Caffyns Regulatory News (CFYN)

23 December 2011 

Caffyns plc ("Caffyns" or the "Company")

The Chairman, Brian Birkenhead, is writing to all shareholders in response to the letter from EPS Enhancing Earnings Limited released on 9 December 2011 by London Trust Limited. The text of the letter from the Chairman is set out below.

Dear Shareholder

Caffyns plc (the "Company")

You may have received a letter from EPS Enhancing Earnings Ltd ("EPS") dated 8 December 2008. The Board does not accept EPS's comments, strongly refutes that there has been any failing in its fiduciary duty and would like to make clear the following points.

It is the Board's view that EPS's letter presents a rambling, inaccurate, biased and unbalanced view of reality. It also covers many of the same issues EPS has raised in previous correspondence.

The Board is always willing to respond to shareholder communications and, in this light, I have set out below the Board's comments on the principal issues in the letter, some of which, you will not be surprised to see, repeat answers previously given to EPS.

Corporate Governance

The Board strongly refutes EPS's assertion that there has been any failing in its fiduciary duty and believes that any Derivative Action which it might initiate in this regard would be entirely without merit. Indeed, EPS first threatened in July 2009 to prepare such an action so presumably its advisors take a similar view to our own.

The composition of the Board is not selected by Mr S Caffyn. For example, the process for Mr Wright's recruitment was led by the Senior Independent Non-Executive Director, Mr Goodburn, and was conducted with the help of an executive search company. Interviews and selection, as for other non-executive appointments, were made collectively by the Nominations Committee.

Each Board member is required to stand for re-election at every third Annual General Meeting (AGM). At the last three AGMs the highest number of ordinary shares voted against a director's re-election has been 1,844 compared to over one million votes in favour in each case (excluding the votes cast by the holders of the second preference shares).

The three current non-executive directors are clearly independent under the terms of the Combined Code on Corporate Governance and provide the Board with considerable business experience. We do not believe that the levels of their shareholdings in the Company are relevant to their effectiveness as non-executive directors. Indeed, there is a widely held view that to be completely independent, non-executive directors should not have significant shareholdings.

Capital structure

The second preference shares have been in issue for over 45 years and details of the capital structure have always been set out in the Annual Report which is available to all potential purchasers of Caffyns' ordinary shares. Preference shares are not uncommon in UK publicly listed companies. By way of illustration of the relative returns, the second preference shareholders have received dividends amounting to £120,000 over the past 10 years compared with over £5.8 million of dividends paid to the ordinary shareholders in the same period. In addition to its holding of the 6% cumulative preference shares, the Caffyn family owns a significant number of ordinary shares.

Ordinary shares have been purchased in the open market largely to satisfy the expected application for shares by employees under the Company's SAYE scheme. This too is not uncommon practice in UK publicly listed companies. The fact that shares have been bought back at a discount to book value is in fact to the benefit of all remaining shareholders. If, in undertaking these purchases, the Company can also assist shareholders in exiting their positions, then so much the better. It is not expected that any shares will be allocated to the executive directors under the Company's Long Term Incentive Plan.

Pension Scheme

The Caffyns Pension Scheme ("the Scheme") has been in existence for over 50 years as part of the Company's remuneration arrangements and has been available to all employees. The first actuarial deficit that the Scheme experienced occurred as at 31 March 2008 although the report from the actuaries was not issued until mid 2009. While there was an accounting deficit in 2003, which was not at that time required under the relevant accounting standards to be included in the Company's net assets, the deficit had moved back into surplus by 31 March 2007. It is only since 31 March 2006 that the surplus/deficit of the Scheme has had to be included on the Company's balance sheet.

The Company has taken a number of steps over the last 10 years to reduce the costs of the Scheme, including closing the final salary section to new entrants in 2001 and closing the career average section to new entrants in 2006, closing the final salary section to future accrual in 2006 and, most recently, closing the Scheme completely to future accrual in 2010.

Since 2008, the recession in financial markets has led to poor asset returns, particularly on Government bonds where quantitative easing has damaged yields and has also had the effect of increasing liabilities in the Scheme, as a scheme's liabilities rise when bond yields fall. We are far from alone in being adversely affected in this way.

Mr S Caffyn and Miss S Caffyn are members of the Scheme on the same terms as all other members of staff. Mr Caffyn's entitlement to retire on an unreduced pension at age 60 was granted to him in 1991 together with 434 other employees who were members of the Scheme at the time. The Scheme had a significant surplus which had to be reduced under legislation which existed at the time. The way in which benefits were equalised due to sex discrimination legislation was decided 20 years ago, under different circumstances to those that exist today. It is not open to the Company or the Trustees of the Scheme to reduce these accrued benefits now.

Strategy

Following the very difficult trading conditions encountered within the motor industry during 2008-09 when the UK entered recession, the Board reacted promptly on a number of fronts and cash of £6.5m was generated from operating activities. This cash generation enabled the company to finance its capital investment programme without having to seek additional capital from shareholders. Following the changed economic environment, the Company's strategy has been to focus on representing the more resilient premium and premium-volume franchises, as clearly expressed in both the Annual Reports of 2010 and 2011. Implementation of this strategy is reflected in the construction of a major new facility in Lewes for Land Rover and the sale/closure of seven non-core operations in the last year. In spite of the impact of the recession in 2008, net assets per share, including the property revaluation net of tax, was £8.94 at 31 March 2011.

The Company acquired five dealerships for a consideration of £5.5m in the period between 1 April 2003 and 31 March 2008, as well as acquiring the franchises for six dealerships in our own freehold properties. The Company spent a further £16.3m on capital expenditure in that period.

The Board continues to work hard to execute its strategy on behalf of ALL shareholders (and by this I mean all holders of ordinary equity) in what is still a very challenging economic environment.

Yours sincerely,

S B Birkenhead

Chairman