and convenience at or after specified times. Where termination for convenience is permitted, the customer must pay a termination fee. In addition to the separately identified call and put options in respect of the Group s shares in its Enterprise Partnerships, termination of service contracts would reduce the revenue of the Enterprise Partnerships and may result in irrecoverable costs and assets, contracts and staff surplus to operational requirements. In view of the Group s short operational history, none of the Group s major long-term contracts has reached maturity. In XIS and XCS, the principal services agreements are divided into individual customer services contracts for the Lloyd s market and the Companies market and all such contracts have an indefinite term and are capable of termination on 12 months notice and not less than three months notice respectively. 12

15 The Group is exposed to operational risks after the establishment of its EPs. The establishment of an Enterprise Partnership results in the assumption of the normal operational risks of a corporate organisation, including responsibility for employees transferred from the customers internal operations to the Enterprise Partnership, compliance with regulatory requirements, dealings with suppliers, leasing obligations for the entity s premises, overhead and certain pensions liabilities. In the insurance and securities processing EPs, the Group also has responsibility for executing complex, high value and repetitive transactions and processes and, in certain circumstances, for losses arising from settling errors. These operational risks, including systemic processing failures could have a material adverse effect on the entity, and the Group s business, results of operations, financial condition and cash flows. Partners may seek to dispose of their shares in EPs creating a cash requirement for the Group. Enterprise Partnership contracts give the customers the right to transfer their shares after an initial period. There are normally pre-emption rights in favour of the Group if the customer intends to sell its shares to a third party. The purchase of shares in these circumstances, if the pre-emption rights are exercised, could place cash demands upon the Group. Following customer approval of a major procurement contract, it may take several months before the Group begins to recognise revenue from that contract. When the Group has entered into a major procurement contract it may take a number of months to complete adapting and implementing the appropriate platforms, systems, IT support, baselining and methodologies. Unanticipated regulatory, technological, legal, design-related or other issues can delay the commencement of operations. The Group does not recognise revenue from these contracts until the implementation phase has been completed and operations have begun and this could have an adverse effect on the Group s prospective results of operations, financial condition and cash flows. Many of the Group s major contracts contain provisions for benchmarking the Group s services against the market for comparable services. The Group s major contracts often contain provisions for benchmarking services against the market for comparable services. The implementation of such benchmarks could lead to reduced charges for services or to increased costs of providing the services, which could have a material adverse effect on the Group s business, results of operations, financial condition and cash flows. The Group is dependent on a few major customers and, in particular, on customers in the banking and insurance industries. For the year ended 31 December 2006, 66% of the Group s revenue was attributable to its ten largest customers and 54% was attributable to its three largest customers: BAE Systems, Deutsche Bank and Aon. After contracts are entered into, the deterioration of relations with, or the termination of any major contracts by, the Group s significant customers could have a material adverse effect on the Group s operating performance. Financial difficulties experienced by any of its significant customers could have a significant impact on the Group. In addition, should any of the Group s significant customers divest large portions of their operations, experience consolidation or a change of control, the functions outsourced by such customer may face significant alteration. This may lead to reductions or changes of the scope of, or termination of, major contracts. A substantial portion of the Group s customers is concentrated in the banking and insurance industries. In the year ended 31 December 2006, 58% of the Group s revenue was attributable to customers in those industries. The Group s revenue is thus largely dependent on revenue from customers in these industries and a reduction in demand from these industries could have an adverse impact on the Group s results of operations. The Group faces competition from a variety of sources. The BPO industry is new and the Group faces competition from other outsourcing companies, processing oriented service providers, service companies that focus on providing business services from relatively low-cost geographic areas (principally India) and large IT and consulting companies with BPO divisions. Some of these companies have financial resources greater than those of the Group, may have access to different technologies or experience from the Group, or may have scales of operations (either in particular 13

16 countries or overall) that provide advantages to them. The Group can provide no assurance that it will be able to compete successfully in the future against present competitors or new entrants from new sources or that competitive pressures will not have a material adverse effect on its business, financial condition or results of operations. The Group s senior management team and other key team members in its various operations are critical to its continued success. The Group s future success depends on the continued service and performance of the members of its management team and other key team members across its various operations. These personnel possess technical and business capabilities, including domain expertise, that are difficult to replace quickly. There is competition for experienced management and the Group may not be able to retain its key personnel or recruit qualified replacements. The loss of key members of the Group s management or other key team members could have a material adverse effect on the Group s business, results of operations, financial condition and cash flows. Attracting skilled personnel is competitive and the Group may fail to attract enough such personnel to support its operations and to continue its business. The Group s business relies on skilled employees, and its success depends to a significant extent on its ability to attract, train and retain employees with technical and industry expertise in the business process outsourcing industry. The Group s failure to attract, train and retain personnel with the qualifications necessary to fulfil the needs of its existing and future customers or to successfully assimilate and train new employees in sufficient numbers could have a material adverse effect on its business, results of operations, financial condition and cash flows. The Group maintains operations in several countries, therefore it is exposed to a variety of employment issues and may be adversely affected by changes in employment law in any of the regions or countries in which it operates. The Group operates in France, Germany, India, Malaysia, the UK, the US and Australia, and is subject to a range of employment regulations. As a result of employment regulations in these countries (and in particular in France, Germany, India and the UK), the Group could have difficulty eliminating redundant employees or may be subject to pension obligations, which could materially affect the Group s results of operations. The Group has two large defined benefit pension schemes in the UK that are currently underfunded on an IAS 19 basis and an unfunded defined benefit arrangement in Germany supported by a contractual trust agreement. The deficits in the Rebus Scheme and LPC Scheme are described in more detail in paragraph 11 of Part 8: Additional Information. The total liabilities for the two pension schemes as at 31 December 2006 on an IAS 19 basis were 91.6 million with assets of 72.2 million and a corresponding deficit of 19.4 million. Assets are held in a contractual trust arrangement ( CTA ) in respect of the German arrangements, assessed as at 31 December 2006 at 47.7 million against pension liabilities assessed at 50.2 million. There is also a provision of 8.0 million on the Xtb balance sheet for long service and early retirement arrangements. The German arrangements are described in more detail in paragraph 11.4 of Part 8: Additional Information. If the Group were required to fund the entirety of the deficit over a shorter period than is currently envisaged for any of the schemes, it could place unanticipated cash demands on the Group and could have a material adverse effect on the Group s financial condition and cash flows. The Group could be exposed to a certain amount of volatility associated with pension deficits and employer contributions and could be faced with a significant cash flow impact in relation to its pension schemes. The nature of a defined benefit pension scheme and the investment strategy adopted means that the Rebus Scheme and LPC Scheme can create volatile cash, balance sheet and profit and loss impacts. In particular the funding level of the schemes for both cash and accounting purposes is sensitive to changes in a wide range of factors, including investment returns, discount rates for valuing liabilities, life expectancy, inflation and salary growth. As a result, it is not possible to predict future funding levels, deficit repayment periods or employer cash contribution obligations and accounting charges. It is possible that these external market factors could materially affect the Group s cash flow and/or balance sheet and distributable 14