Pumpkin Patch Group Voluntary Administrators’ report pursuant to section 239AU of the Companies Act 1993 24 February 2017 Glossary Act New Zealand Companies Act 1993 Bank ANZ Bank New Zealand Limited DOCA Deed of Company Arrangement Administrators Andrew Grenfell, Conor McElhinney and Joseph Hayes Board Peter Schuyt, Luke Bunt and Bruce Cotterill EBITDA Earnings before interest, tax, depreciation and amortisation AGM Annual General Meeting Capex Capital expenditure EOI Expression of interest Appointment Appointment of the Administrators to the NZ Entities and AU Entities on 26 October 2016 CEO Chief Executive Officer First Creditors Meeting Creditors’ meeting held on 7 November 2016 pursuant to section 239AN of the Act. ARITA Australian Restructuring Insolvency and Turnaround Association CFO Chief Financial Officer FX Foreign exchange AU Australia Chapter 11 Insolvency procedure under US law FYXX Financial year ended 31 July 20XX AU Act Australian Corporations Act 2001 Companies The NZ Entities and AU Entities GFC Global Financial Crisis that occurred between 2008 and 2011 AU Administrators Joseph Hayes and Shaun Fraser Creditors’ Committee Creditors’ Committees for PPL and PPOL elected at the First Creditors’ Meeting GM% Gross margin percent AU Entities Pumpkin Patch (Australia) Pty Limited (ACN 068 264 693); and Pumpkin Patch Australia Properties Pty Limited (ACN 146 055 236) Directors’ Statement Statement as to the Companies’ positions pursuant to section 239AF of the Act Group/Pumpkin PPL and its subsidiaries Patch AU Receivers Craig Shepard and David Winterbottom of KordaMentha Australia DIRRI Declaration of Independence, Relevant Relationships and Indemnities required by the AU Administrators under the ARITA code of practice. H1 First half of the financial year (1 August to 31 January) 2 Glossary IP Intellectual property NZ Entities Pumpkin Patch Limited, NZCN 637120; Pumpkin Patch Originals Limited, NZCN 490863; Pumpkin Patch Direct Limited, NZCN 1775025; Torquay Enterprises Limited, NZCN 598479; and Patch Kids Limited, NZCN 1619043 Reorg Reorganisation IPO Initial public offering NZ Receivers Neale Jackson and Brendon Gibson of KordaMentha New Zealand Report This report prepared under section 239AU of the Act KPIs Key performance indicators NZX New Zealand stock exchange RRP Recommended retail price m Millions PP&E Property plant and equipment Secured Creditor ANZ Bank New Zealand Limited McN McGrathNicol PPL Pumpkin Patch Limited, NZCN 637120 UK United Kingdom Model Law UNCITRAL Model Law on Cross-Border Insolvency PPOL Pumpkin Patch Originals Limited, NZCN 490863; US United States of America NPAT Net profit after tax Pumpkin PPL and its subsidiaries Patch/the Group VA Voluntary Administration NZ New Zealand PY Prior year Watershed Meeting The second creditors’ meeting pursuant to section 239AT of the Act to be held at the offices of Simpson Grierson on Tuesday, 7 March 2017 at 12:00pm. NZ Administrators Andrew Grenfell, Conor McElhinney, Joseph Hayes Receivers The NZ Receivers and AU Receivers 3 Contents Glossary of terms 1. Introduction 5 2. Background information 9 3. Historical financial information 18 4. Events leading to appointment of administrators 23 5. Directors’ Statement of Company’s Position 26 6. Administrators’ opinion as to the reasons for failure 28 7. The Receivership 38 8. Investigations 42 9. Alternatives available to creditors 45 10. Appendices 48 Introduction 1. Introduction This section provides information on the entities to which the Administrators were appointed, the objectives of the Administration, the purpose of this report, meetings of creditors and our relevant relationships. Appointment of Voluntary Administrators  Andrew Grenfell and Conor McElhinney of McGrathNicol New Zealand were appointed joint and several administrators of the following New Zealand entities on 26 October 2016 by a resolution of the Companies’ Directors, pursuant to Part 15A of the Companies Act 1993:  Pumpkin Patch Limited, NZCN 637120; Objective of voluntary administration  In a voluntary administration, administrators are empowered by the Act to assume control of an insolvent company, superseding the powers of the directors and officers, to manage the company’s affairs and deal with its assets in the interests of its creditors.  The intention of a voluntary administration is to maximise the prospects of a company continuing in existence or, if that is not possible, to achieve better returns to creditors than would be achieved by its immediate liquidation. During a voluntary administration there is a moratorium over most pre-administration creditor claims.  Administrators are also required to investigate the company’s affairs and report to creditors on the administrators’ opinion as to which outcome of the voluntary administration process is in the creditors’ best interest, informing the creditors prior to their voting at the second meeting (refer section 9).  Pumpkin Patch Originals Limited, NZCN 490863;  Pumpkin Patch Direct Limited, NZCN 1775025;  Torquay Enterprises Limited, NZCN 598479; and  Patch Kids Limited, NZCN 1619043.  Joseph Hayes of McGrathNicol Australia was also appointed joint and several administrator of Pumpkin Patch Originals Limited (“PPOL”).  PPOL owned and operated the retail stores in New Zealand and Australia and was the main operating entity of the Group. A New Zealand registered and domiciled company, PPOL operates in Australia as a branch. While the moratorium under the Act automatically applies in New Zealand, it also applies in Australia subject to the orders made by the Federal Court of Australia on 10 November 2016, recognising the voluntary administration of PPOL as a foreign proceeding pursuant to Article 17 of the Model Law.  Joseph Hayes and Shaun Fraser of McGrathNicol Australia were appointed joint and several administrators of the following Australian entities on 26 October 2016 by resolution of the Companies’ Directors, pursuant to Section 436A of the Corporations Act 2001:  Pumpkin Patch (Australia) Pty Limited, ACN 068 264 693; and  Pumpkin Patch Australia Properties Pty Limited, ACN 146 055 236. Appointment of Receivers and Managers  Immediately following the appointment of the Administrators on 26 October 2016, ANZ Bank New Zealand Limited (“Bank”) appointed Brendon Gibson and Neale Jackson of KordaMentha New Zealand as joint and several receivers and managers of the assets and undertakings of the NZ Entities. Craig Shepard and David Winterbottom of KordaMentha Australia were appointed as joint and several receivers and managers of Pumpkin Patch (Australia) Pty Limited, Pumpkin Patch Australia Properties Pty Limited, The Catalogue Studio Pty Limited and the Australian-based assets of PPOL.  The Receivers represent predominantly the interest of the Secured Creditor (the Bank) and their primary role is to realise enough charged assets to repay the debt owed to the Secured Creditor.  The Receivers were and are responsible for the management and sale of the business and assets of the Group. First creditors’ meeting  Section 239AN of the Act requires an administrator to convene a first creditors’ meeting within eight business days of being appointed.  The first creditors’ meeting for each of the Companies were held on 7 November 2016 (with no nominations to appoint an alternative administrator).  Creditors resolved at the meeting to appoint a Creditors’ Committee to PPL and PPOL. 6 1. Introduction The Watershed Meetings the NZ Entities are to be held at the office of Simpson Grierson at Level 28, the Lumley Building, 88 Shortland Street, Auckland, on Tuesday 7 March 2017 at 12:00pm. Australian creditors of PPOL can attend the meeting via video conference at the Sydney offices of McGrathNicol at Level 12, 20 Martin Place, Sydney NSW at 10:00am local time. Creditors’ committee  A Creditors’ Committee meeting for PPL was held on 24 February 2017. There have been no Creditors’ Committee meetings held for PPOL. The Administrators have had various communications with members of both Creditors’ Committees. Extension of convening period    Section 239AT of the Act requires the Administrators to convene a second creditors meeting (“the Watershed Meeting”) within the convening period, being 20 business days of being appointed. Watershed Meeting  The Watershed Meetings for the NZ Entities are to be held at the office of Simpson Grierson at Level 28, the Lumley Building, 88 Shortland Street, Auckland, on Tuesday 7 March 2017 at 12:00pm. A copy of the notice of meeting is attached to this report.  Australian creditors of PPOL can attend the meeting via video conference at the Sydney offices of McGrathNicol at Level 12, 20 Martin Place, Sydney NSW at 10:00am local time.  The purpose of the Watershed Meeting is for creditors to resolve what option to take in relation to the future of the entities under administration. The options available (under section 239AU of the Act) are whether each entity should: The Watershed Meetings were due to be held on or before 30 November 2016. However, at the First Creditors’ Meeting we noted that, if we believed it was in the best interest of creditors and would preserve value, the Administrators might submit an application to the High Court to extend the convening period for the Watershed Meeting.  be returned to its director(s); or  enter into a Deed of Company Arrangement (“DOCA”); or  enter into liquidation. On 17 November 2016 the Administrators filed such an application in the Auckland High Court requesting an extension of the convening period to 28 February 2017. The Administrators did this because, in their view, an extension of the time for holding the Watershed Meeting would be beneficial as it would provide:   a stable environment for the Receivers to realise the Companies’ assets in an orderly fashion to maximise value; and Purpose of this report  the Administrators more time to investigate the affairs of the Companies, to report to creditors on potential future recoveries, and make a recommendation at the Watershed Meeting regarding the future of the Companies.  The Receivers were supportive of the extension of the convening period.  On 18 November 2016 the High Court granted the orders extending the convening period for the Watershed Meeting to 28 February 2017.  A similar application was also made in Australia and orders were made in the Federal Court of Australia granting an extension of the convening period for the second meeting of creditors for the AU Entities.  In respect of these options, given the Group is insolvent and no DOCA has been proposed, the Administrators’ views are that the only option is for the NZ Entities to be placed in liquidation. Section 239AU of the Act requires the Administrators to provide a report (“Report”) to all creditors ahead of the Watershed Meeting, containing:  details about the business, property, affairs and financial circumstances of the entities under administration;  the Administrators’ opinion and recommendation on each of the options available to creditors; and  if a DOCA is proposed, the details of the DOCA.  This Report has been prepared in respect of the Group and informs creditors about the investigations undertaken by the Administrators to date. 7 1. Introduction The NZ Administrators confirm that they were not disqualified from appointment as administrator of the NZ Entities and (pursuant to the Court order under section 280 of the Act dated 22 February 2017) are not disqualified from being appointed liquidators of the NZ Entities (if appointed by creditors). Context of this report  Declaration of Independence, Relevant Relationships and Indemnities In reviewing this Report, creditors should note the following:   References to the Group in this report are to the entire Pumpkin Patch consolidated group. Financial information is presented for the consolidated Group, not just those entities in voluntary administration. Individual balance sheets for the NZ Entities are included at Appendix one. The NZ Administrators confirm they were not disqualified from appointment as administrator of the NZ Entities and (pursuant to the Court order under section 280 of the Act dated 22 February 2017) none of the NZ Administrators are disqualified from being appointed liquidator of the NZ Entities (if appointed by creditors).  The NZ Administrators and McGrathNicol New Zealand (the NZ Administrators’ firm) confirm that we:  This Report and the statements herein are based upon our preliminary investigations to date. Any additional material issues identified subsequent to this Report may be the subject of a further written report and/or tabled at the forthcoming Watershed Meeting.  are not a creditor of the Companies (other than for our professional fees for carrying out our duties as Administrators of the Company);  have not within the two years immediately preceding the commencement of the administration, been a shareholder, director, auditor, or receiver of the Companies or of a related company;  The Receivers are in control of the Group’s books and records. The investigations of the Group’s affairs have been prepared from books and records made available to the Administrators, as well as information provided by the Group’s officers, key personnel where applicable, and from our own enquiries. Whilst we have no reason to doubt any information contained in this Report, we reserve the right to alter our conclusions should the underlying data prove to be inaccurate or materially changes from the date of this Report.  have not within the two years immediately before the commencement of the administration, provided professional services to the Companies; and  have not within the two years immediately before the commencement of the administration, had a continuing business relationship with the Companies.  The statements and opinions given in this Report are given in good faith and in the belief that such statements and opinions are not false or misleading. Except where otherwise stated, we reserve the right to alter any conclusions reached on the basis of any changed or additional information that may be provided to use between the date of this Report and the date of the Watershed Meeting.  The AU Administrators, in accordance with Section 436AD of the AU Act and the Australian Restructuring, Insolvency & Turnaround Association (“ARITA”) Code of Professional Practice, provided a Declaration of Independence, Relevant Relationships and Indemnities (“DIRRI”) with the AU Administrators’ first communication to creditors (and tabled at the First Meeting of Creditors).  In considering the options available to creditors and formulating our recommendation, the Administrators have necessarily made forecasts of asset realisations and total creditors. These forecasts and estimates may change as asset realisations progress and claims are received from creditors. Whilst the forecasts and estimates are the result of the Administrators’ best assessment in the circumstances, creditors should note that the outcome for creditors may differ from the information provided in this Report.  The DIRRI disclosed information regarding the AU Administrators’ independence, prior personal or professional relationships with the Group or related parties and any indemnities received in relation to the appointments (in the case of the Group there were none). This assessment identified no real or potential risks to the AU Administrators’ independence.  Since the date of the Administrators’ appointment, the Administrators have continued to assess whether any potential conflict of interest issues have arisen. The Administrators remain of the view that there are no real or potential risks to their professional independence.  Amounts in this report are in New Zealand dollars, unless otherwise stated and may not sum exactly due to rounding. 8 Background information 2. 2.1 Background information Group structure The purpose of the background section is to provide creditors with information on the structure and history of the Group. The chart below shows the Group’s ownership structure. All subsidiaries are 100% owned. Key NZX listed holding company: PPL performed the head office and distribution centre functions NZ (In Voluntary Administration & Receivership) Pumpkin Patch Limited (“PPL”) (NZX Listed) Australia (In Voluntary Administration & Receivership) Australia (In Receivership) Other country Pumpkin Patch Australia Pty Limited (“PPAL”) Pumpkin Patch Ireland Limited (Republic of Ireland) Operated two retail stores in Ireland Pumpkin Patch Australia Properties Pty Limited (“PPAPL”) Pumpkin Patch Europe Brands Limited (UK) Operated the UK wholesale business TCS Pty Limited (non-trading) Held the leases for 20% (c.26) of the AU retail stores Source: Annual report, NZ Companies Office records, Simpson Grierson group structure chart Torquay Enterprises Limited (“TEL”) Pumpkin Patch Share Trust Management Limited (NZ) Patch Kids Limited (“PKL”) Holding company Owned the trade marks Pumpkin Patch Originals Limited (“PPOL”) Primary operating entity: – Operated NZ and AU retail stores and wholesale businesses outside of the US and UK – Owned the majority of assets including stock and store fit outs – Sold stock to the wholesale, Irish retail and on-line businesses Pumpkin Patch Direct Limited (“PPDL”) Operated the on-line business, purchasing stock from PPOL Pumpkin Patch LLC (USA) (ceased trading) Previously operated the US retail business Pumpkin Patch Wholesale LLC (USA) Operated the US wholesale business 10 2. 2.2 Background information Business overview The Group’s key business was the sale of Pumpkin Patch (and later Charlie & Me) branded products through retail outlets located throughout New Zealand and Australia, in addition to international retail outlets at various times, supported by a wholesale channel and an online business. On Appointment, PPL and PPOL had 1,596 employees across New Zealand and Australia. Overview of business units Head office (PPL) employees Retail (PPOL) employees Business unit By function (all NZ) By location Description     Wholesale (International) Pumpkin Patch was the founding brand of the business with products targeted from babywear to kidswear, including accessories and footwear. Labels under the Pumpkin Patch brand included Urban Angel and Patch Maternity. Charlie & Me was launched in 2010 with a focus on “every-day wear”. The brand was initially launched in Australia with four stores opening in its first year. The opportunity was seen to use the Pumpkin Patch brand image to enter the “every-day” market to compete with T&T, Cotton On Kids, JK Kids, The Baby Factory etc.  Sold Pumpkin Patch branded product at wholesale prices to third party international customers.  The two forms of customers were  Franchise partners: Customers sold through Pumpkin Patch branded stores. The largest wholesale customer, Jawad, operated as a franchise partner; and  Wholesale customers: No formal volume agreement. Customers purchased on a season by season basis. Customers included major department stores such as Nordstrom in the US. Online business  The transactional website was first launched in 2001 accepting transactions for Australia and New Zealand. NZ AU Compliance 3 North Island - NZ 281 - Customer Services 7 South Island - NZ 60 - Daycare Centre 10 ACT - 21 Design 43 NSW - 378 Online 5 NT - 12 Finance and HR 25 Other - 5 IT 16 QLD - 159 Marketing 15 SA - 55 Merchandise Planning 11 TAS - 15 3 VIC - 311 8 WA Property Retail Management Supply Chain 10 Warehouse 41 Wholesale 7 Total 204 Total Total PPL/PPOL employees 341 95 1,051 1,596 Source: Management information  The Group’s head office was located in Auckland, New Zealand, where the key support functions, including its global distribution centre, were located. A summary of head office employees by function is shown above. These employees were employed by PPL.  Retail employees were employed by PPOL. On appointment PPOL had 341 and 1,051 retail staff in New Zealand and Australia respectively. PPOL’s primary function was the operation of the retail network across Australia and New Zealand. 11 2. 2.3 Background information History of Pumpkin Patch Pumpkin Patch went through considerable change from its inception in 1990 as a mail order business, through to a significant multi-national retailer with stores across New Zealand, Australia, the US, UK and Ireland. PPL listed on the NZX on 9 June 2004. 1990 1994 Founded in New Zealand with a mail order catalogue, opening the first retail store in Auckland due to high demand Pumpkin Patch entered Australia as a mail order catalogue 1997 2000 2001 2002 2003 First Australian store opens Launch of brochure website in Australia and New Zealand Transactional website available to shoppers in Australia and New Zealand First wholesale partner: Nordstrom US Wholesale partner: David Jones, Australia 2004 2005 2006 2007 2008 2009 Pumpkin Patch lists on New Zealand stock exchange raising $120m Opens first franchise partner stores in: UAE, Bahrain, Saudi Arabia, Qatar, Kuwait and Oman First retail store in the USA opens Transactional websites launched in UK and Ireland. Franchise partner stores opened in: Singapore, Malaysia, Indonesia and South Africa Transactional website: US, Franchise partner store, Pakistan Franchise partner store, Russia & India Rebranding of Pumpkin Patch 2010 Franchise partner stores: Jordan, Lebanon, Thailand, China and Malta First retail store in Ireland opens US company enters Chapter 11 bankruptcy proceedings: 20 of 35 stores to close 2011 2012 2013 2014 2015 2016 First Charlie & Me store opened in Australia Wholesale partnership: Amazon, UK and Mexico Franchise partnership in Venezuela Wholesale partnership: Shop Direct, Franchise partnership in Indonesia Online concession with House of Fraser, UK Wholesale partner, Jawad, confirmed closure of 22 Charlie & Me and 13 of 36 Pumpkin Patch stores 26 October: Board appoints administrators, Andrew Grenfell, Conor McElhinney and Joseph Hayes of McGrathNicol Bank appoints receivers Closure of remaining US stores announced Pumpkin Patch UK placed into administration Source: PPL website and public information 12 2. 2.4 Background information Retail store locations The Group operated 166 leasehold retail stores across New Zealand, Australia and Ireland as summarised below. The head office and distribution centre were located in Auckland, New Zealand. The Group unsuccessfully expanded its retail network into the UK and US, subsequently exiting both markets in FY11. Key operating locations of stores by brand Pumpkin Patch – 129 sites Charlie and Me – 17 sites Northern Territory 1 Outlet stores – 18 sites Queensland Ireland – 2 sites` 15 NSW and ACT Western Australia 9 South Australia Year end store numbers by country 6 300 250 200 150 100 50 1 16 45 75 7 23 49 89 18 30 34 35 20 36 2 20 39 50 52 51 49 102 107 111 119 5 Victoria 1 28 4 4 North Island Tasmania 3 20 40 3 35 1 2 2 2 2 3 3 3 2 55 51 53 52 50 45 132 129 129 131 124 119 26 6 2 2 South Island FY05 FY06 Australia FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 New Zealand United Kingdom United States Ireland 7 3 Source: Annual reports and management 13 2. 2.5 Background information Sales by geography and key product categories The Group’s sales peaked at $412.5m in FY09 following expansion into the UK and US, increase in its Australian store network and strong wholesale sales. Sales had fallen 48.5% ($200.1m) to $212.4m by FY16, following the exit from the UK and US retail operations due to losses, reduction in the Australian and New Zealand store network and the loss of key wholesale customers. Sales by geography (including wholesale)  The chart opposite sets out total sales by geography in FY09 and FY16. Sales fell 48.5% from a peak of $412.5m in FY09 to $212.4m in FY16.  Key reasons for the decline in sales: Sales by geography (including wholesale) ($’m) $62.8m  Exiting the US and UK stores after significant investment to grow the store footprint. The decision to exit was as a result of challenging economic conditions, intense competition and continued underlying trading losses. The impact of the offshore expansion is discussed in further detail in section 6.3. $64.4m $22.8m $59.2m  Declining same-store sales in New Zealand and Australia resulting in the gradual closure of under-performing stores (as leases expired). $17.4m 48.5% ($200.1m) decline FY09 $412.5m $43.9m FY16 $212.4m $203.4m  Losing key wholesale customers: Jawad (Middle East) as a result of Jawad’s financial instability, Nordstrom (US) and Kiddicare (UK). New Zealand Australia $151.1m United Kingdom United States Wholesale and other Source: Management information Sales by key product categories (excluding wholesale)  Pumpkin Patch targeted babies to young boys and girls. As shown in the adjacent chart, retail sales (i.e. excluding wholesale) were flat from FY14 to FY16 at $182m.  Toddler category sales declined by $9.0m (21.7%) through continued competition from offshore online retailers and other international retailers such as Uniqlo, Zara, Cotton On and H&M operating in Australasia.  The decline in the toddler category was offset by growth in the baby, girls and boys categories totalling $9.9m (10.8%) over the same period. Sales by key product categories (excluding wholesale) ($'m) $182.3m FY16 $32.4m $38.2m $36.7 $25.8m $182.8m FY14 $41.4m - 20 $37.4m 40 60 $32.0m 80 100 $21.4m 120 140 Toddler Baby Girls Boys Accessories Footwear Other Urban Angel 160 180 200 Charlie & Me Source: Management information 14 2. Background information 2.6a PPL share price, key announcements and Board (June 2004 to December 2010) The chart below (continued on the following page) maps PPL’s share price against the NZX50 since listing in Jun-04, key results and events, and key board/management in place over the period. Key challenges from Jun-04 to Dec-10 included the unsuccessful expansion into the US and UK and the Global Financial Crisis. The NZX50 fell over 40% from Oct-07 to Mar-09; PPL’s share price fell 68% over the same period. Pumpkin Patch historical share price, executives and Board Start/end Transition Ongoing Greg Muir Chair CEO/MD Design Board key: Maurice Prendergast Chrissy Conyngham Board Jane Freeman David Jackson Sally Synnott Brent Impey 5.00 4.50 Results for FY06: net income up to $28.5m from $24.6m PY; sales up 11.1% US expansion plans PPL NZX50 (indexed) Results for FY05: net income up to $24.6m from $8.1m PY; sales up 27.3% 4.00 3.00 2.00 Results for H1 FY06: net income up to $14.6m from $12.5m PY; H1 sales up 8.6% Results for H1 FY07: net income up to $15.5m (6.4%); H1 sales up 19.6% Results for FY08: net income down to $17.1m from $23.5m PY; sales up 12.3%; interest, quota costs and US expansion blamed Plans to open 26 stores in UK over 12 months and also enter the US market through owned stores Earnings guidance for FY07: EBITDA $58m to $62m ($55m PY), net income $26.5m to $28.5m ($28.5m PY) 1.50 1.00 0.50 Results for FY07: net income down to $27.6m (later restated) from $28.5m PY; sales up 17.9% FY06 AGM 3.50 2.50 PPL added to NZX50 Global Financial Crisis NZX50 falls over 40% from Oct-07 to Mar-09; PPL falls 68% over the same period PPL lists 9-Jun-04; raises guidance for FY04 in Jul-04 Results for H1 FY08: net income down to $12.1m from $15.5m PY; H1 sales up 13.5% PPL dropped from NZX50 Results for FY09: net loss of ($26.7m) from $17.1m profit PY; sales up 3.2%; US write offs New childrenswear brand Charlie & Me announced; to open 6-8 stores by year end Chapter 11 filed in US to close 20 of 35 US stores Share repurchase 1.0m shares for $1.12m 30 head office staff made redundant to reduce costs 0.00 Source: S&P Capital IQ and public disclosures; note: neither PPL nor NZX50 adjusted for dividend yield 15 2. Background information 2.6b PPL share price, key announcements and Board (January 2011 to October 2016) Pumpkin Patch’s performance continued to suffer from Jan-11, ultimately resulting in the Board appointing the Administrators on 26-Oct-16. Key issues during this period included an inability to turn around performance despite closing the US and UK operations and undertaking further head office restructurings. There was significant turnover within the board and management during this period. Pumpkin Patch historical share price, executives and Board Board key: Jane Freeman Chair CEO/MD Design Maurice Prendergast Chrissy Conyngham Transition Ongoing Peter Schuyt Neil Cowie Di Humphries Luke Bunt Di Humphries Maurice Prendergast Board Start/end David Jackson Luke Bunt Peter Schuyt Bruce Cotterill Sally Synnott Josette Prince Brent Impey Rod Duke 5.00 4.50 PPL NZX50 (indexed) 4.00 3.50 3.00 2.50 Results for FY14: net loss of ($10.1m) from $5.1m profit PY; sales down 16% Auditor going concern doubt Results for FY12: net loss of ($27.5m) from ($1.9m) loss PY; sales down 7.3%: various write-downs Results for FY11: net loss of ($1.9m) from $25.5m profit PY; sales down 6.7%: “challenging conditions” PPL relationship with Amazon to sell in UK, France, and Germany 2.00 Results for FY13: net income of $5.1m from ($27.5m) loss PY; sales down 4.0% 1.50 1.00 0.50 0.00 55 head office jobs cut and closure of 20 US stores announced PPL UK enters administration: 400 employees and 36 stores Goldman Sachs engaged to perform strategic and capital review Goldman Sachs process fails to find buyer: none of the 10 interested parties offered suitable value to shareholders according to Chairman, Peter Schuyt; PPL focus on closing under-performing stores, supply chain improvement and reducing costs Results for FY16: net loss of ($15.5m) from ($9.1m) loss PY; sales down 10.9% PPL enters VA and receivership 26-Oct-16 Results for FY15: net loss of ($9.1m) from ($11.5m) loss PY; sales down 1.0%: wholesale, currency and online challenges Auditor going concern doubt CFO Matthew Washington resigns Source: S&P Capital IQ and public disclosures; note: neither PPL nor NZX50 adjusted for dividend yield 16 2. 2.7 Background information Secured lenders and charges This section summarises the security held by the Bank and certain suppliers. Secured lenders and charges  The New Zealand and Australian Personal Property Securities Register (“PPSR”) shows the following security interests registered.  The Bank and Australia and New Zealand Banking Group Limited hold charges pursuant to a composite general security deed dated 24 June 2009 over the whole or substantially the whole property of the Group.  The amount outstanding to the Bank at 31 January 2017 was $59m. NZ registered security interest Creditor group Collateral class Secured party Banks All present and after-acquired property ANZ Bank Suppliers Other goods, intangibles and specific items Various # 10 16 AU registered security interest Creditor group Collateral class Secured party Banks All present and after-acquired property ANZ Bank Suppliers Other goods, intangibles and specific items Northern Managed Finance Pty Ltd 1 Intercompany All present and after-acquired property 1 Patchworks Limited # 10 Source: NZ and AU Personal Property Securities Register Note: the number in the table above refers to the number of security interests registered 17 Historical financial information 3. 3.1 Financial information Historical profit and loss This section provides a summary of the consolidated financial performance of the Group during the financial years FY14, FY15 and FY16. Pumpkin Patch’s year-on-year sales revenue was falling due to a declining wholesale business, closure of non-performing stores, increasing competition and FX rate impacts. Overview   The adjacent table provides a summary profit and loss based on the Group’s audited consolidated financial statements. The line items have been adjusted from those disclosed in the audited accounts to separate reorganisation costs and normalise the underlying results. Key points:  The Group’s year-on-year sales revenue was falling due to: ＞ declining wholesale business. Between FY14 and FY16 wholesale revenue declined $23.9m due to the loss of major customers in the Middle East (Jawad), UK (Kidicare), US (Liverpool, Mexico, Nordstrom) and Lebanon (Retail Group); ＞ closing non-performing stores. Year end store numbers FY14: 185; FY16: 166; ＞ increasing competition from offshore online retailers and international retailers operating in Australia and New Zealand; and ＞ increasing NZD/AUD FX rate impacting the translation of Australian revenue.  The above was partially offset by an increase in Web and Australian same-store sales.  Gross profit margin pressure continued to challenge the business due to increased competition, poor purchasing decisions and supply chain disruptions resulting in higher discounts to realise inventory, the FX impact of weaker NZD/USD exchange rates and the reduction in the natural hedge provided by the predominantly USD based wholesale business.  The reduction in revenue in FY16 meant less available earnings to cover administrative and general expenses, which remained flat over the period.  In FY14 the Group engaged an independent third party to undertake a review of the business. The review identified underperforming areas within the business and provided recommended strategies to address the issues identified. This resulted in provisions for underperforming stores, write down of IT software and inventory, employee related reorganisation costs and costs incurred in various transformation projects, shown as reorganisation costs. Summary of Group profit and loss $'m FY14 FY15 FY16 Revenue 240.9 238.5 212.4 Cost of goods sold (117.0) (115.9) (109.6) Gross profit 123.9 122.6 102.8 51.4% 51.4% 48.4% 0.2 0.2 0.2 Selling expenses (109.0) (108.2) (94.8) Finance expenses (3.4) (4.0) (3.2) (11.3) (11.7) (11.5) 0.4 (1.0) (6.6) Reorganisation costs (14.6) (6.4) (6.3) Loss from continuing operations (14.2) (7.4) (12.9) Gross profit margin Other operating income Administrative and general expenses Profit/(loss) from continuing operations (before reorganisation costs) Income tax credit/(expense) Net loss from continuing operations Profit from discontinuing operations Loss for the year 2.6 (1.7) (2.6) (11.6) (9.1) (15.5) - - (9.1) (15.5) 0.1 (11.5) Exchange differences on translation of foreign operations (0.1) 2.1 (0.6) Net movement on cash flow hedges (4.1) 1.8 (5.6) Income tax relating to components of other comprehensive income 1.2 (0.5) 1.6 (14.5) (5.7) (20.2) Total comprehensive loss for the year Source: Audited financial statements. Reorganisation costs in FY14, FY15 and FY16 have been reclassified from cost of goods sold and administrative and general expenses. 19 3. 3.2 Financial information Historical balance sheet The reduction in the Group’s net assets was due to the significant write-downs and losses incurred by the Group with cumulative comprehensive losses over the three year period of $40.4m. Overview   The adjacent table provides summary balance sheets based on the Group’s audited consolidated financial statements at 31 July 2014, 2015 and 2016 and unaudited management accounts at 2 October 2016. Key points:  Trade and other receivables include amounts due from wholesale customers. The reduction from FY14 to FY16 was directly attributable to the declining wholesale business.  The reduction in inventory from $64.3m at 31 July 2014 to $41.2m at 31 July 2015 was due to: ＞ clearance of aged inventory; ＞ reduced store numbers; and ＞ reduction in the level of new season’s stock purchased (days inventory outstanding FY14 187, FY15 166) with insufficient summer 2015 stock purchased negatively impacting the Group’s performance in H1 FY16.  The book value of property, plant and equipment declined as a result of: Summary of Group balance sheet $'m Cash and cash equivalents Trade and other receivables Derivative financial instruments Inventories Current tax receivables Jul-14 Jul-15 Jul-16 2-Oct-16 1.1 1.9 - - 16.8 13.5 4.4 6.1 1.0 5.8 1.1 0.0 64.3 41.2 49.4 48.7 - 1.0 - - Total current assets 83.2 63.4 54.9 54.8 Property, plant and equipment 32.4 28.4 23.4 25.0 Intangible assets 5.8 2.8 2.2 0.2 Non-current tax receivables 3.5 3.6 3.5 3.6 Derivative financial instruments 0.3 - - - Deferred tax assets 7.9 5.6 4.8 5.2 49.9 40.3 33.9 34.0 133.1 103.7 88.8 88.7 Total non-current assets ＞ limited capital expenditure (60% of depreciation) due to capital constraints; Total assets ＞ impairments due to store closures ($2.1m); and Trade and other payables (27.7) (26.7) (25.4) (28.0) ＞ asset disposals, including the FY16 disposal of excess land and buildings with a book value of $1.3m for cash flow purposes. Interest bearing liabilities - (41.0) (46.0) - Derivative financial instruments (1.1) (3.0) (3.1) (3.4)  Reduction in borrowings of $25.0m between July 2014 and July 2015 was predominantly funded from the reduction in inventory. In September 2016 an amended $54.0m facility was agreed with the Bank, expiring 30 September 2017. Deferred landlord consideration (1.4) (1.2) (0.9) (2.1) Total current liabilities (30.2) (71.9) (75.5) (33.4) Interest bearing liabilities (66.0) - - (47.4)  The reduction in net assets was due to the significant write-downs and losses incurred by the Group with cumulative comprehensive losses over the three year period of $40.4m. Other provisions (3.1) (2.6) (3.9) (0.5) Derivative financial instruments (0.1) (1.1) (1.5) (1.5) Total non-current liabilities (69.2) (3.7) (5.4) (49.5) Total Liabilities (99.3) (75.5) (80.9) (82.9) Net assets 33.8 28.2 7.9 5.9 Source: Audited financial statements Jul-14 to Jul-16 and unaudited management accounts as at 2-Oct-16 20 3. 3.3 Financial information Historical cash flow The Group’s cash flow from operating activities was negative in two of the past three years. Capital investment in the business declined as capital constraints arising from historical losses impacted the possible level of reinvestment (capex was running at c.60% of annual depreciation). Overview  The adjacent summary cashflow is based on the Group’s audited consolidated financial statements.  Key points: Summary of Group cash flow $'m  Cash flow from operating activities was negative in two of the past three years. Receipts from customers  The $29.7m cash surplus generated from operating activities in FY15 was due to the clearance of stock and reduced purchases of inventory and was primarily used to reduce debt ($25.0m). The significant sell down of inventory and reduced level of purchases of new season stock in FY15 resulted in stock availability issues for online and clearance stores in FY16. Interest received  Capital out flow from investing activities reduced each year as capital constraints impacted the level of re-investment in the business.  As set out in the cash bridge on the following page, the increase and decrease in borrowings in FY14 and FY15 respectively was due to high inventory levels at the end of FY14 and reduction thereof in FY15. FY14 FY15 FY16 Cash flows from operating activites Other operating income Payments to suppliers and employees 237.0 241.6 219.6 0.8 0.9 0.2 0.2 0.1 0.1 (240.5) (207.5) (222.4) Interest paid (4.2) (4.7) (2.9) Net sales tax received/(paid) (0.2) (0.2) 0.2 Income taxes received/(paid) Net cash (used in)/provided by operating activities (1.1) (0.6) 0.5 (8.0) 29.7 (4.8) - - 1.9 Cash flows from investing activities Proceeds from sale of building Purchase of property, plant and equipment (5.6) (3.6) (2.7) Purchase of intangibles (3.0) (0.3) (1.3) Net cash used in investing activities (8.6) (3.9) (2.1) Drawdown/(repayment) of borrowings 14.0 (25.0) 4.0 Net cash provided by/(used in) financing activities 14.0 (25.0) 4.0 Net (decrease)/increase in cash and cash equivalents (2.6) 0.8 (2.9) Cash and cash equivalents at the beginning of the financial year 3.7 1.1 1.9 Cash and cash equivalents at end of year 1.1 1.9 (1.0) Source: Audited financial statements 21 3. 3.3 Financial information Historical cash flow The $25.0m debt repayment in FY15 was funded from cash released from the reduction of inventory through clearance of aged stock, store closures and a reduction in the purchase of new season stock relative to the prior year. The lower level of new season stock negatively impacted the performance of the Group in H1 FY16. Net cash / (overdraft) movements FY14 to FY16 ($'m) 45.0 40.0 2.2 Increase in new season stock purchases relative to PY to ensure sufficient stock availability. Purchase of PP&E ($3.6m) and intangibles ($0.3m). 23.1 35.0 (3.9) Bank debt repayment funded by cash released from significant inventory reduction. 30.0 25.0 20.0 15.0 Reduction in trade receivables ($5.3m) due to decline in the wholesale business and prepayments ($3.4m) offset by a reduction in payables ($1.2m). Transformation and corporate activity costs ($1.6m), employee related costs ($0.9m) and store closure, defit and onerous lease costs ($2.6m). Corporate activity costs ($0.6m), employee related costs ($0.7m) and store closure, de-fit and onerous lease costs ($3.1m). 11.7 10.0 (25.0) Cash released from inventory reduction: 1. Clearance of aged stock; 2. Fewer stores; and 3. Lower level of new season stock purchases relative to PY. 5.0 1.1 - 2.5 (5.1) (2.1) 0.2 (3.3) (1.0) (8.2) Inven- Other Net Repaym. Reorg. (overdraft) EBITDA tories working capex of debt costs capital (4.4) (4.9) Norm. Jul-14 7.5 1.9 (5.0) Cash / 4.0 3.4 Interest FX, Norm. Inven- Other Net Drawdown Reorg. expense taxes and (overdraft) EBITDA tories working capex of debt costs other Cash / Jul-15 capital Interest FX, Cash / expense taxes and (overdraft) other Jul-16 Source: McN analysis of audited financial statements 22 Events leading to appointment of administrators 4. Events leading to appointment of administrators Pumpkin Patch had been in a steady state of decline for many years and was significantly undercapitalised. Failed sale/capital raising processes left the Board with few options. A key focus during the period was the FY16 audit and the need to renegotiate banking facilities. New facilities were agreed, but the FY16 results issued on 29 September 2016 highlighted a material uncertainty in relation to the Group’s ability to address its capital position. Key events leading up to appointment of Administrators   continue to demonstrate progress against the strategic plan in support of potential requests for funding for capex and other facilities. The information set out in sections two, three and six of this Report highlight a business that had been in a steady state of decline for many years and was significantly undercapitalised. This resulted from the following key issues:  This required new facilities to be negotiated with the Bank to secure funding to September 2017.  unsuccessful expansion into the UK and US;  Performance had started to show signs of stabilisation in the second half of FY16 – same store sales appeared to be increasing along with average spend, some loss making stores were being exited, online sales were growing following reinvestment and a move away from using online as a clearance channel etc.  However, these improvements were insufficient to turnaround the Group’s performance. The Group had lost key international wholesale customers, was facing currency headwinds, and was still significantly capital constrained so could not fund necessary capex for store fit out, lease exits, management information systems etc.  Consequently, the Board asked the Bank to consider a significant restructuring of its debt, through converting a substantial portion of Bank debt into “some form of capital instrument or similar”, along with an interest holiday on term debt, reduced line fees, and a new capex facility (source: presentation to the Bank, 12 August 2016).  On 13 September 2016 the Board signed a term sheet that it considered enabled the Group to continue to trade as a going concern, with the amended facility signed on 22 September 2016.  Consequently, the FY16 accounts were able to be finalised on 29 September 2016, with the auditors including an emphasis of matter that “the going concern assumption is  paying dividends that equated to 97% of net tax paid profit over the expansion period (FY05 to FY11), necessitating significant debt to fund the expansion and subsequent losses;  increasing global competition, aggressive promotional activity in core markets and a poor online presence;  lack of reinvestment in the core retail business; and  inadequate supply chain and management information systems.  Management and the Board were unable to reverse Pumpkin Patch’s issues sufficiently to return it to sustainable profitability. A sale/capital raise process run by Goldman Sachs in 2014/2015 did not identify any interested parties willing to pay equity value for the Group.  Following the unsuccessful sale/capital raise process, the Board developed a strategy to implement changes in an effort to address the Group’s fundamental operational and trading issues and demonstrate the potential viability of the underlying business if given access to additional capital. August 2016 to October 2016 dependent on the Group’s ability to address its capital position and to continue meeting its obligations under its bank facility agreement. The Group is highly geared and capital constrained. This represents a material uncertainty in relation to the Group’s ability to address its capital position.” (source: FY16 audit report). This was in line with the material The following summarises the key issues and events that occurred during August 2016 to October 2016.  A key focus during this period was the FY16 audit and the need to negotiate and agree bank facilities that would allow the Group to:  trade as a going concern over the next 12 months (subject to addressing the identified capital constraint risk) to meet the going concern test to obtain an unqualified audit opinion; risk around capital constraints on the future of the business highlighted by the Board primarily in 2016 financial statements and market advice.  As part of the refinancing, the Group gave an undertaking to the Bank that it would present options to address and consider the Group’s capital constraints by 20 October 2016 (agreement was subsequently reached to extend this date to 31 October 2016).  allow the Board to determine and consider options and address its capital constrained position; and 24 4. Events leading to appointment of administrators (continued) The Board sought expressions of interest from shareholders representing the majority of PPL’s shares, without success. The Directors concluded that, due to the lack of capital and inability to source additional capital from shareholders or the Bank, that the Group could not enter into obligations beyond September 2017 and that the Group was also likely to become insolvent in the future. Consequently, the Board appointed the Administrators to the Companies on 26 October 2016. Immediately following the appointment of administrators, the Bank appointed receivers.  The Board decided to approach major shareholders in the first instance regarding further capital investment. By 20 October 2016, the Group had communicated (or had attempted to communicate) with parties representing over 60% of PPL shareholding. The general feedback was that 10% were moderately positive, with the remaining 90% having a generally negative view or no interest.  The Board also obtained opinions from independent advisers that a trade buyer would be unlikely to purchase PPL’s shares in its current form, and that investment banks would not be prepared to underwrite a rights issue in the short to medium term.  Consequently, the Directors concluded that, having undertaken discussions with shareholders and other advisers, there was no reasonable prospect of a successful capital raising in the short term.  Shareholders were therefore advised on 21 October 2016 that it was highly unlikely that there was any residual value in PPL’s equity and a NZX trading halt was implemented.  The Directors were aware of interest from three parties in purchasing parts of the business and assets of the Group. However, the Directors elected not to pursue these lines of enquiry, as any transaction would likely require some form of insolvency process to complete, there was no clear view as to timeframe for completion and the parties would be unlikely to give assurances that trade and other creditors would recover amounts owing to them. The Directors considered that any negotiation with these parties would therefore be best undertaken with the Group in administration.  On 24 October 2016, the Board requested that the Bank either:  The Directors concluded that, due to the lack of capital and inability to source additional capital from shareholders or the Bank, that the Group could not enter into obligations beyond September 2017 and that the Group was also likely to become insolvent in the future.  Consequently, the Board resolved to place the Companies into voluntary administration and partners of McGrathNicol in New Zealand and Australia were appointed as administrators on 26 October 2016. Immediately following the appointment of the Administrators, the Bank appointed receivers to the Companies.  agree to capitalise a portion of term debt and provide capex funding of $5m for the FY17 financial year; or  that the Bank “step into the financial shoes of the Company” over the period of a sale process, guaranteeing any obligations incurred by the Group during the sale process.  The Bank responded on 25 October 2016, advising that neither solution was practicable in the circumstances. The Bank had already provided significant concessions to PPL (noted above) and was also unwilling to commit to an unknown and uncontrollable level of additional exposure, estimated to be in the millions of dollars (or tens of millions if upcoming winter season orders were placed). 25 Directors' Statement of Company's Position 5. Directors’ Statement of Company’s Position The Directors believe the Group failed due to the loss of its wholesale business, a lack of capital to address weaknesses in the store network and information systems, trading pressure from suppliers due to the Group’s precarious financial position, and unease at entering into commitments beyond 12 months as working capital facilities were only in place until 30 September 2017. The reasons for failure as set out by the Directors are consistent with our own assessment as set out in the subsequent section. Directors’ Statement of Company’s Position   Directors’ opinions as to the reasons for failure The Directors have collectively prepared a Statement of the Company’s Positon as at 9 November 2016, pursuant to section 239AF of the Act (“Directors’ Statement”). The Directors’ Statement summarises the financial position of the Group and provides the Directors’ views on the reasons leading to the appointment of Administrators.   the significant reduction in the international wholesale business and negative currency movements; A summary of the financial positions of each company in the Group is included at Appendix one and summarised below.  a lack of capital to address weaknesses in the store network (ransom payments to exit loss making stores and capital to re-fit tired stores) and information systems (supply chain management and retail KPIs); Summary balance sheets $'m Group PPL PPOL PPDL TEL PKL 25.0 3.0 20.0 - - - Intangible assets 0.2 1.8 - - 0.2 - Deferred tax asset 5.2 (1.5) 4.5 - - 0.2 13.5 - - 1.7 7.8 Fixed assets Investment in subsidiaries Non-current assets 30.4 16.9 24.5 - 2.0 8.0 Non-current liabilities (2.0) - (2.0) - - - Inventories 48.7 - 49.1 - - - Trade debtors 0.7 - 0.4 - - - Trade creditors (28.0) (3.7) (22.9) - (0.0) - Intercompany - (27.4) (26.7) 41.1 18.0 (0.9) Other working capital 3.5 (0.2) 2.4 (0.6) 3.3 (0.0) Working capital 24.9 (31.3) 2.3 21.2 (0.9) Cash at bank/(net debt) (47.4) Net assets  the risk around insolvency being materially higher absent an injection of fresh capital to address the above issues, due to the debt burden being unaffordable in the medium term; NZ Entities As at 2 October 2016 5.9 40.6 0.1 (48.1) 0.0 (14.4) (23.3) 40.6 The Directors have provided their views on the affairs of the Companies and the reasons for its failure. The Directors believe the Group failed due to: - - 23.2 7.1 Source: Management accounts as at 2-Oct-16 for the New Zealand entities and the Group. Note the consolidated balance sheet includes all entities of the Group, not just those in voluntary administration.  credit and trading pressure from suppliers and other stakeholders due to the public disclosure of the Group’s precarious financial position (e.g. the requirement to deliver a capital plan by 20 October 2016), such as wholesale partners withdrawing interest, landlord concern regarding security of tenure and reinvestment, staff uncertainty regarding their future;  the impact on the Group’s short term cash flow of higher than expected NZD/AUD FX rate; and  given the above, Directors’ unease at entering into commitments (in particular commitments beyond 12 months such as lease renewals and forward orders) due to the risk of insolvency and as working capital facilities were only in place until 30 September 2017.  The lack of capital arose from unsuccessful expansions into the US and UK funded by debt while still paying dividends and increased competition affecting profitability. As noted above, the Board had been unable to find a solvent solution to the Group’s capital constraints.  Accordingly, in the Directors’ view, there was a material risk and prospect of insolvency of the Group in the near future and the Board therefore had no choice but to appoint administrators. 27 Administrators' opinion as to the reasons for failure 6. Administrators’ opinion as to the reasons for failure 6.1 Overview This section provides the Administrators’ opinion on the underlying reasons for the Group’s failure. Administrators’ opinion as to the reasons for failure Section Overview Key drivers 6.1 Overview Pumpkin Patch entered voluntary administration and receivership on 26 October 2016  6.2 Retail network Falling same-store sales contributed to an  inefficient retail network Pumpkin Patch’s insolvency was due to cumulative trading losses and a lack of capital to address issues within the business. The reasons for the Group’s poor financial performance and lack of capital are summarised below and explored further in this section. The sales of the 22 New Zealand and 71 Australian stores that traded through the period FY07 and FY16 (“same-stores”) declined 47.2% and 38.5% respectively. This compared to the moderate growth in the New Zealand (19.1%) and Australian (34.9%) industry for clothing, footwear and personal accessories retailing over the same period. However, Pumpkin Patch Australia same-store sales grew in FY15 and FY16.  Stores became uncompetitive in the market due to an inability to update store size, format and fit-out due to capital constraints.  The unsuccessful US and UK expansion cost the Group over $98m and was funded by debt, leaving it highly leveraged with limited capital to execute turnaround strategies or invest in the business. 6.3 UK/US expansion Failed expansion into the UK and US, funded by debt, left the business undercapitalised 6.4 Inventory management Inadequate merchandise planning, supply  chain and inventory management led to significant discounting and contributed to falling gross margins Pumpkin Patch’s product offering did not adequately meet customer needs, with falling quality and design, high price perception and product ranging issues. Pumpkin Patch also experienced supply chain disruption due to reliance on a few key suppliers, causing stock outages. The Group bought stock in bulk in advance to limit these risks. Inadequate systems to deal with end-of-line or end-of-season stock led to significant aged inventory build up at warehouses.  Overall, Pumpkin Patch’s inadequate merchandise planning, supply chain and inventory management left it with the wrong stock at the wrong time, leading to significant discounting to clear stock, contributing to falling gross margins. Between FY15 and FY16, Pumpkin Patch’s margins were also negatively impacted by a falling USD:NZD FX rate.  The management information systems were not fit for purpose for a retailer of Pumpkin Patch’s scale. Management recognised that investment was required to address merchandise planning, supply chain and inventory management, product costing, customer management systems etc., but lacked the capital (estimated $8m) to implement change. 6.5 Management information systems Management information systems not fit for purpose for a retailer of Pumpkin Patch’s scale 6.6 Wholesale Loss of significant wholesale customers  and lack of management of the wholesale channel Between FY14 and FY16 wholesale revenue declined $23.9m due to the loss of major customers. The Group’s Middle East partner, Jawad, accounted for over 60% of wholesale revenues with Jawad encountering financial difficulties from FY14. Management estimated the loss of wholesale accounts in late FY15 and in FY16 equated to a reduction in the Group’s FY16 gross margin of c.$9.1m. 6.7 Capital Lack of capital to address the above issues Almost all (97%) of accumulated NPAT from FY05 to FY11 of $90.7m was paid out as dividends, leaving the UK and US expansions, stock fluctuations and later year trading losses to be funded by debt. This restricted the Group’s ability to raise capital in later years. PPL paid dividends in FY09 and FY11, despite incurring losses in those years.  29 6. 6.2 Administrators’ opinion as to the reasons for failure Declining same-store retail sales contributed to an inefficient store network The sales of the 22 New Zealand and 71 Australian stores that traded through the period FY07 and FY16 (“same-stores”) declined 47.2% and 38.5% respectively. This compared to moderate growth in the New Zealand and Australian industry for clothing, footwear and personal accessories retailing over the same period.  Following the exit of the US and UK retail stores, the Group’s primary retail operations were in New Zealand and Australia.  The adjacent chart highlights the decline in same-store retail stores sales between FY07 and FY16 for the 22 New Zealand and 71 Australian stores that traded throughout the period. Over the period, New Zealand and Australian same-store sales declined 47.2% and 38.5% respectively. This compared to moderate growth in the New Zealand (19.1%) and Australian (34.9%) industry for clothing, footwear and personal accessories retailing over the same period.   The Group was challenged by fundamental changes in the global retail landscape against which it did not sufficiently adapt, protect and defend its position in its core retail markets. 150 100  Significant increase in competition from the expansion into Australia of vertically integrated international apparel brands (e.g. H&M, Zara, Uniqlo, Cotton On) with design-to-rack capabilities of circa 12 weeks compared to Pumpkin Patch’s 28 week process.  Increase in the level of promotional and discounting activity due to: ＞ increased competition in a market size that had limited growth; and ＞ Pumpkin Patch’s pricing strategy, which drove the business into a cycle of increasing price discounting driven by unrealistic RRPs.  Technology shifts such as personal mobile devices changing consumers’ purchasing behaviour. The Group’s management information systems, technology infrastructure and supply chain did not adequately adapt to the shift (refer section 6.5). The above issues, together with management’s focus on the US and UK retail expansion, capital constraints following the exit from those markets and a lack of investment in refreshing its existing core retail store network, were key factors causing the sustained same-store sales decline in the Group’s core retail markets. Australia same store growth in FY15 and FY16 Small same store growth in FY12 50 FY07 Key changes that contributed to Pumpkin Patch’s declining same-store sales were as follows:  While competitors continued to change and refresh their product design and quality, Pumpkin Patch failed to adequately meet changing consumer preferences and trends.  Indexed same-store sales compared to industry Indexed (base year 100) Declining same-store retail sales FY08 NZ CFP FY09 FY10 AU CFP FY11 FY12 FY13 NZ LFL sales FY14 FY15 FY16 AU LFL sales Source: McN analysis of management information, Statistics New Zealand and Australian Bureau of Statistics. Base year for same-store sales analysis FY07; NZ 22 stores and AU 71 stores NZ and AU year on year same-store sales (%) AU 10% NZ 5% (5%) (10%) (15%) (20%) Comparative same-store numbers (25%) AU NZ (30%) 72 91 96 99 102 102 101 96 96 27 32 32 33 32 35 36 36 33 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Source: McN analysis of management information. 30 6. Administrators’ opinion as to the reasons for failure 6.2 Declining same-store retail sales contributed to an inefficient store network (continued) The decline in same-store sales and loss of wholesale revenue exposed Pumpkin Patch’s inefficient retail network relative to the industry. Stores became uncompetitive in the market due to an inability to update store size, format and fit-out due to capital constraints. By FY16, a third of Australian stores and one in five New Zealand stores were loss making before head office costs. The Group had insufficient capital to exit stores through negotiating early termination of leases with its landlords. Benchmarking to industry 100% 90% 3% Wages 4% 10% 8% 56% 56% 53% 14% 16% 15% 21% 20% 20% Rent Other 12% Underperformed compared to industry EBIT margin 9% 6% 4% 50% 57% 57% 18% 17% 17% 23% 20% 21% 80% 70% % of revenue 60% 60% 79% 50% 40% 30% 20% 10% 17% 20% 17% (10%) Benchmarking data AU FY16 NZ FY15 FY08 FY09 FY10 FY11 FY12 FY13 57% 56% 57% 21% 20% 21% 24% 24% 26% (2%) (0.9%) (4.1%) FY14 FY15 FY16 FY16 store contribution analysis 28% Australia Opened during FY16 New Zealand Closed during FY16 Trading 18% 8% (2%) (12%) (22%) (32%) A third of the Australian stores were loss making before head office costs during FY16 Of the 52 New Zealand stores trading during FY16, 10 stores were loss making before head office costs. (42%) Source: McN analysis of audited financial statements, IBISworld Clothing Retailer in Australia October 2016, ANZ Bank FY15 NZ apparel and footwear retailing in New Zealand and McN analysis of management information. The Group’s revenue include US, UK, NZ, AU and the wholesale business. Wage and salaries costs exclude restructuring costs. 31 6. 6.3 Administrators’ opinion as to the reasons for failure Expansion strategy The unsuccessful debt funded expansion into the US and UK left the Group highly leveraged with limited capital to execute turnaround strategies. Expansion strategy    Cumulative cost of the unsuccesful UK & US expansion $98m ($'m) The Group’s strategy post IPO was to expand the brand internationally including opening retail stores in the US and UK, while continuing to grow its core Australia and New Zealand retail network. As shown below, the Group opened 115 new retail stores between FY04 and FY08, with US and UK stores peaking at 34 and 40 respectively in FY08. The expansion was predominantly debt funded (debt increased from nil in FY05 to $81.4m in FY08), with the Group distributing 97% of its FY05 to FY11 net profits as dividends. The US retail network was not profitable resulting in it being placed into Chapter 11 in FY09. The US operations were restructured with 15 stores closed and an impairment charge of $39.9m. In the same year the UK stores were impaired by $6.4m following a review of store performance. The Group closed the remaining US stores by January 2012 and administrators were appointed over the UK stores on 19 January 2012. Associated exit costs of $35.2m were recognised in FY12. As set out in the adjacent chart, the unsuccessful US and UK expansion cost the Group c.$98m leaving it highly leveraged (refer below adjacent chart), with limited capital to execute turnaround strategies. Note the GFC occurred mid-expansion. Year end store numbers by country 300 200 150 100 50 1 16 45 75 7 23 49 89 18 30 50 102 Source: Annual reports (25) (50) (75) (100) Total capex and net losses $98m (125) FY05 FY06 UK CAPEX 34 35 20 36 52 51 107 111 FY07 FY08 UK EBITDA FY09 FY10 US CAPEX FY11 FY12 US EBITDA Source: McN analysis of audited financial statements. Note FY05 and FY06 CAPEX is derived and uses FY08 depreciation of US and UK as a proportion of boo value to estimate US and UK FY05 and FY06 depreciation. Debt to shareholder's equity ($'m) 2 20 39 49 119 3 20 40 55 132 3 3 3 2 51 53 52 50 129 129 131 124 2 45 119 Expansion increased assets 150 Exit of US and UK 97 100 50 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 New Zealand United Kingdom United States Ireland Highly leveraged 96 89 97 82 FY05 81 81 13 - FY05 FY06 Australia - 200 UK and US expansion 250 25 BV of net operating assets  FY06 37 FY07 FY08 31 33 FY09 FY10 Debt 32 33 55 71 60 52 FY11 FY12 FY13 34 66 FY14 28 8 42 48 FY15 FY16 Shareholder's equity Source: McN analysis of audited financial statements 32 6. 6.4 Administrators’ opinion as to the reasons for failure Inadequate merchandise planning, supply chain and inventory management Customer research commissioned by Pumpkin Patch showed its product offering did not adequately meet customer needs, with falling quality and design, high price perception and product ranging issues. Pumpkin Patch also experienced significant supply chain disruption due to reliance on a few key suppliers, causing stock outages, and could not respond quickly to changing consumer trends, due to a 28 week design-to-store timeline. To limit these risks, Pumpkin Patch bought stock in bulk in advance, increasing working capital costs.  Inventory balance and inventory days were improving Customer research commissioned by Pumpkin Patch determined that its product offering was not meeting customer needs, due to: 150  a reduction in quality and innovative design as Pumpkin Patch focused on reducing product cost to improve margins;  product ranging issues, as Pumpkin Patch struggled to find the right balance of product range (number of different designs) and depth (number of units of each design). For example, Pumpkin Patch increased its summer 2013 product range from 2,215 to 3,399 options to increase choice, but found that best selling items sold out quickly and the range fragmented. The summer 2014 range was reduced to 1,700 options, with little apparent impact on performance.  Merchandise planning was performed using Microsoft Excel, with no link to the financial systems or opening and planned closing inventory. A merchandise planning system would have assisted management to make better informed purchasing decisions. Supply chain management issues  Pumpkin Patch’s design-to-store timeline was too long at 28 weeks, meaning it could not respond to changing consumer demands in-season. Pumpkin Patch was also not vertically integrated and relied on a small number of suppliers, exposing the business to risk if suppliers failed to deliver on quality or on time.  As a result, Pumpkin Patch regularly experienced late deliveries and challenges in replenishing successful selling lines. In FY14, the Group suffered stock outages as key suppliers in China and New Zealand experienced financial difficulties and delayed deliveries.  To manage these issues, Pumpkin Patch bought stock in bulk in advance for the UK and US expansion, with the inventory increasing from $86m to $122m from FY07 to FY08, as shown in the chart opposite.  Pumpkin Patch also embarked on an aggressive sales campaign in FY15 to reduce stock levels and used the proceeds to repay c$25.0m of bank debt. Inventory balance $'m  a perception that Pumpkin Patch’s recommended retail prices were too expensive; and 300 FY08 stock build to $122m to supply the UK and US expansion Inventory days improving, but still significantly higher than comparable companies 125 250 100 200 Significant stock reduction in FY15 to pay down bank debt 75 150 50 100 25 50 - Inventory days Merchandise planning issues FY07 FY08 FY09 Inventory balance FY10 FY11 FY12 Inventory days FY13 FY14 FY15 FY16 Inventory days benchmark Source: annual financial statements and McN analysis; inventory days benchmark at 122 days based on FY16 accounts of nine Australasian listed apparel retailers 33 6. 6.4 Administrators’ opinion as to the reasons for failure Inadequate merchandise planning, supply chain and inventory management (continued) Pumpkin Patch did not have an adequate systems to deal with end-of-line or end-of-season stock, leading to significant aged inventory build up at warehouses. Overall, Pumpkin Patch’s inadequate merchandise planning, supply chain and inventory management left it with the wrong stock at the wrong time, leading to significant discounting to clear stock, damaging margins. Inventory management issues  A further symptom of Pumpkin Patch’s inadequate inventory management was how Pumpkin Patch dealt with end-of-line and end-of-season stock, which Pumpkin Patch termed “pack up”. Previously, inventory was packed up in stores and sent back to 3PL’s and head office, with no clear strategy to realise the inventory. Inventory would accumulate in warehouses, as shown in the first chart opposite, where over a third of Pumpkin Patch’s inventory was aged as at FY13. This caused Pumpkin Patch to incur storage costs and tied up cash (working capital) in ageing (devaluing) inventory. Pack up was again managed with Excel spreadsheets.  In later years, the Group developed a strategy to ensure pack up inventory was cleared on a regular basis, reducing ageing from $19.9m (34%) in FY13 to $6.4m (11%) in FY16.  Although Pumpkin Patch’s inventory days began improving from FY11 (peak at 250 days) to FY16 (low at 151 days), as shown in the chart on the previous page, it was still significantly higher than other listed Australasian apparel retailers at 122 days (ref: McGrathNicol working capital report dated and average of nine listed Australasian apparel retailers). Inventory ageing improved through discounting to clear old stock FY16 89% 8% 3% FY15 89% 7% 4% FY14 87% FY13 9% 66% 0% 20% 24% 40% Current season 60% 1 year 10% 80% 2 years and older Average discount Gross margin 70% Increased discounting   All of the above issues meant Pumpkin Patch often held the wrong stock at the wrong time. As shown in the second chart opposite, Pumpkin Patch dealt with this issue by discounting heavily to clear aged stock. The average discount increased from 20% in FY07 to a peak of 40% in FY13 to clear aged stock shown in the first chart. The consistent use of discounting damaged the brand’s premium position perception and trained consumers to wait and buy on-sale. This contributed to Pumpkin Patch’s declining margins, which fell from 62% in FY10 to 48% in FY16. The decline in margin from FY15 to FY16 (51% to 48%) was also caused by unfavourable USD:NZD FX rates, which averaged 0.76 during FY15 and 0.67 during FY16 (FX rate source: S&P Capital IQ). Discounting was also necessary historically due to setting unrealistic RRPs which was caused by Pumpkin Patch’s pricing system discussed in section 6.5. 100% Source: Pumpkin Patch stock ageing reports; note reports were unavailable pre-FY13 Discounting increased consistently, damaging gross margin  4% FY15 to FY16 margin also impacted by USD:NZD rate fallin from 0.76 to 0.67 60% 50% Increased discounting contributed to falling gross margin, from a peak 62% in FY10 to a low 48% in FY16 40% 30% 20% FY07 Average discounts increased from 20% in FY07 to 39% in FY16, peaking at 40% in FY13 to clear aged stock FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Source: discount based on weighted average of Pumpkin Patch NZ store and Pumpkin Patch AU store discounts weighted by NZ and AU total sales; gross margin from statutory accounts 34 6. 6.5 Administrators’ opinion as to the reasons for failure Lack of investment in management information systems The management information systems were not fit for purpose for a retailer of Pumpkin Patch’s scale. Management recognised that investment was required to address merchandise planning, supply chain and inventory management, product costing, customer management systems etc. However, Pumpkin Patch lacked the capital (estimated to cost $8m) to implement such a change. Management information systems  Management was aware that Pumpkin Patch’s information systems were inadequate for a retailer of Pumpkin Patch’s scale. However, Pumpkin Patch lacked the estimated $8m required to remedy the management information system issues set out below.  Merchandise planning: performed using a Microsoft Excel spreadsheet, with no link to the financial systems or opening and planned closing inventory.  Product costing: the software used by Pumpkin Patch was designed in-house and suffered from the following limitations: ＞ An inflexible costing system, relying on fixed methods to calculate landed and other costs, with fixed estimates of certain costs such as freight and duty. ＞ Historically, RRP was set based on an internal requirement to achieve a minimum gross margin (“bottom up” pricing), rather than assessing what the market was willing to pay for a product (“top down” pricing), leading to excessive RRPs and the need to constantly discount.  Customer database: Pumpkin Patch captured customer information through various systems, including transaction history online and in store. However, as noted in Pumpkin Patch’s independently commissioned report, this data was not historically used to provide insights into marketing strategies, inventory design, or purchasing levels.  Retail KPIs: a retailer such as Pumpkin Patch should measure, manage and report on key retail KPI metrics, such as footfall (the number of people coming into a store), conversion rates (how many of those people buy something), basket size (how much each customer spends), product profitability, store profitability etc. These metrics are necessary to measure store staff performance, overall store performance and the effects of promotional activity. Internal documents note Pumpkin Patch only began implementing conversion metrics across a few stores in the months prior to insolvency.  Omni-channel retailing: Management recognised that Pumpkin Patch would not be able to transition to a true omni-channel retailer until the IT system limitations were addressed.  The lack of investment in management information systems caused a number of the issues that led to Pumpkin Patch’s failure. 35 6. 6.6 Administrators’ opinion as to the reasons for failure Loss of key wholesale customers Management estimated the loss of wholesale accounts in late FY15 and in FY16 equated to a reduction in the Group’s FY16 gross margin of c.$9.1m. The chart opposite highlights the declining wholesale revenue by key region and gross margin.  Between FY14 and FY16 wholesale revenue declined $23.9m due to the loss of major customers in the Middle East (Jawad), UK (Kidicare), US (Liverpool, Mexico, Nordstrom) and Lebanon (Retail Group). Management estimated the loss of these wholesale accounts equated to a year-on-year reduction in the Group’s FY16 gross margin of $9.1m (source: August 2016 board report).  Historically the Group’s Middle East partner, Jawad accounted for more than 60% of wholesale revenues. Concerns over Jawad’s financial position were raised in FY14 with the Group exiting the relationship in FY16. An alternative Middle East partner, the Apparel Group, had been identified, however the Apparel Group put the discussions on hold following the issuance of the Group’s FY16 financial results and market announcements related to its capital position.  Between FY15 and FY16 the number of markets and locations the wholesale/franchise business operated in reduced from 16 to 10 and 213 to 78, respectively.  According to board reports, there had been a historical lack of customer account management with relationships only maintained at a buyer level (source: April 2016 board report). Wholesale revenue and GM% declining 60% 40 50% 30 40% 30% 20 20% 10 Gross margin %  Revenue ($'m) Wholesale 10% - 0% FY10 FY11 FY12 ME & Asia FY13 EU & USA Source: McN analysis of management information FY14 FY15 Other FY16 GM% 36 6. Administrators’ opinion as to the reasons for failure 6.7 Paid all profits as dividends, contributing to lack of capital to address issues The Group generated a cumulative NPAT from FY05 to FY11 of $90.7m, of which $88.2m (97%) was paid out as dividends over the same period. This meant that the UK and US expansions, stock fluctuations and later year trading losses all had to be debt funded, leaving the Group with no ability to raise capital in later years. The Group also paid dividends in FY09 and FY11, despite incurring losses in those years. PPL paid out all profits as dividends, so had to use debt to fund expansion and later trading losses NPAT/(NLAT) Net debt Share price Net debt increased from $37.2m in FY07 to $81.4m in FY08 to fund an inventory build to ensure sufficient inventory was available for planned store openings in the US and UK, given past supply chain disruptions experienced by the Group 5.00 80 4.00 Higher net debt to fund poor trading performance 60 3.00 Net debt reduced to $18.8m in FY09 through sell-down of inventory of $41.5m and close -out of FX contracts of $25.3m 40 2.00 20 1.00 - FY09 impairment of US retail operations and UK retail stores of $39.9.m and $6.5m respectively (20) (40) FY12 reorganisation costs of $39.8m, including US and UK closures, onerous lease provisions etc. Cumulative NPAT FY05 to FY11 of $90.7m of which $88.2m (97%) was paid out as dividends FY05 FY06 FY07 FY08 FY09 FY10 Share price $ 100 NPBT, dividends and net debt $'m Dividends paid (1.00) Various reorganisation costs: FY14 $14.6m, FY15 $6.4m, FY16 $6.3m (2.00) FY11 FY12 FY13 FY14 FY15 FY16 Source: McN analysis of historical statutory accounts; share price source S&P Capital IQ 37 The Receivership 7. The Receivership Once appointed, the Receivers became responsible for the management and trading of the business. The Receivers are responsible for determining the most appropriate strategy for realising the assets of the business to repay the Secured Creditor. Appointment of Receivers  As a result of the above observations, the Receivers focused on:  Brendon Gibson and Neale Jackson of KordaMentha were appointed Receivers and Managers of the NZ Entities on 26 October 2016, following the Board placing those companies into Voluntary Administration.  In Australia, Craig Shepard and David Winterbottom of KordaMentha were appointed Receivers and Managers of: ＞ continuing marketing and promotional activity;  the Australia-based assets of PPOL; ＞ improving the supply chain from the Group’s distribution centre, to improve the rate of delivery to market (both retail and online);  stabilising the operations of the business, ensuring the retail network and online business continued to trade on a ‘business as usual’ basis: ＞ continuing to trade the Group’s business and continuing to employ all staff;  the AU Entities; and   The Catalogue Studio Pty Limited. ＞ seeking a day 14 extension from the Courts, meaning the Receivers were not forced to re-document employment contracts and lease agreements; and The Receivers are responsible for the management and trading of the business. They are charged with determining the most appropriate strategy for realising the assets of the business to repay the Secured Creditor. ＞ requesting the Administrators take steps to preserve leases and extend the Watershed Meeting convening period to assist in preserving value in the retail business. Commencement of the Receivership  Immediately following their appointment, the Receivers assessed the financial position and viability of the Group in order to determine the optimal strategy for the receivership. Some of the early observations of the Receivers included:  The business was significantly capital constrained. The financial position of the Group had been well publicised in the period leading up to the receivership.  Some parties had expressed interest in the Group or its assets before receivership, which provided a foundation for a sale process.  implementing a review of the performance of all retail outlets to identify stores that were underperforming and any remedial action; and  commencing a sale process for the entire business on a going concern basis.  Prior to the receivership, the Group announced that it planned to close a number of retail outlets over a two to three year period. At the date of Receivership, some had already closed in line with that strategy.  After analysing the performance of the retail network, and considering other factors, the Receivers proceeded to close a number of underperforming outlets:  A number of retail outlets in New Zealand and Australia were performing extremely poorly.  27 retail outlets in Australia, which closed on 13 November 2016; and  seven in New Zealand, which closed on 8 November 2016.  Implementing these initial closures streamlined the operations of the business for potential sale as a going-concern or trading through an alternative stock liquidation process. 39 7. The Receivership The Receivers were of the view that It would not be possible to trade the business for an extended period as some critical business functions (such as design and sourcing) were interrupted by the receivership. Accordingly, the Receivers determined that an accelerated sale process would deliver the best chance of preserving value and achieving a going concern sale. No offers for the business as a going concern were received. As such, the Receivers implemented their alternative strategy involving a managed wind down of the retail and online businesses. Sale process  The Receivers were of the view that it would not be possible to trade the business for an extended period as some critical business functions (such as design and sourcing) were interrupted by the receivership. Accordingly, the Receivers determined that an accelerated sale process would deliver the best chance of preserving value and achieving a going concern sale.  The Receivers canvassed initial interest in the business as a going concern, through: Managed wind down  Throughout the sales process, the Receivers assessed the options available to wind-down the business in the event that no acceptable offers were received. As part of this, the Receivers sought proposals from two specialist stock liquidation advisers to recommend the optimal process to maximise realisation of the remaining stock.  GA Australia (‘GA’) were engaged by the Receivers on 24 November 2016. GA advised the Receivers on appropriate pricing and promotional strategies to ensure realisations from stock, as well as in store furniture, fixtures and fittings, were optimised.  The Receivers implemented the pricing and promotional strategies to ensure stock realisations were maximised whilst also ensuring costs of trading the retail and online business were appropriately controlled.  After the announcement of the managed wind down, the Receivers implemented a restructure of head office to rationalise overhead costs while maintaining key staff required in the wind down.  Inventory was realised between 24 November 2016 and 12 February 2016. The online channels and retail outlets progressively closed across the period, to ensure an appropriate balance between available inventory and cost.  The table below shows the number of stores closed, by week and locations:  Press coverage of the receivership and sale process.  Advertisements in the Australian Financial Review, New Zealand Herald and National Business Review.  Direct contact with parties based on: ＞ prior interest shown in the Pumpkin Patch business; ＞ being financial investors in the Australasian market; ＞ being industry participants; and ＞ having other potential drivers of interest in the business.  The process generated limited interest. General feedback was:  The industry is currently facing significant issues.  The level of assets required to be held and invested was high compared to the low and uncertain returns.  Pumpkin Patch had been “shopped” as a potential investment/takeover for a long period of time.  A small number of parties showed some interest in buying certain assets and business activities. They were given access to detailed information about the business on 1 November 2016 and asked to provide Expressions of Interest (‘EOI’) by 11 November 2016, as a first stage.  The Receivers advised that no parties submitted EOI’s for the business as a going concern.  As a result of the lack of interest from parties in acquiring the business as a going concern, the Receivers implemented their alternative strategy involving a managed wind down of the retail and online businesses. Store closures Week Ended 13-Nov-16 8-Jan-17 15-Jan-17 22-Jan-17 29-Jan-17 5-Feb-17 12-Feb-17 Australia New Zealand Total 27 7 34 2 2 3 3 9 14 30 31 2 14 17 4 11 28 47 35 Source: The Receivers 40 7. The Receivership Throughout the sale process, the Receivers had interest from a number of parties in the Group’s intellectual property. Following the announcement of the managed wind down process, the Receivers sought interest for the Pumpkin Patch brand and associated intellectual property by 31 January 2017. The Receivers advise they are currently in advanced negotiations with interested parties Sale of brand and intellectual property  Throughout the sale process, the Receivers had interest from a number of parties in the Group’s intellectual property. Following the announcement of the managed wind down process, the Receivers sought EOI’s for the Pumpkin Patch brand and associated intellectual property by 31 January 2017.  The Receivers advise they are currently in advanced negotiations with interested parties. Conclusions  The Group’s business could not be sold as a going concern. The Receivers advised the general feedback from interested parties was that:  the level of assets required to be held and invested was high compared to low and uncertain returns; and  Pumpkin Patch had been “shopped” as a potential investment/takeover for a long period of time.  As a result the Receivers implemented their alternative strategy of realising the significant stock holdings through a managed wind down of the online and retail businesses. In parallel, the Receivers are running a sale process for the intellectual property and fixed assets which they expect will close soon. 41 Investigations 8. Investigations In the absence of a DOCA being proposed or the Companies being returned to the control of their directors, there is no alternative but for the Companies to be placed into liquidation at the Watershed Meeting. In the event that liquidators are appointed to the NZ Entities, further investigations will need to be undertaken pursuant to the statutory duties liquidators have under the Act. Context  There is currently no practical alternative but for the NZ Entities to be placed into liquidation at the Watershed Meeting.  In this context, information has been set out in this report to allow creditors to understand the circumstances surrounding the collapse of the Group, but it is measured in its disclosure, to preserve the integrity of further investigations and legal actions that might take place once the NZ Entities are placed into liquidation. Reckless trading  Insolvent and reckless trading claims  Other than in cases of fraud, the directors of a company may only be sued for insolvent or reckless trading if the company is in receivership or liquidation. Claims for insolvent or reckless trading are often difficult to prove.  Before a Court will order that a director pay compensation in respect of insolvent or reckless trading, it must be established that: Administrators’ investigations Directors’ and officers’ responsibilities  Sections 131 to 138 of the Act set out the duties, obligations and responsibilities imposed on directors, which are designed to promote good governance and ensure that directors act in the best interests of the company. These include duties of:  the person was a director of the company at the relevant time;  the company was insolvent at that time, or became insolvent as a result of the director’s actions;  care, diligence and skill;  good faith; and  at that time, there were reasonable grounds for suspecting that the company was insolvent or would become insolvent; and  acting in the best interests of the company.   If identified, an administrator must, as soon as practicable, report to the Registrar any misconduct of a director, officer or shareholder of the company pursuant to section 239AI of the Act. To date the Administrators have not identified any matter requiring reporting under this section. In the event that liquidators are appointed to the NZ Entities, further investigations will need to be undertaken pursuant to the statutory duties liquidators have under the Act. Insolvent trading  A director may be personally liable to a company if the director agrees to a company incurring an obligation when at that time the director knew, or should have known, that the company would not be able to perform that obligation. The Court may order that a director compensate the company for insolvent trading. A director must not agree, cause or allow a company's business to be carried on in a manner likely to create a substantial risk of serious loss to the company's creditors. The Court may order that a director compensate the company for reckless trading.  the company’s creditors have consequently suffered loss and damage. Director’s defences  In New Zealand, directors have a number of defences available to them in respect of a claim for insolvent or reckless trading. These include:  At the time of incurring the obligations, the director had reasonable grounds to expect that the company was able to meet its obligations when they fell due.  The director relied on information provided by a competent and reliable person, which concluded that the company was solvent at the time the obligations were incurred or the actions taken by the company were reasonable.  The director took reasonable steps to prevent the obligation being incurred. 43 8. Investigations An insolvent company is one that is unable to pay its debts when they fall due for payment, or is one where its liabilities exceed its assets. The Administrators do not yet have a concluded position on the date of insolvency for the NZ Entities, as the issue requires further work and investigation. Solvency considerations  An insolvent company is one that is unable to pay its debts when they fall due for payment, or is one where its liabilities exceed its assets. It is important to understand the timing of insolvency, because it can provide opportunities for a liquidator to pursue certain claims against directors and other parties that would not otherwise be available if the company was solvent.  On 26 October 2016 the Board resolved that Pumpkin Patch was likely to become insolvent at some future time and responded by appointing voluntary administrators.  The Administrators do not yet have a concluded position on the date of insolvency for the NZ Entities, as the issue requires further work and investigation. However, we note that: Voidable transactions   unfair preference payments;  uncommercial transactions;  unfair loans;  unreasonable director-related transactions;  The Company had agreed banking facilities in September 2016 that provided sufficient funding until September 2017, based on management’s forecasts.  The Board was required to provide a recapitalisation plan to the Bank by 31 October 2016.  On 20 October 2016, the Board had determined that it could find no viable source of capital and consequently requested a trading halt.  The Board sought a recapitalisation from the Bank on 24 October 2016.  When the recapitalisation request was declined, the Board appointed voluntary administrators on 26 October 2016. In the event that the Companies are put into liquidation, certain transactions that occurred prior to the appointment of the Administrators, and where the property of the Companies was disposed of or dealt with, may be recovered by the liquidator. These are known as voidable transactions. Potentially voidable transactions include:  creation of a charge over any property; and  transactions for the purpose of defeating creditors.  Creditors are advised that:  for the purposes of voidable transactions, the “specified period", being the relevant time period in which transactions may be deemed to be voidable transactions under the Act, is two years before the date a company is put into liquidation; and  there are a number of statutory defences available under the Act to counterparties of the above potentially voidable transactions. Adequacy of books and records  Pursuant to Section 194 of the Act, the board of a company is required to ensure that accounting records are maintained which correctly record and explain the company’s transactions, financial position and performance, and that would enable financial statements to be prepared and audited.  If the board fails to maintain books and records in accordance with Section 194, each director commits an offence and is liable on conviction to a penalty not exceeding $50,000 pursuant to Section 374 (3) of the Act.  Based on the books and records of Pumpkin Patch provided to us, in our view, Pumpkin Patch’s books and records are adequate pursuant to Section 194 of the Act. 44 Alternatives available to creditors 9. Alternatives available to creditors Given the Group is insolvent and no DOCA has been proposed, the Administrators recommend that creditors vote in favour of each of the NZ entities being placed into liquidation. Alternative courses of action   The matters requiring our opinion are whether it would be in the creditors’ interests for:  realising any available assets not already realised by the receivers and further enquiries with regard to potential insolvent trading and voidable transactions; and  the administrations to end, with control of the NZ Entities reverting to the Directors; or  adjudicating creditor claims and payment of dividends if sufficient recoveries are made.  the NZ Entities to execute a DOCA; or  a liquidator be appointed.  Deed of Company Arrangement   A DOCA is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with. It aims to maximise the chances of the company, or as much as possible of its business, continuing, or to provide a better return for creditors than an immediate liquidation. A DOCA if passed by the required majority binds all unsecured creditors, even if they voted against the proposal. To date, no DOCA proposal has been put forward to the Administrators for their consideration. As such, there is no DOCA proposal on which the Administrators can report or provide an opinion on, or on which creditors can vote.  Creditors may consider ending the administrations and returning the control of the NZ Entities to the Directors. We do not believe this to be a commercially viable option, given the NZ Entities are without funds to meet creditor liabilities and are therefore insolvent. In our opinion, it is not in the best interests of creditors to vote for the administrations to end. That a liquidator be appointed  Given that the Group is insolvent and that no DOCA has been proposed, the Administrators recommend that creditors vote in favour of each of the NZ Entities being placed into liquidation. High Court order  Pursuant to section 280 of the Act, an application was submitted to the High Court seeking orders that the Administrators may be appointed to act as liquidators of the NZ Entities if required. The High Court granted the orders on 22 February 2017. Return to creditors  The immediate financial outcome for unsecured creditors is largely dependent on the outcome of the receivership, as there are no material assets that fall outside of the Bank’s security.  The Secured Lender holds an ‘all present and after acquired security interest’ in each of the appointed entities and its debt is cross-collateralised amongst the group.  There is expected to be a shortfall to the Secured Lender.  As such, and unless there are recoveries that become available in liquidation (such as voidable transactions or legal action relating to insolvent trading), there will be no recoveries available for unsecured creditors. Administration to end  The liquidation of the NZ Entities would involve: An Administrator would usually recommend that creditors vote for an insolvent company to be put into liquidation in the absence of an acceptable DOCA proposal. An Administrator would also recommend liquidation in preference to a DOCA if there is a strong likelihood that recoveries in liquidation will improve the return to creditors in comparison to the return expected under a DOCA. 46 9. Alternatives available to creditors The Watershed Meeting has been convened and will be held on Tuesday 7 March 2017, 12:00pm at the office of Simpson Grierson at Level 28, the Lumley Building, 88 Shortland Street, Auckland, at which meeting we will present the material in this Report. Those creditors based in Australia will be able to attend the meeting via video link at 10:00am local time, by attending McGrathNicol’s Sydney offices located at Level 12, 20 Martin Place, Sydney NSW at 10am local time. Liquidation Committee  In the event that creditors resolve that the NZ Entities be put into liquidation, the Act provides that a Liquidation Committee (“LC”) may be formed for one or more entity.  In these circumstances, the LC would provide the liquidator with a sounding board as to likely creditor views on any contentious issues.  At the Watershed Meeting, creditors will be invited to consider whether LC’s should be formed, and if so, to nominate members.  At the First Creditors Meeting, creditor committees were formed for both PPL and PPOL. Please note that these roles do not continue past the completion of the Administrations. If current members of these creditor committees wish to act on the LC, they should nominate themselves to be members at the upcoming Watershed Meeting.  Creditors may exercise their right to vote by voting at the meeting in person, by appointing a proxy or by postal vote. A company may appoint a representative to attend on its behalf without the need for a proxy. The proxy forms lodged by creditors for the first creditors’ meeting cannot be used for the Watershed Meeting.  Accordingly, creditors should ensure that a proxy form, power of attorney or evidence of appointment of a company representative is completed and lodged with the Administrators. Postal/Proxy forms must be received by Thursday, 2 March 2017, together with a completed creditor’s claim form. Watershed Meeting  The Watershed Meeting has been convened to be held on Tuesday 7 March 2017, 12:00pm at the office of Simpson Grierson at Level 28, the Lumley Building, 88 Shortland Street, Auckland, at which meeting we will present the material in this Report. Those creditors based in Australia will be able to attend the meeting via video link at 10:00am local time, by attending McGrathNicol’s Sydney offices located at Level 12, 20 Martin Place, Sydney NSW.  Creditors should arrive 30 minutes prior to the commencement of the meeting to facilitate registration procedures.  Pursuant to section 239AL of the Act, the Administrators propose holding the Watershed Meeting for all the NZ Entities concurrently.  As outlined earlier, given that the Companies are insolvent and that no DOCA has been proposed, the Administrators recommend that creditors vote in favour of each if the NZ Entities being placed into liquidation.  Creditors who intend to vote at the meeting are required to lodge a claim form with the Administrators. Creditors who have already lodged a claim form and the amount of their claim has not changed do not need to submit another claim form. If the amount of their claim has changed they can submit a revised claim form. A blank claim for was sent with the notice of meeting. 47 Appendices Appendix One Summarised financial information of Pumpkin Patch Limited Statutory information Pumpkin Patch Limited - Historical balance sheet $'000 Jul-14 Jul-15 Jul-16 2-Oct-16 Property, plant and equipment 5,022 4,535 3,125 3,038 Intangible assets 5,278 2,434 1,903 1,806 Non-current tax receivables 3,567 3,567 - Deferred tax asset 3,093 506 - Investment in subsidiaries 13,522 13,522 Non-current assets 30,482 Trade and other receivables  Company number: 637120  Incorporated 27 June 1994  Directors: Peter Schuyt Appointed: 21 August 2012 (1,493) Bruce Cotterill Appointed: 01 October 2014 13,522 13,522 Luke Bunt Appointed: 01 October 2014 24,564 18,550 16,873 32,164 22,066 16,289 598 Trade and other payables (49,890) (45,186) (41,217) (31,936) Working capital (17,726) (23,120) (24,929) (31,338) Cash at bank Net assets - 77 330 18 76 12,833 1,774 (6,360) (14,389)  Description: NZX listed parent company Pumpkin Patch Limited - Historical financial performance $'000 FY14 FY15 Revenue 32,883 30,093 Finance expenses (1,862) (4,172) Admnistrative and general expenses (40,825) (35,511) (38,415) Loss from continuing operations before income tax (9,804) (9,590) (6,618) 1,564 (1,506) (1,531) (8,240) (11,096) (8,150) Income tax (expense)/credit Net loss from continuing operations FY16 31,797 - Source: FY15 financial statements and trial balance for FY16 and 2 October 2016 provided by management Note: Revenue represents inter-company management fees that eliminate on consolidation 49 Appendix One Summarised financial information of Torquay Enterprises Limited Statutory information Torquay Enterprises Limited - Historical balance sheet $'000 Jul-14 Jul-15 Jul-16 0.1 0.1 0.1 0.1 472 366 257 245 Investment in subsidiaries 1,749 1,749 1,749 1,749 Non-current assets 2,221 2,115 2,006 1,995 Trade and other receivables 36,578 39,519 21,317 20,535 Trade and other payables (15,374) (17,826) Property, plant and equipment Intangible assets Current tax liabilities (14) (85) (1) - 2-Oct-16  Company number: 598479  Incorporated: 08 October 1993  Director: Luke Bunt  Description: Owns and licenses trademarks Appointed: 23 September 2015 (1) 688 Working capital 21,191 21,608 21,316 21,221 Net assets 23,412 23,724 23,322 23,216 Torquay Enterprises Limited - Historical financial performance $'000 Revenue Finance expenses Administrative and general expenses FY14 2,993 (743) (2,163) FY15 3,036 (2,558) FY16 2,768 (2,726) Profit/(loss) before income tax 87 478 42 Income tax (expense)/credit (90) (166) (444) (2) 312 (402) Net profit/(loss) after tax Source: FY15 financial statements, draft FY16 financial statements and trial balance at 2 October 2016 provided by management. Revenue represents royalty income from the provision of trade mark licenses. 50 Appendix One Summarised financial information of Pumpkin Patch Originals Limited Statutory information Pumpkin Patch Originals Limited - Historical balance sheet $'000 Jul-14 Jul-15 Jul-16 Property, plant and equipment 26,825 23,638 20,310 Dertivative financial instruments Deferred tax asset Non-current assets Provisions Deferred landlord contributions 278 - - 2-Oct-16 20,020 - 4,735 5,048 4,692 4,529 31,838 28,686 25,002 24,548 (488) (519) (146) (543) Company number: 490863  Incorporated: 21 December 1990  Director: Luke Bunt  Description: Retailer Appointed: 17 September 2015 Pumpkin Patch Originals Limited - Historical financial performance (2,540) (2,105) (1,268) (74) (1,054) (1,541) (1,498) Revenue Non-current liabilities (3,102) (3,678) (2,955) (2,041) Cost of goods sold Inventories 64,061 41,494 50,007 49,091 Gross profit Derivative financial instruments -  $'000 FY14 204,770 (91,362) FY15 202,866 (89,969) FY16 175,103 (80,509) 113,408 112,897 94,594 4,045 5,486 2,126 63,422 21,095 7,796 1,756 Other operating income Derivative financial instruments (103) 2,840 (2,022) (3,383) Selling expenses (96,331) (93,725) (84,685) Current tax receivables 141 141 2,226 6,483 Finance expenses (4,467) (5,338) (3,543) (19,658) (49,606) Administrative and general expenses (20,649) (17,785) (12,988) Profit before income tax (3,994) 1,535 (4,496) 1,840 162 (1,078) Trade and other receivables Trade and other payables Provisions Deferred landlord contributions Working capital Source: Management information Cash at bank (69,807) (26,282) (356) (1,210) (1,153) (1,284) (1,175) (947) 56,074 228 36,903 479 36,249 207 (2,051) Income tax (expense)/credit 2,291 Loss from discountinuing operations (net of tax) - Bank loans (66,654) (41,000) (46,733) (48,149) Net debt (66,426) (40,521) (46,526) (48,149) 18,384 21,390 11,769 (23,350) Net assets Profit for the year (122) (2,276) 1,697 (5,574) Source: FY15 financial statements and draft FY16 financial statements provided by management Source: FY15 financial statements, draft FY16 financial statements and trial balance at 2 October 2016 provided by management 51 Appendix One Summarised financial information of Pumpkin Patch Direct Limited Statutory information Pumpkin Patch Direct Limited - Historical balance sheet $'000 Inventory Jul-14 - Jul-15 - Jul-16 - 2-Oct-16 29 Trade and other receivables 13,728 34,942 33,756 41,777 Trade and other payables (15,490) (36,209) (34,419) (1,271) Current tax liabilities (60) (120) (2,241) 26 (1,822) (1,387) (2,904) 40,532 Deferred tax liability (10) (5) (5) - Non-current liabilities (10) (5) (5) - Cash at bank 108 25 21 31 (1,724) (1,367) (2,888) 40,562 Working capital Source: Management information Net assets  Company number: 1775025  Incorporated: 27 February 2006  Director: Luke Bunt  Description: On-line retailer Appointed: 17 September 2015 Pumpkin Patch Direct Limited - Historical financial performance $'000 FY14 FY15 FY16 Revenue 32,260 32,568 35,064 Cost of goods sold (18,888) (21,396) (22,233) Gross profit 13,373 11,172 12,830 89 200 70 Selling expenses (8,335) (7,998) (6,512) Finance expenses (329) (11) (1) (4,597) (2,950) (5,787) 200 412 600 Other operating income Administrative and general expenses Profit before income tax Income tax (expense)/credit 130 Profit for the year 330 (56) 357 (2,121) (1,521) Source: FY15 financial statements, draft FY16 financial statements and trial balance at 2 October 2016 provided by management 52 Appendix One Summarised financial information of Patch Kids Limited Statutory information Patch Kids Limited - Historical balance sheet $'000 Jul-14 Jul-15 Jul-16 2-Oct-16 Deferred tax asset 81 - - 235 Non-current assets 81 - - 235 Investment in subsidiaries Trade and other receivables 5,919 7,633 6,758 7,803 748 581 538 (917) (10) Trade and other payables (1,644) (2,162) (1,670) Working capital 5,023 6,052 5,626 6,876 Net assets 5,104 6,052 5,626 7,111  Company number: 1619043  Incorporated: 05 April 2005  Director: Luke Bunt  Description: Holding company Appointed: 23 September 2015 Patch Kids Limited - Historical financial performance $'000 FY14 FY15 FY16 Revenue 10 12 - Expenses 7 (403) 30 Income tax (196) (110) Profit/(loss) for year (179) (501) (5) 24 Source: FY15 financial statements, draft FY16 financial statements and trial balance at 2 October 2016 provided by management 53 CIRCULAR TO CREDITORS Pumpkin Patch Limited (Receivers and Managers and Administrators Appointed) Pumpkin Patch Originals Limited (Receivers and Managers and Administrators Appointed) Pumpkin Patch Direct Limited (Receivers and Managers and Administrators Appointed) Patch Kids Limited (Receivers and Managers and Administrators Appointed) Torquay Enterprises Limited (Receivers and Managers and Administrators Appointed) (collectively “the Companies”) Andrew Grenfell and Conor McElhinney were appointed joint and several Voluntary Administrators of the Companies with Joseph Hayes also appointed Joint and Several Administrator of Pumpkin Patch Originals Limited (collectively “the Administrators”) on 26 October 2016. The purpose of this circular is to provide creditors with information about the business, property, affairs and financial circumstances of the Companies in preparation for the watershed meeting of creditors. The meeting is to be held on 7 March 2017 at 12:00pm at the offices of Simpson Grierson, Level 28, Lumley Centre, 88 Shortland Street, Auckland. Creditors based in Australia may attend the meeting via video link at 10.00 am local time at the Sydney offices of McGrathNicol at Level 12, 20 Martin Place Sydney. Creditors should arrive 30 minutes before the commencement of the meeting. If you wish to attend the meeting please email us at insolvency@mcgrathnicol.co.nz. The following documents are attached to this circular: 1 Notice convening the meeting; 2 Creditors claim form; and 3 Proxy/postal voting form. The Administrators’ report to creditors is available for downloading from the McGrathNicol website www.mcgrathnicol.com. Alternatively, if you wish to have a copy of this report emailed or posted directly to you please email pcooper@mcgrathnicol.co.nz. At the watershed meeting creditors are entitled to vote on whether: 1 the Companies should execute a Deed of Company Arrangement; (“DOCA”), (if applicable); or 2 the administrations should end and the control of the Companies be handed back to the directors; or 3 to appoint a liquidator. As detailed in the Administrators’ report, a DOCA has not been submitted to, or proposed by, the Administrators. Pursuant to a Court order under section 280 of the Companies Act 1993 dated 22 February 2017, the Administrators are able act as liquidators of the Companies in the event creditors vote to appoint liquidators. A copy of the Court order is available on McGrathNicol’s website. Creditors who intend to vote at the meeting must lodge a claim form with the Administrators prior to the meeting. Claims should be received by Thursday, 2 March 2017. If you have already lodged a claim form and the amount of your claim has not changed then you do not need to submit another claim form. If the amount of your claim has changed you can submit a revised claim form. Creditors who are unable to attend the meeting and wish to be represented should ensure that either a proxy form, or evidence of appointment of a company representative, is validly completed and provided to the Administrators prior to the meeting. Proxy forms are attached and must be received by the Administrator by Thursday, 2 March 2017. For further information please refer to the website www.mcgrathnicol.com. Creditors who wish to discuss any aspects of the above should contact Leanne de Seymour on (09) 926 5104. Dated 24 February 2017 Andrew Grenfell Administrator Enclosures: Notice of Meeting Claim Form Postal/Proxy Vote Form 2 NOTICE OF WATERSHED MEETING Pumpkin Patch Limited (Receivers and Managers and Administrators Appointed) Pumpkin Patch Originals Limited (Receivers and Managers and Administrators Appointed) Pumpkin Patch Direct Limited (Receivers and Managers and Administrators Appointed) Patch Kids Limited (Receivers and Managers and Administrators Appointed) Torquay Enterprises Limited (Receivers and Managers and Administrators Appointed) (collectively “the Companies”) Notice is given pursuant to sections 239AT and 239AU(1(a) of the Companies Act 1993 that a meeting of the creditors of the Companies will be held on 7 March 2017 at 12.00 pm at the offices of Simpson Grierson, Level 28, Lumley Centre, 88 Shortland Street, Auckland. Creditors based in Australia may attend the meeting via video link at 10.00 am local time at the Sydney offices of McGrathNicol at level 12, 20 Martin Place, Sydney. Creditors should arrive 30 minutes before the commencement of the meeting. If you are attending the meeting please email us at insolvency@mcgrathnicol.co.nz. Pursuant to section 239AL of the Companies Act 1993 it is intended to hold the meeting of the Companies jointly. Should any creditor object to the joint creditors meetings they should send a written objection to the Administrators at the address below by Thursday, 2 March 2017. Unless any creditor objects in accordance with this notice all creditors will be taken to have agreed to the joint watershed meeting. Agenda 1. To consider the Administrators’ report concerning the Companies business, property, affairs and financial circumstances. 2. To consider and vote on the Administrators’ recommended course of action as to the future of the Companies. 3. Any other business. The offices of the Administrators are at: McGrathNicol Level 17, 34 Shortland Street, Auckland PO Box 106-733, Auckland 1143 insolvency@mcgrathnicol.co.nz Telephone: +64 9 366 4655 www.mcgrathnicol.com Dated 24 February 2017 Andrew Grenfell Administrator Lodge your postal vote or proxy By Mail: McGrathNicol Limited PO Box 106-733 Auckland, 1143 By Fax +64 9 366 4656 By Email: insolvency@mcgrathnicol.co.nz Postal/Proxy Vote Form Pumpkin Patch Limited (Receivers and Managers and Administrators Appointed) Pumpkin Patch Originals Limited (Receivers and Managers and Administrators Appointed) Pumpkin Patch Direct Limited (Receivers and Managers and Administrators Appointed) Torquay Enterprises Limited (Receivers and Managers and Administrators Appointed) Patch Kids Limited (Receivers and Managers and Administrators Appointed) (collectively “the Companies”) Meeting of Creditors – Tuesday 7 March 2017 at 12:00pm For your proxy or vote to be effective it must be received by Thursday, 2 March 2017 Notes You may cast your vote in one of the three ways described below. You may abstain from voting on one or more of the resolutions. Appointment of Proxy If you do not plan to attend the meeting, you may appoint a proxy. The Chairman of the meeting is willing to act as proxy for any creditor who wishes to appoint him or her for that purpose. To do this, enter “the Chairman” or the name of your proxy in the space allocated in “Step 2” of this form. meeting or to amend any resolutions as stated in the Notice of Meeting. The Chairman of the meeting will only accept appointments as proxy in cases where the creditor specifies the vote is to be for, against or abstained. The Chairman is unable to accept appointments as a general proxy without specific voting instruction. Alternatively, creditors that are companies may appoint a company representative and provide evidence to the Administrators prior to the meeting that the representative has been validly appointed. (c) Attending and voting in person You should bring this Voting Form to the meeting. Signing Instructions for Postal Forms (a) Casting a postal vote You may cast a postal vote on one or more of the resolutions by completing the FOR, AGAINST or ABSTAIN boxes in “Step 1” overleaf, signing this voting form and returning it to the Administrators. Individual Where the debt is in one name, the creditor must sign. Joint (b) Appointing a proxy You may appoint a proxy to attend the meeting and either direct the proxy as to how to vote or give the proxy discretion as to how to vote on the resolutions by completing the FOR, AGAINST, ABSTAIN or PROXY DISCRETION box on “Step 1” overleaf, completing the appointment of proxy details in “Step 2” overleaf, signing the Voting Form and returning it to McGrathNicol. If you do not provide any instructions on the Proxy form about how the proxy should vote, you acknowledge that the proxy may exercise your right to vote at his or her discretion and may vote as he or she thinks fit or abstain from voting. In doing so, you acknowledge that the proxy may exercise your right to vote even if he or she has an interest in the outcome of the Resolution(s). You also exercise your proxy’s right to vote on all motions from the floor or additional resolutions put to the Where the debt is in more than one name, all of the creditors should sign. Power of Attorney If this Proxy Form has been signed under a power of attorney, a copy of the power of attorney and a signed certificate of non-revocation of the power of attorney should be produced to the company with this Proxy Form. Companies This form should be signed by a Director jointly with another Director, or a Sole Director can also sign alone. Please sign in the appropriate place and indicate the office held. Turn over to complete the form to vote / appoint a proxy Name of Creditor: ____________________________________________________ Name of company you are a Creditor of: : ____________________________________________________ STEP 1 Voting Instructions / Voting Paper Please note: if you do not plan to attend the meeting, you may cast a postal vote or appoint a proxy to vote at the meeting. Ordinary Business Please note you can only vote for a resolution for a company of which you are a creditor. Resolution 1 It is resolved that the company be placed into liquidation. Resolution 2 For Against Abstain Proxy Discretion     For Against Abstain Proxy Discretion     It is resolved that the Administration end and control of the company be returned to the directors. A Deed of Company Arrangement (‘DOCA’) has not been proposed by the Administrator and unless a creditor proposes a DOCA at the Watershed Meeting, this option does not need to be considered or voted on. In the event a DOCA is proposed by a creditor at the Watershed Meeting creditors will need to be present or have a proxy in attendance to vote on a resolution related to a DOCA. STEP 2 Appointment of Proxy IF YOU MARK ANY OF THE PROXY DISCRETION BOXES ABOVE YOU MUST APPOINT A PROXY. THE CHAIRMAN WILL NOT ACT AS A GENERAL PROXY. I/We being a creditor of ______________________________________ (Receivers and Managers and Administrators Appointed) hereby appoint _________________________________________________________________________ of _______________________________ or failing him/her ______________________________________________________________________ of _______________________________ as my/our proxy to act generally at the meeting on my/our behalf and to vote in accordance with the following directions at the Watershed meeting to be held at 12:00pm on Tuesday, 7 March 2017 at Simpson Grierson, Level 28, Lumley Centre, 88 Shortland Street Auckland, and at any adjournment of that meeting. SIGN Signature of Creditor(s) This section must be completed. Creditor or Sole Director and second Director (if more than one) or Authorised Officer Contact Name______________________________________________Contact daytime Telephone__________________________Date___________________ 2