Annual Report • Apr 21, 2011
Annual Report
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THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. It contains the Resolutions to be voted on at the Extraordinary General Meeting of the Company to be held at 11.00 a.m. on 17 May 2011. If you are in any doubt about the contents of this document and/or the action you should take, you should immediately consult your stockbroker, bank, solicitor, accountant, fund manager or other appropriate independent financial adviser authorised under the Financial Services and Markets Act 2000 if you are resident in the United Kingdom or, if not, another appropriately authorised independent financial adviser in your own jurisdiction. If you have sold or otherwise transferred all of your Ordinary Shares, please pass this document (together with the accompanying Form of Proxy) as soon as possible to the purchaser or transferee or to the stockbroker, bank or other agent through whom the sale or transfer was effected for delivery to the purchaser or transferee. If you have sold or transferred part only of your holding of Ordinary Shares, please consult the stockbroker, bank or other agent through whom the sale or transfer was effected. However, the distribution of this document and the accompanying Form of Proxy into jurisdictions other than the United Kingdom may be restricted by law and neither this document nor the accompanying Form of Proxy should be mailed, distributed, forwarded, transmitted or sent in, into or from (in particular, but without limitation) the United States, Australia, Canada, Japan, South Africa or the Republic of Ireland. Any failure to comply with any of those restrictions may constitute a violation of the securities laws or regulations of any such jurisdiction. Therefore, persons outside the United Kingdom into whose possession this document and/or the accompanying Form of Proxy has come should inform themselves about, and observe, any such restrictions.
This document, which comprises in relation to Beale PLC both a circular prepared in compliance with Chapter 13 of the Listing Rules and a prospectus prepared in accordance with the Prospectus Rules has been filed with and approved by the FSA in accordance with section 85 of FSMA. The information disclosed in this document may not be the same as that which would have been disclosed if it had been prepared in accordance with the laws and regulations of any jurisdiction outside England and Wales. This document, together with the documents incorporated by reference (as set out in Part XI of this document) will be made available to the public in accordance with section 3.2 of the Prospectus Rules by the same being made available, free of charge, at www.beales.co.uk/corporate-information, at the Company's registered office and by a written request to the Registrar from their offices, details of which are set out on page 21 of this document. You should read the whole of this document and any documents incorporated herein by reference and, in light of that, consider whether to vote in favour of the Resolutions. In particular, your attention is drawn to the factors described in the "Risk Factors" section of this document.
(Incorporated in England and Wales under the Companies Act 1985 with registered number 02755125)
Proposed acquisition of 19 department stores from ARCS
Readmission of the Ordinary Shares to listing on the Official List of the UK Listing Authority and to trading on the London Stock Exchange
Notice of Extraordinary General Meeting
Subscription by ARCS for new redeemable preference shares
Adoption of new articles of association
New performance share plan
Sponsor
Your attention is drawn to the letter from the Chairman of the Company which is set out in Part I of this document and which contains the unanimous recommendation of the Directors that you vote in favour of the Resolutions to be proposed at the Extraordinary General Meeting to be held at the Norfolk Royale Hotel, Richmond Hill, Bournemouth BH2 6EN at 11.00 a.m. on 17 May 2011. A notice convening the Extraordinary General Meeting is set out on pages 140 to 142 of this document and the Form of Proxy for use at the meeting is also enclosed. To be valid, the Form of Proxy must be completed and returned, in accordance with the instructions printed on it, so as to be received at the offices of the Company's registrars Capita Registrars, PXS, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU as soon as possible but, in any event, so as to arrive not later than 11.00 a.m. on 15 May 2011, being 48 hours before the time appointed for the holding of the meeting. The completion and return of a Form of Proxy will not preclude you from attending and voting in person at the Extraordinary General Meeting should you wish to do so.
Applications will be made (i) to the UK Listing Authority for the Ordinary Shares to be readmitted to listing on the Official List and (ii) to the London Stock Exchange for the Ordinary Shares to be readmitted to trading on its main market for listed securities. It is expected that Readmission will become effective, and that dealings in the Ordinary Shares will recommence, at 8.00 a.m. on the Effective Date. Neither the Ordinary Shares nor this document have been, or will be, registered under the US Securities Act or under the applicable securities laws of any state of the United States or under the securities laws of any other jurisdiction outside the United Kingdom or any state, province or territory thereof.
Shore Capital, which is authorised and regulated in the United Kingdom by the FSA, and Shore Capital Stockbrokers, which is a member of the London Stock Exchange and is also authorised and regulated in the United Kingdom by the FSA, are acting exclusively as sponsor/financial adviser and broker respectively to the Company and no one else in connection with the Proposed Acquisition and Readmission and will not, in relation thereto, regard any other person (whether or not a recipient of this document) as its client and will not be responsible to anyone other than the Company for providing the protections afforded to clients of Shore Capital or Shore Capital Stockbrokers or for providing advice in relation to the Proposed Acquisition and Readmission or any other transactions or arrangements referred to in this document, save as imposed by the Financial Services and Markets Act 2000 or the regulatory regime established thereunder.
Neither Shore Capital nor Shore Capital Stockbrokers has authorised the contents of this document for any purpose and, without limiting the statutory rights of any person to whom it is issued, makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of any information contained in this document and accepts no responsibility or liability whatsoever for its contents or for any statement made, or purported to be made, by it and accordingly, each of Shore Capital and Shore Capital Stockbrokers expressly disclaims all and any liability, whether arising in tort, contract or otherwise, which it might otherwise be found to have in respect of this document or any such statement. No person has been authorised to give any information or make any representations other than those contained in this document and, if given or made, such information or representations must not be relied upon as having been so authorised. The Company will if necessary comply with its obligations to publish a supplementary prospectus containing further updated information required by law or by any regulatory authority but assumes no further obligation to publish additional information.
| Page | ||
|---|---|---|
| SUMMARY | 3 | |
| RISK FACTORS | 10 | |
| IMPORTANT NOTICES | 17 | |
| EXPECTED TIMETABLE OF PRINCIPAL EVENTS | 20 | |
| DIRECTORS, SECRETARY AND ADVISERS | 21 | |
| PART I | LETTER FROM THE CHAIRMAN OF BEALE | 22 |
| PART II | INFORMATION ON THE BEALE GROUP | 34 |
| PART III | INFORMATION ON ARCS | 44 |
| PART IV | OPERATING AND FINANCIAL REVIEW ON THE BEALE GROUP | 50 |
| PART V | OPERATING AND FINANCIAL REVIEW ON THE BUSINESS | 56 |
| PART VI | HISTORICAL FINANCIAL INFORMATION ON THE GROUP | 60 |
| PART VII | HISTORICAL FINANCIAL INFORMATION ON THE BUSINESS | 61 |
| PART VIII UNAUDITED PRO FORMA STATEMENT OF NET ASSETS OF THE GROUP | 81 | |
| PART IX | SUMMARY OF THE PRINCIPAL TERMS AND CONDITIONS OF THE | |
| ACQUISITION AGREEMENT, TERM LOAN AGREEMENT, IT SERVICES AGREEMENT AND NED AGREEMENT |
85 | |
| PART X | ADDITIONAL INFORMATION | 95 |
| PART XI | DOCUMENTS INCORPORATED BY REFERENCE | 138 |
| PART XII | NOTICE OF EXTRAORDINARY GENERAL MEETING | 140 |
| PART XIII DEFINITIONS | 143 |
The summary below should be read as an introduction to this Prospectus. Any investment decision relating to Ordinary Shares should be based on a consideration of the Prospectus as a whole. Where a claim relating to the information contained in this Prospectus is brought before a court, a claimant investor may, under the national legislation of certain EEA states, have to bear the costs of translating this Prospectus before legal proceedings are initiated. Civil liability attaches to those persons who are responsible for this summary, including any translation of it, but only if the summary is misleading, inaccurate or inconsistent when read together with the other parts of this Prospectus.
The Company announced on 6 April 2011 that it had entered into a conditional agreement to acquire the trade and assets of 19 department stores currently owned and operated by Anglia Regional Co-operative Society Limited ("ARCS"), for a total initial consideration of £7.5 million payable wholly in cash on completion of the Acquisition Agreement.
The consideration payable in respect of the Proposed Acquisition will be financed entirely by ARCS through the provision by it to JEB of a £2.5 million unsecured five year term loan and its subscription for £8.5 million of redeemable preference shares to be issued by the Company.
On Completion, ARCS will also pay a cash contribution to JEB of £2.3 million, £1.2 million of which must, within 12 months of Completion, be spent or be contractually committed to be spent on improvements to some or all of the Target Stores. Total cash funding from ARCS on Completion will amount to £13.3 million and the excess over the initial consideration payable for the Proposed Acquisition and the amount to be spent on improvements to the Target Stores will be available for use in all of the Enlarged Group's businesses. Further financial contributions to support the viability of certain stores and to enable them to integrate into the Beale format, amounting in aggregate in the first year following Completion to approximately £2.4 million, will also be made by ARCS. These payments will be made provided JEB continues to trade the relevant stores. Following Completion, ARCS will continue to own and operate various in-store concessions at certain of the Target Stores.
The Group is, through JEB, engaged in the operation of a department store network, predominantly in provincial towns across the UK and currently operates 13 stores offering an assortment of merchandise.
ARCS is a large co-operative society in the UK and, following a management change three years ago, is currently following a strategy of focusing on its core food, furniture, travel and funerals businesses and divesting certain non-food operations.
One of the Group's main objectives is to become a leading regional department store retailer. It is the Board's belief that this objective will principally be achieved through acquisition with the aim of returning the Group to profitability and by ensuring, as far as possible, that new acquisitions make a positive contribution, whilst maintaining control of the Group's cost base.
Your Board believes that the Proposed Acquisition represents a logical platform from which to further develop its existing businesses. It is both strategically and financially attractive for the following reasons:
the consideration payable for the Proposed Acquisition is to be entirely financed by ARCS;
the Group will receive a £2.3 million one-off cash contribution from ARCS, some of which will provide funding for the immediate expected capital expenditure requirements of certain of the Target Stores;
The Board believes that cost synergies may be achieved principally by optimising purchasing arrangements, improving the efficiency of the Enlarged Group and by reducing duplication of functions where appropriate.
Under the terms of the Acquisition Agreement, JEB will acquire the fixed assets, contracts and goodwill associated with the Business for a nominal consideration and stock, forward orders and cash floats at valuation. In addition, JEB will be required within six months following Completion (or by 27 December 2011 if earlier) to purchase for sale through the Target Stores further stocks held at ARCS' distribution centre in Peterborough.
The Business presently employs approximately 850 staff in total whose employment will transfer to JEB on Completion. The principal terms and conditions of employment of transferring employees will be safeguarded. However, given the continuing uncertain economic outlook, the Acquisition Agreement provides that ARCS will indemnify JEB in respect of certain severance payments which may be made by it to any of the employees of the Business up to various dates following Completion.
As at the date of this document, the formal consent of the relevant landlords to the assignment, sub-letting or underletting (as appropriate) of the Target Stores located in Abingdon, Chipping Norton, Cinderford and Kings Lynn still remains to be obtained, although consent in principle has been given. Although it is anticipated that all landlord's consents will be in place by Completion, to cover the possibility that some may not be available and, in any event, in relation to the Target Store located in Skipton (the lease of which is not capable of assignment or underletting), the Group will, rather than taking an approved assignment or underletting, occupy the relevant property under separate concession based terms agreed between itself and ARCS. This will enable the Group to acquire the businesses carried on at each of the Target Stores on Completion and, in respect of those stores where landlord's consent has not been obtained, provide a further 12 months in which to obtain the consent, failing which JEB must decide whether to take an assignment or underletting (in any event at its own risk) or close the relevant Target Store. Failure to obtain landlord's consent in respect of any one Target Store will not affect the acquisition by the Group of the businesses carried on in the other Target Stores.
The Group understands that occupying any leasehold property in this way could potentially put it in breach of the relevant lease and at risk of a claim being made by the landlord for any loss suffered. ARCS has agreed to indemnify the Beale Group in this circumstance for any closure costs and (at Skipton only) any loss arising from the seizure of stock.
The precise level of consideration payable by JEB will be determined following the preparation and agreement of a completion statement and finalisation of a stock valuation process (which is intended to be achieved within two months of Completion).
Completion of the Proposed Acquisition, drawdown of the Term Loan and the issue by the Company to ARCS of the Preference Shares are each conditional on obtaining the approval of Shareholders to certain of the Resolutions at the Extraordinary General Meeting. If the necessary approvals of Shareholders are not obtained at the EGM, the Acquisition Agreement will terminate in its entirety and the Proposed Acquisition will not proceed.
The Group was admitted to listing on the London Stock Exchange in 1995 and currently operates 13 department stores, under a variety of brands, from a head office in Bournemouth. The flagship store is also based in Bournemouth.
Merchandise is sourced directly by the Group and is also provided by suppliers and other retailers operating in-store concessions who are typically required to pay a commission to the Group based on the level of sales achieved. Sales volumes and contributions per square foot vary from department to department and from store to store.
ARCS was founded in 1921 and has its roots in Peterborough. Since then it has grown to become (by turnover) the sixth largest retail consumer co-operative in the country. It has a diverse range of operations including department stores, food, furniture, travel and funerals. It has a total turnover in excess of £300 million and provides employment for over 3,000 employees.
The table below sets out selected audited financial information for the Group for the three years ended 1 November 2008, 31 October 2009 and 30 October 2010.
| Financial years ended | ||||
|---|---|---|---|---|
| 1 November | 31 October | 30 October | ||
| 2008 | 2009 | 2010 | ||
| £'000 | £'000 | £'000 | ||
| Gross sales (VAT inclusive) | 88,982 | 84,950 | 87,247 | |
| Gross sales (VAT exclusive) | 75,891 | 73,735 | 74,696 | |
| Revenue | 47,881 | 47,566 | 48,566 | |
| (Loss) before taxation | (1,522) | (987) | (668) | |
| (Loss) after taxation | (1,391) | (917) | (583) | |
| Net assets | 17,431 | 13,805 | 14,592 | |
| (Loss) per share | (6.78p) | (4.47p) | (2.84p) | |
| Net assets per share | 84.9p | 67.3p | 71.1p |
A summary of the audited historical financial information on the Business for the three years ended 6 September 2008, 5 September 2009 and 4 September 2010, and for the period from 5 September 2010 to 22 January 2011 is set out below. The period to January 2010 is unaudited.
| 20 weeks ended | |||||
|---|---|---|---|---|---|
| Financial years ended September | January | ||||
| 2008 | 2009 | 2010 | 2010 | 2011 | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| Gross sales (VAT inclusive) | 66,583 | 60,468 | 61,062 | 26,537 | 26,367 |
| Gross sales (VAT exclusive) | 60,620 | 55,518 | 55,600 | 24,212 | 23,700 |
| (Loss) before taxation | (3,751) | (3,998) | (4,899) | (1,178) | (2,243) |
| (Loss) after taxation | (2,701) | (2,879) | (3,527) | (848) | (1,615) |
| Net assets | 5,735 | 2,691 | 5,916 | N/A | 6,393 |
On 27 January 2011, Beale announced its preliminary results for the financial year to 30 October 2010. Beale commented as follows:
The Group loss before taxation of £668,000 showed further progress on the previous year, when the loss was £987,000. The underlying improvement was more substantial than this, as we incurred a loss of £271,000 in the two stores acquired during the year, much of which was attributable to start-up costs.
The Group's gross sales increased by 2.7% to £87.2 million; these include concession sales and VAT, as well as the sales of the new stores. The VAT increase during the year contributed about 1.4% of the increase.
Revenue, which excludes VAT and includes only the commission element of concession sales, was 2.1% higher than in the previous year at £48.6 million. Like for like revenue, excluding the new stores, declined by 2.1%.
Like for like gross margins were comparable to those in the previous year at 54.2% (2009: 54.5%). Robbs of Hexham includes a substantial food store, which operates at lower margins than our usual department store business, with the result that the overall margin declined slightly to 53.7%.
Despite the new acquisitions administrative expenses were well controlled, and were £148,000 lower at £26.5 million.
Our net debt increased, and at the year-end was £8.1 million (2009: £6.4 million). The seasonality of our business means that our borrowings are at their highest around the year end. The increase was largely attributable to the costs of acquiring and refurbishing our new stores and supporting the higher working capital investment in the enlarged Group.
Retail sales were seriously affected by snow throughout the country in November and early December. Gross sales for the 11 weeks ended 15 January 2011 were 4.6 per cent. higher than for the equivalent period last year.
For the 5 week period from 6 December 2010 to 15 January 2011, following the worst of the adverse weather conditions, gross sales were 16.3 per cent. higher than in the previous year. The comparison is flattered to some degree by the snow which affected parts of the country in the first half of January 2010".
At the Annual General Meeting of the Company held on 17 March 2011, the Chairman stated:
"Gross sales for the 19 weeks to 12 March 2011, including concessions and the two new stores acquired in 2010, were 5.9% higher than for the previous year, like-for-like sales declined by 6.2% For the first quarter, to 29 January 2011, gross sales were up 4.9% on the previous year.
As noted in the Annual Report, trading in the current year has been significantly adversely affected by the worst pre Christmas snowfalls for 30 years. However since the weather improved we have made progress in recapturing the lost sales; gross sales during the latest six-week period since 29 January, including concessions and new stores, were 9.4% up on the previous year and like-for-like sales were 4.7% lower.
The Board is pleased that first quarter sales were achieved at an improved gross margin compared with the previous year, despite the promotional discounting required to be competitive over Christmas. Furthermore, like for like expenses were lower than the previous year as we continued to focus on cost reduction, albeit total expenses increased as a result of the acquisition of the two new stores.
The increase of VAT on 4 January 2011 and the effect of the Government's tighter fiscal policy mean that the remainder of the year will be challenging, but the Board believes the strategies and actions being taken will in due course improve the Group's financial performance".
The trading performance of the Target Stores, as reported in the historical financial information on the Business for the year ended 4 September 2010, was adversely affected by a number of factors. Retail sales were affected by the general poor condition of the UK economy and adverse weather which affected store trading times and the ability of customers to get to the stores.
The Board has adopted a policy of paying dividends only when justified by the profits of the Company and so as to have proper regard to the need to maintain sufficient levels of working capital. No dividends were paid by the Company in any of the financial years ended 1 November 2008, 31 October 2009 or 30 October 2010. The Board does not expect that the dividend policy of the Company will change materially following the Proposed Acquisition.
The Resolutions relating to approval of the Acquisition Agreement, the issue of the Preference Shares on a non pre-emptive basis and adoption of the New Articles must be passed by Shareholders at the Extraordinary General Meeting in order for the Proposed Acquisition to proceed. If these Resolutions are not passed and the Proposed Acquisition does not take effect, there will be serious adverse consequences for the Group as the Company will not be able to operate within the borrowing limits available under its existing revolving credit loan facility with HSBC of £9.0 million, will breach its revised banking covenants and have insufficient working capital for the following 12 months. The consequences of this would (as described below) be materially detrimental to the interests of Shareholders.
The Company will be required to pay professional fees and expenses associated with the Proposed Acquisition of approximately £1.1 million (plus VAT) (which otherwise would have been payable out of the one-off cash contribution payment to be made by ARCS on Completion) out of its existing cash resources.
Furthermore, the net proceeds of the Term Loan and Preference Share subscription proposed to be made by ARCS, which would have been available for use in all of the Enlarged Group's businesses after satisfaction by JEB of the initial consideration payable under the Acquisition Agreement, will not be received.
HSBC is supportive of the Proposed Acquisition and has consented to it and, as described on pages 127 and 128 of this document, HSBC has varied the financial covenants contained in the Company's loan facility in order to allow the Proposed Acquisition to proceed.
However, as part of the agreement reached with it, HSBC requires that if the Proposed Acquisition does not proceed, it will have the right to immediately appoint reporting accountants, at Beale's cost, to carry out an independent business review and report on such matters relating to the Company and the Group as HSBC (acting reasonably) considers necessary or desirable. It is not presently certain what the conclusion or the consequences of any such review would be, or what the bank might conclude would be necessary or desirable.
In the absence of the financing that would otherwise have been provided by ARCS, it is, in any event, likely that the Group would breach the covenant relating to available headroom which would be tested within 28 days of the first test date of 31 July 2011.
Without the Proposed Acquisition proceeding, the Company would have available to it a limited range of options to reduce borrowings or deal with any potential covenant breach, which it would start to implement as soon as possible if the necessary Resolutions were not passed at the Extraordinary General Meeting. Such actions would include reducing the Group's cost base, reducing capital expenditure and conserving cash through stricter working capital management. Asset disposals might also be possible. Taken together, these actions would assist the working capital position. However, if such actions were insufficient to reduce borrowings sufficiently or address the risk of a covenant breach (as, in the opinion of the Directors, is almost certain given the available timeframe), the Company would seek to agree with HSBC (who, as described above, have been supportive of the Company's request to amend its existing facility and make the Proposed Acquisition) that the relevant covenants be relaxed or that any breach of such covenants be waived.
Discussions with HSBC concerning banking covenants would commence immediately. However, in light of their previous discussions and given that the financing from ARCS will no longer be available, the Directors believe it is unlikely that the Group would be able to secure such an amendment or waiver from HSBC. In those circumstances, the Company would attempt to seek alternative sources of financing, for example, by way of a new issue of Ordinary Shares. In these circumstances and within the required timeframe, the Directors believe that an equity fundraising would in practice be very difficult, or impossible, to achieve and cannot be confident of the success of such a course of action. Even were it possible, the dilutive effect on Shareholders could be considerable.
A breach by the Company of any of its banking covenants would constitute an event of default under the facility. As a consequence, HSBC could immediately cancel its facilities and demand immediate repayment of all amounts due to it. If the Company were unable to reach agreement with HSBC or an alternative lender, it would be unable to repay its existing facilities in full. The shortfall would equal the amount of all outstanding borrowings at the time, up to the maximum borrowing limit of £9.0 million. In this event, HSBC would have the right (among others) to enforce the security held by it over the principal assets of the Group, immediately exercise its rights to appoint a receiver or administrator and commence formal insolvency proceedings failing which the Company would be likely to seek itself the protection of a formal insolvency process, probably administration.
If that were the case, the value of an Ordinary Share would decline and result in investors losing most or all of their investment in the Company.
Accordingly, to avoid this outcome, the Directors believe it is important that Shareholders vote in favour of the relevant Resolutions in order that the Proposed Acquisition can proceed.
The Enlarged Group's business, operating results and financial condition could be adversely affected by risks relating to the Enlarged Group and its businesses. As a result, the value of an Ordinary Share could decline and investors could lose part or all of their investment. The risk factors summarised below are considered by the Directors to be material in relation to (i) the Group, the Target Stores and, if the Proposed Acquisition becomes effective, the Enlarged Group; (ii) the Proposed Acquisition and the Target Stores; and (iii) the Ordinary Shares:
employee and trade union relations;
funding of future expansion;
Prior to making any decision to vote in favour of the Resolutions at the Extraordinary General Meeting, Shareholders should carefully consider, together with all other information contained in this document, the specific risk factors described below. A number of factors affect the operating results, financial condition and prospects of the Group and the Target Stores and, following Completion, will affect the Enlarged Group or the industry in which it operates.
This section describes the risk factors which are considered by the Directors to be material in relation to the Group, the Proposed Acquisition, the Target Stores and, following Completion, the Enlarged Group. However, they are not set out in any particular order of priority and should not be regarded as exhaustive or a complete and comprehensive statement of all potential risks and uncertainties associated with the Group, the Enlarged Group and/or the Target Stores. Additional risks and uncertainties that are not presently known to the Directors, or which they currently deem immaterial, may also have an adverse effect on the Group's, the Target Stores' and, following Completion, the Enlarged Group's operating results, financial condition and prospects.
There may be other risks of which the Board is not aware or that the Board currently believes to be immaterial which may have an adverse effect on the Group's or, following Completion, the Enlarged Group's business, financial condition, results or future prospects. The majority of the risk factors set out below are contingencies which may or may not arise and the Board is not in a position to express a view on the likelihood of any such contingency arising.
The information given is as of the date of this document and, except as required by the FSA, the London Stock Exchange, the Listing Rules, the Prospectus Rules, the Disclosure and Transparency Rules or any other applicable law, will not be updated.
The Resolutions relating to approval of the Acquisition Agreement, the issue of the Preference Shares on a non pre-emptive basis and adoption of the New Articles must be passed by Shareholders at the Extraordinary General Meeting in order for the Proposed Acquisition to proceed. If these Resolutions are not passed and the Proposed Acquisition does not take effect, there will be serious adverse consequences for the Group as the Company will not be able to operate within the borrowing limits available under its existing revolving credit loan facility with HSBC of £9.0 million, will breach its revised banking covenants and have insufficient working capital for the following 12 months. The consequences of this would (as described below) be materially detrimental to the interests of Shareholders.
The Company will be required to pay professional fees and expenses associated with the Proposed Acquisition of approximately £1.1 million (plus VAT) (which otherwise would have been payable out of the one-off cash contribution payment to be made by ARCS on Completion) out of its existing cash resources.
Furthermore, the net proceeds of the Term Loan and Preference Share subscription proposed to be made by ARCS, which would have been available for use in all of the Enlarged Group's businesses after satisfaction by JEB of the initial consideration payable under the Acquisition Agreement, will not be received.
HSBC is supportive of the Proposed Acquisition and has consented to it and, as described on pages 127 and 128 of this document, HSBC has varied the financial covenants contained in the Company's loan facility in order to allow the Proposed Acquisition to proceed.
However, as part of the agreement reached with it, HSBC requires that if the Proposed Acquisition does not proceed, it will have the right to immediately appoint reporting accountants, at Beale's cost, to carry out an independent business review and report on such matters relating to the Company and the Group as HSBC (acting reasonably) considers necessary or desirable. It is not presently certain what the conclusion or the consequences of any such review would be, or what the bank might conclude would be necessary or desirable.
In the absence of the financing that would otherwise have been provided by ARCS, it is, in any event, likely that the Group would breach the covenant relating to available headroom which would be tested within 28 days of the first test date of 31 July 2011.
Without the Proposed Acquisition proceeding, the Company would have available to it a limited range of options to reduce borrowings or deal with any potential covenant breach, which it would start to implement as soon as possible if the necessary Resolutions were not passed at the Extraordinary General Meeting. Such actions would include reducing the Group's cost base, reducing capital expenditure and conserving cash through stricter working capital management. Asset disposals might also be possible. Taken together, these actions would assist the working capital position. However, if such actions were insufficient to reduce borrowings sufficiently or address the risk of a covenant breach (as, in the opinion of the Directors, is almost certain given the available timeframe), the Company would seek to agree with HSBC (who, as described above, have been supportive of the Company's request to amend its existing facility and make the Proposed Acquisition) that the relevant covenants be relaxed or that any breach of such covenants be waived.
Discussions with HSBC concerning banking covenants would commence immediately. However, in light of their previous discussions and given that the financing from ARCS will no longer be available, the Directors believe it is unlikely that the Group would be able to secure such an amendment or waiver from HSBC. In those circumstances, the Company would attempt to seek alternative sources of financing, for example, by way of a new issue of Ordinary Shares. In these circumstances and within the required timeframe, the Directors believe that an equity fundraising would in practice be very difficult, or impossible, to achieve and cannot be confident of the success of such a course of action. Even were it possible, the dilutive effect on Shareholders could be considerable.
A breach by the Company of any of its banking covenants would constitute an event of default under the facility. As a consequence, HSBC could immediately cancel its facilities and demand immediate repayment of all amounts due to it. If the Company were unable to reach agreement with HSBC or an alternative lender, it would be unable to repay its existing facilities in full. The shortfall would equal the amount of all outstanding borrowings at the time, up to the maximum borrowing limit of £9.0 million. In this event, HSBC would have the right (among others) to enforce the security held by it over the principal assets of the Group, immediately exercise its rights to appoint a receiver or administrator and commence formal insolvency proceedings failing which the Company would be likely to seek itself the protection of a formal insolvency process, probably administration.
If that were the case, the value of an Ordinary Share would decline and result in investors losing most or all of their investment in the Company.
Accordingly, to avoid this outcome, the Directors believe it is important that Shareholders vote in favour of the relevant Resolutions in order that the Proposed Acquisition can proceed.
As the Target Stores operate in similar markets to those in which the Group operates, and due to the nature of their respective merchandise and brands, the risks identified in this paragraph 2 refer to the Group before, and the Enlarged Group after, completion of the Proposed Acquisition and references to the Group should be construed accordingly.
The Group's results are impacted by the prevailing economic climate, levels of employment, real disposable income, salaries and wage rates, interest rates, the availability of consumer credit, consumer confidence and consumers perception of economic conditions. In the financial year ended 30 October 2010, the entirety of the Group's revenues were derived from the United Kingdom. Therefore, the general slowdown in the UK economy and the uncertain economic outlook may continue to adversely affect consumer spending habits, which may reduce the Group's revenues. In addition, many of the products that the Group sells represent discretionary purchases, as a result of which it may experience a decline in sales, which in turn may have a material adverse effect on the Group's business, financial condition and results of operations.
The early onset of winter at the end of 2010 negatively impacted retail revenues. The Target Stores were more adversely affected than the Group's stores due to their geographic location in those areas where weather conditions were at their worst. Prolonged unseasonal weather conditions or temporary severe weather during one of the Group's peak trading seasons, such as the Christmas season, could materially and adversely affect its gross transaction values and, in turn, its results of operations.
The markets in which the Group operates are highly competitive and changing and the Group competes with a wide variety of retailers of varying sizes and covering different product categories across all its markets. The entry of new competitors into any of the Group's markets, a change in the level of marketing undertaken by those competitors or in their pricing policies, the consolidation of the Group's competitors and/or the introduction of new competing merchandise or brands could have a material adverse effect on the Group's sales volumes, revenue and profitability. In addition, many of the Group's competitors have greater financial resources, greater purchasing economies of scale and/or lower cost bases, any of which may give them a competitive advantage over the Group.
Whilst the Group is not overly dependent on any individual supplier, any significant disruption or other adverse event affecting its relationship with any of its more significant suppliers could have a material adverse effect on its business, financial condition or results of operations. If the Group needs to replace any such supplier, it may face risks and costs associated with a transfer of operations. In addition, a failure to replace any of its significant suppliers on commercially reasonable terms, or at all, could have an adverse effect on the Group's business, financial condition or results of operations.
The Group's continued success is dependent on the ongoing services of a small number of senior officers and employees, many of whom have significant experience in the retail industry and could be difficult to replace, and on the Group's ability to continue to attract, motivate and retain highly qualified personnel. In particular, the Group's ability to integrate businesses that it acquires effectively may depend on its ability to retain key officers and employees, including those of the Target Stores (subject to Completion). The loss of senior personnel, or the inability to recruit sufficient qualified personnel, could have an adverse effect on the Group's ability to run its businesses and, accordingly, on the results of operations of the Group.
The Group's business is subject to seasonal peaks. Historically, its most important trading period in terms of gross sales, operating results and cash flow has been the Christmas and January sale season, with approximately 33 per cent. of its sales during the financial year to 30 October 2010 occurring between the beginning of November 2009 and the end of January 2010. The Group incurs significant additional expenses in advance of the Christmas season in anticipation of higher sales during that period, including the cost of additional inventory, advertising and the hiring of temporary employees. The Group's investment in working capital historically peaks in early October and falls significantly in early January. Past trends indicate that, in addition to the Christmas season, a peak in sales occurs during June and July as a result of promotional events and seasonal sales. If sales during the Group's peak seasons, particularly the Christmas season, are significantly lower than it expects for any reason, it may be left with higher inventory levels. If these volumes are significant, the Group will rely on markdowns and/or promotional activity to clear excess stock as quickly as possible thereby adversely impacting gross margins. At the same time, if it fails to purchase a sufficient quantity of merchandise, it may not have an adequate supply of products to meet consumer demand. This may cause the Group to lose sales.
A significant proportion of the Group's revenue is derived from the sale of fashion-related products, which are subject to changing customer tastes. Changes in customer preferences make it more difficult to predict sales demand accurately. The Group's success depends, in part, on its ability to predict and respond to changing consumer demands and preferences, and to translate market trends into appropriate, saleable merchandise offerings. The Group's ability to anticipate and respond to changing customer preferences and tastes depends, in part, on its ability to attract and retain key personnel in its buying, design, merchandising, marketing and other functions. Competition for such personnel is intense and the Group may not be able to attract and retain a sufficient number of qualified personnel in future periods.
The Group must enter into contracts for the purchase and manufacture of certain merchandise well in advance of the applicable selling season. The long lead times between ordering and delivery make it more important to predict accurately, and more difficult to fulfil, customer demand for items. There can be no assurance that the Group's orders will match actual demand. If the Group is unable to predict or respond to sales demand or to changing styles or trends successfully, its sales will be lower and it may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow-moving inventory or it may experience inventory shortfalls on popular merchandise, any of which could have a material adverse effect on its business, financial condition and results of operations.
Whilst in general, relations with the Group's existing employees are good, unlike the Group, ARCS recognises trade unions generally in relation to its employees and, while historic relations with those employees and the relevant unions have also been positive, there can be no assurance that, following Completion, the Enlarged Group will not be affected by work stoppages or other forms of industrial action which may, to the extent it is unable to make alternative staffing arrangements, have a material adverse effect on the Enlarged Group's sales volumes, revenues and profits.
In order to fund the Group's expansion plans in the long term, and in particular to fund future acquisitions, it may be necessary to raise funds by way of equity or debt or a combination of both. Any expansion plans for the Group may be constrained to the extent that it is unable to raise equity finance or that banks or other providers are not willing to provide any additional debt and other facilities required.
The majority of the Group's existing stores are, and all of the Target Stores will be, held through leasehold interests that are generally subject to periodic rent reviews and renegotiations. The majority of these property leases provide for upwards-only adjustments to rent upon rent reviews, and certain of them provide for automatic periodic escalation of rents. As a result, the Beale Group and, following Completion, the Enlarged Group is (and will remain) susceptible to fluctuations in the property rental market.
In addition, the Beale Group and, following Completion, the Enlarged Group may not be able to renew all of its existing store leases, generally if the landlord is able to establish legal grounds for non-renewal or if a contracted out lease comes to an end, although the Directors are not presently aware of any such risk. The leases held over four of the Target Stores expire in the next five years. These factors may result, among other things, in significant alterations in rental terms (including rental rates and service charges), in an inability to achieve site renewals, the closure of stores in desirable locations or in a failure to secure real estate locations adequate to meet annual targets. Any of these factors could have a material adverse effect on the Group's (and, following Completion, the Enlarged Group's) business, financial condition or results of operations.
The Group's property portfolio comprises properties that have been constructed at various times and a number of its properties have been constructed in areas that have historically been the subject of commercial use. It is possible that on-site pollution or contamination could have been caused by such previous uses, or in limited circumstances by current uses, for which it is possible that the Group could be held liable. Although the Directors are not aware of any relevant liability, claims or actions, a claim or regulatory action against a member of the Group for pollution or contamination could have a material adverse effect on its business, financial condition and results of operations.
A number of the Group's existing properties and certain of those properties occupied by the Business are believed to contain materials in which asbestos is present. Pursuant to applicable law and regulation, the Beale Group is and, following Completion, the Enlarged Group, will be subject to duties to manage the risks of asbestos in its premises, which include ensuring that, so far as reasonably practicable, no person can come to harm from its presence. This may involve isolating, encapsulating or removing asbestos that is found to be in a poor condition. The Beale Group has developed and implemented an asbestos management plan which incorporates a set of policies and procedures to assist it to manage the asbestos risks in its properties. The ongoing management of asbestos by Beale may involve additional expenditure over forthcoming years. Any failure to manage the asbestos in its properties could result in the Beale Group and, following Completion, the Enlarged Group incurring fines or other liabilities, adversely affect its reputation and/or temporarily cause the full or partial closure of such properties, each of which could have a material adverse effect on the Group's or, following Completion, the Enlarged Group's, business, financial condition or results of operations.
The Group has two occupational defined benefit pension schemes, as described in ''Pension schemes'' in paragraph 16 of Part X of this document. Both schemes have been closed for future service accrual. The Beale pension scheme was assessed to have an IAS 19 deficit of £2.90 million as at the year ended 30 October 2010 while the Denners pension scheme was assessed to have an IAS 19 surplus of £0.40 million as at the same date. The estimated amount of contributions expected to be paid to these schemes during the year ending 29 October 2011 in respect of final salary benefits is £1,574,004. From 1 March 2011, no further contributions are payable in relation to the Denners pension scheme. Under the current schedule of contributions and recovery plan agreed with the trustees of the Beale pension scheme, JEB aims to eliminate the current deficit by February 2016.
However, there are various risks that could adversely affect the funding of the defined benefits available under these schemes, and consequently the Group's funding obligations in the longer term, such as the poor investment performance of pension fund investments; the schemes' trustees switching to an investment strategy not having the appropriate mix of equities, bonds and other investments; increasing employer contributions to the schemes; longer life expectancy; adverse annuity rates; or a change in the actuarial calculations used. An increase in the Group's pension related liabilities could have a material adverse impact on its profits and cash flow in the longer term.
The Group's operating results may fluctuate significantly in the future due to a variety of factors, many of which may be outside its control. Accordingly, Shareholders should not rely on comparisons with the Group's historic results as an indicator of its future performance or that of the Enlarged Group. It is possible that in the future, the Group's and, following Completion, the Enlarged Group's operating results will fall below the expectations of securities analysts or investors.
This paragraph 3 relates solely to specific risks relating to the Target Stores and the Business. General risks concerning the retail market, and which relate to both the Target Stores and the Group's existing businesses, are described in paragraph 2 above.
During the period prior to Completion, events or developments may occur which could have an adverse effect on the operations of the Target Stores. Under the terms of the Acquisition Agreement, the Group will be required to complete the Proposed Acquisition notwithstanding such adverse events or developments. This may have an adverse effect on the business, financial condition and results of operations of the Enlarged Group.
As at the date of this document, the formal consent of the relevant landlords to the assignment, sub-letting or underletting (as appropriate) of the Target Stores located in Abingdon (including the warehouse property), Chipping Norton, Cinderford and Kings Lynn still remains to be obtained although consent in principle has been given in respect of all those properties and formal licences are in the process of being negotiated. Although it is anticipated that all landlord's consents will be in place by Completion, to cover the possibility that some may not be available and, in any event, in relation to the Target Store located in Skipton (the lease of which is not capable of assignment or underletting), the Group will, rather than taking an approved assignment or underletting, occupy the relevant property under separate concession based terms agreed between itself and ARCS. This will enable the Group to acquire the businesses carried on at each of the Target Stores on Completion and, in respect of those stores where landlord's consent has not been obtained, provide a further 12 months in which to obtain the consent, failing which JEB must decide whether to take an assignment or underletting (in any event at its own risk) or close the relevant Target Store.
The Group understands that occupying any leasehold property in this way could potentially put it in breach of the relevant lease and at risk of a claim being made by the landlord for any loss suffered. ARCS has agreed to indemnify the Beale Group in this circumstance for any closure costs and (at Skipton only) any loss arising from the seizure of stock. If such a claim led to it having to vacate the relevant store, the Group's gross transaction values and, in turn, its results of operations could be materially and adversely affected. However, failure to obtain landlord's consent in respect of any one Target Store will not affect the acquisition by the Group of the businesses carried on in the other Target Stores.
Although detailed IT integration plans have been put in place by the Group in respect of the Proposed Acquisition and ongoing support is to be provided by ARCS under the IT Services Agreement, the testing of interfaces and new structures linked with the considerable transference of data onto the Group's existing systems requires significant time and focus. There can be no guarantee that the Enlarged Group's IT integration plan will work effectively and it may be compelled to accelerate its capital investment programme on new EPoS systems for the Target Stores, resulting in disruption to the Business and increased costs.
The success of the Proposed Acquisition will depend in part on the ability of the Enlarged Group and its management to integrate the operations, technologies and personnel of the Target Stores into those of the Group's existing businesses with a view to achieving reductions in the Enlarged Group's cost base as a proportion of total sales. The Group's management team have limited experience of implementing an integration plan of the scale proposed. If the Enlarged Group fails to successfully integrate the two businesses, this could negatively impact on its results of operations. The integration of these operations is complex and, accordingly, may result in unanticipated operational problems, expenses and other liabilities, and the diversion of management's attention.
The challenges involved in this integration include the following:
• assimilating the personnel and business cultures of both the Group's existing businesses and the Target Stores.
There can be no assurance that the Enlarged Group will be successful in meeting all of these challenges.
The historical operating results of the Target Stores may not necessarily be indicative of future performance. Furthermore, the Target Stores' future ability to contribute fully to the Enlarged Group's cash flows and operating profitability will be dependent upon a number of factors, including certain risks described in this section of the document.
Shares are risk investments and share prices have been and remain volatile, which could result in investors being unable to realise the amount originally invested. Shareholders should be aware that the value of the Ordinary Shares and the income arising therefrom can decrease as well as increase and may not always reflect the underlying value or prospects of the Company or the Enlarged Group. Furthermore, the price of an Ordinary Share may fall in response to market appraisals of the Group's strategy or if the Enlarged Group's operating results and/or prospects from time to time are below the prior expectations of market analysts and investors.
The ongoing ability of the Company to make dividend payments to Shareholders will depend on a number of factors, including its financial condition and results of operations, contractual restrictions (in particular those imposed by ARCS under the terms of issue of the Preference Shares and pursuant to the Term Loan and by HSBC pursuant to its facilities with the Company) and other factors considered relevant by the Directors. Under English law, any payment of dividends would be subject to the 2006 Act. All final dividends to be distributed by the Company must be recommended by the Directors and approved by Shareholders. Moreover, under English law, the Company may pay dividends on the Ordinary Shares only out of profits available for distribution in accordance with the 2006 Act.
Although the Directors intend, where permitted, to pay dividends to Shareholders in the future, there can be no assurance that the Company will declare and pay, or have the ability to declare and pay, any further dividends on the Ordinary Shares.
Readmission should not be taken as implying that there will be a liquid market in the Ordinary Shares. An investment in the Ordinary Shares may thus be difficult to realise.
In the event of a winding up of the Company, the Ordinary Shares will rank behind any liabilities of the Company (including in respect of the Preference Shares) and therefore any return for Shareholders will depend on the Company's assets being sufficient to meet the prior entitlements of creditors.
Electronic proxy appointment is available for the Extraordinary General Meeting to those who hold their Ordinary Shares in CREST. Any such Shareholder may appoint a proxy by completing and transmitting a CREST proxy instruction to Capita Registrars (CREST participant ID RA10), so that it is received by no later than 11.00 a.m. on 15 May 2011. Alternatively, Shareholders may appoint a proxy by completing and returning the enclosed Form of Proxy by post or by hand to Capita Registrars at the address provided so that it is received by no later than 11.00 a.m. on 15 May 2011. The giving of a CREST proxy instruction or return of a Form of Proxy (as the case may be) will not prevent a Shareholder from attending and voting in person at the Extraordinary General Meeting or any adjournment thereof, should the Shareholder wish to do so.
This document includes statements that are, or may be deemed to be, "forward looking statements". These forward looking statements can be identified by the use of forward looking terminology, including the terms "believes", "estimates", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology. These forward looking statements include all matters that are not historical facts and are stated subject to the Company's obligations under the Disclosure and Transparency Rules, Listing Rules and Prospectus Rules.
They appear in a number of places throughout this document and include statements regarding the intentions, beliefs or current expectations of the Company, the Board or the Group (as the case may be) concerning, amongst other things, the results of operations, financial condition, prospects, growth and strategies of the Company or the Group and the industry in which they operate.
All forward looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause the Company's actual results to differ materially from those indicated in these statements. These factors include but are not limited to those described in the section entitled "Risk Factors", which should be read in conjunction with the other cautionary statements that are included in this document. Any forward looking statements in this document reflect the Company's current views with respect to future events and are subject to these and other risks and uncertainties relating to the Company's businesses, results of operations and growth strategy.
By their nature, forward looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward looking statements are not guarantees of future performance. The Company's or the Group's actual results of operations, financial condition, dividend policy and the development of the markets in which they operate may differ materially from the impression created by the forward looking statements contained in this document. In addition, even if the results of operations, financial condition and dividend policy of the Company or the Group (as the case may be), and the development of the markets in which they operate, are consistent with the forward looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause these differences include, but are not limited to:
Forward looking statements in this document based on past trends or activities should not be taken as a representation that such trends or activities will continue in the future. In particular, any statement in this document which infers that the Proposed Acquisition may be earnings accretive or earnings enhancing does not constitute a profit forecast and should not be interpreted to mean that the earnings or net assets per Ordinary Share in the first full financial year following Completion, nor in any subsequent period, would necessarily match or be greater than those for the relevant preceding financial year.
You are advised to read this document in its entirety and, in particular, the sections of this document entitled "Summary", "Risk Factors", Part I – "Letter from the Chairman of Beale", Part IV – "Operating and Financial Review on the Beale Group", Part VIII – "Unaudited pro forma statement of net assets of the Group" and Part IX – "Summary of the principal terms and conditions of the Acquisition Agreement, Term Loan Agreement, IT Services Agreement and NED Agreement" for a further description of the factors that could affect the Company's or the Group's and, following Completion, the Enlarged Group's future performance and the markets in which they operate. These sections should be read in conjunction with the other cautionary statements that are included in this document. In light of these risks and uncertainties, the events described in the forward looking statements in this document may not occur. Any forward looking statements in this document reflect the Company's current views with respect to future events and are subject to these and other risks and uncertainties relating to the Company's businesses, results of operations and growth strategy.
These forward looking statements apply only as of the date of this document. The Company undertakes no obligation publicly to update or review any forward looking statement, whether as a result of new information, future developments or otherwise, subject always to the continuing obligations of the Company to make relevant disclosures under the Listing Rules, Prospectus Rules and the Disclosure and Transparency Rules as are in force from time to time. Prospective investors and Shareholders are therefore cautioned not to place undue reliance on these forward looking statements and should specifically consider the factors identified in this document which could cause actual results to differ before making an investment decision.
As required by the 2006 Act and Article 4 of the European Union IAS Regulation issued by the IASB, the consolidated financial statements of the Group are prepared in accordance with IFRS and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB, as endorsed and adopted by the European Union. The other financial information in this document has also been prepared on the same basis.
Unless otherwise indicated, all references in this document to "sterling", "pounds sterling", "£", "pence", "penny" or "p" are to the lawful currency of the UK. The Company prepares its financial statements in pounds sterling.
Certain financial data has been rounded. As a result of this rounding, the totals of data presented in this document may vary slightly from the actual arithmetic totals of such data.
Where third party information has been used in this document, the source of such information has been identified.
The contents of this document should not be construed as legal, business or tax advice. Each prospective investor and Shareholder should consult his, her or its own legal adviser, financial adviser or tax adviser for advice.
Certain information in relation to the Group has been incorporated by reference into this document. You should refer to Part XI of this document for further details.
No person has been authorised to give any information or to make any representations other than those contained in this document and, if given or made, such information or representations must not be relied on as having been authorised by the Group, Shore Capital or Shore Capital Stockbrokers. Subject to the Listing Rules and/or the Prospectus Rules and/or the Disclosure and Transparency Rules, neither the delivery of this document nor any acquisition of Ordinary Shares made in reliance upon it shall, in any circumstances, create any implication that there has been no change in the affairs of the Group since the date of this document or that the information in it is correct as of any subsequent date.
No statement in this document is intended as a profit forecast and no statement in this document should be interpreted to mean that the earnings per Ordinary Share for the current or future years would necessarily match or exceed the historical published earnings per Ordinary Share.
Recipients of this document acknowledge that: (i) they have not relied on Shore Capital, Shore Capital Stockbrokers or any person affiliated with any of them in connection with any investigation of the accuracy of any information contained in this document or their investment decision; and (ii) they have relied only on the information contained in or incorporated by reference into this document and that no person has been authorised to give any information or to make any representation concerning the Company or its subsidiaries or the Ordinary Shares (other than as contained in this document) and, if given or made, any such other information or representation should not be relied upon as having been authorised by the Company, Shore Capital or Shore Capital Stockbrokers.
The contents of the Company's website or any website directly or indirectly linked to the Company's website do not form part of this document and neither prospective investors nor Shareholders should rely on it.
Capitalised terms have the meanings ascribed to them in Part XIII of this document.
| Event | Time and/or date |
|---|---|
| Announcement of the Proposed Acquisition and suspension of trading in the Ordinary Shares |
6 April 2011 |
| Publication and posting of this document and Forms of Proxy | 20 April 2011 |
| Latest time and date for receipt of Forms of Proxy/CREST proxy instructions from Shareholders in response to the Resolutions |
11.00 a.m. on 15 May 2011 |
| Extraordinary General Meeting | 11.00 a.m. on 17 May 2011 |
| Expected date of announcement of results of the Extraordinary General Meeting through a Regulatory Information Service |
17 May 2011 |
| Expected date for completion of the Proposed Acquisition | 22 May 2011 |
| Expected date of cancellation of listing of Ordinary Shares and subsequent Readmission |
24 May 2011 |
| Notes: |
(1) References to times in this document are to London time (unless otherwise stated).
(2) If any of the times and/or dates set out in the expected timetable of principal events shown above and mentioned throughout this document should change, the revised times and/or dates will be notified to the UK Listing Authority, the London Stock Exchange and by an announcement through a Regulatory Information Service.
| Directors | |
|---|---|
| Mike Killingley Tony Brown Ken Owst Keith Edelman Simon Peters |
Non-executive Chairman Chief Executive Officer Group Finance Director Senior non-executive director Non-executive director |
| The business address for each of the above is: The Granville Chambers, 21 Richmond Hill, Bournemouth BH2 6BJ |
|
| Company Secretary | Chris Varley |
| Registered and Head Office | The Granville Chambers 21 Richmond Hill Bournemouth BH2 6BJ |
| Sponsor and Financial Adviser | Shore Capital and Corporate Limited Bond Street House 14 Clifford Street London W1S 4JU |
| Stockbroker | Shore Capital Stockbrokers Limited The Corn Exchange Fenwick Street Liverpool L2 7RB |
| Solicitors to the Company | Blake Lapthorn New Kings Court Tollgate Chandler's Ford Eastleigh SO53 3LG |
| Solicitors to the Sponsor | Pinsent Masons LLP 30 Crown Place London EC2A 4ES |
| Reporting Accountants to Beale | Deloitte LLP Abbots House Abbey Street Reading RG1 3BD |
| Auditors to Beale | Deloitte LLP Mountbatten House 1 Grosvenor Square Southampton S015 2BZ |
| Reporting Accountants and Auditors to ARCS |
KPMG LLP St James Square, Manchester M2 6DS |
| Registrars | Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU |
(Incorporated and registered in England and Wales with registered number 2755125)
Mike Killingley (Non-executive Chairman) The Granville Chambers Tony Brown (Chief Executive Officer) 21 Richmond Hill Ken Owst (Finance Director) Bournemouth Keith Edelman (Senior non-executive) BH2 6BJ Simon Peters (Non-executive)
Directors Registered Office
20 April 2011
To the holders of Ordinary Shares
Dear Shareholder,
Notice of Extraordinary General Meeting
The Company announced on 6 April 2011 that it had entered into a conditional agreement to acquire the trade and assets of 19 department stores currently owned and operated by ARCS, a UK regional department store operator and co-operative society, for a total initial consideration of £7.5 million payable wholly in cash on completion of the Acquisition Agreement.
The consideration payable in respect of the Proposed Acquisition will be financed entirely by ARCS through the provision by it to JEB of a £2.5 million unsecured term loan and its subscription for £8.5 million principal of redeemable preference shares to be issued by the Company, further details of which are set out in paragraph 6 of this letter. The Board believes that the financing structure agreed with ARCS provides an attractive form of long-term debt for the Enlarged Group, particularly given the current financing environment. It is the Board's view that the Group would not have been able to obtain equivalent funds from alternative sources on better terms.
On Completion, ARCS will also pay a cash contribution to JEB of £2.3 million, £1.2 million of which must, within 12 months of Completion, be spent or be contractually committed to be spent on improvements to some or all of the Target Stores. Further financial contributions to support the viability of certain stores and to enable them to integrate into the Beale format, amounting in aggregate in the first year following Completion to approximately £2.4 million, will also be made by ARCS. These payments will be made provided JEB continues to trade the relevant stores. Following Completion, ARCS will continue to own and operate various in-store concessions relating to the sale of furniture, beds and floorcoverings and the provision of travel agency, optician and hairdressing services at certain of the Target Stores.
Further information regarding the Target Stores and the terms of the Proposed Acquisition are set out in paragraphs 3 and 4 of this letter.
Due to its size in relation to Beale, the Proposed Acquisition constitutes a reverse takeover under the Listing Rules. This document comprises a combined circular and prospectus on the Enlarged Group. The approval of Shareholders in general meeting is required prior to Completion and Readmission. Given the need for Shareholder approval of the Proposed Acquisition and the related allotment and issue of the Preference Shares to ARCS, it is proposed that the approval of Shareholders also be sought at the Extraordinary General Meeting for the adoption of the New Articles in order to reflect the rights which will attach to the Preference Shares but also to update the Existing Articles generally and to reflect various changes in company law which have become effective on full implementation of the 2006 Act and other related legislation in the UK.
It is also proposed that the Company adopt the Performance Share Plan, further details of which are set out in paragraph 9 of this letter. The Listing Rules require that Shareholder approval be sought for the adoption of any long-term incentive scheme.
Accordingly, an Extraordinary General Meeting of the Company is to be held at 11.00 a.m. on 17 May 2011 at the Norfolk Royale Hotel, Richmond Hill, Bournemouth BH2 6EN for the purpose of considering and, if thought fit, approving the Proposed Acquisition, the allotment and issue of the Preference Shares and the adoption by the Company of the New Articles and the Performance Share Plan. The notice convening the Extraordinary General Meeting is set out on pages 140 to 142 of this document. The subscription proposed to be made by ARCS for the Preference Shares and the making by it of the Term Loan are inter-conditional. If the necessary Shareholder approvals are not obtained at the Extraordinary General Meeting, the Proposed Acquisition will not be completed, no investment will be made by ARCS in the Group and the Ordinary Shares will recommence trading on the London Stock Exchange.
In addition, as indicated in paragraph 16 below, there will be serious adverse consequences for the Group which would in such circumstances be required to pay costs, fees and expenses associated with the Proposed Acquisition of approximately £1.1 million (plus VAT) out of its existing cash resources and give HSBC the right to immediately appoint reporting accountants to carry out an independent business review on the Company and the Group. It is not presently certain what the conclusion of such any such review would be, or what the bank would conclude would be necessary or desirable, but the consequences could be materially detrimental to the interests of Shareholders.
As the Proposed Acquisition is classed as a reverse takeover under the Listing Rules, upon the Effective Date the UK Listing Authority will cancel the listing of the Ordinary Shares. Applications will be made by the Company to the UK Listing Authority and the London Stock Exchange for the Ordinary Shares to be readmitted to listing on the Official List and to trading on the London Stock Exchange's main market for listed securities. It is expected that Readmission will become effective and that dealings will recommence in the Ordinary Shares at 8.00 a.m. on 24 May 2011.
The principal purpose of this document is to provide you with details of, and the background to, the Proposed Acquisition, to explain why your Board considers it to be in the best interests of the Company and Shareholders as a whole and to recommend that you vote in favour of the Resolutions set out in the Notice of Extraordinary General Meeting. In this regard, your attention is drawn in particular to paragraph 16 below headed "Importance of the vote".
The Group is, through JEB, engaged in the operation of a department store network, predominantly in provincial towns across the UK and currently operates 13 stores offering an assortment of merchandise, including womenswear, menswear, cosmetics, gifts, homewares, furniture, toys, electrical products and accessories.
ARCS is a large co-operative society in the UK and, following a management change three years ago, is currently following a strategy of focusing on its core food, furniture, travel and funerals businesses and divesting certain non-food operations. The Proposed Acquisition follows the purchase by JEB in September 2010 of the Rochdale store previously owned and operated by ARCS. Discussions commenced with ARCS last year with a view to the Group acquiring the majority of its department store operations. Following Completion, ARCS will continue to own and operate just four department stores as well as its core furniture, food, travel and funerals operations.
One of the Group's main objectives is to become a leading regional department store retailer. It is the Board's belief that this objective will principally be achieved through acquisition with the aim of returning the Group to profitability and by ensuring, as far as possible, that new acquisitions make a positive contribution, whilst maintaining control of the Group's cost base. The Board is also committed to developing a customer focused department store group that provides quality products and merchandise, competitively priced to meet the requirements of the local communities that the Group serves.
The Group's other short-term strategic initiatives include seeking to work with brand partners and a proven supply base, whilst continuing to enhance its current portfolio of stores. Beale will also continue to develop its merchandise range in order to better meet customer needs and seek to reduce the Group's cost base as a proportion of overall trading space.
Your Board believes that the Proposed Acquisition represents a logical platform from which to further develop its existing businesses. It is both strategically and financially attractive for the following reasons:
The Board believes that cost synergies may be achieved principally by optimising purchasing arrangements, improving the efficiency of the Enlarged Group and by reducing duplication of functions where appropriate. It also believes that optimising the sourcing of merchandise will yield improved margins for both the Target Stores and the Group's existing stores. It is anticipated that increases in sales may be achieved by the introduction of new departments and by adding already proven brands and products to the Target Stores. The Directors believe that these benefits can be delivered and the Target Stores successfully integrated without significant disruption to the underlying operations of the businesses of the Enlarged Group.
The Directors believe that the Proposed Acquisition will be earnings enhancing.
The Group proposes to acquire leasehold interests in 19 of the 23 department stores currently owned and operated by ARCS across the UK and trading principally under the "Westgate" brand together with a warehouse property. The Enlarged Group will receive ongoing financial contributions from ARCS. The amounts payable will vary for each individual store with the overall level of contribution dependant on its notional categorisation as a group "A", "B" or "C" store. Set out in the table which appears in section 1 of Part IX of this document are summary details of the Target Stores by location and category.
JEB intends to continue operating the Group's existing branding policy in the Business in order to maintain customer confidence and to assist in direct marketing. The Target Stores' trading square footage varies considerably from Diss (at approximately 6,000 sq. ft.) to Mansfield (trading from approximately 94,000 sq. ft). Over a period of time, certain of the Target Stores may be re-branded with one or more of the Beale trading names, although no specific decisions will be taken until after Completion.
The range of departments traded in the Target Stores is similar to that already traded within the Beale Group. The smaller Target Stores are generally more focused on fashion with the larger stores carrying a full department store offering. In those Target Stores that currently have established furniture, beds, floorcoverings, travel, optician or hairdressing businesses, the relevant departments will continue to be operated by ARCS on a concession basis.
Under the terms of the Acquisition Agreement, JEB will acquire the fixed assets, contracts and goodwill associated with the Target Stores (including the "Westgate", "Contact Electrical Homestores" and "Comfortmaker" brands) for a nominal consideration and stock, forward orders and cash floats at valuation. In addition, JEB will be required within six months following Completion (or by 27 December 2011 if earlier) to purchase for sale through the Target Stores further stocks held at ARCS' distribution centre in Peterborough.
The Target Stores presently employ approximately 830 staff in total whose employment, together with that of certain ARCS head-office employees engaged primarily in the Business, will transfer to JEB on Completion. The employment of a further ten ARCS employees previously engaged in its buying department was transferred to JEB with effect from 1 February 2011 pursuant to the terms of an agreement under which ARCS transferred to JEB all its buying functions associated with the Target Stores (excluding those in respect of furniture, electrical items and concessions). Further details of this agreement are provided in paragraph 12.1(g) of Part X of this document. The principal terms and conditions of employment of transferring employees will be safeguarded. However, given the continuing uncertain economic outlook, the Acquisition Agreement provides that, in the event any restructuring exercise is required, ARCS will indemnify JEB in respect of certain severance payments which may be made by it to any of the employees of the Business up to various dates following Completion.
As at the date of this document, the formal consent of the relevant landlords to the assignment, sub-letting or underletting (as appropriate) of the Target Stores located in Abingdon (including the warehouse property), Chipping Norton, Cinderford and Kings Lynn still remains to be given although consent in principle has been obtained in respect of all those properties and formal licences are in the process of being negotiated. Although it is anticipated that all landlord's consents will be in place by Completion, to cover the possibility that some may not be available and, in any event, in relation to the Target Store located in Skipton (the lease of which is not capable of assignment or underletting), the Group will, rather than taking an approved assignment or underletting, occupy the relevant property under separate concession based terms agreed between itself and ARCS. This will enable the Group to acquire the businesses carried on at each of the Target Stores on Completion and, in respect of those stores where landlord's consent has not been obtained, provide a further 12 months in which to obtain the consent, failing which JEB must decide whether to take an assignment or underletting (in any event at its own risk) or close the relevant Target Store.
The Group understands that occupying any leasehold property in this way could potentially put it in breach of the relevant lease and at risk of a claim being made by the landlord for any loss suffered. ARCS has agreed to indemnify the Beale Group in this circumstance for any closure costs and (at Skipton only) any loss arising from the seizure of stock. However, failure to obtain landlord's consent in respect of any one Target Store will not affect the acquisition by the Group of the other Target Stores.
The precise level of consideration payable by JEB will be determined following the preparation and agreement of a completion statement and finalisation of a stock valuation process (which is intended to be achieved within two months of Completion).
Completion of the Proposed Acquisition, drawdown of the Term Loan and the issue by the Company to ARCS of the Preference Shares are conditional on obtaining the approval of Shareholders to certain of the Resolutions at the Extraordinary General Meeting. If the necessary approvals of Shareholders are not obtained, the Acquisition Agreement will terminate in its entirety and the Proposed Acquisition will not proceed.
Given the relative size of the Proposed Acquisition and the comparative scale of the Group's existing IT function, JEB and ARCS have agreed, pursuant to the IT Services Agreement, that ongoing IT support for the EPoS systems used in the Target Stores will continue to be provided by ARCS (or its suppliers) at nominal cost to the Enlarged Group for a period of up to four years from Completion, by which time JEB will assume full responsibility for its IT requirements and thereafter operate on a stand alone system. Any requirements for system updates, including the replacement of EPoS terminals and other equipment, will be undertaken and paid for by the Enlarged Group.
Further details of the Acquisition Agreement (and the conditions thereto) and the IT Services Agreement are set out in Part IX of this document.
A summary of the audited historical financial information on the Business for the three years ended 6 September 2008, 5 September 2009 and 4 September 2010, and for the period from 5 September 2010 to 22 January 2011 is set out below. The period to January 2010 is unaudited.
| 20 weeks | |||||
|---|---|---|---|---|---|
| Financial years ended September | ended January | ||||
| 2008 | 2009 | 2010 | 2010 | 2011 | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| Gross sales (VAT inclusive) | 66,583 | 60,468 | 61,062 | 26,537 | 26,367 |
| Gross sales (VAT exclusive) | 60,620 | 55,518 | 55,600 | 24,212 | 23,700 |
| (Loss) before taxation | (3,751) | (3,998) | (4,899) | (1,178) | (2,243) |
| (Loss) after taxation | (2,701) | (2,879) | (3,527) | (848) | (1,615) |
| Gross assets | 11,568 | 9,920 | 11,575 | N/A | 12,520 |
| Net assets | 5,735 | 2,691 | 5,916 | N/A | 6,393 |
Shareholders should read the whole of this document and not rely solely on the summary financial information set out above.
Please refer to the unaudited pro forma statement of net assets of the Group in Part VIII of this document for further information about the financial effects of the Proposed Acquisition including an illustration of the effect the Proposed Acquisition might have had on the consolidated net assets of the Group as at 30 October 2010 on the assumption that the Proposed Acquisition was completed on that date.
As described above, the Group proposes to finance the Proposed Acquisition and fulfil certain of the further ongoing working capital requirements of the Enlarged Group, inter alia through the provision by ARCS to JEB of an unsecured term loan of £2.5 million and the issue by the Company to ARCS of £8.5 million principal of Preference Shares.
The Term Loan will become available to JEB and be fully drawn down by it on Completion. The principal amount owing on the Term Loan will be repayable over a period of five years in instalments of £250,000 made at six monthly intervals commencing on 31 October 2011, or earlier without penalty if JEB so elects. Interest will be charged quarterly in arrears with effect from Completion at the rate of 4 per cent. per annum over the LIBOR rate (as defined in the Term Loan Agreement) increasing to 6 per cent. over LIBOR in the event of a default which is not remedied within 12 months. If certain events of default occur, the Term Loan will be immediately repayable on demand.
Further details of the Term Loan Agreement are provided in Part IX of this document.
Preference Shares having a nominal value of £8.5 million will be subscribed for by ARCS in cash and issued by the Company on Completion. No coupon is payable on the Preference Shares until the date falling five years after Completion but thereafter, ARCS will be entitled to receive in priority to the payment of dividends to the holders of Ordinary Shares a fixed net cash cumulative dividend of 8 per cent. per annum on the capital paid up on the Preference Shares for a period of 48 months (the first such dividend being payable on 30 November 2016) and thereafter, until their redemption in full, a dividend of 9 per cent. per annum. In the event of a default which is not remedied within twelve months, the effective dividend accruing on the Preference Shares will increase by 4 per cent. per annum.
The Preference Shares will, subject to the provisions of the 2006 Act, be redeemable by the Company at par in equal instalments of £500,000 made at six monthly intervals also commencing on 30 November 2016, or earlier (together with any arrears or accruals of dividend) if the Company so elects.
The Preference Shares will also, following the third anniversary of Completion but not, save for transfers intra-group before that date, be freely transferable by ARCS to a maximum of five transferees in multiples of at least £500,000. The Preference Shares will not be capable of being dealt in on any stock exchange in the United Kingdom or elsewhere and no application for any public listing or quotation of the Preference Shares will be made. The holder(s) of the Preference Shares will be entitled to receive notice of and to attend any general meeting of the Company but will generally have no entitlement to vote thereat.
Beale will be required to ensure that no interim or final dividends are paid to Shareholders or otherwise declared by it, in any particular year, prior to JEB having made all repayments of the Term Loan then due and payable and Beale having effected, as of the date any such dividend is declared or paid, all redemptions of the Preference Shares then required to have been made. The Company has also undertaken to ensure, to the extent within its power or under its control, that its distributable reserves are no less than the nominal value of the Preference Shares in issue from time to time.
In the event that the Company defaults in the payment when due of any amount of principal or dividend due on the Preference Shares or on a winding-up of the Company (but not otherwise), ARCS (and any other holder(s) of such shares) will have the option to convert some or all of their outstanding Preference Shares into such number of Ordinary Shares (calculated by reference to a customary formula) as represents in aggregate up to (but no more than) 9.99 per cent. of the issued ordinary share capital of the Company. The Ordinary Shares which arise on conversion will be credited as fully paid and rank equally in all respects with the Ordinary Shares then in issue and be admitted to the Official List and to trading on the London Stock Exchange's main market within 20 business days from issue.
On Completion, the Company will contribute the subscription monies received by it for the Preference Shares to JEB to enable it to satisfy the consideration payable under the Acquisition Agreement. The balance of the amount subscribed for the Preference Shares and the Term Loan remaining after payment of the initial consideration due to ARCS on Completion and settlement of costs and expenses together with the £2.3 million cash contribution payable to JEB (which will together total approximately £4.5 million) will be available for use by JEB in all its businesses.
Further details of the rights attaching to the Preference Shares and the other relevant provisions of the New Articles are provided in paragraph 4.5 of Part X of this document.
Following completion of the Proposed Acquisition, the Enlarged Group will continue to be managed by the current executive Directors. For so long as Preference Shares having a nominal value of at least £4.25 million remain in issue and are held by ARCS or an associated company or the Term Loan remains outstanding, ARCS will have the ability, after the date falling three months' from Completion, to appoint its most senior executive to the boards of directors of both the Company and JEB.
The integration of the Target Stores into the Group's existing business will be overseen by the executive Directors and the senior management of the Group with support as necessary from external integration specialists. A dedicated integration team comprising members of the Group's operational management has been established and will remain in place both before and after Completion. This team will include an integration director, operational staff and a project manager and will also draw on internal Group expertise in the areas of training, IT, visual merchandising and HR together with other individuals having experience in merchandising, finance, IT and human resources providing support from the Group's head office in Bournemouth.
The Company has, together with ARCS, undertaken a joint IT systems integration review and concluded that the Beale systems software provided by Microsoft Dynamics will be used as the basis for the Enlarged Group's stock management platform. Each of the Target Stores will, in the medium term, continue to operate on its existing EPoS platform, with interfaces providing a link to the Beale Group's central systems control function. It is expected that over time and where necessary, the Target Stores' EPoS systems will be replaced. The detailed basis on which IT systems integration and support will initially be achieved within the Business is provided for in the IT Services Agreement, further details of which are set out in Part IX of this document.
Your attention is drawn to the "Risk Factors" section set out on pages 10 to 16 of this document and the additional information in respect of the Group and the Business set out in Part X. Shareholders and prospective investors are advised to read the whole of this document and not rely solely on the summary information contained in this letter.
The Company proposes to introduce the Performance Share Plan to enable the Remuneration Committee to grant long-term equity-based awards to Company executives and employees which are aligned to the interests of Shareholders. The Remuneration Committee will supervise the operation of the Performance Share Plan.
A full summary of the principal terms of the Performance Share Plan is set out in paragraph 6.2 of Part X of this document.
On 27 January 2011, Beale announced its preliminary results for the financial year to 30 October 2010. Beale commented as follows:
The Group loss before taxation of £668,000 showed further progress on the previous year, when the loss was £987,000. The underlying improvement was more substantial than this, as we incurred a loss of £271,000 in the two stores acquired during the year, much of which was attributable to start-up costs.
Our two new stores were Robbs of Hexham and the former Westgate department store in Rochdale. Robbs was acquired from administrators in June and we signed a new 15 year lease, in respect of which we received significant commercial inducements. Following an extensive review of the business, we made substantial changes, refurbished the store and relaunched it in September. It is now one of our larger stores by turnover.
In September we signed a 25 year lease on the Rochdale store, with significant commercial inducements, and relaunched it under the name of Whitakers in October.
The Group's gross sales increased by 2.7% to £87.2 million; these include concession sales and VAT, as well as the sales of the new stores. The VAT increase during the year contributed about 1.4% of the increase.
Revenue, which excludes VAT and includes only the commission element of concession sales, was 2.1% higher than in the previous year at £48.6 million. Like for like revenue, excluding the new stores, declined by 2.1%.
Like for like gross margins were comparable to those in the previous year at 54.2% (2009: 54.5%). Robbs of Hexham includes a substantial food store, which operates at lower margins than our usual department store business, with the result that the overall margin declined slightly to 53.7%.
Despite the new acquisitions administrative expenses were well controlled, and were £148,000 lower at £26.5 million.
Our net debt increased, and at the year-end was £8.1 million (2009: £6.4 million). The seasonality of our business means that our borrowings are at their highest around the year end. The increase was largely attributable to the costs of acquiring and refurbishing our new stores and supporting the higher working capital investment in the enlarged Group.
Retail sales were seriously affected by snow throughout the country in November and early December. Gross sales for the 11 weeks ended 15 January 2011 were 4.6% higher than for the equivalent period last year.
For the 5 week period from 6 December 2010 to 15 January 2011, following the worst of the adverse weather conditions, gross sales were 16.3% higher than in the previous year. The comparison is flattered to some degree by the snow which affected parts of the country in the first half of January 2010.
No dividend is proposed.
In February 2010, Panther Securities plc, a listed property investment company, acquired shares which lifted the shareholding of Panther and its major shareholder Andrew Perloff, from just under 10% to 29.72%. These shares were acquired from Lawdene, previously our largest shareholder, whose interest in the Company is now 4.5%.
In April 2010 Simon Peters, finance director of Panther Securities, joined the Board as a nonexecutive director.
The steady improvement in the Group's performance in the difficult trading environment would not have been possible without the exceptional commitment of our staff. On behalf of the Board and shareholders I thank them for their unstinting contribution.
During September 2010 we were pleased to announce that the Group's £9.0 million term loan facility, which was due to expire in February 2011, had been replaced by a new 2 year revolving loan facility, also of £9.0 million, expiring on 31 August 2012. We also have a modest overdraft facility.
We have continued to trade comfortably within our facilities throughout the past year, and have met all our banking covenants. Our forecasts show that the Group should be able to operate within its borrowing facilities and the Board has therefore continued to adopt the going concern basis in preparing the annual report and accounts.
The increase in VAT on 4 January 2011, and the effect of the Government's tighter fiscal policy, continues to make the retail sector challenging.
Despite this, we believe that our trading strategy will generate further improvements in the Group's underlying performance. We shall also continue to seek new opportunities to increase the size of the Group with the acquisition of additional stores, which could be managed without a material increase in the size of our head office."
At the Annual General Meeting of the Company held on 17 March 2011, the Chairman stated:
"Gross sales for the 19 weeks to 12 March 2011, including concessions and the two new stores acquired in 2010, were 5.9% higher than for the previous year, like-for-like sales declined by 6.2%. For the first quarter, to 29 January 2011, gross sales were up 4.9% on the previous year.
As noted in the Annual Report, trading in the current year has been significantly adversely affected by the worst pre Christmas snowfalls for 30 years. However since the weather improved we have made progress in recapturing the lost sales; gross sales during the latest six-week period since 29 January, including concessions and new stores, were 9.4% up on the previous year and like-for-like sales were 4.7% lower.
The Board is pleased that first quarter sales were achieved at an improved gross margin compared with the previous year, despite the promotional discounting required to be competitive over Christmas.
Furthermore, like for like expenses were lower than the previous year as we continued to focus on cost reduction, albeit total expenses increased as a result of the acquisition of the two new stores.
The increase of VAT on 4 January 2011 and the effect of the Government's tighter fiscal policy mean that the remainder of the year will be challenging, but the Board believes the strategies and actions being taken will in due course improve the Group's financial performance".
The Board believes that the Enlarged Group will be well placed both operationally and financially to drive continued growth for the remainder of 2011 and into future years.
As described above, completion of the Proposed Acquisition, the making of the Term Loan and the subscription by ARCS for the Preference Shares are each subject to the approval by Shareholders at the Extraordinary General Meeting of Resolutions 1, 2, 4 and 5 referred to below. The Board also believes that adoption by the Company of the Performance Share Plan pursuant to Resolution 3 is necessary for the future incentivisation of the executive Directors and other key employees.
Accordingly, you will find set out on pages 140 to 142 of this document the Notice convening the Extraordinary General Meeting to be held at 11.00 a.m. on 17 May 2011 at the Norfolk Royale Hotel, Richmond Hill, Bournemouth BH2 6EN at which the following Resolutions will be proposed:
Resolution 1 proposes that, in accordance with and subject to the terms of the Acquisition Agreement, the Proposed Acquisition be approved.
In order for the Directors to issue the Preference Shares for cash other than on a pre-emptive basis the Directors require the necessary authorisations by Shareholders to allot those shares under the 2006 Act. Resolution 2 proposes that the Directors be authorised to allot shares in the Company up to a maximum nominal amount of £8,500,000, representing the 8,500,000 new Preference Shares to be issued in connection with the Proposed Acquisition. This authority will expire on the first anniversary of the date the resolution is passed.
Resolution 3 comprises a resolution to approve and to authorise the Directors to implement the Performance Share Plan.
Resolution 4 will be proposed as a special resolution. Resolution 4 proposes that, conditional upon the passing of resolution 2 referred to above, the Directors be empowered to disapply pre-emption rights to the extent necessary in relation to the allotment of the Preference Shares in connection with the Proposed Acquisition. This authority will also expire on the first anniversary of the date the resolution is passed.
Resolution 5 will also be proposed as a special resolution and proposes that, subject to and conditional upon the passing of Resolutions 1, 2 and 4, the New Articles be approved and adopted as the new articles of association of the Company in substitution for, and to the exclusion of, the Existing Articles. An explanation of the principal differences between the New Articles and the Existing Articles and a detailed summary of the key provisions of the New Articles are set out in paragraph 5 of Part X of this document.
The authorities sought by Resolutions 2 and 4 are being sought in addition to those obtained at the Annual General Meeting of the Company held on 17 March 2011.
You will find enclosed with this document a Form of Proxy for use by Shareholders at the Extraordinary General Meeting or any adjournment thereof. Whether or not you intend to be present at the Extraordinary General Meeting, you are requested to complete and sign the Form of Proxy in accordance with the instructions printed on it and to return it as soon as possible and, in any event, so as to be received by Capita Registrars, PXS, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU no later than 11.00 a.m. on 15 May 2011, being 48 hours before the time of the Extraordinary General Meeting.
If the Form of Proxy is not returned or (as appropriate) a CREST proxy instruction is not submitted by 11.00 a.m. on 15 May 2011, your vote will not count unless you attend in person at the Extraordinary General Meeting. The completion and return of a Form of Proxy or CREST proxy instruction will not prevent you from attending the Extraordinary General Meeting and voting in person if you wish to do so.
As the Proposed Acquisition constitutes a reverse takeover under the Listing Rules, the London Stock Exchange and the UK Listing Authority respectively will cancel trading in the Ordinary Shares on the London Stock Exchange's main market for listed securities, and the listing of the Ordinary Shares on the Official List, on the Effective Date. Applications will be made to the UK Listing Authority and to the London Stock Exchange for the Ordinary Shares to be readmitted to listing on the Official List and to trading on the London Stock Exchange's main market for listed securities. It is expected that, subject to the conditions of the Acquisition Agreement and the Introduction Agreement being satisfied or, where permitted, waived and subject also to the timing of the satisfaction or, where permitted, waiver of such conditions, Readmission will become effective and that dealings in Ordinary Shares will recommence on the London Stock Exchange at 8.00 a.m. on the Effective Date.
The Existing Articles already (and the New Articles will) permit the holding of Ordinary Shares under the CREST system. The Company will apply for the Ordinary Shares to be readmitted to CREST on the Effective Date. Accordingly, settlement of transactions in Ordinary Shares following Readmission may continue to take place within the CREST system if any Shareholder so wishes.
The Company has obtained irrevocable undertakings to vote in favour of the Resolutions at the Extraordinary General Meeting from Shareholders (including each of the Directors and/or their relevant connected parties) holding 7,036,540 Ordinary Shares in aggregate, representing approximately 34.28 per cent. of the Company's existing issued share capital.
The Resolutions relating to approval of the Acquisition Agreement, the issue of the Preference Shares on a non pre-emptive basis and adoption of the New Articles must be passed by Shareholders at the Extraordinary General Meeting in order for the Proposed Acquisition to proceed. If these Resolutions are not passed and the Proposed Acquisition does not take effect, there will be serious adverse consequences for the Group as the Company will not be able to operate within the borrowing limits available under its existing revolving credit loan facility with HSBC of £9.0 million, will breach its revised banking covenants and have insufficient working capital for the following 12 months. The consequences of this would (as described below) be materially detrimental to the interests of Shareholders.
The Company will be required to pay professional fees and expenses associated with the Proposed Acquisition of approximately £1.1 million (plus VAT) (which otherwise would have been payable out of the one-off cash contribution payment to be made by ARCS on Completion) out of its existing cash resources.
Furthermore, the net proceeds of the Term Loan and Preference Share subscription proposed to be made by ARCS, which would have been available for use in all of the Enlarged Group's businesses after satisfaction by JEB of the initial consideration payable under the Acquisition Agreement, will not be received.
HSBC is supportive of the Proposed Acquisition and has consented to it and, as described on pages 127 and 128 of this document, HSBC has varied the financial covenants contained in the Company's loan facility in order to allow the Proposed Acquisition to proceed.
However, as part of the agreement reached with it, HSBC requires that if the Proposed Acquisition does not proceed, it will have the right to immediately appoint reporting accountants, at Beale's cost, to carry out an independent business review and report on such matters relating to the Company and the Group as HSBC (acting reasonably) considers necessary or desirable. It is not presently certain what the conclusion or the consequences of any such review would be, or what the bank might conclude would be necessary or desirable.
In the absence of the financing that would otherwise have been provided by ARCS, it is, in any event, likely that the Group would breach the covenant relating to available headroom which would be tested within 28 days of the first test date of 31 July 2011.
Without the Proposed Acquisition proceeding, the Company would have available to it a limited range of options to reduce borrowings or deal with any potential covenant breach, which it would start to implement as soon as possible if the necessary Resolutions were not passed at the Extraordinary General Meeting. Such actions would include reducing the Group's cost base, reducing capital expenditure and conserving cash through stricter working capital management. Asset disposals might also be possible. Taken together, these actions would assist the working capital position. However, if such actions were insufficient to reduce borrowings sufficiently or address the risk of a covenant breach (as, in the opinion of the Directors, is almost certain given the available timeframe), the Company would seek to agree with HSBC (who, as described above, have been supportive of the Company's request to amend its existing facility and make the Proposed Acquisition) that the relevant covenants be relaxed or that any breach of such covenants be waived.
Discussions with HSBC concerning banking covenants would commence immediately. However, in light of their previous discussions and given that the financing from ARCS will no longer be available, the Directors believe it is unlikely that the Group would be able to secure such an amendment or waiver from HSBC. In those circumstances, the Company would attempt to seek alternative sources of financing, for example, by way of a new issue of Ordinary Shares. In these circumstances and within the required timeframe, the Directors believe that an equity fundraising would in practice be very difficult, or impossible, to achieve and cannot be confident of the success of such a course of action. Even were it possible, the dilutive effect on Shareholders could be considerable.
A breach by the Company of any of its banking covenants would constitute an event of default under the facility. As a consequence, HSBC could immediately cancel its facilities and demand immediate repayment of all amounts due to it. If the Company were unable to reach agreement with HSBC or an alternative lender, it would be unable to repay its existing facilities in full. The shortfall would equal the amount of all outstanding borrowings at the time, up to the maximum borrowing limit of £9.0 million. In this event, HSBC would have the right (among others) to enforce the security held by it over the principal assets of the Group, immediately exercise its rights to appoint a receiver or administrator and commence formal insolvency proceedings failing which the Company would be likely to seek itself the protection of a formal insolvency process, probably administration.
If that were the case, the value of an Ordinary Share would decline and result in investors losing most or all of their investment in the Company.
Accordingly, to avoid this outcome, the Directors believe it is important that Shareholders vote in favour of the relevant Resolutions in order that the Proposed Acquisition can proceed.
For the reasons described in this letter, the Board considers the Proposed Acquisition, the allotment and issue of the Preference Shares and the adoption of the New Articles and the Performance Share Plan to be in the best interests of the Company and Shareholders as a whole.
Accordingly, the Board are unanimously recommending that you vote in favour of all the Resolutions at the Extraordinary General Meeting.
Yours faithfully
Mike Killingley (Non-Executive Chairman)
The Group was admitted to listing on the London Stock Exchange in 1995 and currently operates 13 department stores from a head office in Bournemouth. The flagship store is also based in Bournemouth.
The Group trades under a variety of brands including Beales in Bedford, Bournemouth, Horsham, Kendal, Poole, Tonbridge, Winchester and Worthing, as Broadbents & Boothroyds in Southport, as Denners in Yeovil, as Robbs in Hexham (acquired on 4 June 2010) and as Whitakers in Rochdale (acquired from ARCS on 5 September 2010) and Bolton.
The Group owns the principal freehold parts of the Bedford, Kendal and Yeovil stores. All other stores are occupied on a leasehold basis.
The business operated by the Group was founded in 1881 by Mr J.E. Beale who opened a shop on part of the site of the existing Bournemouth store. Over time the Company developed and expanded acquiring adjoining properties to enlarge the original shop into a department store.
The Group has grown both organically and through acquisition. Initially a second department store was purchased in Bournemouth in the 1920s followed by expansion outside of Bournemouth with the opening of a third store in Poole in 1969. The Group has continued to develop over time through the acquisition or opening of further stores as follows: Bedford (1980), Winchester (1991), Southport (1993), Bolton (1996), Kendal and Yeovil (1999), Tonbridge and Worthing (2002), Horsham (2006) and Hexham and Rochdale (2010).
Department stores are established retail formats in the UK. Beale seeks to appeal to a wide range of customers within the catchment areas that it serves.
The stores within Beale's portfolio select merchandise categories and ranges which are focused on satisfying the needs of its customer base within the catchment area served by each store to maximise contribution per square foot.
Merchandise is sourced directly by the Group and is also provided by suppliers and other retailers operating in-store concessions who are typically required to pay a commission to the Group based on the level of sales achieved. Sales volumes and contributions per square foot vary from department to department and from store to store.
The Group's sales mix by category is as follows:
catering;
gifts and stationery;
The particular mix of sales categories varies from store to store depending on store size and the nature of the competition around each trading location. The precise range and size of each department is targeted to the individual needs of each locality. The principal merchandise categories across all the Group's stores are mens and womenswear, cosmetics, fashion accessories, gifts, homewares and catering. Certain products are sourced from Associated Independent Stores Limited ("AIS"), a buying group that supplies independent retailers.
Various womenswear ranges are sold in the Group's stores and comprise a wide variety of branded merchandise such as Country Casuals, Jaeger, Jacques Vert, Précis, Planet, Gerry Weber, Joules, Phase Eight, Basler, Fransa, Wallis, Noa Noa and Windsmoor.
Menswear ranges comprise an assortment of brands such as Jaeger, Joules, Crew, Henri Lloyd, Duck and Cover, Levis, Barbour, Ben Sherman, Timberland and McNeal. These ranges are supplemented by merchandise sourced by the Group from AIS.
Homewares products include linens, cookware, china, glass and cutlery. The Group or its concession partners sell a wide variety of brands in these categories including Dorma, Christy, Sanderson, Bedeck, Wedgwood, Portmeirion, Montgomery and Arthur Price. Beale has also introduced an exclusive range of own label homeware that it has branded as "homebasics", which seeks to offer both value and quality.
The fashion accessory range sold in the Group's stores includes men's and women's shoes, lingerie, hosiery, gloves, scarves, handbags, luggage and fashion jewellery and comprises brands such as Jane Shilton, Radley, Guess, Ted Baker, Triumph, Elbeo, Pretty Polly, Charnos, Dents, Shilton, Tula, Antler and Samsonite.
Furniture and carpets are sold in six of the Group's stores. The ranges on offer are sourced principally through AIS and include brands such as Ercol, Collins and Hayes, Slumberland, Relyon and Axminster.
Beale sells a number of international cosmetic and fragrance brands in the Group's stores including MAC, Estée Lauder, Clinique, Clarins, Lancôme, Christian Dior, Sisley, Laura Mercier and YSL.
A range of electrical goods are sold in various of the Group's stores.
The Group or its concession partners operate catering outlets in each store. As well as providing customer convenience, these outlets generate additional revenue in their own right.
Beale offers customers a wide range of personal and household gift ranges across its stores which are supplemented by specific seasonal products. Stationery ranges are based on a selection of greetings cards with other personal and business stationery products being offered in the larger stores.
In addition to the above categories, the Group or its concession partners operate other departments, including haberdashery, knitting yarns, travel and hairdressing in a number of its stores.
The Group offers its own store credit card and also provides interest free instalment credit to customers purchasing electrical goods, furniture and carpets and other "big ticket" items. Credit sales form a significant percentage of Group turnover. Approximately 57,000 of the Group's store card accounts were used at least once in the last financial year. The Group's store card is operated in a similar manner to other credit card products with customers receiving a monthly statement and an interest free period for payment. Balances outstanding after that period are currently charged at up to 1.87 per cent. per month, equivalent to an APR of 24.9 per cent. The Group's store credit cards entitle holders to:
At 30 October 2010, approximately £2.6 million of credit was outstanding on in house credit accounts and of this, about half was interest bearing. Total gross interest received by the Group on these accounts was approximately £391,000 for the 52 weeks ended on that date.
Details of the Group's department stores appear below:
| Approximate gross sales | ||
|---|---|---|
| (excluding VAT) by store | ||
| Approximate | for the year ended | |
| selling space | 30 October 20102 | |
| Location | Sq ft | £'m |
| Beales stores | ||
| Bedford | 25,000 | 4.2 |
| Bournemouth | 79,000 | 14.4 |
| Horsham | 33,000 | 4.0 |
| Kendal | 24,000 | 4.8 |
| Poole | 44,000 | 8.7 |
| Tonbridge | 37,000 | 4.9 |
| Winchester | 19,000 | 2.5 |
| Worthing | 56,000 | 7.9 |
| Whitakers stores | ||
| Bolton | 55,000 | 5.1 |
| Rochdale1 | 30,000 | 0.3 |
| Broadbents & Boothroyds store | ||
| Southport | 34,000 | 7.3 |
| Denners store | ||
| Yeovil | 54,000 | 7.7 |
| Robbs store | ||
| Hexham1 | 65,000 | 2.5 |
| Total | ———— 555,000 |
———— 74.3 |
| ———————— | ———————— |
Notes:
Hexham was acquired on 4 June 2010 and Rochdale was acquired on 5 September 2010.
Excludes interest on customer credit accounts.
The Group operates in the competitive department store sector. The Group's main competitors vary from location to location. The Group competes with peers such as Debenhams, John Lewis and House of Fraser. General UK retail competition has further intensified over time through the development of internet trading and regional shopping centres such as West Quay in Southampton and the Metro Centre near Newcastle.
Beale's operations are entirely focused on the UK market. The Group currently has 13 department stores ranging from Hexham in the north to Bournemouth in the south.
The Group's main objective is to become a leading regional department store retailer. It is the Board's belief that this objective will principally be achieved through acquisition with the aim of returning the Group to profitability. The Board is committed to developing a customer focused department store group that provides quality products and merchandise, competitively priced to meet the requirements of the local communities that the Group serves.
The Group's other short-term strategic initiatives include seeking to work with brand partners and a proven supply base, whilst continuing to enhance the Group's current portfolio of stores. Beale will also continue to develop its merchandise range in order to better meet customer needs and seek to reduce the Group's cost base as a proportion of overall trading space.
The Directors believe that the Group's employees will be fundamental to the success of the Enlarged Group. Beale's average monthly number of employees for the last three years was as follows:
| Financial years ended | |||
|---|---|---|---|
| The average number of persons (including directors) | 1 November | 31 October | 30 October |
| employed by the Group during the year | 2008 | 2009 | 2010 |
| Full time | 428 | 392 | 417 |
| Part time | 750 | 705 | 684 |
| ———— | ———— | ———— | |
| 1,178 | 1,097 | 1,101 | |
| ———————— | ———————— | ———————— |
The tables below set out selected financial information for Beale for each of the three financial years ended 1 November 2008, 31 October 2009 and 30 October 2010. The information has been extracted without material adjustment from the audited consolidated financial statements of Beale incorporated by reference in Part XI of this document. In order to make a proper assessment of the financial performance of Beale's businesses, prospective investors and Shareholders should read this document as a whole and not rely solely on the key or summarised information in this section.
| Financial years ended | ||||
|---|---|---|---|---|
| 1 November | 31 October | 30 October | ||
| 2008 | 2009 | 2010 | ||
| £'000 | £'000 | £'000 | ||
| Gross sales1 | 88,982 | 84,950 | 87,247 | |
| Revenue – continuing operations | ———— 47,881 |
———— 47,566 |
———— 48,566 |
|
| Cost of sales | (21,615) | (21,655) | (22,467) | |
| Gross profit | ———— 26,266 |
———— 25,911 |
———— 26,099 |
|
| Administrative expenses | (27,492) | (26,668) | (26,520) | |
| Operating loss – continuing operations | ———— (1,226) |
———— (757) |
———— (421) |
|
| Finance expense | (314) | (231) | (248) | |
| Finance income | 18 | 1 | 1 | |
| Loss on ordinary activities before taxation | ———— (1,522) |
———— (987) |
———— (668) |
|
| Taxation credit | 131 | 70 | 85 | |
| Loss for the period from continuing operations | ———— | ———— | ———— | |
| attributable to equity members of the parent | (1,391) ———————— |
(917) ———————— |
(583) ———————— |
|
| Basic and diluted loss per share | (6.78p) | (4.47p) | (2.84p) |
| Financial years ended | |||
|---|---|---|---|
| 1 November | 31 October | 30 October | |
| 2008 | 2009 | 2010 | |
| £'000 | £'000 | £'000 | |
| Operating loss | (1,226) | (757) | (421) |
| Adjustments for: | |||
| Cash disbursements of pension obligations (net | |||
| of charge included within the income statement) | (1,320) | (717) | (849) |
| Depreciation | 2,235 | 1,972 | 1,878 |
| Profit on fixed asset disposal | – | (171) | – |
| Decrease/(increase) in inventories | 1,789 | 215 | (968) |
| Decrease/(increase) in trade and other receivables | 1,278 | 418 | (136) |
| Decrease/increase in trade and other payables | (4,687) | 1,473 | 1,087 |
| Cash (utilised in)/generated from operations | ———— (1,931) ———————— |
———— 2,433 ———————— |
———— 591 ———————— |
| Financial years ended | ||||
|---|---|---|---|---|
| 1 November | 31 October | 30 October | ||
| 2008 | 2009 | 2010 | ||
| £'000 | £'000 | £'000 | ||
| Cash flows from operating activities before | ||||
| interest and tax | (1,931) | 2,433 | 591 | |
| Interest paid | (305) | (253) | (267) | |
| Interest received | 18 | 1 | 1 | |
| Tax received | 63 | – | – | |
| N et cash flow (used in)/generated from |
———— | ———— | ———— | |
| operating activities | (2,155) | 2,181 | 325 | |
| Cash flows from investing activities | ———————— | ———————— | ———————— | |
| Purchase of property, plant and equipment | (559) | (1,115) | (1,627) | |
| Purchase of new business | – | – | (403) | |
| Proceeds from sale of fixed assets | 332 | – | ||
| Net cash used in investing activities | (559) | (783) | (2,030) | |
| Cash flows from financing activities | – | – | – | |
| New bank loans raised | 7,100 | 8,600 | ||
| Increase/(repayment) of bank loans | 2,750 | (7,500) | (7,100) | |
| Net proceeds from obligations under finance leases | 2 | 1 | – | |
| Net cash generated from/(used in) | ||||
| financing activities | 2,752 | (399) | 1,500 | |
| N et increase/(decrease) in cash and cash |
———— | ———— | ———— | |
| equivalents in the period | 38 | 999 | (205) | |
| C ash and cash equivalents (including overdrafts) |
———————— | ———————— | ———————— | |
| at beginning of period | (366) | (328) | 671 | |
| C ash and cash equivalents (including overdrafts) |
———— | ———— | ———— | |
| at end of period | (328) ———————— |
671 ———————— |
466 ———————— |
|
Department store sales account for over 99 per cent. of the Group's income. Trade (including concessions) purchases account for approximately 65 per cent. of the Group's payments. Other major cash outflows are VAT, central support services, store operating costs, rent and staff payroll.
| Financial years ended | |||
|---|---|---|---|
| 1 November | 31 October | 30 October | |
| 2008 | 2009 | 2010 | |
| £'000 | £'000 | £'000 | |
| Non-current assets | |||
| Goodwill | 892 | 892 | 892 |
| Property, plant and equipment | 25,219 | 24,201 | 24,096 |
| Financial assets | 16 ———— |
16 ———— |
16 ———— |
| 26,127 | 25,109 | 25,004 | |
| Current assets | |||
| Inventories | 8,449 | 8,234 | 9,495 |
| Trade and other receivables due after one year | 4,684 | 164 | 152 |
| Trade and other receivables due within one year | 4,102 | 4,250 | |
| Cash and cash equivalents | 76 ———— |
671 ———— |
466 ———— |
| 13,209 ———— |
13,171 ———— |
14,363 ———— |
|
| Total assets | 39,336 | 38,280 | 39,367 |
| Current liabilities | ———————— | ———————— | ———————— |
| Trade and other payables | (7,484) | (8,935) | (10,040) |
| Tax liabilities | (35) | (35) | (35) |
| Bank overdrafts and loans | (2,904) ———— |
– ———— |
– ———— |
| (10,423) ———— |
(8,970) ———— |
(10,075) ———— |
|
| Net current assets | 2,786 | 4,201 | 4,288 |
| Non-current liabilities | ———————— | ———————— | ———————— |
| Bank loan | (5,000) | (7,100) | (8,600) |
| Retirement benefit obligations | (1,369) | (4,533) | (2,482) |
| Deferred tax | (4,135) | (2,893) | (2,639) |
| Obligations under finance leases | (978) ———— |
(979) ———— |
(979) ———— |
| (11,482) | (15,505) | (14,700) | |
| Total liabilities | ———— (21,905) |
———— (24,475) |
———— (24,775) |
| Net assets | ———— 17,431 |
———— 13,805 |
———— 14,592 |
| Equity | ———————— | ———————— | ———————— |
| Share capital | 1,026 | 1,026 | 1,026 |
| Share premium account | 440 | 440 | 440 |
| Revaluation reserve | 7,559 | 8,209 | 8,226 |
| Capital redemption reserve | 242 | 242 | 242 |
| ESOP reserve | (27) | (27) | (27) |
| Retained earnings | 8,191 ———— |
3,915 ———— |
4,685 ———— |
| Total equity | 17,431 ———————— |
13,805 ———————— |
14,592 ———————— |
The Group currently has banking facilities with HSBC comprising a £112,000 overdraft facility which is repayable on demand and a £9.0 million revolving loan facility which now has an expiry date of 31 October 2012. The facilities are secured principally over the Group's freehold interests and contain a number of key financial covenants, further details of which are contained in paragraph 12.1(a) of Part X. The interest payable on the revolving loan facility is 3 per cent. above the LIBOR rate and, in respect of the overdraft, 3 per cent. above the prevailing Bank of England base rate.
On 27 January 2011, Beale announced its preliminary results for the financial year to 30 October 2010. Beale commented as follows:
The Group loss before taxation of £668,000 showed further progress on the previous year, when the loss was £987,000. The underlying improvement was more substantial than this, as we incurred a loss of £271,000 in the two stores acquired during the year, much of which was attributable to start-up costs.
Our two new stores were Robbs of Hexham and the former Westgate department store in Rochdale. Robbs was acquired from administrators in June and we signed a new 15 year lease, in respect of which we received significant commercial inducements. Following an extensive review of the business, we made substantial changes, refurbished the store and relaunched it in September. It is now one of our larger stores by turnover.
In September we signed a 25 year lease on the Rochdale store, with significant commercial inducements, and relaunched it under the name of Whitakers in October.
The Group's gross sales increased by 2.7% to £87.2 million; these include concession sales and VAT, as well as the sales of the new stores. The VAT increase during the year contributed about 1.4% of the increase.
Revenue, which excludes VAT and includes only the commission element of concession sales, was 2.1% higher than in the previous year at £48.6 million. Like for like revenue, excluding the new stores, declined by 2.1%.
Like for like gross margins were comparable to those in the previous year at 54.2% (2009: 54.5%). Robbs of Hexham includes a substantial food store, which operates at lower margins than our usual department store business, with the result that the overall margin declined slightly to 53.7%.
Despite the new acquisitions administrative expenses were well controlled, and were £148,000 lower at £26.5 million.
Our net debt increased, and at the year-end was £8.1 million (2009: £6.4 million). The seasonality of our business means that our borrowings are at their highest around the year end. The increase was largely attributable to the costs of acquiring and refurbishing our new stores and supporting the higher working capital investment in the enlarged Group.
Retail sales were seriously affected by snow throughout the country in November and early December. Gross sales for the 11 weeks ended 15 January 2011 were 4.6% higher than for the equivalent period last year.
For the 5 week period from 6 December 2010 to 15 January 2011, following the worst of the adverse weather conditions, gross sales were 16.3% higher than in the previous year. The comparison is flattered to some degree by the snow which affected parts of the country in the first half of January 2010.
No dividend is proposed.
In February 2010, Panther Securities plc, a listed property investment company, acquired shares which lifted the shareholding of Panther and its major shareholder Andrew Perloff, from just under 10% to 29.72%. These shares were acquired from Lawdene, previously our largest shareholder, whose interest in the Company is now 4.5%.
In April 2010 Simon Peters, finance director of Panther Securities, joined the Board as a nonexecutive director.
The steady improvement in the Group's performance in the difficult trading environment would not have been possible without the exceptional commitment of our staff. On behalf of the Board and shareholders I thank them for their unstinting contribution.
During September 2010 we were pleased to announce that the Group's £9.0 million term loan facility, which was due to expire in February 2011, had been replaced by a new 2 year revolving loan facility, also of £9.0 million, expiring on 31 August 2012. We also have a modest overdraft facility.
We have continued to trade comfortably within our facilities throughout the past year, and have met all our banking covenants. Our forecasts show that the Group should be able to operate within its borrowing facilities and the Board has therefore continued to adopt the going concern basis in preparing the annual report and accounts.
The increase in VAT on 4 January 2011, and the effect of the Government's tighter fiscal policy, continues to make the retail sector challenging.
Despite this, we believe that our trading strategy will generate further improvements in the Group's underlying performance. We shall also continue to seek new opportunities to increase the size of the Group with the acquisition of additional stores, which could be managed without a material increase in the size of our head office."
At the Annual General Meeting of the Company held on 17 March 2011, the Chairman stated:
"Gross sales for the 19 weeks to 12 March 2011, including concessions and the two new stores acquired in 2010, were 5.9% higher than for the previous year, like-for-like sales declined by 6.2%. For the first quarter, to 29 January 2011, gross sales were up 4.9% on the previous year.
As noted in the Annual Report, trading in the current year has been significantly adversely affected by the worst pre Christmas snowfalls for 30 years. However since the weather improved we have made progress in recapturing the lost sales; gross sales during the latest six-week period since 29 January, including concessions and new stores, were 9.4% up on the previous year and like-for-like sales were 4.7% lower.
The Board is pleased that first quarter sales were achieved at an improved gross margin compared with the previous year, despite the promotional discounting required to be competitive over Christmas.
Furthermore, like for like expenses were lower than the previous year as we continued to focus on cost reduction, albeit total expenses increased as a result of the acquisition of the two new stores.
The increase of VAT on 4 January 2011 and the effect of the Government's tighter fiscal policy mean that the remainder of the year will be challenging, but the Board believes the strategies and actions being taken will in due course improve the Group's financial performance".
Applications will be made to the UKLA and to the London Stock Exchange for the Ordinary Shares to be readmitted to listing on the Official List and to trading on the main market of the London Stock Exchange. It is expected that, subject to the conditions of the Acquisition Agreement and the Introduction Agreement being satisfied or, where permitted, waived and subject also to the timing of the satisfaction or, where permitted, waiver of such conditions, Readmission will become effective and that dealings in Ordinary Shares will recommence on the London Stock Exchange at 8.00 a.m. on the Effective Date.
The Existing Articles already (and the New Articles will) permit the holding of Ordinary Shares under the CREST system. The Company will apply for the Ordinary Shares to be readmitted to CREST on the date of Readmission. Accordingly, settlement of transactions in Ordinary Shares following Readmission may continue to take place within the CREST system if any Shareholder so wishes.
ARCS was founded in 1921 and has its roots in Peterborough. Since then it has grown to become (by turnover) the sixth largest retail consumer co-operative in the country. It has a diverse range of operations including department stores, furniture, food, travel and funerals. It has a total turnover in excess of £300 million and provides employment for over 3,000 employees.
The flagship department store is based in Peterborough. The remaining stores are based nationally but with a particular concentration in the East of England region. Following Completion, ARCS will continue to operate department stores only in the towns of Blyth, Hartlepool, March and Scunthorpe.
ARCS has historically operated department stores as part of the co-operative offering to its members and local communities.
The department store business approximately doubled its size in terms of trading space and turnover through two major acquisitions in 2005 and 2006 taking the number of stores at that time from 14 to 26. Since then one new department store was opened in Saffron Walden in 2010.
ARCS has previously exited a number of stores not deemed core or in its long term strategy. In total, five stores have closed over the last three years. A further four Target Stores are on short term leases which expire within 5 years.
In February 2011, ARCS transferred its buying function for the department stores to JEB and will pending Completion continue to operate under the outsourcing agreement described in paragraph 12.1(g) of Part X of this document.
Department stores are established retail formats in the UK. ARCS seeks to appeal to a wide range of customers within the catchment areas that it serves. Management believe that ARCS' core customers have an age profile of over 40 years.
As with the Beale Group, merchandise is both sourced directly by ARCS and provided by suppliers operating in-store concessions. Gross margins, sales volumes and contributions per square foot vary significantly from department to department, and from store to store.
The sales mix of the Target Stores by category is as follows:
The particular mix of categories varies from store to store depending on store size and the nature of the competition in each catchment area. The precise range and size of each department is targeted to the individual needs of each locality. The principal merchandise categories across all the Target Stores are:
The range comprises a wide variety of branded merchandise such as Esprit, Noa Noa, Mexx and Animal.
This range comprises a wide variety of branded merchandise such as Esprit, Weird Fish and Animal.
The ARCS fashion accessory range includes men's and women's shoes, lingerie, hosiery, gloves, scarves, handbags, luggage and fashion jewellery. ARCS or its concession partners sell a variety of brands including Antler, Radley and Carlton.
The homewares range includes linens, cookware, china, glass and cutlery. ARCS or its concession partners sell a variety of brands in these categories including Viners, Salter, Prestige and Anthony Worrall Thompson.
Furniture including dining, upholstery and bedroom, beds and carpets are sold in six of the Target Stores.
ARCS or its concession partners sell a number of cosmetic and fragrance brands including Clarins, Estee Lauder and Clinique.
A range of electrical goods are sold. These are branded goods and are presently sourced through an agreement with E-Store, a division of The Co-operative Group.
In addition to the above categories, in selected Target Stores, ARCS or its concession partners operate other departments including optical, travel and restaurant services.
Details of the Target Stores appear below:
| Approximate | |||
|---|---|---|---|
| gross sales | |||
| (excluding VAT) | |||
| Approximate | by store for | ||
| selling space | Approximate the year ended | ||
| excluding ARCS' | selling | 4 September | |
| Location | concessions | space1 | 2010 |
| Sq ft | Sq ft | £'m | |
| Abingdon | 18,000 | 18,000 | 5.7 |
| Beccles | 17,000 | 17,000 | 1.7 |
| Bishop Auckland | 17,000 | 27,000 | 2.1 |
| Chipping Norton | 10,000 | 10,000 | 1.3 |
| Cinderford | 10,000 | 10,000 | 1.1 |
| Diss | 6,000 | 6,000 | 0.8 |
| Harrogate | 28,000 | 34,000 | 4.3 |
| Keighley | 28,000 | 47,000 | 5.0 |
| Kings Lynn | 19,000 | 19,000 | 2.5 |
| Lowestoft | 21,000 | 21,000 | 2.3 |
| Mansfield | 67,000 | 94,000 | 5.7 |
| Peterborough | 57,000 | 83,000 | 7.7 |
| Approximate | |||
|---|---|---|---|
| gross sales | |||
| (excluding VAT) | |||
| Approximate | by store for | ||
| selling space | Approximate the year ended | ||
| excluding ARCS' | selling | 4 September | |
| Location | concessions | space1 | 2010 |
| Sq ft | Sq ft | £'m | |
| Redcar | 25,000 | 25,000 | 2.2 |
| Saffron Walden2 | 10,000 | 10,000 | 0.3 |
| St Neots | 24,000 | 24,000 | 3.9 |
| Skegness | 26,000 | 38,000 | 2.6 |
| Skipton | 22,000 | 27,000 | 2.5 |
| Spalding | 19,000 | 19,000 | 1.8 |
| Wisbech | 26,000 | 26,000 | 2.1 |
| Total | ———— 450,000 ———————— |
———— 555,000 ———————— |
———— 55.6 ———————— |
Note:
The approximate gross sales figures detailed above are equivalent to the "Gross sales (excluding VAT)" detailed in the historical financial information provided in Part VII of this document and therefore represent the gross value of concession sales.
Turnover from ARCS' department store business derives exclusively from UK locations. The mix of ARCS' turnover between concession and own bought merchandise varies greatly by store. As an average across the Target Stores, the mix is approximately 67 per cent. from own bought and the remainder from concessions.
Beale is a similar operator but not a competitor of ARCS as there is no overlap in locations. Competitors are other department store and high street retailers selling similar products that operate within close proximity of the ARCS' stores and internet retailers.
ARCS' department store strategy has been to provide local communities and members with a broad range of consumer products at affordable prices and enhanced customer service and after care. The Target Stores focus in particular on fashion and home products.
Following a management change three years ago, ARCS' growth strategy is now focused on its core food, furniture, travel and funerals businesses, whilst seeking to consolidate its department stores into a more profitable and manageable portfolio.
ARCS has introduced a number of strategic initiatives to increase the profitability of its department store business and previously developed a strategy to increase the density of stores in a smaller trading region in the east of England. This led to discussions with Beale about specific opportunities to transfer to it stores outside the core region such as Rochdale, which subsequently developed into discussions about the other stores.
ARCS' average monthly number of employees engaged in the Business for the last three years was as follows:
| Financial years ended | |||||
|---|---|---|---|---|---|
| The average number of persons | 6 September | 5 September | 4 September | ||
| (including directors) employed by ARCS | 2008 | 2009 | 2010 | ||
| in the Target Stores during the year | |||||
| Full time | 302 | 268 | 265 | ||
| Part time | 551 | 548 | 595 | ||
| ———— 853 ———————— |
———— 816 ———————— |
———— 860 ———————— |
The tables below set out selected audited financial information for the Business for the three financial years ended 6 September 2008, 5 September 2009 and 4 September 2010 and for the period from 5 September 2010 to 22 January 2011. The period to January 2010 is unaudited. The information has been extracted without material adjustment from the historical financial information on the Business, set out in full in Part VII of this document. In order to make a proper assessment of the financial performance of the Business, prospective investors and Shareholders should read this document as a whole and not rely solely on the key or summarised information in this section.
| Financial years | 20 weeks | |||||
|---|---|---|---|---|---|---|
| ended September | ended January | |||||
| 2008 | 2009 | 2010 | 2010 | 2011 | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | ||
| Gross sales | 66,583 ———— |
60,468 ———— |
61,062 ———— |
26,537 ———— |
26,367 ———— |
|
| Revenue | 39,408 | 36,294 | 37,748 | 16,823 | 16,566 | |
| Cost of sales | (21,958) | (20,303) | (22,125) | (9,900) | (9,829) | |
| Gross profit | ———— 17,450 |
———— 15,991 |
———— 15,623 |
———— 6,923 |
———— 6,737 |
|
| Administrative expenses | (21,201) | (19,989) | (20,522) | (8,101) | (8,980) | |
| Loss on ordinary activities | ———— | ———— | ———— | ———— | ———— | |
| before taxation | (3,751) | (3,998) | (4,899) | (1,178) | (2,243) | |
| Taxation credit | 1,050 | 1,119 | 1,372 | 330 | 628 | |
| Loss for the period | ———— (2,701) ———————— |
———— (2,879) ———————— |
———— (3,527) ———————— |
———— (848) ———————— |
———— (1,615) ———————— |
Notes
Gross sales reflect revenue from concession sales and VAT from continuing operations.
There were no items of other comprehensive income for any of the periods above.
| Financial years | 20 weeks | ||||
|---|---|---|---|---|---|
| ended September | ended January | ||||
| 2008 | 2009 | 2010 | 2010 | 2011 | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| Operating loss | (3,751) | (3,998) | (4,899) | – | (2,243) |
| Adjustments for: | |||||
| Depreciation and amortisation | 680 | 744 | 918 | – | 381 |
| Impairment/reversal of impairment | 467 | 448 | (644) | – | 4 |
| (Increase)/decrease in trade and | |||||
| other receivables | 810 | (2) | (260) | – | (295) |
| (Increase)/ decrease in inventories | 38 | 2,027 | (831) | – | (858) |
| Increase/(decrease) in trade and | |||||
| other payables | 3,813 | 1,332 | (1,301) | – | 387 |
| Movement in provisions | 699 | 65 | (270) | – | 81 |
| Cash generated from/(utilised in) | |||||
| operations | 2,756 | 616 | (7,287) | – | (2,543) |
| Cash flows from investing activities | |||||
| Purchase of property, plant and | |||||
| equipment | (1,854) | (1,639) | (817) | – | (165) |
| Cash flows from financing | |||||
| activities | |||||
| Movement in group investment | (969) | 953 | 8,125 | – | 2,720 |
| Net cash generated from financing | ———— | ———— | ———— | ———— | ———— |
| activities | (969) | 953 | 8,125 | – | 2,720 |
| Net (decrease)/increase in cash and | |||||
| cash equivalents in the period | (67) | (70) | 21 | – | 12 |
| Cash and cash equivalents at | |||||
| beginning of period | 321 | 254 | 184 | – | 205 |
| Cash and cash equivalents | ———— | ———— | ———— | ———— | ———— |
| (including overdrafts) | |||||
| at end of period | 254 | 184 | 205 | – | 217 |
| ———————— | ———————— | ———————— | ———————— | ———————— |
Sources of income for ARCS' department store business are store sales (including VAT), rental income for space occupied in stores, car park income and other sundry receipts.
Concessions are predominantly cashed up by ARCS (only approximately 15 per cent. are directly banked by concessionaires) with net settlement being made to each concessionaire 11 days after the end of the trading week.
There were approximately £1.2 million of credit sales made in the 2009/10 financial year which entirely related to electrical products sold within stores. These credit agreements are held by a third party with ARCS paying an agreement fee of 5.96 per cent. Funds relating to these credit agreements are on average settled three weeks after delivery of the goods.
Cashflow payments consist of the following: purchases, selling costs, operating costs (stores), rates and services (stores), credit card commission, advertising and promotions, financial services, rent paid, property expenses, VAT to HMRC and capital expenditure.
| Financial years ended September |
20 weeks | ||||
|---|---|---|---|---|---|
| ended January | |||||
| 2008 | 2009 | 2010 | 2010 | 2011 | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| Non-current assets | |||||
| Property, plant and equipment | 2,593 | 3,040 | 3,583 | – | 3,363 |
| Current assets | |||||
| Inventories | 8,182 | 6,155 | 6,986 | – | 7,844 |
| Trade and other receivables | 539 | 541 | 801 | – | 1,096 |
| Cash and cash equivalents | 254 ———— |
184 ———— |
205 ———— |
– ———— |
217 ———— |
| 8,975 ———— |
6,880 ———— |
7,992 ———— |
– ———— |
9,157 ———— |
|
| Total assets | 11,568 ———————— |
9,920 ———————— |
11,575 ———————— |
– ———————— |
12,520 ———————— |
| Current liabilities | |||||
| Trade and other payables | (5,134) ———— |
(6,465) ———— |
(5,165) ———— |
– ———— |
(5,552) ———— |
| (5,134) | (6,465) | (5,165) | – | (5,552) | |
| Net current assets | 6,434 | 3,455 | 6,410 | – | 6,968 |
| Non-current liabilities | |||||
| Provisions for liabilities and charges | (699) ———— |
(764) ———— |
(494) ———— |
– ———— |
(575) ———— |
| Total liabilities | (5,833) | (7,229) | (5,659) | – | (6,127) |
| Net assets | ———— 5,735 ———————— |
———— 2,691 ———————— |
———— 5,916 ———————— |
———— – ———————— |
———— 6,393 ———————— |
The trading performance of the Target Stores, as reported in the historical financial information on the Business for the year ended 4 September 2010, was adversely affected by a number of factors. Retail sales were affected by the general poor condition of the UK economy and adverse weather which affected store trading times and customers' ability to get to the stores.
Turnover performance in the 24 weeks ended 19 March 2011 in ARCS' department store business has been approximately 3 per cent. below the prior year. Gross margins for the period are approximately 30.6 per cent. compared to approximately 30.8 per cent. achieved last year. Administrative expenses continued to be well managed with expenses increasing by approximately 2.0 per cent. in the 24 weeks ended 19 March 2011.
The following review should be read in conjunction with Beale's audited consolidated financial statements, and the related notes to the financial statements, for each of the financial years ended 1 November 2008, 31 October 2009 and 30 October 2010 which are incorporated by reference in Part XI of this document and from which the information contained within this Part IV has been sourced. Shareholders and prospective investors should read the whole of this document and the documents incorporated herein by reference and should not just rely on the financial information set out in this Part IV. See also "Presentation of Financial Information" and "International Financial Reporting Standards" set out in the section of this document entitled "Important Notices".
The information in this section contains certain forward looking statements that involve risks and uncertainties. Beale's actual results may differ materially from those anticipated in these forward looking statements as a result of factors including, but not limited to, those set out in the section of this document entitled "Risk Factors" and in "Disclosure regarding Forward Looking Statements", set out in the section of this document entitled "Important Notices".
Beale is the holding company of a UK retail department store group. The business operated by the Group was founded in 1881, and the Group currently operates a portfolio of 13 stores across the UK, from Hexham in the north to Bournemouth in the south. The majority of the stores trade under the Beales brand, with the exception of four stores which have retained their original local brand, Broadbents & Boothroyds (Southport), Denners (Yeovil), Robbs (Hexham) and Whitakers (Bolton), the name under which the former Westgate store in Rochdale also now trades.
Beale offers branded, functional and aspirational merchandise for men, women and the home, tailored to the individual requirements of the Group's customers in each locality. The Board's aim is to grow the Group both organically through the ongoing development of its existing portfolio and by acquisition of similar department stores.
As reported on 27 January 2011 in the Group's preliminary results to 30 October 2010, retail sales were seriously affected by snow throughout the country in November and early December 2010. Further ongoing periods of adverse weather in any of the locations from which the Group trades would be likely to have a material impact on trading.
The Group's operations are focused solely on the UK retail sector. A double-dip recession or economic stagnation could lead to certain further concessions operating within the Group's stores entering into administration or other insolvency process. The resultant drop in revenue contribution would negatively impact on the Group's trading performance.
Consumer budgets may be negatively impacted through a combination of factors such as further tax rises (for example, in VAT), inflation or economic uncertainty resulting in pay restraint which could either squeeze consumers' budgets or dampen consumer demand and negatively affect the Group's trading prospects.
Beale operates in the UK retail market which is indirectly affected by any government fiscal and monetary policy which impacts positively or negatively on consumer spending.
The Beale Group's revenues are influenced by the seasonality of its business. This is demonstrated by the fact that like-for-like gross sales (excluding VAT), stripping out the acquisitions of Hexham (acquired 4 June 2010) and Rochdale (acquired 5 September 2010), for November and December 2009 accounted for approximately 26 per cent. of Group sales in the financial year ended 30 October 2010.
The following financial information has been extracted without material adjustment from the audited consolidated financial statements of the Group for the financial years ended 1 November 2008, 31 October 2009 and 30 October 2010 as incorporated by reference in Part XI of this document.
The table below sets out the locations of the Group's operations, the relative size of its stores and revenues derived from the stores in question.
| Approximate | ||
|---|---|---|
| gross sales | ||
| (excluding VAT) | ||
| by store for | ||
| the year ended | ||
| Approximate | 30 October | |
| selling space | 20102 | |
| Location | Sq ft | £'m |
| Beales stores | ||
| Bedford | 25,000 | 4.2 |
| Bournemouth | 79,000 | 14.4 |
| Horsham | 33,000 | 4.0 |
| Kendal | 24,000 | 4.8 |
| Poole | 44,000 | 8.7 |
| Tonbridge | 37,000 | 4.9 |
| Winchester | 19,000 | 2.5 |
| Worthing | 56,000 | 7.9 |
| Whitakers stores | ||
| Bolton | 55,000 | 5.1 |
| Rochdale1 | 30,000 | 0.3 |
| Broadbents & Boothroyds store | ||
| Southport | 34,000 | 7.3 |
| Denners store | ||
| Yeovil | 54,000 | 7.7 |
| Robbs store | ||
| Hexham1 | 65,000 ———— |
2.5 ———— |
| Total | 555,000 ———————— |
74.3 ———————— |
Note:
Hexham was acquired on 4 June 2010 and Rochdale was acquired on 5 September 2010.
Excludes interest on customer credit accounts.
The table below sets out selected data from the Group's published financial information for the periods indicated. The data has been extracted without material adjustment from the audited consolidated financial statements of the Group as incorporated by reference in Part XI of this document.
| Financial years ended | ||||
|---|---|---|---|---|
| 1 November | 31 October | 30 October | ||
| 2008 | 2009 | 2010 | ||
| £'000 | £'000 | £'000 | ||
| Gross sales | 88,982 | 84,950 | 87,247 | |
| VAT | (13,091) | (11,215) | (12,551) | |
| Gross sales (exc. VAT) | ———— 75,891 |
———— 73,735 |
———— 74,696 |
|
| Agency sales less commission | (28,010) | (26,169) | (26,130) | |
| Revenue | 47,881 ———————— |
47,566 ———————— |
48,566 ———————— |
Analysis of gross sales (excluding VAT) and revenue:
| 52 weeks to | 52 weeks to | 52 weeks to | |||||
|---|---|---|---|---|---|---|---|
| 1 November 2008 | 31 October 2009 | 30 October 2010 | |||||
| Gross | Gross | Gross | |||||
| sales | Revenue | sales | Revenue | sales | Revenue | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||
| Own bought sales | 39,115 | 39,115 | 39,312 | 39,312 | 39,911 | 39,911 | |
| Concession sales | 36,338 | 8,328 | 34,025 | 7,856 | 34,394 | 8,264 | |
| Interest on customer | |||||||
| accounts | 438 ———— |
438 ———— |
398 ———— |
398 ———— |
391 ———— |
391 ———— |
|
| 75,891 ———————— |
47,881 ———————— |
73,735 ———————— |
47,566 ———————— |
74,696 ———————— |
48,566 ———————— |
In the year ended 30 October 2010, the Group acquired stores in Hexham (on 4 June 2010) and in Rochdale (on 5 September 2010). For the year ended 30 October 2010 revenue, which excludes VAT and includes only the commission element of concession sales, was 2.1 per cent. higher than in the previous year at £48.6 million. Like for like revenue, excluding the new stores, declined by 2.1 per cent.
Beale maintains cash to fund the daily cash requirements of its business. Going forward, Beale expects that its operations will be funded through a combination of cash and borrowing facilities available to the Group. As at 2 April 2011, the Group held £350,000 of unrestricted cash.
The Group currently has banking facilities with HSBC comprising a £112,000 overdraft facility which is repayable on demand and a £9.0 million revolving loan facility which now has an expiry date of 31 October 2012. The facilities are secured principally over the Group's freehold interests and contain a number of key financial covenants, further details of which are contained in paragraph 12.1(a) of Part X. The interest payable on the revolving loan facility is 3 per cent. above the LIBOR rate and, in respect of the overdraft, 3 per cent. above the prevailing Bank of England base rate. As at 2 April 2011, £7.70 million was drawn against existing facilities.
The Group typically has cash demands which peak at the end of October each year when Christmas stock is received. Working capital falls significantly in early January each year. In the year ended 31 October 2010, working capital fell by approximately £3.5 million from the peak achieved following Christmas trading, to a low point in early January 2011.
As described in paragraph 6 of Part I, the Group will have additional resources of £13.3 million to finance the Proposed Acquisition and fulfil the further ongoing working capital requirements of the Enlarged Group. Other than in respect of the financing provided by ARCS, the trading seasonality of the Enlarged Group is not anticipated to be significantly affected by the Proposed Acquisition.
Sources of income for the Group are store sales (including VAT), store card interest and rental income and other sundry receipts. Cashflow payments consist of the following: purchases, selling costs, operating costs (stores), rates and services (stores), credit card commission, advertising and promotions, financial services, rent paid, property expenses, head office costs, VAT to HMRC and capital expenditure. The following table shows information regarding Beale's cash flows for the periods indicated as extracted, without material adjustment, from its audited consolidated financial statements.
| 1 November | 31 October | 30 October | |
|---|---|---|---|
| 2008 | 2009 | 2010 | |
| £'000 | £'000 | £'000 | |
| Cash (used in)/generated from operations | (2,218) | 2,181 | 325 |
| Income taxes received | 63 | – | – |
| Cash flows from investing activities | (559) | (783) | (2,030) |
| Cash flows from financing activities | 2,752 | (399) | 1,500 |
| Increase/(decrease) in cash | ———— 38 |
———— 999 |
———— (205) |
| ———————— | ———————— | ———————— |
The Company's revolving loan agreement with HSBC requires that its approval be sought in relation to acquisitions or disposals of freehold or leasehold properties. To date, the obligations imposed upon the Company in this loan agreement have not restricted the manner in which the Group operates, and HSBC's consent to the making by the Group of the Proposed Acquisition has been sought and obtained. The Company's significant leasing arrangements referred to below relate to the leasing of department stores. None of the leases gives the Group a purchase option. The Group's leases of land and buildings are subject to rent reviews at intervals between one and five years. None of the department store leases has a fixed escalation clause.
The table below sets out all future commitments under the non-cancellable operating leases of the Group as at 1 November 2008, 31 October 2009 and 30 October 2010:
| 1 November | 31 October | 30 October | |
|---|---|---|---|
| 2008 | 2009 | 2010 | |
| £'000 | £'000 | £'000 | |
| Land and buildings | 60,902 | 58,913 | 68,058 |
| Other | 434 | 301 | 185 |
| Total | ———— 61,336 ———————— |
———— 59,214 ———————— |
———— 68,243 ———————— |
On 3 July 2009, the Company entered into a guarantee in favour of BES Trustees Plc and the individual trustees of the Beale pension scheme in respect of the present and future obligations and liabilities of JEB to make payments to such scheme up to a maximum of £6 million in the event of any default by JEB. In August 2010, the Company entered into a guarantee for £516,000 in favour of HSBC sufficient to allow it to provide a guarantee in an equivalent amount to HSBC Merchant Services LLP in relation to the provision by it of credit card processing services to the Group.
The following table shows the indebtedness of Beale as at 2 April 2011, based on its unaudited management accounts as at that date, and its capitalisation at 30 October 2010, extracted from the audited consolidated financial statements of Beale incorporated by reference in Part XI of this document:
| – (8,679) ———— (8,679) |
|---|
| ———————— |
| 1,026 |
| 440 |
| 8,226 |
| 242 |
| (27) |
| 4,685 |
| ———— 14,592 ———————— |
There has been no material change to the capitalisation of Beale between 30 October 2010 and the date of this document.
The following table shows the net financial indebtedness of Beale as at 2 April 2011, based on its unaudited management accounts as at that date:
| £'000 | |
|---|---|
| Net financial indebtedness as at 2 April 2011 | |
| Cash | 350 |
| Restricted cash | – |
| ———— 350 |
|
| Liquidity | ———————— |
| Current bank debt | – |
| Other current financial debt | – |
| Current financial debt | ———— – |
| Net current financial indebtedness | ———— – ———— |
| Non-current bank debt | (7,700) |
| Other non-current financial debt (Finance lease) | (979) ———— |
| Non-current financial indebtedness | (8,679) ———— |
| Net financial indebtedness | (8,329) |
| ———————— |
Beale uses a number of key performance measures in its business, including statutory measures such as revenue, gross profit and operating profit. The most significant non-statutory measures used are gross sales, margin, markdown, discount analysis, stock turn, stock loss, debtor days, wage to sales and contribution analysis.
Retail sales were seriously affected by snow throughout the country in November and early December 2010. Gross sales for the 11 weeks ended 15 January 2011 were 4.6 per cent. higher than for the equivalent period last year.
For the five week period from 12 December 2010 to 15 January 2011, following the worst of the adverse weather conditions, gross sales were 16.3 per cent. higher than in the previous year. The comparison is flattered to some degree by the snow which affected parts of the country in the first half of January 2010.
The economic outlook has changed significantly following the General Election in May 2010. It still remains difficult to forecast the public's reaction to ongoing spending cuts and the increase in VAT. The Board will continue to monitor customers' reactions to these changes and adjust the Group's trading strategy accordingly but in the Directors' view, customers will continue to be cautious throughout the year. The Company's increased focus on purchasing from the Far East has assisted to date in achieving increases in input margins; however, the euro/sterling exchange rate continues to be disadvantageous to Beale and the Board does not expect this to improve in the near term. Beale's pricing and buying strategies are designed to ensure that the Company's margins are protected from currency fluctuations. Beale's balance sheet remains strong and the Board's strategies are focused on improving the Group's businesses. The Company continues to enjoy a good relationship with its bank, HSBC. The Board will work hard to continue the improvement in results achieved in 2009/2010 with the ultimate objective of returning the Company to profitability.
For a discussion of the principal risk factors faced by the Group and, following Completion, by the Enlarged Group, please refer to the "Risk Factors" section of this document.
The following review should be read in conjunction with the historical financial information on the Business for each of the 52 week periods ended 6 September 2008, 5 September 2009 and 4 September 2010 and the unaudited interim financial information for the periods to 4 January 2010 and 4 January 2011 which are set out in Part VII of this document and from which the information contained within this Part V has been sourced. Shareholders and prospective investors should read the whole of this document and the documents incorporated herein by reference and should not just rely on the financial information set out in this Part V. See also "Presentation of Financial Information" and "International Financial Reporting Standards" set out in the section of this document entitled "Important Notices".
The information in this section contains certain forward looking statements that involve risks and uncertainties. The actual results of the Business may differ materially from those anticipated in these forward looking statements as a result of factors including, but not limited to, those set out in the section of this document entitled "Risk Factors" and in "Disclosure regarding Forward Looking Statements", set out in the section of this document entitled "Important Notices".
ARCS was founded in 1921 and has its roots in Peterborough. Since then it has grown to become (by turnover) the sixth largest retail consumer co-operative in the country. It has a diverse range of operations including department stores, furniture, food, travel and funerals. It has a total turnover in excess of £300 million and provides employment for over 3,000 employees.
The flagship department store is based in Peterborough. The remaining stores are based nationally but with a particular concentration in the East of England region. Following Completion, ARCS will continue to operate department stores only in the towns of Blyth, Hartlepool, March and Scunthorpe.
The trading performance of the Target Stores can be adversely affected by a number of factors. As reported in the historical financial information on the Business for the year ended 4 September 2010, retail sales were affected by the general poor condition of the UK economy and adverse weather which affected store trading times and customers' ability to get to the stores.
As reported in the historical financial information on the Business for the year ended 4 September 2010, retail sales were affected by snow throughout the country in November and early December 2010. Further ongoing periods of adverse weather in the locations from which the Business trades would be likely to have a material impact on trading.
The department store operations of the Business are focused solely on the UK retail sector. A doubledip recession or economic stagnation could lead to certain concessions operating within the Target Stores entering into administration. The resultant drop in revenue contribution would impact on the trading performance of the Business.
Consumer budgets may be negatively impacted through a combination of factors such as further tax rises (for example, in VAT), inflation or economic uncertainty resulting in pay restraint which could either squeeze consumers' budgets or dampen consumer demand and negatively affect trading prospects.
The Target Stores operate in the UK retail market which can be indirectly affected by government fiscal and monetary policy that in turn can impact positively or negatively on consumer spending.
The operations of the Target Stores are influenced by the seasonality of their customer base. Typically around 16 per cent. of turnover across all of ARCS' department stores is accounted for in the months of November and December.
Details of the Target Stores appear below:
| Approximate | |||
|---|---|---|---|
| gross sales | |||
| (excluding VAT) | |||
| Approximate | by store for the | ||
| selling space | year ended | ||
| excluding ARCS' | Approximate | 4 September | |
| concessions | selling space1 | 20102 | |
| Location | Sq ft | Sq ft | £'m |
| Abingdon | 18,000 | 18,000 | 5.7 |
| Beccles | 17,000 | 17,000 | 1.7 |
| Bishop Auckland | 17,000 | 27,000 | 2.1 |
| Chipping Norton | 10,000 | 10,000 | 1.3 |
| Cinderford | 10,000 | 10,000 | 1.1 |
| Diss | 6,000 | 6,000 | 0.8 |
| Harrogate | 28,000 | 34,000 | 4.3 |
| Keighley | 28,000 | 47,000 | 5.0 |
| Kings Lynn | 19,000 | 19,000 | 2.5 |
| Lowestoft | 21,000 | 21,000 | 2.3 |
| Mansfield | 67,000 | 94,000 | 5.7 |
| Peterborough | 57,000 | 83,000 | 7.7 |
| Redcar | 25,000 | 25,000 | 2.2 |
| Saffron Walden2 | 10,000 | 10,000 | 0.3 |
| St Neots | 24,000 | 24,000 | 3.9 |
| Skegness | 26,000 | 38,000 | 2.6 |
| Skipton | 22,000 | 27,000 | 2.5 |
| Spalding | 19,000 | 19,000 | 1.8 |
| Wisbech | 26,000 | 26,000 | 2.1 |
| Total | ———— 450,000 ———————— |
———— 555,000 ———————— |
———— 55.6 ———————— |
Note:
Includes ARCS concession space of approximately 105,000 sq ft.
The Saffron Walden department store opened on 8 June 2010 therefore the sales figure above represents 13 weeks of trade.
The table below sets out selected data for the Business extracted without material adjustment for the three financial years ended 6 September 2008, 5 September 2009 and 4 September 2010 and for the period from 5 September 2010 to 22 January 2011. The period to January 2010 is unaudited.
| 20 weeks | ||||
|---|---|---|---|---|
| ended January | ||||
| 2011 | ||||
| £'000 | £'000 | £'000 | £'000 | £'000 |
| 26,367 | ||||
| (5,963) | (4,950) | (5,462) | (2,325) | (2,667) |
| ———— 23,700 |
||||
| (6,940) | ||||
| (194) | (143) | (252) | (53) | (194) |
| 39,408 | 36,294 | 37,748 | 16,823 | ———— 16,566 ———————— |
| 2008 66,583 ———— 60,620 (21,018) ———— |
2009 60,468 ———— 55,518 (19,081) ———— |
Financial years ended September 2010 61,062 ———— 55,600 (17,600) ———— ———————— ———————— ———————— |
2010 26,537 ———— 24,212 (7,336) ———— ———————— |
The liquidity available to the Enlarged Group is described in paragraph 4 of Part IV of this document.
The following table shows information regarding the cash flows of the Business for the periods indicated as extracted without material adjustment from the historical financial information on the Business.
| 20 weeks | |||||
|---|---|---|---|---|---|
| Financial years ended September | ended January | ||||
| 2008 | 2009 | 2010 | 2010 | 2011 | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| Cash flow generated/(utilised in) | |||||
| operations | 2,756 | 616 | (7,287) | – | (2,543) |
| Cash flows from investing activities | (1,854) | (1,639) | (817) | – | (165) |
| Cash flows from financing activities | (969) | 953 | 8,125 | – | 2,720 |
| Net (decrease)/increase in cash and cash equivalents in the period |
———— (67) ———— |
———— (70) ———— |
———— 21 ———— |
———— – ———— |
———— 12 ———— |
The contractual obligations and commitments of the Business relate mainly to property leases and other small operating leases.
The table below sets out all future commitments under the non-cancellable operating leases of the Business as at 6 September 2008, 5 September 2009 and 4 September 2010. These commitments will, where not expressly assumed by JEB under the Acquisition Agreement, be funded from ARCS' cash resources.
| 20 weeks | |||||
|---|---|---|---|---|---|
| Financial years ended September | ended January | ||||
| 2008 | 2009 | 2010 | 2010 | 2011 | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| Land and buildings | 11,621 | 10,694 | 13,760 | – | 13,142 |
| Other | 203 ———— |
153 ———— |
192 ———— |
– ———— |
161 ———— |
| Total | 11,824 ———————— |
10,847 ———————— |
13,952 ———————— |
– ———————— |
13,303 ———————— |
ARCS uses a number of key performance measures in the Business, including statutory measures such as revenue, gross profit and operating profit. The most significant non-statutory measures used are gross sales, margin, markdown, discount analysis, stock days, stock loss, wage to sales and contribution analysis.
The trading performance of the Target Stores, as reported in the historical financial information on the Business for the year ended 4 September 2010, was adversely affected by a number of factors. Retail sales were affected by the general poor condition of the UK economy and adverse weather which affected store trading times and customer's ability to get to the stores.
Turnover performance in the 24 weeks ended 19 March 2011 in ARCS' department store business has been approximately 3 per cent. below the prior year. Gross margins for the period are approximately 30.6 per cent. compared to approximately 30.8 per cent. achieved last year. Administrative expenses continued to be well managed with expenses increasing by approximately 2.0 per cent. in the 24 weeks ended 19 March 2011.
For a discussion of the principal risk factors faced by the Enlarged Group, please refer to the "Risk Factors" section of this document.
The consolidated financial statements of the Group included in the Annual Report and Financial Statements of the Company for each of the financial years ended 1 November 2008, 31 October 2009 and 30 October 2010 together with the audit reports thereon are incorporated by reference into and form part of this document.
Deloitte LLP of 1 Grosvenor Square, Southampton, a member of the Institute of Chartered Accountants in England and Wales, has issued unqualified audit opinions on the consolidated financial statements of the Company and its subsidiaries included in the Annual Report and Financial Statements of the Company for each of the financial years ended 1 November 2008, 31 October 2009 and 30 October 2010.
The Independent Auditors' Report for the financial year ended 1 November 2008 is set out on pages 20-21 of the Annual Report and Financial Statements 2008. The Independent Auditors' Report for the financial year ended 31 October 2009 is set out on pages 17-18 of the Annual Report and Financial Statements 2009. The Independent Auditors' Report for the financial year ended 30 October 2010 is set out on pages 16-17 of the Annual Report and Financial Statements 2010.
For the years ended 6 September 2008, 5 September 2009 and 4 September 2010 and the five four week periods ended 23 January 2010 and 22 January 2011
| (unaudited) | ||||||
|---|---|---|---|---|---|---|
| Note | 22 January | 23 January 4 September 5 September 6 September | ||||
| 2011 | 2010 | 2010 | 2009 | 2008 | ||
| £000 | £000 | £000 | £000 | £000 | ||
| Gross sales | 4 | 26,367 ———————— |
26,537 ———————— |
61,062 ———————— |
60,468 ———————— |
66,583 ———————— |
| Revenue | 4 | 16,566 | 16,823 | 37,748 | 36,294 | 39,408 |
| Cost of sales | (9,829) ———— |
(9,900) ———— |
(22,125) ———— |
(20,303) ———— |
(21,958) ———— |
|
| Gross profit | 6,737 | 6,923 | 15,623 | 15,991 | 17,450 | |
| Administrative expenses | (8,980) ———— |
(8,101) ———— |
(20,522) ———— |
(19,989) ———— |
(21,201) ———— |
|
| Operating loss and loss | ||||||
| before tax | (2,243) | (1,178) | (4,899) | (3,998) | (3,751) | |
| Tax | 6 | 628 ———— |
330 ———— |
1,372 ———— |
1,119 ———— |
1,050 ———— |
| Loss for the period/year | (1,615) ———————— |
(848) ———————— |
(3,527) ———————— |
(2,879) ———————— |
(2,701) ———————— |
All transactions arise from continuing operations.
Gross sales represent the total of all sales made at stores including concessions sales and VAT. A reconciliation is given in note 4 between gross sales and revenue.
There were no items of other comprehensive income for any of the periods above.
The financial information shown above may not be representative of future results; for example, the historical cost and funding structure does not reflect equivalent future structures, which may be significantly different from those that resulted from the Business being wholly owned by ARCS.
As at 6 September 2008, 5 September 2009, 4 September 2010 and 22 January 2011
| Note | 22 January | 4 September | 5 September | 6 September | |
|---|---|---|---|---|---|
| 2011 | 2010 | 2009 | 2008 | ||
| £000 | £000 | £000 | £000 | ||
| Non-current assets | |||||
| Property, plant and equipment | 9 | 3,363 | 3,583 | 3,040 | 2,593 |
| Current assets | ———— | ———— | ———— | ———— | |
| Inventory | 10 | 7,844 | 6,986 | 6,155 | 8,182 |
| Trade and other receivables | 11 | 1,096 | 801 | 541 | 539 |
| Cash and cash equivalents | 217 ———— |
205 ———— |
184 ———— |
254 ———— |
|
| 9,157 | 7,992 | 6,880 | 8,975 | ||
| Total assets | ———— 12,520 |
———— 11,575 |
———— 9,920 |
———— 11,568 |
|
| Current liabilities | ———— | ———— | ———— | ———— | |
| Trade and other payables | 12 | (5,552) | (5,165) | (6,465) | (5,134) |
| Net current assets | ———— 6,968 |
———— 6,410 |
———— 3,455 |
———— 6,434 |
|
| Non current liabilities | |||||
| Provisions for liabilities and charges 13 | (575) ———— |
(494) ———— |
(764) ———— |
(699) ———— |
|
| Total liabilities | (6,127) | (5,659) | (7,229) | (5,833) | |
| Total net assets | ———— 6,393 ———————— |
———— 5,916 ———————— |
———— 2,691 ———————— |
———— 5,735 ———————— |
|
| INVESTED CAPITAL | |||||
| Group investment | 6,393 | 5,916 | 2,691 | 5,735 | |
| Total group investment | ———— 6,393 |
———— 5,916 |
———— 2,691 |
———— 5,735 |
|
| ———————— | ———————— | ———————— | ———————— |
For the years ended 6 September 2008, 5 September 2009 and 4 September 2010 and the five four week periods ended 22 January 2011
| 22 January | 4 September | 5 September | 6 September | |
|---|---|---|---|---|
| 2011 | 2010 | 2009 | 2008 | |
| £000 | £000 | £000 | £000 | |
| Operating activities | ||||
| Loss on ordinary activities before tax | (2,243) | (4,899) | (3,998) | (3,751) |
| Adjustments: | ||||
| Depreciation and amortisation | 381 | 918 | 744 | 680 |
| Impairment/Reversal of impairment | 4 | (644) | 448 | 467 |
| Movement in trade and other receivables | (295) | (260) | (2) | 810 |
| Movement in inventories | (858) | (831) | 2,027 | 38 |
| Movement in trade and other payables | 387 | (1,301) | 1,332 | 3,813 |
| Movement in provisions | 81 | (270) | 65 | 699 |
| Cash flow from operating activities | ———— (2,543) ———— |
———— (7,287) ———— |
———— 616 ———— |
———— 2,756 ———— |
| Investing activities | ||||
| Purchase of property, plant and equipment | (165) | (817) | (1,639) | (1,854) |
| Cash flow from investing activities | ———— (165) ———— |
———— (817) ———— |
———— (1,639) ———— |
———— (1,854) ———— |
| Cash flows from financing activities | ||||
| Movement in group investment | 2,720 ———— |
8,125 ———— |
953 ———— |
(969) ———— |
| Net cash inflow from financing | 2,720 | 8,125 | 953 | (969) |
| Net change in cash and cash equivalents | ———— 12 ———————— |
———— 21 ———————— |
———— (70) ———————— |
———— (67) ———————— |
| Movement in net cash | ||||
| Cash and cash equivalents, beginning of period | 205 | 184 | 254 | 321 |
| Increase/(decrease) in cash and cash equivalents | 12 | 21 | (70) | (67) |
| Cash and cash equivalents, end of period | ———— 217 |
———— 205 |
———— 184 |
———— 254 |
| ———————— | ———————— | ———————— | ———————— |
The historical financial information shows the results of the Business for the three years ended 6 September 2008, 5 September 2009 and 4 September 2010 and the five four week periods ended 23 January 2010 and 22 January 2011, prepared for the purposes of ensuring compliance with the Listing Rules and the Prospectus Rules in connection with the Proposed Acquisition.
The historical financial information covers the years ended 6 September 2008, 5 September 2009 and 4 September 2010 and the five four week periods ended 23 January 2010 and 22 January 2011, is presented in £ sterling (being the functional and presentational currency of the Business) rounded to the nearest thousand and is prepared on the historical cost basis.
The financial information has been prepared in accordance with the requirements of the Listing Rules and in accordance with this basis of preparation. This basis of preparation describes how the historical financial information has been prepared in accordance with International Financial Reporting Standards effective at 22 January 2011 as adopted by the EU (Adopted IFRS).
Adopted IFRS does not provide for the specific accounting treatments set out below and accordingly in preparing the historical financial information certain accounting conventions commonly used in the preparation of historical financial information for inclusion in investment circulars as described in the Annexure to SIR 2000 (the Investment Reporting Standard applicable to public reporting engagements on historical financial information) issued by the UK Auditing Practices Board have been applied. The application of these conventions results in the material departures from Adopted IFRS set out below. In other respects Adopted IFRS has been applied. As a result of these matters, no statement of compliance with Adopted IFRS is included. As the historical financial information is the first financial information for the Business, it is not relevant to present a reconciliation between UK GAAP and IFRS.
The structure of the wider ARCS group is such that separate statutory financial statements for the Business have not previously been prepared. Furthermore, ARCS' underlying financial records aggregate the results of the Business with the results of other business streams, including travel, optical and furniture businesses, into a category defined as "Non-Food". To present the results of the Business in this historical financial information, the directors of ARCS have adopted certain methodologies in presenting the results of the Business as a stand-alone entity.
The ARCS financial records contain cost categories described as central and divisional (non-food) costs. An apportionment of such central costs to the Business has been made in this historical financial information. In the case of staff and staff-related costs, this has been done by reference to the role of individual members of staff. In respect of non-staff costs, the apportionment has been based on the nature of specific costs and their relevance to the Business.
Total allocated central and divisional costs amount to £1.6 million (five four week periods ended 23 January 2010: £1.5 million; years ended 4 September 2010, 5 September 2009, 6 September 2008: £3.8 million, £3.6 million, £4.3 million). We set out below how major categories of central and divisional costs have been allocated to the Business. In addition to these specific items, other costs of £439,000 (five four week periods ended 23 January 2010: £431,000; years ended 4 September 2010, 5 September 2009, 6 September 2008: £1,026,000, £584,000, £997,000) have been allocated on a consistent basis based on the relative size of the Business in the context of the wider ARCS group.
The properties from which the Business operates are a mix of freehold properties owned by ARCS and leasehold properties. In the case of freehold properties, these are held elsewhere in the ARCS group, and in certain cases (but not all) an internal rental charge is levied against the Business.
For the purposes of this historical financial information, the intention of the ARCS directors is that all properties occupied by the Business should bear an annual charge. This has been calculated as follows:
The total allocated property costs amount to £753,000 (five four week periods ended 23 January 2010: £753,000; years ended 4 September 2010, 5 September 2009, 6 September 2008: £1,965,000, £2,092,000, £2,092,000).
ARCS operates a defined benefit pension scheme for the benefit of current and past employees of the ARCS group. This was closed to future accrual on 14 August 2009.
The plan exposes the Business to actuarial risks associated with the current and former employees of the overall ARCS group, with the result that there is no consistent and reliable basis for allocating the obligation, plan assets and cost to the Business.
As a result, the Business recognises a cost equal to the contributions payable for each accounting period in respect of employees directly employed by the business or apportioned to it.
Following closure of the defined benefit scheme to future accrual on 14 August 2009, the ARCS group now operates a defined contribution scheme. The assets of the scheme are held separately from those of the ARCS group in an independently administered fund.
As a result the Business recognises a cost equal to the contributions payable for each accounting period in respect of employees directly employed by the Business or apportioned to it.
ARCS organises its financing and treasury on a central basis, and it is not possible to apportion finance costs on a reasonable basis to the Business. Accordingly, no finance costs are recorded in this historical financial information.
As a co-operative society, ARCS operates a scheme whereby its members receive a notional "dividend" calculated by reference to their purchases from ARCS. That "dividend" is then encashed by members against future purchases from ARCS. In the period covered by this historical financial information, purchases by members from the Business have created a voucher liability for the wider ARCS group, and members have encashed their voucher entitlements from the wider ARCS group in part against purchases from the Business. An element of consideration is deferred and subsequently recognised in the period in which the awards are redeemed.
The historical financial information includes property, plant and equipment (principally store fixtures) directly attributable to the Business and which will transfer as part of the Proposed Acquisition. All other property, plant and equipment, including freehold properties, are excluded.
As part of its operations, the Business facilitates the provision of consumer finance by third parties to customers. Receivables, representing amounts due by third party finance providers in respect of sales of goods made to customers by the Business, are included in the Statement of Financial Position.
As noted above, ARCS arranges its financing on a group basis. Accordingly, cash and cash equivalents recorded in this historical financial information solely relate to cash in tills in the Target Stores.
ARCS operates group payroll and sales tax registrations. For the purposes of this historical financial information, payroll tax liabilities have been estimated on a basis consistent with the apportionment of employee costs. Sales tax balances attributable to the Business have been calculated based on a reasonable apportionment of taxable sales and purchases.
As the Business does not constitute a separate statutory entity, there is no requirement to calculate separable corporation tax assets or liabilities. For the purposes of this historical financial information, a tax rate of 28 per cent. of profit or loss before tax has been provided in the Statement of Comprehensive Income. As statutory tax assets or liabilities are only calculated and settled on a group basis, no separate tax assets or liabilities are included in this historical financial information, and any notional asset or liability arising by virtue of the Statement of Comprehensive Income treatment is set off against net group investment.
As explained above, the Business is not a separate statutory entity and in certain cases (for example financing) it is not possible to identify separately assets and liabilities attributable to the Business which are only dealt with on an ARCS group basis. Accordingly, it would be inappropriate to show share capital or an analysis of reserves for the Business. The net liabilities of the Business are therefore represented by the cumulative investment of ARCS in the Business at each period end (shown as "Group investment"). Consistent with the above, this historical financial information does not contain a statement of changes in equity. In addition, this historical financial information does not include any distributions or dividends for the same reason.
For the purpose of this historical financial information, the Business has adopted the new and revised Standards and Interpretations in issue and effective, as issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB, as adopted by the European Union (EU), that are relevant to its operations. These are:
At the date of authorisation of this historical financial information, the following standards were in issue but not yet effective:
• Amendment to IFRIC 13 – effective period beginning on or after 1 January 2011 – The fair value of award credits will take into account the amount of discounts or incentives that otherwise would be offered to customers that have not earned the award credits
• IFRS 9 Financial Instruments – effective date 1 January 2013 – The IASB aims to replace IAS 39 Financial Instruments Recognition and Measurement in its entirety by the end of 2010, with the replacement standard to be effective for annual periods beginning 1 January 2013. IFRS 9 is the first part of Phase 1 of this project.
These accounting policies have been used throughout all periods presented in this historical financial information, except where the Business has applied certain accounting policies and exemptions upon transition to IFRS. The exemptions applied by the Business and the effects of transition to IFRS are outlined in note 1 above.
The historical financial information is presented in UK £ Sterling. This currency is the functional and presentational currency of the Business.
The historical financial information is presented in accordance with IAS 1 Presentation of Financial Statements (Revised 2007), subject to certain adjustments which are required to reflect the fact that the Business is not a statutory entity. These adjustments are explained in more detail in note 1. The Business has elected to present the Statement of Comprehensive Income in one statement.
Revenue is measured as the fair value of the consideration received or receivable and represents amounts receivable for sales to customers in the normal course of business, net of discounts and sales related taxes and includes the profit contribution earned on agency sales (including concession departments). Revenue is recognised when goods are delivered to customers and title is passed. Gross sales reflect revenue inclusive of concession sales and VAT. As an integral part of the Business, the Target Stores contain concessions operated both by third parties and by other parts of the ARCS business. Third party concessions (principally fashion-related) will transfer with the Business under the Acquisition Agreement. This historical financial information discloses the gross revenue attributable to such concessions, and includes the concession margin earned by the Business on such revenue. Concessions for other businesses owned by the wider ARCS group (in respect of, for example, furniture, travel and optical businesses) have also operated from the Target Stores. Under the terms of the Proposed Acquisition, such businesses will continue to operate from the Target Stores and a concession margin will be paid. Historically, no such concession margin was earned by the Business, and therefore for the purpose of this historical financial information, the gross revenue attributable to such revenue is not disclosed, and no pro forma concession margin earned has been included.
The ARCS directors regard the Business as a single operating segment.
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets acquired under finance lease are capitalised and the outstanding future lease obligations are shown in creditors.
Rentals payable under operating leases (including any pre-determined rental increase) are charged to the Statement of Comprehensive Income on a straight-line basis over the term of the relevant lease.
Depreciation is calculated to write down the cost less estimated residual value of all property, plant and equipment by equal annual instalments over their expected useful lives, using the straight line method. The rates generally applicable are:
Fixtures and fittings 10 per cent. to 33.33 per cent. per annum
The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the Statement of Comprehensive Income.
The assets' residual value and useful lives are reviewed, and adjusted if required, at each accounting period end. The carrying amount of an asset is written down immediately to its recoverable amount if the carrying amount is greater than its estimated recoverable amount.
At each balance sheet date, or more frequently if an indicator of impairment exists, the Business reviews the carrying amounts of its property, plant and equipment to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Business estimates the recoverable amount of the cash-generating unit to which the asset belongs.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in the Statement of Comprehensive Income, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in the Statement of Comprehensive Income, unless the relevant assets are carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
Inventories are stated at the lower of cost and net realisable value. Cost comprises purchase price including any rebates and, where applicable, those costs that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling price.
The basis of calculation of tax income or expense is explained under the Basis of preparation in note 1 above.
Provisions are recognised when the Business has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount can be made. Provisions are not recognised for future operating losses. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the period end date, including the risks and uncertainties associated with the present obligation.
In the case of onerous lease provisions, where the Business is committed to future rental payments on a property that are in excess of income generated by that property, an onerous lease provision is made. In assessing whether a provision is required management assess whether there are realistic alternatives other than continuing to trade and that continuing to trade is the least cost strategy for the Business. The provision represents the lower of i) the cost to exit the lease, ii) the discounted value of future rentals, and iii) the discounted value of future trading losses. The value of fixtures and fittings at the location are also considered and are written down to zero with the remaining amount being booked as a provision.
Financial assets and financial liabilities are recognised when the Business becomes a party to the contractual provisions of the financial instrument.
Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred.
A financial liability is derecognised when it is extinguished, discharged, cancelled or expires.
Financial assets are classified into the following specified categories: financial assets at fair value through profit and loss (FVTPL), held-to-maturity investments, available for sale financial assets and loans and receivables.
The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.
The Business has no held-to-maturity investments, financial assets at FVTPL or available for sale financial assets.
Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as 'loans and receivables'. Loans and receivables are measured at amortised cost using the effective interest method less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables where the recognition of interest would be immaterial.
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each year end date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been adversely impacted. For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance account. When a trade receivable is uncollectable, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit and loss.
If, in a subsequent period, an amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit and loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.
Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. The Business has no financial liabilities at FVTPL. All interest-related charges and, if applicable, changes in an instrument's fair value that are reported in profit or loss are included in the Statement of Comprehensive Income line items "finance costs" or "finance income".
Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability or, where appropriate, a shorter period.
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provisions for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Business will not be able to collect all amounts due according to the original terms of the receivables.
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
Cash and cash equivalents represents cash held in target store tills at each year-end date.
In the process of preparing this historical financial information, the critical judgements made by the ARCS directors relate to the basis of preparation to comply with the requirements of the United Kingdom Listing Authority and to enable the historical financial information to show a true and fair view for the purposes of the prospectus. The judgements made, as they relate to different financial statement areas, are explained in more detail in notes 1 and 2 above.
In applying that basis of preparation, the ARCS directors have had to make estimates in certain areas, for instance in the attribution of central costs to the Business. Whilst the ARCS directors have made every effort to make such estimates on a fair and reasonable basis, they remain key sources of estimation uncertainty.
The ARCS directors are required to assess whether ARCS has adequate resources to continue in operational existence for the foreseeable future.
The Historical Financial Information on the Business has been prepared on the assumption that ARCS remains a going concern and continues to support the Business via intercompany funding.
The ARCS group currently meets its day to day working capital requirements from its cash reserves and revolving credit facility which is due for repayment on 28 February 2013.
The ARCS directors have reviewed the ARCS group's forecast of cash flows for the current and following period. Following this review, and taking into account repayments to be made in relation to bank loans, those directors have formed a judgement that at the time of approval of this historical financial information, the ARCS group has sufficient resources to continue operating for the foreseeable future.
In addition to such judgements, the following represent sources of estimation uncertainty:
Inventories are stated at the lower of cost and net realisable value, as set out in the accounting policy above. Provisions reduce the value below cost and are therefore subject to the judgements of the ARCS directors. Changes in customer demand could give rise to future changes in the value of the inventory held.
Provisions are made in respect of onerous leases. Provisions are recognised when the ARCS directors can make a reliable estimate and are satisfied that the liability is probable. However, such liabilities may depend upon the actions of third parties and on the specific circumstances pertaining to each obligation, neither of which are fully controlled by the Business.
The Target Stores' property, plant and equipment are reviewed for impairment on an annual basis, and whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Such circumstances or events could include: a pattern of losses involving the store asset; a decline in the market value of a particular store asset; and an adverse change in the business or market in which the store asset is involved. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining what cash flow is directly related to the potentially impaired asset, the useful life over which cash flows will occur and their amount and the asset's residual value, if any. Estimates of future cash flows and the selection of appropriate discount rates relating to particular assets or groups of assets involve the exercise of a significant amount of judgement.
Revenue relates wholly to retail sales made in the UK. Revenue excludes the non-commission element of sales made by concession outlets. The ARCS directors regard the Business as consisting of one segment. The Business is monitored and strategic decisions are made by the Chief Operating Decision Maker based on revenues, gross profit and operating results.
| (unaudited) | |||||
|---|---|---|---|---|---|
| 22 January | 23 January | 4 September | 5 September | 6 September | |
| 2011 | 2010 | 2010 | 2009 | 2008 | |
| £000 | £000 | £000 | £000 | £000 | |
| Gross sales | 26,367 | 26,537 | 61,062 | 60,468 | 66,583 |
| VAT | (2,667) | (2,325) | (5,462) | (4,950) | (5,963) |
| Gross sales (excluding VAT) | ———— 23,700 |
———— 24,212 |
———— 55,600 |
———— 55,518 |
———— 60,620 |
| Agency sales less commission | (6,940) | (7,336) | (17,600) | (19,081) | (21,018) |
| Effect of customer loyalty | |||||
| programmes | (194) | (53) | (252) | (143) | (194) |
| Revenue | ———— 16,566 ———————— |
———— 16,823 ———————— |
———— 37,748 ———————— |
———— 36,294 ———————— |
———— 39,408 ———————— |
The loss before taxation is stated after charging/(crediting):
| (unaudited) | |||||
|---|---|---|---|---|---|
| 22 January | 23 January | 4 September | 5 September | 6 September | |
| 2011 | 2010 | 2010 | 2009 | 2008 | |
| £000 | £000 | £000 | £000 | £000 | |
| Cost of inventories recognised | |||||
| as an expense | 10,687 | 11,169 | 22,956 | 18,276 | 21,920 |
| Operating lease rentals – land | |||||
| and buildings | 1,321 | 1,196 | 3,242 | 2,971 | 2,682 |
| Operating lease rentals – | |||||
| vehicles | 43 | 40 | 113 | 126 | 122 |
| Depreciation: property, plant | |||||
| and equipment – owned | |||||
| assets | 381 | 247 | 918 | 744 | 680 |
| Charge in respect of onerous | |||||
| lease provisions | 155 | – | 24 | 294 | 699 |
| (Credit)/charge in respect of | |||||
| impairments | 4 | – | (644) | 448 | 467 |
| ———————— | ———————— | ———————— | ———————— | ———————— |
| (unaudited) | |||||
|---|---|---|---|---|---|
| 22 January | 23 January | 4 September | 5 September | 6 September | |
| 2011 | 2010 | 2010 | 2009 | 2008 | |
| £000 | £000 | £000 | £000 | £000 | |
| Notional corporation tax credit @ 28% (2010: 28%, |
|||||
| 2009: 28%, 2008: 28%) | 628 ———————— |
330 ———————— |
1,372 ———————— |
1,119 ———————— |
1,050 ———————— |
The average number of people directly employed in the Business (excluding apportioned employees) during the relevant periods were:
| (unaudited) | ||||||
|---|---|---|---|---|---|---|
| 22 January | 23 January | 4 September | 5 September | 6 September | ||
| 2011 | 2010 | 2010 | 2009 | 2008 | ||
| £000 | £000 | £000 | £000 | £000 | ||
| Operations | – full time | 261 | 247 | 252 | 255 | 287 |
| – part time | 608 | 583 | 593 | 546 | 549 | |
| Corporate office | – full time | 13 | 14 | 13 | 13 | 15 |
| – part time | 2 | 2 | 2 | 2 | 2 | |
| ———— 884 ———————— |
———— 846 ———————— |
———— 860 ———————— |
———— 816 ———————— |
———— 853 ———————— |
||
The aggregate cost of these employees (including apportioned costs) was:
| (unaudited) | |||||
|---|---|---|---|---|---|
| 22 January | 23 January | 4 September | 5 September | 6 September | |
| 2011 | 2010 | 2010 | 2009 | 2008 | |
| £000 | £000 | £000 | £000 | £000 | |
| Wages and salaries | 3,530 | 3,208 | 8,386 | 7,627 | 8,277 |
| Payroll taxes | 235 | 241 | 594 | 540 | 675 |
| Other pension costs | 87 | 76 | 197 | 599 | 685 |
| ———— 3,852 ———————— |
———— 3,525 ———————— |
———— 9,177 ———————— |
———— 8,766 ———————— |
———— 9,637 ———————— |
Included within these costs is an allocation of central costs which includes an apportionment of senior management and ARCS' costs. The amounts in question were £592,000 for the year ended 4 September 2010, £657,000 for the year ended 5 September 2009, £621,000 for the year ended 6 September 2008, £244,000 for the four week period ended 23 January 2010 and £230,000 for the four week period ended 22 January 2011.
The carrying amounts of the financial assets and liabilities of the Business as recognised at the period end date of the reporting periods under review may also be categorised as follows.
The IAS 39 categories of financial asset included in the Statement of Financial Position and the headings under which they are included are as follows:
| At | At | At | At | |
|---|---|---|---|---|
| 22 January | 4 September | 5 September | 6 September | |
| 2011 | 2010 | 2009 | 2008 | |
| £000 | £000 | £000 | £000 | |
| Financial assets | ||||
| Trade and other receivables | 1,096 | 801 | 541 | 539 |
| Cash and cash equivalents | 217 | 205 | 184 | 254 |
| ———— 1,313 ———————— |
———— 1,006 ———————— |
———— 725 ———————— |
———— 793 ———————— |
The IAS 39 categories of financial liabilities included in the Statement of Financial Position and the headings under which they are included are as follows:
| At | At | At | At | |
|---|---|---|---|---|
| 22 January | 4 September | 5 September | 6 September | |
| 2011 | 2010 | 2009 | 2008 | |
| £000 | £000 | £000 | £000 | |
| Financial liabilities | ||||
| Trade and other payables | 5,552 | 5,165 | 6,465 | 5,134 |
| ———————— | ———————— | ———————— | ———————— |
| Fixtures | ||
|---|---|---|
| & Fittings | Total | |
| £000 | £000 | |
| Cost | ||
| At 1 September 2007 | 12,166 | 12,166 |
| Additions | 1,854 | 1,854 |
| Disposals | (67) ———— |
(67) ———— |
| At 6 September 2008 | 13,953 | 13,953 |
| Additions | 1,639 | 1,639 |
| Disposals | (1,712) ———— |
(1,712) ———— |
| At 5 September 2009 | 13,880 | 13,880 |
| Additions | 817 | 817 |
| Disposals | (317) | (317) |
| At 4 September 2010 | ———— 14,380 |
———— 14,380 |
| Additions | 165 | 165 |
| Disposals | (30) | (30) |
| At 22 January 2011 | ———— 14,515 |
———— 14,515 |
| ———————— | ———————— | |
| Accumulated depreciation | ||
| At 1 September 2007 | 10,280 | 10,280 |
| Charged in year | 680 | 680 |
| Impairment in year | 467 | 467 |
| Eliminated on disposals | (67) ———— |
(67) ———— |
| At 6 September 2008 | 11,360 | 11,360 |
| Charged in year | 744 | 744 |
| Impairment in year | 448 | 448 |
| Eliminated on disposals | (1,712) ———— |
(1,712) ———— |
| At 5 September 2009 | 10,840 | 10,840 |
| Charged in year | 918 | 918 |
| Reversal of impairment in year | (644) | (644) |
| Eliminated on disposals | (317) ———— |
(317) ———— |
| At 4 September 2010 | 10,797 | 10,797 |
| Charged in period | 381 | 381 |
| Impairment in period | 4 | 4 |
| Eliminated on disposals | (30) ———— |
(30) ———— |
| At 22 January 2011 | 11,152 | 11,152 |
| Net book amount at 22 January 2011 | ———————— 3,363 |
———————— 3,363 |
| Net book amount at 4 September 2010 | ———————— 3,583 |
———————— 3,583 |
| Net book amount at 5 September 2009 | ———————— 3,040 |
———————— 3,040 |
| Net book amount at 6 September 2008 | ———————— 2,593 |
———————— 2,593 |
| ———————— | ———————— |
| At | At | At | At | |
|---|---|---|---|---|
| 22 January | 4 September | 5 September | 6 September | |
| 2011 | 2010 | 2009 | 2008 | |
| £000 | £000 | £000 | £000 | |
| Finished goods for resale | 7,844 ———————— |
6,986 ———————— |
6,155 ———————— |
8,182 ———————— |
The amount of inventories written down in the period was £78,000 (years ended 4 September 2010, 5 September 2009, 6 September 2008: £57,000, £58,000, £76,000).
| At | At | ||
|---|---|---|---|
| 22 January | 4 September | 5 September | 6 September |
| 2011 | 2010 | 2009 | 2008 |
| £000 | £000 | £000 | £000 |
| 77 | 136 | 98 | 208 |
| 1,019 | 665 | 443 | 331 |
| 1,096 | 801 | 541 | ———— 539 ———————— |
| ———— ———————— |
———— | At At ———— ———————— ———————— |
All trade receivable amounts are short term. All the trade and other receivables of the Business have been reviewed for indicators of impairment and no material impairment is considered to have arisen. The carrying value is considered a fair approximation of their fair value.
In addition, elements of the unimpaired trade receivables of the Business are past due as at the reporting date. The age of financial assets past due but not impaired is as follows:
| At | At | At | At | |
|---|---|---|---|---|
| 22 January | 4 September | 5 September | 6 September | |
| 2011 | 2010 | 2009 | 2008 | |
| £000 | £000 | £000 | £000 | |
| Not more than three months | 38 | 98 | 98 | 181 |
| More than three months but not more | ||||
| than six months | 39 | 27 | – | 13 |
| More than six months but not more | ||||
| than one year | – | 11 | – | 2 |
| More than one year | – | – | – | 12 |
| ———— 77 ———————— |
———— 136 ———————— |
———— 98 ———————— |
———— 208 ———————— |
| At | At | At | At | |
|---|---|---|---|---|
| 22 January | 4 September | 5 September | 6 September | |
| 2011 | 2010 | 2009 | 2008 | |
| £000 | £000 | £000 | £000 | |
| Trade payables | 3,230 | 3,158 | 3,648 | 3,493 |
| Other taxation and social security | 525 | 254 | 554 | – |
| Accruals | 1,470 | 1,540 | 2,039 | 1,330 |
| Deferred income | 177 | 120 | 153 | 173 |
| Other creditors | 150 | 93 | 71 | 138 |
| ———— 5,552 ———————— |
———— 5,165 ———————— |
———— 6,465 ———————— |
———— 5,134 ———————— |
All amounts are short term and the ARCS directors consider that the carrying values of trade and other payables are a reasonable approximation of their fair value.
| At | At | At | At | |
|---|---|---|---|---|
| 22 January | 4 September | 5 September | 6 September | |
| 2011 | 2010 | 2009 | 2008 | |
| £000 | £000 | £000 | £000 | |
| At beginning of period/year | 494 | 764 | 699 | – |
| Charged to profit and loss | 155 | 24 | 294 | 699 |
| Utilised in year | (74) | (294) | (229) | – |
| At end of period/year | ———— 575 ———————— |
———— 494 ———————— |
———— 764 ———————— |
———— 699 ———————— |
The provisions relate to onerous leases at department store properties, where the Business is committed to future lease rentals in excess of income generated at those locations. The outflow of cash is expected to occur either over the remaining lease term as lease rentals are paid or for particular leases the outflow is expected to occur at the point that an exit from the lease can be agreed. The leases run for a variety of different terms with the longest remaining lease period running to 28 September 2027. The remaining leases included in the provision expire between 2012 and 2016.
The Statement of Financial Position includes trade receivables and payables, which do not attract interest. As the ARCS group manages its finance and treasury functions on a central basis, the Business has no direct exposure to interest rate risk.
The Business is not exposed to any significant transaction foreign exchange risk. The Business does not adopt a prescribed policy to eliminate currency exposures as the risk is minimal.
The future minimum lease commitments under non-cancellable operating leases are as follows:
| 22 January 2011 | 4 September 2010 | 5 September 2009 | 6 September 2008 | |||||
|---|---|---|---|---|---|---|---|---|
| Land and | Land and | Land and | Land and | |||||
| buildings Transport | buildings Transport | buildings Transport | buildings Transport | |||||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | |
| Operating leases expiring: | ||||||||
| Within one year | 1,696 | 80 | 1,696 | 80 | 939 | 57 | 939 | 61 |
| Between two and five years | 5,819 | 81 | 6,098 | 112 | 3,676 | 96 | 3,711 | 142 |
| Over five years | 5,627 –——— |
– ———– |
5,966 ———– |
– ———– |
6,079 ———– |
– ———– |
6,971 ———– |
– ———– |
| 13,142 –—————— – |
161 ——————– – |
13,760 ——————– – |
192 ——————– – |
10,694 ——————– – |
153 ——————– – |
11,621 ——————– – |
203 ——————–– |
The above commitments relate only to leases entered into with third parties in respect of the Business, and therefore exclude any informal internal leases with other members of the ARCS group (see further within the Property costs section of the Basis of preparation note).
The exposure of the Business to credit risk is limited to the carrying amount of financial assets recognised at the year end date, as summarised below:
| At | At | At | At |
|---|---|---|---|
| 22 January | 4 September | 5 September | 6 September |
| 2011 | 2010 | 2009 | 2008 |
| £000 | £000 | £000 | £000 |
| 217 | 205 | 184 | 254 |
| 1,096 | 801 | 541 | 539 |
| 1,313 | 1,006 | 725 | ———— 793 ———————— |
| ———— ———————— |
———— ———————— |
———— ———————— |
The Business continuously monitors its counterparties and incorporates this information into its credit risk controls. Where available at reasonable cost, external credit rating and/or reports on customers and other counterparties are obtained and used. The policy of the Business is to deal only with creditworthy counterparties.
The ARCS directors consider that the above financial assets are not impaired for each of the reporting dates under review and are of good credit quality, including those that are past due (see note 11 for further information on fair value of financial assets at each period end date).
None of the financial assets of the Business are secured by collateral or other credit enhancements.
ARCS seeks to manage financial risk in the Business by ensuring sufficient liquidity is available to meet foreseeable needs and by investing cash assets safely and profitably. The liquidity needs of the Business are managed by carefully monitoring cash outflows due in day-to-day business. Liquidity needs are monitored in various time bands and on a week-to-week basis, as well as on the basis of a rolling 90-days projection. Long-term liquidity needs for a 180-day and a 360-day outlook period are identified monthly.
All financial liabilities have maturities of 6 months or less.
At 22 January 2011, the Business had no capital commitments (September 2010, 2009, 2008 £nil).
There were no contingent liabilities external to the Business at 22 January 2011 (September 2010, 2009, 2008 £nil).
Contributions paid to the personal pension plans of employees are charged to the Statement of Comprehensive Income in the period in which they become payable.
The Business was charged commercial rents from other group companies. Both Westgate Properties (Anglia) Limited and Food and Funeral Properties Limited (formerly Westgate Optical Limited) charged rent of £414,000 and £258,000 respectively during the five four week periods ended 22 January 2011 (five four week periods ended 23 January 2010: £414,000 and £258,000 respectively, years ended 4 September 2010, 5 September 2009, 6 September 2008: £1,080,000 and £673,000 respectively).
These rents are paid quarterly in advance with prepayments of £185,000 and £115,000 respectively, being recorded at 22 January 2011 (4 September 2010 £59,000 and £37,000, 5 September 2009 £56,000 and £35,000, 6 September 2008 £54,000 and £33,000 respectively).
Day to day transactions between key management and the Business are conducted on an arm's length basis. The aggregate amount due from these related parties on store cards is not significant at the period end.
During the year ended 6 September 2008 Moorewood Estates, Chartered Surveyors has advised ARCS on certain property transactions. Moorewood Estates is owned by Mr R A Newton, a director of ARCS. All transactions have been carried out in the normal course of business and fees have been agreed on an arm's length commercial basis. Total fees for the year were £29,400. A balance of £3,800 was outstanding at the year end. There were no transactions in 2009, 2010 or the five four week periods to 22 January 2011.
Subsequent to the balance sheet date, no events have been identified requiring adjustment or disclosure in this financial information.
KPMG LLP St James' Square Manchester M2 6DS United Kingdom
The Directors Beale PLC The Granville Chambers 21 Richmond Hill Bournemouth BH2 6BJ
Shore Capital and Corporate Limited Bond Street House 14 Clifford Street London W1S 4JU
20 April 2011
Dear Sirs
We report on the financial information set out on pages 61 to 78 of the Prospectus dated 20 April 2011 of Beale PLC. This financial information has been prepared for inclusion in the Prospectus relating to the acquisition of the target business dated 20 April 2011 of Beale PLC on the basis of the accounting policies set out in Note 1 and 2. This report is required by paragraph 20.1 of Annex I of the Prospectus Directive Regulation and is given for the purpose of complying with that paragraph and for no other purpose.
The Directors of Beale PLC are responsible for preparing the financial information on the basis of preparation set out in note 1 to the historical financial information.
It is our responsibility to form an opinion on the financial information and to report our opinion to you.
Save for any responsibility arising under Prospectus Rules 5.5.3R (2)(f) to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with Listing Rule 13.4.1R(6) and paragraph 23.1 Annex I of the Prospectus Directive Regulation, consenting to its inclusion in the Prospectus.
We conducted our work in accordance with Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidence relevant to the amounts and disclosures in the financial information. It also included an assessment of the significant estimates and judgments made by those responsible for the preparation of the financial information and whether the accounting policies are appropriate to the entity's circumstances, consistently applied and adequately disclosed.
We planned and performed our work so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial information is free from material misstatement whether caused by fraud or other irregularity or error.
In our opinion, the financial information gives, for the purposes of the Prospectus dated 20 April 2011, a true and fair view of the state of affairs of the target business as at the dates stated and of its losses, cash flows and changes in equity for the periods then ended in accordance with the basis of preparation set out in note 1.
For the purposes of Prospectus Rule 5.5.3R (2)(f) we are responsible for this report as part of the Prospectus and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the Prospectus in compliance with paragraph 1.2 of Annex I of the Prospectus Directive Regulation.
Yours faithfully
KPMG LLP Chartered Accountants
Set out below is an unaudited pro forma statement of net assets of the Group which has been prepared to illustrate the effect the Proposed Acquisition might have had on the consolidated net assets of the Group as at 30 October 2010, being the date of the last published consolidated balance sheet of the Group, on the assumption that the Proposed Acquisition was completed on that date. This table has been prepared for illustrative purposes only, and because of its nature addresses a hypothetical situation and does not represent the Group's actual financial position following the Proposed Acquisition.
| Beale Group as at 30 October 2010 |
Adjustments ——————————————— |
Pro forma | |||
|---|---|---|---|---|---|
| Note 1 | Note 2 | Note 3 | Note 4 | Note 5 | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| Non-current assets | |||||
| Goodwill | 892 | – | – | – | 892 |
| Property, plant and equipment | 24,096 | – | – | 200 | 24,296 |
| Financial assets | 16 ———— |
– ———— |
– ———— |
– ———— |
16 ———— |
| 25,004 ———— |
– ———— |
– ———— |
200 ———— |
25,204 ———— |
|
| Current assets | |||||
| Inventories | 9,495 | 7,000 | – | – | 16,495 |
| Trade and other receivables | 4,402 | 300 | – | – | 4,702 |
| Cash and cash equivalents | 466 ———— |
(7,300) ———— |
13,300 ———— |
(1,300) ———— |
5,166 ———— |
| 14,363 | – | 13,300 | (1,300) | 26,363 | |
| Total assets | ———— 39,367 |
———— – |
———— 13,300 |
———— (1,100) |
———— 51,567 |
| Current liabilities | ———————— | ———————— | ———————— | ———————— | ———————— |
| Trade and other payables | (10,040) | – | (500) | – | (10,540) |
| Tax liabilities | (35) ———— |
– ———— |
– ———— |
– ———— |
(35) ———— |
| (10,075) | – | (500) | – | (10,575) | |
| Net current assets | ———— 4,288 |
———— – |
———— 12,800 |
———— (1,300) |
———— 15,788 |
| Non-current liabilities | ———— | ———— | ———— | ———— | ———— |
| Bank loan | (8,600) | – | – | – | (8,600) |
| Retirement benefit obligations | (2,482) | – | – | – | (2,482) |
| Deferred tax liabilities | (2,639) | – | – | – | (2,639) |
| Obligations under finance leases | (979) | – | – | – | (979) |
| Other payables | – ———— |
– ———— |
(10,500) ———— |
– ———— |
(10,500) ———— |
| (14,700) ———— |
– ———— |
(10,500) ———— |
– ———— |
(25,200) ———— |
|
| Total liabilities | (24,775) | – | (11,000) | – | (35,775) |
| Net assets | ———————— 14,592 ———————— |
———————— – ———————— |
———————— 2,300 ———————— |
———————— (1,100) ———————— |
———————— 15,792 ———————— |
The unaudited pro forma statement of net assets as at 30 October 2010 has been compiled on the following basis:
The cash payment of £7.5 million has been allocated as follows:
| £'000 | |
|---|---|
| Inventories | 7,000 |
| Trade and other receivables – deposit | 300 |
| Cash and cash equivalents – cash floats | 200 |
| ———— 7,500 |
|
| Less cash floats acquired | (200) |
| Net cash movement | ———— 7,300 |
| ———————— |
The funding has been allocated as follows:
| £'000 | £'000 | |
|---|---|---|
| Non-current liabilities – other payables | ||
| Preference shares | 8,500 | |
| Term loan | 2,500 | |
| Less current portion – trade and other payables | (500) ———— |
|
| 2,000 ———— |
||
| 10,500 | ||
| Current liabilities | 500 ———— |
|
| Preference share and term loan funding | 11,000 | |
| Cash contribution | 2,300 ———— |
|
| Total cash funding | 13,300 ———————— |
|
Save for the adjustments outlined above, no account has been taken of any trading or transactions since 30 October 2010.
Deloitte LLP Abbots House Abbey Street Reading RG1 3BD
The Board of Directors on behalf of Beale PLC The Granville Chambers 21 Richmond Hill Bournemouth BH2 6BJ
Shore Capital and Corporate Limited Bond Street House 14 Clifford Street London W1S 4JU
20 April 2011
Dear Sirs
We report on the pro forma financial information (the "Pro forma financial information") set out in Part VIII A of the prospectus dated 20 April 2011 (the "Prospectus"), which has been prepared on the basis described in the notes thereto, for illustrative purposes only, to provide information about how the proposed acquisition might have affected the financial information presented on the basis of the accounting policies adopted by the Company in preparing the financial statements for the period ended 30 October 2010. This report is required by Annex I item 20.2 of Commission Regulation (EC) No 809/2004 (the "Prospectus Directive Regulation") and is given for the purpose of complying with that requirement and for no other purpose.
It is the responsibility of the directors of the Company (the "Directors") to prepare the Pro forma financial information in accordance with Annex I item 20.2 and Annex II items 1 to 6 of the Prospectus Directive Regulation.
It is our responsibility to form an opinion, in accordance with Annex I item 20.2 of the Prospectus Directive Regulation, as to the proper compilation of the Pro forma financial information and to report that opinion to you in accordance with Annex II item 7 of the Prospectus Directive Regulation.
Save for any responsibility arising under Prospectus Rule 5.5.3R (2)(f) to any persons and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in accordance with this report or our statement, required by and given solely for the purposes of complying with Annex I item 23.1 of the Prospectus Directive Regulation, consenting to its inclusion in the Prospectus.
In providing this opinion we are not updating or refreshing any reports or opinions previously made by us on any financial information used in the compilation of the Pro forma financial information, nor do we accept responsibility for such reports or opinions beyond that owed to those to whom those reports or opinions were addressed by us at the dates of their issue.
We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro forma financial information with the Directors.
We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Pro forma financial information has been properly compiled on the basis stated and that such basis is consistent with the accounting policies of the Company.
Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in jurisdictions outside the United Kingdom, including the United States of America, and accordingly should not be relied upon as if it had been carried out in accordance with those standards or practices.
In our opinion:
For the purposes of Prospectus Rule 5.5.3R(2)(f) we are responsible for this report as part of the Prospectus and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the Prospectus in compliance with Annex I item 1.2 of the Prospectus Directive Regulation.
Yours faithfully
Deloitte LLP Chartered Accountants
Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office is at 2 New Street Square, London EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited ("DTTL"), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.
Under the terms of the Acquisition Agreement, ARCS will sell and JEB will acquire the fixed assets (comprising shop fittings, fixtures, furniture and machinery), certain motor vehicles, office and IT equipment (other than any EPoS terminals), contracts and goodwill together with certain relevant intellectual property associated with the Target Stores (including the "Westgate", "Contact Electrical Homestores" and "Comfortmaker" brands) and their respective stock in trade, inventory and stores, forward orders made for new stock items and cash floats. Liability for the payment of any outstanding creditors of the Business and the benefit of any book debts as at Completion will remain with ARCS.
In addition, JEB will be required within six months following Completion (or by 27 December 2011 if earlier) to purchase for sale through the Target Stores further stocks held at ARCS' distribution centre in Peterborough. Existing employees of the Target Stores together with certain head-office employees engaged primarily in the central administration of the Business and staff engaged at the Abingdon warehouse will also transfer to JEB on Completion.
Between exchange of the Acquisition Agreement and Completion, ARCS will be required to ensure that the Target Stores are operated in the ordinary and usual course and will be restricted from entering into obligations in respect of forward orders or purchasing stocks from any new supplier or (except where the level of expenditure committed to with any single supplier is less than £5,000 (plus VAT) and with all suppliers is less than £50,000 (plus VAT) in aggregate), other than at the written direction of JEB. New forward orders may only be committed to in the ordinary course of business and on a basis consistent with ARCS' past practice.
Completion of the Proposed Acquisition, the issue by the Company to ARCS of the Preference Shares and draw-down by JEB of the Term Loan are each conditional on obtaining the necessary approvals of Shareholders at the Extraordinary General Meeting (the "Condition").
If the Condition is not satisfied by 31 August 2011, ARCS may, on 10 business days notice, terminate the Acquisition Agreement in its entirety (which will thereupon cease to have effect). Completion of the purchase of the Business is proposed to take place on the Completion Date. The aggregate consideration payable on Completion will be a nominal amount in respect of the fixed assets, contracts and goodwill associated with the Business, £7.0 million in respect of the stocks of the Target Stores and £0.2 million in respect of cash floats. An initial deposit of £0.3 million will also be payable on account of those further stocks held at ARCS' distribution centre for delivery to the Target Stores following Completion. The consideration payable in respect of the Proposed Acquisition will be financed entirely from the proceeds of the subscription to be made by ARCS for the Preference Shares and by drawdown of the Term Loan by JEB.
Following Completion ARCS will also pay financial contributions to JEB to support the viability of certain of the Target Stores and to enable them to integrate into the Beale format. These payments will amount in aggregate in the first year following Completion to approximately £2.4 million. These payments will be made provided JEB continues to trade the relevant stores.
Summary details of the Target Stores and the terms on which they will be occupied appear below:
| Approximate trading | |||
|---|---|---|---|
| Property Group A |
Lease term | Annual rent | square footage |
| Unit C Fairacres, Marcham Road, Abingdon, Oxfordshire |
To 28 February 2022 (excluded from security of tenure) |
£403,530 | 18,000 |
| 80 Newgate Street, Bishop Auckland, County Durham |
15 years from Completion | £100,000 plus 5 per cent. of net turnover in excess of an agreed target |
27,000 |
| 8 Market Place, Diss, Norfolk |
15 years from Completion | £50,000 plus 5 per cent. of net turnover in excess of an agreed target |
6,000 |
| Sunwin House, Low Street, Keighley, West Yorkshire |
15 years from Completion | £250,000 plus 5 per cent. of net turnover in excess of an agreed target |
47,000 |
| 7 Market Place, Spalding, Lincolnshire |
15 years from Completion (excluded from security of tenure) |
£75,000 plus 5 per cent. of net turnover in excess of an agreed target |
19,000 |
| 57 High Street, St Neots, Cambridgeshire |
15 years from Completion | £200,000 plus 5 per cent. of net turnover in excess of an agreed target |
24,000 |
| Group B | |||
| 22 Smallgate, Beccles, Suffolk |
10 years from Completion (excluded from security of tenure) |
Equal to 20 per cent. of store profit |
17,000 |
| 141 London Road North, Lowestoft, Suffolk |
10 years from Completion (excluded from security of tenure) |
Equal to 20 per cent. of store profit |
21,000 |
| Co-operative House, Queen Street, Mansfield, Nottinghamshire |
10 years from Completion (excluded from security of tenure) |
Equal to 20 per cent. of store profit |
94,000 |
| Westgate House, Park Road, Peterborough, Cambridgeshire |
10 years from Completion (excluded from security of tenure) |
Equal to 20 per cent. of store profit |
83,000 |
| 77-87 Lumley Road, Skegness, Lincolnshire |
10 years from Completion (excluded from security of tenure) |
Equal to 20 per cent. of store profit |
38,000 |
| 1-2 Church Terrace, Wisbech, Cambridgeshire |
10 years from Completion (excluded from security of tenure) |
Equal to 20 per cent. of store profit |
26,000 |
| Approximate trading | |||
|---|---|---|---|
| Property Group C |
Lease term | Annual rent | square footage |
| 1-4 High Street, Chipping Norton, Oxfordshire |
To 8 August 2014 | £75,000 | 10,000 |
| Town Hall Buildings, High Street, Cinderford, Gloucestershire |
To 11 September 2013 | £52,000 | 10,000 |
| 5 Albert Street, Harrogate, North Yorkshire |
To 18 September 2014 (excluded from security of tenure) |
£400,000 | 34,000 |
| Westgate House, Vancouver Centre, Kings Lynn, Norfolk |
To 24 December 2016 | £190,000 | 19,000 |
| 7 Regent Walk, Redcar, Cleveland |
10 years from Completion (excluded from security of tenure) |
£195,630 | 25,000 |
| 6 Market Place, Saffron Walden, Essex |
10 years from Completion (excluded from security of tenure) |
£185,000 | 10,000 |
| Swadford Street, Skipton, North Yorkshire |
To 29 November 2012 (excluded from security of tenure) |
No rent payable | 27,000 |
| Abingdon warehouse, 1 Blacklands Way, Abingdon Business Park, Oxfordshire |
To 25 December 2011 (by virtue of break rights to be exercised) |
£72,500 | N/A |
JEB will on Completion (for the annual rental and lease duration indicated in the table which appears above):
in Bishop Auckland, Diss, Keighley, Spalding and St. Neots for terms of fifteen years with increases in the minimum rent payable at the end of the fifth and tenth years (save in the case of the Target Store in Spalding where separate arrangements will apply including a right for Westgate to terminate after the third year of the term if JEB does not agree to pay the rent up to a specific threshold); and
in Beccles, Lowestoft, Mansfield, Peterborough, Skegness and Wisbech for terms of ten years such leases having the benefit of mutual break options in favour of ARCS/Westgate and in favour of JEB on or after the third (or, in respect of Skegness, second) anniversary of Completion. JEB will also have a right of first refusal on any subject to contract transaction agreed by ARCS or Westgate (as appropriate) with a third party to acquire a new lease over any of these properties and neither ARCS nor Westgate will have any right to transfer or let any of these properties to another department store user (except a discount retailer); and/or
The leases of the group "A" Target Stores will be granted on the basis that JEB will be liable for both internal and external repairs subject to schedules of condition agreed between the parties. The leases of the group "B" Target Stores will be granted on an internal repairing basis only subject to these schedules of condition and, in relation to the leases of the group "C" Target Stores, ARCS will also indemnify JEB in respect of any costs and expenses incurred by it in making good (if required by the landlord) any wants of repair shown on those schedules and for any pre-existing reinstatement liabilities. At Skipton, because a concession agreement is being granted, JEB will not have a repairing liability.
ARCS is required to carry out certain remedial works to the group "A" Target Stores in accordance with an agreed schedule within twelve months of Completion.
In the event that either ARCS or Westgate (as appropriate) or JEB exercises its right to terminate one or more of the leases or sub-leases to be entered into in respect of various of the Target Stores, then ARCS will indemnify JEB in respect of any non-payroll related costs and expenses (including without limitation any fixed asset write off) incurred by JEB in connection with such termination and the associated closure of the relevant Target Store. In addition to the indemnities described above, ARCS will indemnify JEB against all occupancy costs incurred by it in relation to its occupation of the warehouse property in Abingdon.
ARCS will, on Completion, be required to pay JEB a cash sum of £2.3 million (the "Inducement Amount") part of which must be used by it to finance fit-out improvements to some or all of the Target Stores. In the event that JEB has not, within 12 months of Completion, spent or otherwise committed itself contractually to spend within 30 days thereof at least £1.2 million of the Inducement Amount (excluding VAT) on improvements, the amount of such shortfall must be repaid to ARCS and may not be reclaimed by JEB.
ARCS and JEB will be required, during the week prior to Completion, to have carried out a joint stock taking exercise and, within 60 days following Completion, agreed such adjustments (if any) as may be required to the value of stock held at each of the Target Stores and any apportionments required in respect of prepayments and accruals made in relation to outgoings or expenses of the Business.
Any damaged, unsaleable and terminal stocks will be disregarded in this valuation and transferred at nil value and all other stock will (by reference to its product category) have an appropriate age discounting and margin provision applied to it. Any stock held in the Target Stores at Completion having a value which exceeds the agreed initial valuation of £7.0 million will be paid for by JEB on or before the date falling six months from Completion.
Any further balancing amounts payable by JEB or repayable by ARCS will be paid within 14 days following agreement or, in the event of any dispute, determination by an independent expert of the completion statement.
ARCS has given certain warranties and indemnities to JEB in respect of the Business (subject to normal limitations) customary for a transaction of this nature. JEB will be able to bring claims for breach of any warranty for a period of up to 18 months following Completion. The aggregate liability of ARCS under the warranties given by it is £3.5 million.
For a period of five years from Completion, ARCS and Westgate have each agreed not to carry on any trade or business (other than ARCS' retained concessions businesses and its existing Anglia Home Furnishing ("AHF") operation and ancillary homewares business) which competes with the Business within a radius of 20 miles from any Target Store. However, ARCS will be permitted to open new AHF stores which primarily sells furniture so long as sales of homewares and products do not represent more than 5 per cent. of the store's total revenues if any such store lies within a five mile radius of any of the Target Stores. JEB will also allow ARCS to use (on a royalty free basis) the name "Westgate" in connection with the carrying on following Completion of its retained department store businesses in Scunthorpe, Blyth, March and Hartlepool.
In addition, ARCS and Westgate have each agreed for a period of two years from Completion not to induce any supplier of goods or services to the Business to cease to supply the Target Stores or, without the prior agreement of JEB, to employ or engage any employee of the Business having a base salary of £25,000 per annum or more.
ARCS and JEB will on Completion enter into new concession agreements in customary form regulating the future operation by ARCS of in-store concessions relating to the sale of furniture, beds and floorcoverings and the provision of travel agency, optician and hairdressing services at certain of the Target Stores.
The Acquisition Agreement also provides that ARCS will indemnify JEB up to an aggregate maximum amount of £2.5 million and until various dates following Completion in respect of any obligation it has to make certain severance payments associated with any restructuring exercise undertaken in relation to those employees engaged in any of the Target Stores or in the central administration of the Business or in the event that either ARCS or Westgate (as appropriate) or JEB exercises its right to terminate one or more of the leases or sub-leases to be entered into in respect of the Target Stores.
The parties have also agreed that, in the event JEB ceases trading at and fully closes down any of the Target Stores following Completion, an amount equivalent to the value of the stocks relating to that store transferred to it on Completion will (subject to the provisions of the 2006 Act) promptly be used by the Company to redeem an equivalent principal amount of the Preference Shares. In addition, the Company will be required to ensure that no interim or final dividends are paid to Shareholders or otherwise declared by it, in any particular year, prior to JEB having made all repayments of the Term Loan then due and payable pursuant to the Term Loan Agreement and the Company having effected, as of the date any such dividend is declared or paid, all redemptions of the Preference Shares then required to have been made under the New Articles. The Company has also undertaken to ensure, to the extent within its power or under its control, that its distributable reserves are no less than the nominal value of the Preference Shares in issue from time to time.
Under the terms of the Term Loan Agreement, a loan facility of £2.5 million will become available to JEB and be fully drawn down by it on Completion. JEB will be permitted to use the proceeds of the Term Loan to help it finance the consideration payable to ARCS under the Acquisition Agreement and for general working capital purposes.
The principal amount owing on the Term Loan will be repayable over a period of five years in instalments of £250,000 made at six monthly intervals commencing on 31 October 2011. JEB will be permitted to repay earlier either in full or in an amount of at least (and in integral multiples of) £250,000 together with accrued interest if it so elects. There will be no penalty for early repayment of the Term Loan and, to the extent that JEB makes any such prepayment, its obligation to make the next successive repayment(s) owing will be deemed satisfied to the extent necessary up to (but not exceeding) the relevant prepayment amount.
Interest will be charged quarterly in arrears with effect from Completion at the rate of 4 per cent. per annum over the applicable LIBOR rate increasing to 6 per cent. per annum over LIBOR in the event of a default that is not remedied within 12 months.
Beale and JEB each give certain representations and warranties to ARCS customary for a loan agreement of this nature.
While the Term Loan will be unsecured:
The outstanding principal amount of the Term Loan together with all interest and other amounts owing thereunder will become immediately repayable in full in the event of (i) a change in control of Beale or JEB or (ii) a sale of all or substantially all of the assets of Beale and JEB.
The Term Loan Agreement also contains certain customary (but reasonably limited) events of default which, while they are continuing, will allow ARCS to immediately cancel the Term Loan and require immediate repayment, namely:
• a member of the Group becoming insolvent or the subject of certain insolvency related proceedings.
JEB will not (save as permitted by the Acquisition Agreement) be permitted to exercise any right of set-off or counterclaim it might have in respect of any payment due to ARCS under the Term Loan Agreement. ARCS may, at any time, set off any obligation owed by it to JEB (whether or not matured at such time) against any matured obligation owed to it by JEB under the Term Loan Agreement.
Neither JEB nor ARCS may (except with the prior written consent of the other) assign, novate or otherwise deal with any of its rights, interests or obligations under the Term Loan Agreement.
Under the terms of the IT Services Agreement, ARCS will agree to provide JEB with certain information, communications and technology services for a period of up to four years following Completion.
The obligations to be undertaken by ARCS to JEB (together the "Services") will include the provision of:
together with the provision by ARCS of specified IT systems associated with its performance of the Services (the "IT Systems").
ARCS will provide the Services and the IT Systems to JEB on a non-exclusive basis and will be entitled to supply similar services to any third party. ARCS will be required to undertake the Services with reasonable skill and care and in accordance with all generally acceptable standards and practices applicable to the Services and to use its reasonable endeavours to do so in accordance with the target service levels agreed between the parties.
While ARCS will be responsible for the maintenance and management of the IT Systems provided, it will not be responsible for the adequacy of those systems (save insofar as warranting that they are adequate to operate the Business as at Completion) nor be under any obligation to replace, enhance or in any way improve any of the IT Systems at any time or to implement any systems, processes or plans developed or acquired by ARCS following Completion (save insofar as the same require to be implemented to comply with applicable law or at the request of a third party used to provide any part of the Services or following agreement between the parties under a change control procedure).
JEB will remain responsible for the maintenance, management and adequacy of its own IT infrastructure and will also be responsible for securing and/or creating any interfaces required between its own IT systems and the IT Systems.
JEB will receive the Services at nominal cost and will only be required to reimburse ARCS for:
the costs of delivery and installation of any equipment required in order for ARCS to provide the Services (currently set for switches and routers at between £0 and £150 per delivery depending on the distance of the Target Store from Peterborough);
the cost of consumables (paper rolls, print ribbons, ink rollers, logos, print labels and heads, batteries, keyboards, computer mice and cash drawers) save to the extent these are purchased as part of the miscellaneous operational stock of the Business under the Acquisition Agreement; and
ARCS will be permitted to increase the amounts it charges to JEB if JEB changes its instructions or fails to give instructions to ARCS in relation to the Services or if ARCS incurs any costs as a result of complying with any applicable law or following agreement between the parties under the change control procedure. If ARCS' costs associated with providing the Services increase as a result of any increase in the costs levied by a third party used to provide any part of the Services, ARCS will only be able to pass such increase on to JEB where it has agreed to accept such additional costs. If JEB fails to pay ARCS any amount owing by it, ARCS will be entitled to claim interest on the sums owed and/or (after having given JEB notice of the outstanding amount and a period of not less than 10 business days to make payment) suspend performance of the Services.
ARCS will be entitled to sub-contract provision of any of the Services and JEB will be obliged to adhere to any terms and conditions imposed by any sub-contractor.
To enable effective operation of the IT Services Agreement, JEB is under an obligation (amongst other things):
Both ARCS and JEB agree to use reasonable endeavours throughout the duration of the agreement to meet their respective obligations in order to facilitate the separation of their IT systems before the date falling four years from Completion.
ARCS' liability under the IT Services Agreement will be capped in any event at £50,000. The IT Services Agreement will however contain restrictions on JEB's ability to recoup from ARCS (among others) any of the following types of losses:
JEB's liability under the IT Services Agreement will also be capped at £50,000.
All equipment supplied in relation to the Services and the IT Systems will remain the property of ARCS save insofar as JEB pays it for replacements of irreparable equipment. JEB will also be required to keep ARCS indemnified against all costs, losses, damages and liabilities that ARCS incurs or suffers as a result of any loss of or damage to any such equipment during the period of the IT Services Agreement.
A number of restrictions will be imposed on JEB, including:
If JEB breaches any of these restrictions, ARCS will be entitled to charge it an amount equal to that it would have charged to grant a licence/allow the unauthorised activity from the start of the period of unauthorised use plus interest.
Either party may request a variation to the IT Services Agreement and Services and ARCS will be permitted to modify the agreement as necessary to comply with obligations owed by it to third party suppliers but will be required to use reasonable endeavours to ensure that such modifications do not result in any deterioration in the Services or the IT Systems.
Either party will be able to terminate the IT Services Agreement and the provision by ARCS of the Services will cease with immediate effect if:
ARCS will also be entitled to terminate the IT Services Agreement (in whole or in part) if a third party supplier upon which ARCS is dependant in performing its obligations under the agreement terminates its agreement with ARCS but cannot exercise its right of termination in these circumstances prior to it having used reasonable endeavours to implement alternative arrangements to provide the Services for the remainder of the duration of the term of the IT Services Agreement.
In the event of any termination or expiry of the IT Services Agreement, ARCS will be required to indemnify JEB in respect of any employment liabilities relating to or which arise from the period prior to the termination or expiry of the IT Services Agreement, which are imposed on it by reason of the operation of the transfer of undertakings legislation, save to the extent such liability arises from any breach or default by JEB. ARCS will also be required to indemnify JEB against any redundancy costs arising within 12 months of the termination or expiry date.
On any termination of the IT Services Agreement, JEB will be restricted for a period of 12 months from soliciting the services of any employees of ARCS who provided the Services.
In the event of a dispute under the IT Services Agreement, a set escalation procedure must generally be followed before either party can commence proceedings in court.
Under the terms of the NED Agreement ARCS will, for so long as either it or an associated company is the holder of issued Preference Shares having a nominal value of at least £4.25 million and/or any part of the Term Loan remains unpaid by JEB, have the right, after the date falling three months from Completion, to appoint one non-executive director (the "ARCS Director") to each of the Board and the board of directors of JEB, to remove from office any person so appointed and to appoint another person in his place.
Any person appointed as the ARCS Director must be the individual who then holds office as the most senior executive of ARCS.
The appointment of each ARCS Director will be subject to the provisions of the New Articles provided that (to the extent appointed) the ARCS Director will not be subject to the obligations relating to retirement by rotation or re-election set out therein. Each ARCS Director will also, inter alia, be a member of the Nomination Committee.
Neither ARCS nor the ARCS Director will be entitled to receive any fee for the services to be provided under the terms of the NED Agreement or to participate in the Beale pension scheme, medical benefit schemes or any of its employee share schemes.
The ARCS Director will be subject to strict obligations of confidentiality in relation to his use or disclosure (including, but without limitation, to ARCS or any associated company) of any trade or other confidential information concerning the business or affairs of the Enlarged Group.
The appointment of the ARCS Director under the terms of the NED Agreement is terminable:
On any termination of his appointment, the ARCS Director will not be entitled to receive any compensation for loss of office and will only be entitled to receive reimbursement of any expenses reasonably and properly incurred before that date.
The Company and the Directors (whose names appear on page 21 of this document) accept responsibility for the information contained in this document. To the best of the knowledge and belief of the Company and the Directors (who have taken all reasonable care to ensure that such is the case), the information contained in this document is in accordance with the facts and does not omit anything likely to affect the import of such information.
3.1. The issued ordinary share capital of the Company (i) as at 19 April 2011, being the latest practicable date prior to the date of publication of this document; and (ii) as it is expected to be immediately following Readmission and the proposed issue of the Preference Shares, is as follows:
| As at the date of this document | Following Readmission | |||
|---|---|---|---|---|
| Number | Amount (£) | Number | Amount (£) | |
| Ordinary Shares | 20,524,797 | 1,026,239.80 | 20,524,797 | 1,026,239.80 |
| Preference shares | – | – | 8,500,000 | 8,500,000 |
4.5. Set out below is a summary of the principal rights which will attach to the Preference Shares, inter alia, in relation to attendance and voting at general meetings, entitlements on a winding-up of the Company and transferability:
While the holders of the Preference Shares from time to time will be permitted to attend general meetings of the Company, the Preference Shares will not carry any rights to vote thereat unless the business of the meeting includes the consideration of a resolution to wind up the Company or a resolution is proposed that would adversely vary the special rights attaching to the Preference Shares, in which case the holder(s) of the Preference Shares will be entitled to vote on that resolution only.
In that event, the Preference Shares will have one vote per share.
After the third anniversary of Completion (but not, save for transfers intra-group, before that date), the Preference Shares will be freely transferable to a maximum of five transferees in multiples of at least £500,000. ARCS is obliged to notify the Company prior to making any such proposed transfer.
No dividend will accrue on the Preference Shares for a period of five years from their date of issue. Thereafter, without resolution of the Board or the Company in general meeting and before application of any profits to reserve or for any other purpose, a preferential dividend of 8 per cent. per annum will initially be payable on each of the Preference Shares for a period of 48 months, increasing to 9 per cent. per annum (excluding, in each case, the amount of any associated tax credit) thereafter. These dividends will be cumulative, accrue on a daily basis and will be payable half yearly in arrears in two equal instalments on 30 November and 31 May (or, in either case, if not a business day, on the next business day) (the "fixed dividend date") in each relevant financial year.
The first Preference Share dividend will be payable on 30 November 2016 in respect of the period commencing on the fifth anniversary of their date of issue and ending on that date.
If the Company fails to redeem any part of the Preference Shares on their due date or fails to make any dividend payment when due, the preference dividend will, with effect from the date falling 12 months thereafter until the date of payment, increase by 4 per cent. per annum (excluding the amount of any associated tax credit).
On a return of capital on a winding up of the Company or otherwise (other than on conversion, redemption or purchase of shares), the surplus assets of the Company available for distribution among the members will be applied first, to the repayment of capital paid up on the Preference Shares together with any arrears or accruals (if any) of dividend calculated down to and including the date of commencement of the winding up and secondly, to the repayment of the capital paid up or credited as paid up on the Ordinary Shares with any surplus assets being divided amongst the holders of the Ordinary Shares in proportion to the number of shares held by them.
Subject to the 2006 Act, the Company may redeem any of the Preference Shares at any time but will be required to redeem any such shares that have not been converted half-yearly in two equal instalments of £500,000 payable on 30 November and 31 May in each relevant financial year, the first such redemption to be made on 30 November 2016 or as soon thereafter as the Company is permitted to do so in accordance with the 2006 Act. The redemption price payable will be the nominal amount paid up on the Preference Shares together with any accrued and unpaid dividend due at the redemption date.
In addition, the Preference Shares must be immediately redeemed on a change of control of the Company or on a sale of all, or substantially all, of the assets of the Enlarged Group.
Each holder of Preference Shares will be entitled to convert any of its Preference Shares into fully paid Ordinary Shares in the event that:
The number of Ordinary Shares to be issued on any exercise of this conversion right will be calculated by taking the nominal value of the Preference Shares the subject of the proposed conversion together (if required) with any arrears or accruals of dividend and calculating the number of Ordinary Shares which such amount would in total be capable of purchasing at a price established:
provided always that any such exercise by a holder of Preference Shares of its conversion rights may not, in any circumstances, result in the allotment and issue to it (and any other holder(s) of Preference Shares) of more than 9.99 per cent. in aggregate of the issued ordinary share capital of the Company.
Ordinary Shares arising on conversion will be issued credited as fully paid and rank pari passu in all respects and form one class with the Ordinary Shares then in issue and rank for an appropriate proportion of any dividends declared on the Ordinary Shares in respect of the financial year in which they are converted. Dividends on Preference Shares which are converted will cease to accrue on the fixed dividend date last preceding the relevant conversion date. In circumstances where the conversion of Preference Shares would otherwise result in a reduction of share capital, a class of valueless non-voting deferred shares would be created by the Company and issued to the relevant holder(s).
The Preference Shares will rank in priority to the Ordinary Shares in respect of both income and capital. No further issues of securities which will rank equally with or in priority to the Preference Shares may be made by the Company while they remain in issue. The consent of the holders of the Preference Shares will also be needed by the Company to the extent that it proposes to:
(i) reduce or repay all or any part of the share capital of the Company (other than a repayment in the course of a winding up), including the purchase by the Company of any of its own shares;
The Preference Shares will not be listed on the Official List nor be capable of being dealt in on any stock exchange in the United Kingdom or elsewhere and no application for any public listing or quotation of the Preference Shares will be made.
4.6. As at 19 April 2011, being the last business day prior to the date of publication of this document, no Ordinary Shares were held by the Company as treasury shares.
If any member, or any other person appearing to the directors to be interested in any shares in the capital of the Company held by such member, has been duly served with a notice under section 793 of the 2006 Act and is in default for a period of 14 days from the date of service of the notice under that section in supplying to the Company the information thereby required, then the Company may (at the absolute discretion of its directors) at any time thereafter by notice (a "restriction notice") to such member direct that, in respect of the shares in relation to which the default occurred and any other shares held at the date of the restriction notice by the member, or such of them as the directors may determine from time to time (the "restricted shares" which expression includes any further shares which are issued in respect of any restricted shares), the member shall not, nor shall any transferee to which any of such shares are transferred other than pursuant to a permitted transfer or pursuant to the relevant provision of the New Articles, be entitled to be present or to vote on any question, either in person or by proxy, at any general meeting of the Company or separate meeting of the holders of any class of shares of the Company, or to be reckoned in a quorum.
Where the restricted shares represent at least 0.25 per cent. in nominal value of the issued shares of the Company of the same class, the restriction notice may in addition direct, inter alia, that any dividend or other money which would otherwise be payable on the restricted shares shall be retained by the Company without liability to pay interest; where the Company has offered the right to elect to receive shares instead of cash in respect of any dividends any election by such member of such restricted shares will not be effective; and no transfer of any of the shares held by the member shall be registered unless the member is not himself in default in supplying the information requested and the transfer is part only of the member's holding and is accompanied by a certificate given by the member in a form satisfactory to the directors to the effect that, after due and careful enquiry, the member is satisfied that none of the shares which are the subject of the transfer are restricted shares.
The rights for the time being attached to any share or class of shares in the Company (whether or not the Company may be or is about to be wound up) may from time to time be varied or abrogated in accordance with the provisions set out in the 2006 Act. The Board may convene a meeting of the holders of any class of shares whenever it thinks fit and whether or not the business to be transacted involves a variation or abrogation of class rights. Subject to the terms of issue of, or the rights attached to, any shares, the rights or privileges attached to any class of shares shall not be deemed to be varied or abrogated by the creation or issue of any new shares ranking pari passu in all respects (save as to the date from which such new shares shall rank for dividend) with or subsequent to those already issued or by the reduction of the capital paid up on such shares or by the purchase or redemption by the Company of its own shares or the sale of any shares held as treasury shares in accordance with the provisions of the 2006 Act and the New Articles.
Subject to the provisions of the 2006 Act and any provisions contained in the New Articles from time to time, in particular in relation to the Preference Shares:
(ii) Notwithstanding any other provision of the New Articles to the contrary, unless otherwise determined by the directors, any Ordinary Shares may be held in uncertificated form and title to such shares may be transferred by means of a relevant system (in each case as defined in the CREST Regulations).
(f) General meetings
for taxation and attributable to any outside shareholders in subsidiaries of the Company, all as shown in the latest audited and consolidated balance sheet of the Group but after such adjustments and deductions as are specified in the relevant provision of the New Articles.
The provisions regulating the operations of the Company are currently set out in the Company's memorandum of association and the Existing Articles. The Company's memorandum contains, among other things, the objects clause which sets out the scope of the activities the Company is authorised to undertake. This is drafted to give a wide scope.
The 2006 Act significantly reduces the constitutional significance of a company's memorandum and provides that a memorandum will record only the names of subscribers and the number of shares each subscriber has agreed to take in a company. Under the 2006 Act, the objects clause and all other provisions which are contained in a company's memorandum are now deemed to be contained in the company's articles of association but the Company can remove these provisions by special resolution.
Further, the 2006 Act states that unless a company's articles provide otherwise, a company's objects are unrestricted. This abolishes the need for companies to have objects clauses. For this reason, the Company is proposing to remove its objects clause together with all other provisions of its memorandum which, by virtue of the 2006 Act, are now treated as forming part of the Company's articles of association.
Resolution 5(a) set out in the Notice of Extraordinary General Meeting seeks to achieve the removal of these provisions for the Company. As the effect of this Resolution will be to remove the statement currently in the Company's memorandum of association regarding limited liability, the New Articles also contain an express statement regarding the limited liability of Shareholders.
(b) Change of name
Under the 1985 Act, a company could only change its name by special resolution. Under the 2006 Act, a company may change its name by other means provided for by its articles. To take advantage of this provision, the New Articles will enable the directors of the Company to pass a resolution to change the Company's name.
(c) Authorised share capital and unissued shares
The 2006 Act abolishes the requirement for a company to have an authorised share capital and the New Articles reflect this. Directors will still be limited as to the number of shares they can at any time allot because allotment authority continues to be required under the 2006 Act, save in respect of employee share schemes.
Under the 1985 Act, if a company wished to issue redeemable shares, it had to include in its articles the terms and manner of redemption. The 2006 Act enables directors to determine such matters instead provided they are so authorised by the articles. The New Articles contain such an authorisation. Other than in respect of the Preference Shares, the Company has no plans to issue redeemable shares but if it did so, the Company's directors would need Shareholder authority to issue new shares in the usual way.
(d) Variation of rights
The Existing Articles contain provisions regarding the variation of class rights. The proceedings and specific quorum requirements for a meeting convened to vary class rights are contained in the 2006 Act. The relevant provisions have not, therefore, been included in the New Articles.
(e) Form of resolution
The Existing Articles contain a provision that, where for any purpose an ordinary resolution is required, a special or extraordinary resolution is also effective and that, where an extraordinary resolution is required, a special resolution is also effective. This provision is not included in the New Articles as the concept of extraordinary resolutions has not been retained under the 2006 Act.
(f) Authority to purchase own shares, consolidate and sub-divide shares and reduce share capital Under the 1985 Act, a company required specific enabling provisions in its articles to purchase its own shares, to consolidate or sub-divide its shares and to reduce its share capital or other undistributable reserves as well as Shareholder authority to undertake the relevant action. Under the 2006 Act, a company will only require shareholder authority to do any of these things and it will no longer be necessary for articles to contain enabling provisions. Accordingly the relevant enabling provisions have not been included in the New Articles.
(g) Provision for employees on cessation of business
The 2006 Act provides that the powers of the directors of a company to make provision for a person employed or formerly employed by the company or any of its subsidiaries in connection with the cessation or transfer to any person of the whole or part of the undertaking of the company or that subsidiary may only be exercised by the directors if they are so authorised by the company's articles or by the company in general meeting. The New Articles provide that the directors of the Company may exercise this power.
The Existing Articles contain provisions dealing with the distribution of assets in kind in the event of the Company going into liquidation. These provisions have not been incorporated in the New Articles on the grounds that a provision concerning the powers of liquidators is a matter for insolvency law rather than the articles and because the Insolvency Act 1986 confers powers on the liquidator which would enable it in any event to do what is envisaged by the Existing Articles.
Under the 1985 Act, a company required authority in its articles to have an official seal for use abroad. Under the 2006 Act, such authority is no longer required. Accordingly, the relevant authorisation does not appear in the New Articles.
The New Articles provide an alternative option for execution of documents (other than share certificates). Under the New Articles, when the seal is affixed to a document it may be signed by one authorised person in the presence of a witness, whereas previously the requirement was for signature by either a director and the secretary or two directors or such other person or persons as the directors may approve.
CREST is a paperless settlement system enabling securities to be evidenced otherwise than by a certificate and transferred otherwise than by a written instrument. The New Articles are consistent with CREST membership and, amongst other things, allow for the holding and transfer of shares in uncertificated form. The New Articles contain other provisions in respect of transactions with Ordinary Shares in uncertificated form and generally provide for the modification of certain provisions of the Existing Articles so that they can be applied to transactions involving shares held in this way.
The Existing Articles permit the directors of the Company to suspend the registration of transfers. Under the 2006 Act, share transfers must be registered as soon as practicable. The power in the Existing Articles to suspend the registration of transfers is inconsistent with this requirement. Accordingly, this power has not been included in the New Articles.
The New Articles will provide the Company with a first and paramount lien on every share which is not fully paid for all amounts payable to it, whether or not in respect of that share.
The provision in the Existing Articles requiring the Board to keep accounting records has not been included in the New Articles as this requirement is contained in the 2006 Act.
The Existing Articles specify the circumstances in which a director of the Company must vacate office. The New Articles update these provisions to treat physical illness in the same manner as mental illness.
Each director of the Company shall, notwithstanding that he is not a member, continue to be entitled to attend and speak at any general meeting. In addition, the New Articles give power to the Chairman of any general meeting to invite any person to attend and speak at that meeting if he considers that this will assist in the deliberations of the meeting.
Under the New Articles, the Board may also direct that any person wishing to attend any meeting should provide such evidence of identity and submit to such searches or other security arrangements or restrictions as the Board shall consider appropriate in the circumstances and the Board shall be entitled in its absolute discretion to refuse entry to any person who fails to provide such evidence of identity or submit to such searches or otherwise comply with such security arrangements or restrictions.
The Chairman will also be permitted to take such action or give such directions as he thinks fit to promote the orderly conduct of business as laid down in the notice of the meeting. The Chairman's decision on matters of procedure will be final.
The 2009 Regulations also amended the 2006 Act so that it now provides that each proxy appointed by a member may attend and speak at general meetings and have one vote on a show of hands (whereas under the Existing Articles, proxies are only entitled to vote on a poll) unless the proxy is appointed by more than one member in which case the proxy has one vote for and one vote against if the proxy has been instructed by one or more members to vote for the resolution and by one or more members to vote against the resolution. The New Articles reflect these changes.
The 2009 Regulations further amended the 2006 Act in order to enable multiple representatives appointed by the same corporate member to vote in different ways on a show of hands and a poll. The New Articles contain provisions which reflect these amendments.
Amendments made to the 2006 Act by the 2009 Regulations also specifically provide for the holding and conducting of electronic meetings. The New Articles reflect the relevant provisions.
Provisions of the 2006 Act which came into force in January 2007 also enable companies to communicate with members by electronic and/or website communications. The New Articles allow communications to members in electronic form and, in addition, they also permit the Company to take advantage of new provisions relating to website communications.
Before the Company can communicate with a member by means of website communication, the relevant member must be asked individually by the Company to agree that it may send or supply documents or information to him by means of a website and the Company must either have received a positive response or have received no response within a period of 28 days beginning with the date on which the request was sent. The Company will notify the member (either in writing or by other permitted means) when a relevant document or information is placed on the website and a member can always request a hard copy version of the document or information.
The New Articles remove the provision giving the Chairman a casting vote at general meetings in the event of an equality of votes as this is no longer permitted under the 2006 Act.
Under the 2006 Act, as amended by the 2009 Regulations, general meetings adjourned for lack of quorum must be held at least 10 clear days after the original meeting. The New Articles reflect this requirement.
Under the 2006 Act as amended by the 2009 Regulations, the Company must determine the right of members to vote at a general meeting by reference to the register not more than 48 hours before the time for the holding of the meeting, not taking account of weekends and bank holidays. The New Articles reflect this requirement.
There are no limitations in the Existing Articles or the New Articles on the rights of non-United Kingdom Shareholders to hold, or to exercise voting rights attached to, Ordinary Shares. However, the New Articles specify that non-United Kingdom Shareholders are not entitled to receive notices of general meetings unless they have given an address in the United Kingdom to which such notices may be sent.
The 2006 Act sets out directors' general duties which largely codify the existing law but with certain changes. Any director now has to avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of any company of which he is a director. The requirement is very broad and could apply, for example, if a director becomes a director of another company or a trustee of another organisation. The 2006 Act allows directors of public companies to authorise conflicts and potential conflicts, where appropriate, where the articles contain a provision to this effect. The 2006 Act also allows articles of association to contain other provisions for dealing with directors' conflicts of interest to avoid a breach of duty. Accordingly, whereas the Existing Articles only permit the directors to authorise conflicts in specific situations, they may, in accordance with the New Articles, authorise more broadly a matter proposed to them which would, if not authorised, involve a breach by a director of his duty under section 175 of the 2006 Act to avoid a situation in which he may have a direct or indirect interest (or duty) that may conflict with the Company's interests and also include other provisions allowing conflicts of interest to be dealt with in a manner consistent with common practice and broadly as currently provided for by the Existing Articles.
However, there are safeguards which will apply when the Company's directors decide whether to authorise a conflict or potential conflict. First, only directors who have no interest in the matter being considered will be able to take the relevant decision and secondly, in taking the decision, the directors must act in a way they consider, in good faith, will be most likely to promote the Company's success. The directors will be able to impose limits or conditions when giving authorisation if they think this is appropriate.
It is also proposed that the New Articles will contain provisions relating to confidential information, attendance at Board meetings and availability of Board papers to protect a director being in breach of duty if a conflict of interest or potential conflict of interest arises. These provisions will only apply where the position giving rise to the potential conflict has previously been authorised by the Board.
Under the Existing Articles, the non-executive directors of the Company (other than alternate directors) are entitled to receive by way of fees for their services as directors an amount not exceeding in aggregate £100,000 per annum or such higher amount as the Company by ordinary resolution may from time to time determine. This amount has been increased in the New Articles to £150,000 per annum. Any such fees payable shall continue to be distinct from any salary, remuneration or other amounts payable to a director pursuant to any other provision of the New Articles. The New Articles continue to make clear that a director shall not be required to hold any shares in the Company. The New Articles also contain provisions broadly similar to those of the Existing Articles to the effect that, at each annual general meeting any newly appointed director and each of the directors who was elected or re-elected at a general meeting held in the third calendar year falling immediately beforehand will retire and be eligible for re-election. The New Articles do not contain the provision contained in the Existing Articles (although no longer applied) which provides that the chief executive officer of the Company need not stand for re-election.
(y) Notice and conduct of Board meetings
The powers contained in the Existing Articles enabling directors of the Company to hold meetings by telephone have been retained but will be further expanded to allow for meetings to be held by means of electronic communication. In addition, the New Articles specify that a resolution in writing authenticated by all the directors entitled to receive notice of the relevant Board or committee meeting, not being less than the requisite quorum, shall be as valid and effective as a resolution duly passed at a meeting of the full Board or such committee.
(z) Directors'indemnities and loans to fund expenditure
The 2006 Act has in some areas widened the powers of a company to indemnify directors and to fund expenditure incurred in connection with certain actions taken against them. In particular, a company that is a trustee of an occupational pension scheme can now indemnify a director against liability incurred in connection with the company's activities as trustee of the scheme. In addition, the existing exemption allowing the Company to provide money for the purpose of funding a director's defence in court proceedings now expressly covers regulatory proceedings and applies to associated companies. The New Articles reflect these new provisions.
The Remuneration Committee will supervise the operation of the Performance Share Plan (the "Plan").
Any employee (including an executive director) of the Company and its subsidiaries will be eligible to participate in the Plan at the discretion of the Committee.
The Committee may grant awards to acquire Ordinary Shares within six weeks following the Company's announcement of its results for any period. The Committee may also grant awards within six weeks of Shareholder approval of the Plan or at any other time when the Committee considers there are exceptional circumstances which justify the granting of awards. It is intended that the first awards will be made shortly following adoption of the Plan.
The Committee may grant awards as conditional shares or as nil (or nominal) cost options. The Committee may also decide to grant cash-based awards of an equivalent value to share-based awards or to satisfy share-based awards in cash, although it does not currently intend to do so.
An award may not be granted more than 10 years after Shareholder approval of the Plan.
No payment is required for the grant of an award. Awards are not transferable, except on death. Awards are not pensionable.
An employee may not receive awards in any financial year over Ordinary Shares having a market value in excess of 150 per cent. of his annual base salary in that financial year. In exceptional circumstances, such as recruitment or retention, this limit is increased to 200 per cent. of an employee's annual base salary.
The vesting of awards granted to executive directors and other senior executives will be subject to performance conditions set by the Committee. Awards may be granted to other, more junior employees without performance conditions being imposed.
For the initial awards proposed to be granted to the executive Directors, the performance condition that will determine the vesting of awards will be based on absolute "EPS" growth. EPS is the earnings per share of the Company calculated on such basis as specified by the Committee. The performance condition applying to the initial awards will allow 25 per cent. of an award to vest for EPS in the 2013/14 financial year of 4.25 pence, increasing pro-rata to 100 per cent. vesting of an award for EPS in the 2013/14 financial year of 9.25 pence. For the purposes of comparison, EPS in the 2009/10 financial year of the Company was (2.84) pence.
The Committee can set different performance conditions from that described above for future awards provided that, in the reasonable opinion of the Committee, the new conditions are not materially less challenging in the circumstances than those described.
The Committee may also vary any performance condition applying to existing awards if an event has occurred which causes the Committee to consider that it would be appropriate to amend the performance condition, provided the Committee considers the varied condition is fair and reasonable and not materially less challenging than the original condition would have been but for the event in question.
Awards granted to the executive directors and other senior executives of the Group will normally vest three years after grant to the extent that any applicable performance condition (see above) has been satisfied. Awards granted to other, more junior employees may be granted with vesting periods of less than three years if the Committee sees fit. In either case, the participant must also remain employed by the Group for their award to vest. Awards granted as nil or nominal cost options are then exercisable up until the tenth anniversary of grant unless they lapse earlier.
Because the performance condition applying to the initial awards is measured at the end of the 2013/14 financial year, those awards will vest three and a half years after grant to the extent that the applicable performance condition has been satisfied and provided the participant is still employed by the Group.
The Committee may decide that participants will receive a payment (in cash and/or Ordinary Shares) on or shortly following the issue or transfer of shares in satisfaction of their award of an amount equivalent to the dividends that would have been paid on those Ordinary Shares between the time the awards were granted and the time they vest. This amount may assume the reinvestment of dividends.
As a general rule, an award will lapse upon a participant ceasing to hold employment or be a director within the Group.
However, if a participant ceases to be an employee or director in the Group because of his death, ill-health, injury, disability, retirement, his employing company or the business for which he works being sold out of the Group or in other circumstances at the discretion of the Committee, then his award will vest on the date on which it would have vested if he had not ceased to hold such employment or office, subject to: (i) the performance condition being satisfied at that time; and (ii) the pro-rating of the award to reflect the period of time between its grant and the date of cessation of employment, although the Committee can decide not to pro-rate an award if it regards it as inappropriate to do so in the particular circumstances.
If a participant ceases to be an employee or director of the Group for one of the "good leaver" reasons specified above, the Committee can decide that his award will vest on the date of cessation of employment or office, subject to (i) the extent to which the performance condition has been satisfied by reference to the date of cessation; and (ii) the pro-rating of the award by reference to the time of cessation as described above.
Awards structured as nil or nominal cost options will be exercisable for a period of 12 months from the date of vesting. Any such options which have already vested (but which have not been exercised) on the date of cessation of employment will be exercisable for 12 months from the date of cessation.
In the event of a takeover or winding up of the Company (not being an internal corporate reorganisation) all awards will vest early subject to: (i) the extent that any performance condition has been satisfied at that time; and (ii) the pro-rating of the awards to reflect the reduced period of time between their grant and vesting, although the Committee can decide not to pro-rate an award if it regards it as inappropriate to do so in the particular circumstances.
In the event of an internal corporate reorganisation, awards will be replaced by equivalent new awards over shares in a new holding company unless the Committee decides that awards should vest on the basis which would apply in the case of a takeover.
If a demerger, special dividend or other similar event is proposed which, in the opinion of the Committee, would affect the market price of Ordinary Shares to a material extent, then the Committee may decide that awards will vest on the basis which would apply in the case of a takeover as described above.
Awards will not confer any shareholder rights until the awards have vested or the options have been exercised and the participants have received their Ordinary Shares.
Any Ordinary Shares allotted or transferred when an award vests or is exercised will rank equally with the Ordinary Shares then in issue (except for rights arising by reference to a record date prior to their allotment).
In the event of any variation of the Company's share capital or in the event of a demerger, payment of a special dividend or similar event which materially affects the market price of the Ordinary Shares, the Committee may make such adjustment as it considers appropriate to the number of Ordinary Shares subject to an award and/or the exercise price payable (if any).
The Plan may operate over new issue Ordinary Shares, Ordinary Shares in treasury or Ordinary Shares purchased in the market.
In any ten calendar year period, the Company may not issue (or grant rights to issue) more than 10 per cent. of the issued ordinary share capital of the Company under the Plan and any other employee share plan adopted by the Company.
Ordinary Shares in treasury will count as new issue Ordinary Shares for the purposes of these limits unless institutional investors decide that they need not count.
The Committee may, at any time, amend the Plan in any respect, provided that the prior approval of Shareholders is obtained for any amendments that are to the advantage of participants in respect of the rules governing eligibility, limits on participation, the overall limits on the issue of Ordinary Shares or the transfer of Ordinary Shares in treasury, the basis for determining a participant's entitlement to, and the terms of, the Ordinary Shares or cash to be acquired and the adjustment of awards.
The requirement to obtain the prior approval of Shareholders will not, however, apply to any minor alteration made to benefit the administration of the Plan, to take account of a change in legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for participants or for any company in the Group. Shareholder approval will also not be required for any amendments to any performance condition applying to an award.
A copy of the Plan will be available for inspection during normal business hours on any weekday (Saturday, Sunday and public holidays excepted) at the offices of Blake Lapthorn, which are located at Watchmaker Court, 33 St John's Lane, London EC1M 4DB, from the date of this document to and including the date of Readmission and at the Extraordinary General Meeting for at least 15 minutes before and during the meeting.
(a) Chairman (Non-executive)
Mike Killingley was appointed to the Board on 1 March 2004 and became its non-executive chairman on 1 April 2004. He was with KPMG, chartered accountants, from 1971 until 1998, and held the post of senior partner of their Southampton office from 1988. He is currently a non-executive director of Falkland Islands Holdings plc and ViCTory VCT PLC and is Treasurer of the University of Southampton.
Tony Brown was appointed as Chief Executive by the Group on 1 June 2008. Mr Brown previously held the position of retail director of British Home Stores from 2001 and was responsible for store operations throughout the UK and Ireland. He was previously operations director of Somerfield Stores and a regional managing director of ASDA.
Ken Owst joined the Group in April 1994 as Group Finance Director having started his retail career with Allders Department Stores in 1985. He was appointed as a Director in August 1994 and is a fellow of the Chartered Institute of Management Accountants.
Keith Edelman was appointed as a Director on 23 September 2008. He was managing director of Arsenal Holdings plc from May 2000 to May 2008 and was group chief executive of Storehouse PLC (comprising British Home Stores and Mothercare) between 1993 and 1999. He is currently Chairman of Nirah, the senior independent director of Supergroup PLC and a non-executive director of Olympic Park Legacy Company and Safestore Holdings PLC. Mr Edelman is the appointed senior independent non-executive Director.
Simon Peters was appointed to the Board on 28 April 2010. He was appointed a director of Panther Securities plc, a substantial shareholder, in 2005. Mr Peters was with KPMG chartered accountants between 1999 and 2004.
(a) Save as set out below, none of the Directors has been a member of the administrative, management or supervisory bodies of any company or a partner in any partnership (other than the Company and other members of the Group), at any time in the five years immediately preceding the date of this document:
| Director | Current | Past |
|---|---|---|
| Mike Killingley | Falkland Islands Holdings Plc Singer & Friedlander AIM VCT Limited The Portsmouth Harbour Ferry Company Limited University of Southampton Holdings Limited ViCTory VCT Plc |
Atkins ABG Limited Conder Environmental Plc VT Trustees Limited |
| Tony Brown | N/A | N/A |
| Ken Owst | N/A | N/A |
| Keith Edelman | Argentium International Limited D III LLP D IV LLP Metro Racing Limited (in liquidation) N.I.R.A.H Holdings Limited N.I.R.A.H Limited Olympic Park Legacy Company Limited Phoenix Capital Advisors Limited Safestore Holdings Plc Stonebury Properties Ltd Supergroup plc |
Arnotts Holdings Limited Arsenal (AFC Holdings) Limited Arsenal (Emirates Stadium) Limited Arsenal Broadband Limited Arsenal Holdings Plc Arsenal Securities Plc Arsenal Stadium Management Company Limited Arsenal Stadium Management Holdings Limited Ashburton Properties (Northern Triangle) Limited Ashburton Properties Holdings Limited Ashburton Trading Limited ATL (Holdings) Limited Drayton Park Trading Limited HHL Holdings Limited Highbury Holdings Limited Highbury Square Management Limited Qualceram Shires Plc Queensland Road Trading Limited Stadium Capital West Limited Stadium Investment Limited The Arsenal Football Club Plc |
Director Current Past CJV Properties Limited Etonbrook Properties Plc Eurocity Properties (Central) Limited Eurocity Properties Plc London Property Company Plc M.R.G. Systems Limited Melodybright Limited Multitrust Property Investments Limited Northstar Land Limited Northstar Property Investment Limited Panther (Bromley) Limited Panther (Dover) Limited Panther (VAT) Properties Limited Panther AL (VAT) Limited Panther AL Limited Panther Developments Limited Panther Investment Properties Limited Panther Securities plc Panther Shop Investments (Midlands) Limited Panther Shop Investments Limited Panther Trading Limited Snowbest Limited Surrey Motors Limited TRS Developments Limited Westmead Building Company Limited Abbey Mills Properties Ltd Wenhedge Limited Richmond House (Stockton) Management Limited TRS Developments (Cheadle) Limited TRS Developments (Dynevor) Limited TRS Developments (Glasgow) Limited TRS Developments (South Shields) Limited TRS Developments (Sparkbrook) Limited TRS Developments (Stockton) Limited Yardworth Limited Simon Peters
(e) None of the Directors has been convicted of any fraudulent offence within the last five years.
Each of the executive Directors has a service contract. Tony Brown has a service contract dated 11 October 2007 (which commenced on 1 June 2008) and Ken Owst has a service contract dated 6 March 1995 (and subsequently amended on 29 October 1996, 23 June 1998, 5 June 2000 and 10 March 2009). The executive Directors' service contracts are not for a fixed term and provide, in the case of Mr Brown, for twelve months' prior written notice of termination from either party and, in the case of Mr Owst, for three months' prior written notice of termination from him and 12 months' prior written notice from the Company. The Company is under an obligation to pay damages for wrongful termination. In addition, in the event of a takeover of the Company, Mr Owst is, to the extent his employment is terminated in connection therewith, entitled to receive up to one year's salary.
Tony Brown is presently entitled to a basic annual salary of £250,000, inclusive of any directors' fees to which he may be entitled. Ken Owst is presently entitled to a basic annual salary of £127,500, inclusive of any directors' fees to which he may be entitled. Full details of the remuneration paid to each of the executive Directors during the 52 weeks to 30 October 2010 are set out in the table below.
Tony Brown has a fully funded company car and Ken Owst receives a cash car allowance of £6,360 per annum.
Tony Brown is entitled to have a sum equal to 15 per cent. of his annual base salary paid directly into the defined contribution section of the Beale pension scheme and in the financial year ended 30 October 2010, the Company contributed £35,625 to this scheme on his behalf.
Ken Owst is entitled to have a sum equal to 8 per cent. of his annual base salary paid directly into an approved personal pension scheme of his choice and in the financial year ended 30 October 2010, the Company contributed £10,000 on his behalf to an approved personal pension scheme. Ken Owst is also a deferred member of the final salary section of the Beale pension scheme which was closed to further accrual on 30 April 2009.
The executive Directors participate in an annual bonus scheme whereby Tony Brown can earn a bonus of up to 100 per cent. of his salary and Ken Owst can earn a bonus of up to 60 per cent. of his salary. This scheme is based primarily on achievement by the Beale Group of demanding profit targets. The scheme also provides for an element payable at the discretion of the Remuneration Committee.
Both executive Directors also participate in the Medium Term Bonus Scheme ("MTBS") which runs for the three years ending 31 October 2011. The amounts which accrue to the executive Directors under the MTBS are equal to their annual bonuses from the scheme referred to above. Any entitlement to a medium term bonus will only be payable if the Director in question remains in the Company's employment, is not working his notice period and has not tendered his resignation when the bonus becomes payable in January 2012. The relevant profit targets applicable to each of the above schemes were not achieved in the year ended 31 October 2009 or in the year ended 30 October 2010.
The Directors are eligible to receive a maximum discount of 20 per cent. on merchandise purchased in the Group's stores. Lower rates of discount are applicable to certain merchandise categories.
Each executive Director is entitled to be reimbursed all out-of-pocket expenses incurred by him in the performance of his duties upon production of satisfactory evidence of payment or expenditure.
Each of Tony Brown and Ken Owst are, in addition to public and bank holidays, entitled to 26 paid days' holiday per annum during the appointment. Holidays not taken in any holiday year cannot be carried over into a subsequent holiday year. In the event that the service of either executive Director is terminated, the Director is entitled to receive payment in lieu of any accrued but unused holiday entitlement.
The Company provides each executive Director with private medical expenses insurance for him and his spouse and children under the age of eighteen.
Tony Brown receives life assurance cover of three times his basic salary and a spouse's pension. Ken Owst is entitled to life assurance cover of four times his basic salary and a spouse's pension.
The Company's current policy for providing remuneration to executive Directors is aimed at attracting, motivating and retaining Directors of the high calibre needed to maintain the Group's position and to reward them for enhancing value to Shareholders. The main elements of the remuneration package for the executive Directors include basic annual salary, benefits in kind, pension contributions and bonus payments.
The Company's policy is that a substantial proportion of the potential remuneration of the executive Directors should be performance related. The performance measurement of the executive Directors and the determination of their annual remuneration package is undertaken by the Remuneration Committee.
The Company previously operated an approved share option scheme (the "Scheme"). No further options will be granted and there remain no outstanding options previously granted under the Scheme. The Company does not currently operate a share incentive plan in which the executive Directors (or any other Group employee) are entitled to participate. It is proposed that the Performance Share Plan will be introduced from the date of the EGM.
Details of the executive Directors' remuneration for the 52 weeks to 30 October 2010 are as follows:
| Executive Director | Salary and fees £ | Bonus £ Total benefits £ | Totals | |
|---|---|---|---|---|
| Tony Brown | 245,000 | – | 6,000 | 251,000 |
| Ken Owst | 125,000 | – | 8,000 | 133,000 |
The total amount set aside or accrued by the Group in the financial year ended 30 October 2010 to provide pension, retirement or similar benefits to Tony Brown and Ken Owst was £35,625 and £10,000 respectively. Tony Brown's contributions were paid into the defined contribution section of the Beale pension scheme. Ken Owst's contributions were paid into a personal pension plan. Details of relevant disclosures can be found on pages 54 to 57 of the Group's 2010 annual report (which has been incorporated herein by reference).
The non-executive Directors do not have contracts of service but their appointments are subject to the Existing Articles and their re-election at annual general meetings in accordance therewith. All non-executive Directors are entitled to be reimbursed for all out-of-pocket expenses incurred in the performance of their duties and receive benefits in the form of directors' fees and insurance. Details of the non-executive Directors' letters of appointment are set out below:
Set out below are the dates of appointment of each of the Directors and the dates of their last re-election to the Board:
| Executive Directors | Date appointed | Last re-elected |
|---|---|---|
| Tony Brown | 1 June 2008 | 18 March 2009 |
| Ken Owst | 1 August 1994 | 18 March 2009 |
| Non-executive Directors | Date appointed | Last re-elected |
| Mike Killingley | 1 March 2004 | 18 March 2010 |
| Keith Edelman | 23 September 2008 | 18 March 2009 |
| Simon Peters | 28 April 2010 | 17 March 2011 |
The remuneration of the non-executive Directors is determined by the Board based on independent surveys of fees paid to non-executive directors of similar companies and within the limits set out in the Existing Articles, which limit the total amount of aggregate fees paid as a whole to £100,000 or such larger amount as the Company may by ordinary resolution determine. The New Articles will contain a similar provision but limit the total amount of aggregate fees paid as a whole to £150,000 or such larger amount as the Company may by ordinary resolution determine.
The non-executive Directors are not eligible to join the designated Group pension plan. Fees paid to the non-executive Directors for the 52 weeks to 30 October 2010 are as follows:
| Non-executive Directors | Total for 52 weeks to 30 October 2010 |
|---|---|
| Mike Killingley | £43,000 |
| Keith Edelman | £25,000 |
| Simon Peters | No fee was paid |
The non-executive Directors do not receive additional fees in respect of their membership of the Remuneration Committee, Nomination Committee or Audit Committee and were not paid any benefits in kind in the 52 weeks to 30 October 2010.
The Board is supported by a senior management team which includes the following individuals:
Suzi Bailey is a Director of Buying with responsibility for furniture, toys, linens, homewares, gifts, and Christmas. She joined the Group in 2004, having gained substantial experience in a range of buying roles at House of Fraser.
Rhona Ferguson is a member of the Institute of Chartered Accountants. She is the Group Management Accountant and joined the Company in 2000. Prior to joining the Group, Rhona worked as Finance Manager for 7 years at Magna Housing Association.
Clint Hardiman is Director of Retail Operations and joined the Group in 2009 having relocated from South Africa. Clint's initial appointment with Beale was as Store Director of its flagship store in Bournemouth and he was promoted to his current position in January 2010. Clint gained extensive experience working in a range of senior roles for Ackermans, a large South African based retailer.
Trevor Jones is the Services Executive, having joined the Company in 2008 from Bourne Gas, a mechanical maintenance business. Trevor previously worked for 12 years as Facilities Manager for Care South. His employment with Beale began as Maintenance and Services Manager, before being promoted to his current role in December 2008.
Lin Louttit is a Fellow of the Chartered Institute of Personnel and Development, and is the HR Executive of the Group. She joined the Company in 2001 from Marks and Spencer, where she worked in both HR and Learning and Development for 19 years. Lin joined Beale as Group HR Adviser, and has held her current position since 2004.
Gemma Quin is Head of Merchandising, having joined the Group in 2010 from New Look, where she was the Merchandise Planning Manager. Gemma has previously worked in a range of merchandising roles for Arcadia, House of Fraser, Kookai, and Tesco.
Arnold Sincup is the IT Executive and joined the Company in 1997 from the Maples Group where he was IT and Logistics Manager. Arnold began his IT career as a commercial apprentice at Rolls Royce and gained further IT experience at Tarmac Quarry products and the wholesale and retail food distribution group, Morgan Edwards.
Joanna Sotherton is a Director of Buying and has responsibility for apparel and cosmetics. She joined the Company in 1994 and has substantial buying and merchandise experience, having worked for John Lewis for 15 years.
Chris Varley is a Fellow of the Institute of Chartered Accountants in England and Wales. He is Group Company Secretary/Financial Controller. He joined the Group in 1987 from Merck. Throughout his career he has dealt with a broad range of accounting and legal matters.
Save as disclosed in this paragraph 7, no contracts of employment have been entered into with any Director or senior manager of the Group or amended within six months prior to the date of this document.
It is the policy of the Company to comply with current best practice in corporate governance as set down in the Governance Code. As at the date of this document, the Board considers that the Group complies with its provisions save that it has not complied with:
In addition, following Completion and until repayment in full of the Term Loan and redemption of at least 50 per cent. of the Preference Shares by nominal value, the Group will, to the extent ARCS appoints a director to the Board under the NED Agreement, not be able to comply with clause B.7 of the Governance Code which requires that all directors be subject to re-election at regular intervals as any such director will not be subject to re-election.
The Board has established Nomination, Remuneration and Audit Committees, with formally delegated duties and responsibilities, and written terms of reference. From time to time, separate committees may be set up by the Board to consider specific issues should the need arise.
The Board currently comprises the non-executive Chairman Mike Killingley, two non-executive Directors, Keith Edelman and Simon Peters and two executive Directors, Tony Brown and Ken Owst. The role of senior independent director is performed by Keith Edelman. The composition of the Board is described in paragraph 7 of this Part X.
The Governance Code recommends that, for smaller companies, there should be at least two independent non-executive directors (excluding the chairman), independence is defined in clause B1.1 of the Governance Code. There is currently an independent non-executive Chairman and two nonexecutive Directors (one of whom is also considered independent) and two executive Directors as at the date of this document. The non-executive Directors monitor the Group's performance and its executive management. The roles of the chief executive and chairman are clearly divided, with the chief executive having responsibility for running the Group's businesses and the chairman running the Board. The senior independent non-executive Director's responsibilities include the provision of an additional channel of communication between the Chairman and the non-executive Directors and another point of contact for Shareholders if they have issues of concern which communication through the normal channels of Chairman, chief executive or finance director has failed to resolve, or where these contacts are inappropriate.
Newly appointed directors of the Company are offered for re-election at the annual general meeting following their appointment and, once elected, directors are required to submit themselves for reelection at least once every three years in accordance with the Existing Articles. Similar provisions will apply under the New Articles. All directors have access to the advice and services of the Company secretary, who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with and there is a procedure agreed by the Board for directors, in the furtherance of their duties, to take independent professional advice, if necessary, at the Company's expense. Directors receive appropriate training on appointment to the Board and on an ongoing basis. Directors and officers of the Company have the benefit of a directors' and officers' liability insurance policy.
The Board meets formally at least eight times each year and gives full consideration to strategic, financial and operational issues. It has a schedule of matters set aside for its direction including the approval of interim and full year financial statements and annual budgets. Profit and working capital forecasts and monthly management accounts are also regularly reviewed by the Board.
The Company is ready, where practicable, to enter into a dialogue with institutional Shareholders based on a mutual understanding of objectives and the executive Directors meet with institutional Shareholders by arrangement. The Board uses the annual general meeting to communicate with private investors and encourages their participation. The Chairman, chief executive and finance director carry out analysts' briefings during the year. Certain Directors also have face to face meetings with major Shareholders when appropriate. Such meetings allow directors to develop an understanding of Shareholders' views.
The Group's monitoring of its internal control systems is continual. The internal controls in place aim to safeguard the Group's assets and to ensure that its operations are carried out in an efficient and effective manner. They encompass controls to deal with significant business, operational, financial, compliance and other risks which may otherwise prevent achievement of the Group's objectives.
The key components of the Group's internal control system, all of which were fully operational during 2010 and to date in 2011, are set out below:
The Directors are responsible for establishing and maintaining the Group's systems of internal operational and risk control covering financial compliance management and for reviewing its effectiveness. However, such systems are designed to manage rather than eliminate the risk of failure to achieve business objectives, and can provide only reasonable and not absolute assurance against misstatement or loss.
A new internal auditor joined the Group on 17 January 2011 and the Group now has an internal audit function which is principally focused on its retail outlets. Systematic audits are carried out on a regular basis to ensure compliance with the Group's procedures relating to stock management and cash control. Audits are planned such that all stores are audited twice each year. The Group's internal auditor is based in its head office in Bournemouth.
The Audit Committee presently comprises the Company's two independent non-executive Directors, Mike Killingley and Keith Edelman. The chairman of the Audit Committee is Mike Killingley. Meetings of the Audit Committee are normally held not less than three times a year and the other Board members, Company Secretary and the Company's external auditors attend by invitation.
The Audit Committee's responsibilities, inter alia, include:
The Audit Committee is authorised by the Board to obtain outside legal or other independent professional advice at the Company's expense.
The Nomination Committee presently comprises the Company's two non-executive Directors, Keith Edelman and Simon Peters, and the Company's non-executive Chairman, Mike Killingley who also chairs the committee. The Company considers that it complies with the Governance Code recommendations regarding the composition of the Nomination Committee. Meetings of the Nomination Committee are held as and when required, but not less than once a year.
The Nomination Committee's responsibilities, inter alia, include:
The Nomination Committee is authorised by the Board to obtain outside legal or other independent professional advice at the Company's expense.
The membership of the Remuneration Committee presently comprises the Company's two independent non-executive Directors, Keith Edelman and Mike Killingley. The chairman of the Remuneration Committee is Keith Edelman. Meetings of the Remuneration Committee are normally held not less than twice a year. The Company considers that it complies with the Governance Code recommendations regarding the composition of the Remuneration Committee. No Director plays a part in any discussion about his own remuneration.
The Remuneration Committee's responsibilities, inter alia, include:
The Remuneration Committee is authorised by the Board to obtain outside legal or other independent professional advice at the Company's expense.
| Number | Percentage | |
|---|---|---|
| of Ordinary | of voting | |
| Shares as | rights as at | |
| at 19 April | 19 April | |
| Shareholder | 2011 | 2011 |
| Mike Killingley | 45,000 | 0.22 |
| Ken Owst1 | 42,400 | 0.21 |
| Tony Brown | 15,000 | 0.07 |
| Keith Edelman | 15,000 | 0.07 |
Note:
Simon Peters is the finance director of Panther Securities plc which, as noted in paragraph 9.3 below, is a substantial shareholder of the Company.
Save as set out in this paragraph, the Directors are not aware of any interests of persons connected with them which would, if such connected person were a Director, be required to be notified to the Company pursuant to DTR 3.1.2.
9.3. As at 19 April 2011 (being the latest practicable date prior to the date of publication of this document, and so far as is known to the Company by virtue of the notifications made pursuant to the 2006 Act and/or Chapter 5 of the Disclosure and Transparency Rules), the name of each person (other than a Director) who, directly or indirectly, is interested in three per cent. or more of the voting rights in the Company, and the amount of such person's interest, is as follows:
| Number | Percentage | |
|---|---|---|
| of Ordinary | of voting | |
| Shares as | rights as at | |
| at 19 April | 19 April | |
| Shareholder | 2011 | 2011 |
| Panther Securities plc1 | 6,100,000 | 29.72 |
| Gartmore Investments Limited | 1,720,000 | 8.38 |
| Lawdene Limited | 925,403 | 4.51 |
| Nigel Beale and Anthony Lowrey | 819,140 | 3.99 |
Note:
Save as set out in this paragraph, the Company is not aware of any person who, directly or indirectly, jointly or severally, has or will immediately following Readmission have a notifiable interest in three per cent. or more of the issued share capital of the Company.
Other than as provided by the City Code and Chapter 28 of the 2006 Act, there are no rules or provisions relating to mandatory bids and/or squeeze-out and sell-out rules relating to the Company.
The City Code applies to the Company. Under the City Code, if an acquisition of interests in Ordinary Shares were to increase the aggregate holding of the acquirer and its concert parties to interests in Ordinary Shares carrying 30 per cent. or more of the voting rights in the Company, the acquirer and, depending on the circumstances, its concert parties would be required (except with the consent of the Panel on Takeovers and Mergers) to make a cash offer for the outstanding shares in the Company at a price not less than the highest price paid for interests in Ordinary Shares by the acquirer or its concert parties during the previous 12 months. This requirement would also be triggered by any acquisition of interests in Ordinary Shares by a person holding (together with its concert parties) shares carrying between 30 per cent. and 50 per cent. of the voting rights in the Company if the effect of such acquisition were to increase that person's percentage of the total voting rights in the Company.
Under the 2006 Act, if an offeror were to make an offer to acquire all of the Ordinary Shares not already owned by it and was to acquire 90 per cent. of the Ordinary Shares to which such offer related it could then compulsorily acquire the remaining ten per cent. The offeror would do so by sending a notice to outstanding Shareholders telling them that it would compulsorily acquire their Ordinary Shares and then, six weeks later, it would deliver a transfer of the outstanding Ordinary Shares in its favour to the Company which would execute the transfers on behalf of the relevant Shareholders and pay the consideration to the Company which would hold the consideration on trust for outstanding Shareholders. The consideration offered to the Shareholders whose Ordinary Shares are compulsorily acquired under this procedure must, in general, be the same as the consideration that was available under the original offer unless a Shareholder can show that the offer value is unfair.
The 2006 Act would also give minority Shareholders a right to be bought out in certain circumstances by an offeror who has made a takeover offer. If a takeover offer related to all the Ordinary Shares and, at any time before the end of the period within which the offer could be accepted, the offeror held or had agreed to acquire not less than 90 per cent. of the Ordinary Shares, any holder of Ordinary Shares to which the offer related who had not accepted the offer could by a written communication to the offeror require it to acquire those Ordinary Shares.
The offeror would be required to give any Shareholder notice of his right to be bought out within one month of that right arising. The offeror may impose a time limit on the rights of minority Shareholders to be bought out, but that period cannot end less than three months after the end of the acceptance period or, if later, three months from the date on which notice is served on Shareholders notifying them of their sell-out rights. If a Shareholder exercises his rights, the offeror is entitled and bound to acquire those Ordinary Shares on the terms of the offer or on such other terms as may be agreed.
There have been no public takeover bids by third parties in respect of the share capital of the Company during its last or current financial year.
Under the terms of the Introduction Agreement, the Company confirms the appointment of Shore Capital as sponsor and agrees with it that, conditional upon, inter alia, the passing of the applicable Resolutions and the satisfaction of certain other conditions precedent (including the Acquisition Agreement having become unconditional in all respects in accordance with its terms), by not later than 8.00 a.m. on 24 May 2011 (or such later time or date as the Company and Shore Capital may agree, being not later than 8.00 a.m. on 21 June 2011), Shore Capital should use its reasonable endeavours to procure Readmission.
If all of the conditions precedent in the Introduction Agreement are not fulfilled (or, where permitted, waived) in all respects by the specified time and date or by such later date as Shore Capital and the Company may agree (being not later than 8.00 a.m. on 21 June 2011), the obligations of Shore Capital under the Introduction Agreement will terminate and Readmission will not proceed.
Under the Introduction Agreement, the Company has given certain representations and warranties to Shore Capital regarding, inter alia, the accuracy of the information contained in this document and an indemnity in relation to any claims against Shore Capital or any loss suffered by it arising directly or indirectly in connection with or arising out of the services rendered or duties performed by it under the Introduction Agreement, save for any claim or loss that arises as a result of Shore Capital's negligence, bad faith or wilful default.
Shore Capital may terminate its obligations under the Introduction Agreement if, inter alia, in the opinion of Shore Capital (acting in good faith) there is a material breach of any of the provisions of the Introduction Agreement by the Company or any of the warranties contained in the Introduction Agreement or if a statement of fact contained within this document ceases to be true and accurate and not misleading in any respect which Shore Capital (acting in good faith) regards as being material at any time prior to Readmission. Shore Capital may also terminate on the occurrence of certain force majeure events including a material adverse change in the condition, business or prospects of the Group or a fundamental change in economic, political or market conditions or any outbreak of hostilities or similar crisis which (in the opinion of Shore Capital acting in good faith), makes it inadvisable to proceed with the Readmission.
In addition to the Introduction Agreement summarised in paragraph 11 above and the Acquisition Agreement, IT Services Agreement, Term Loan Agreement and NED Agreement which are summarised in Part IX of this document, the following contracts (not being contracts entered into in the ordinary course of business) have been entered into by the Company or a member of the Group (a) within the two years immediately preceding the date of this document and are, or may be, material or (b) at any time and contain provisions under which any member of the Group has any obligation or entitlement which is, or may be, material to the Group as at the date of this document:
The Company as borrower and each of JEB, I.M.S Finance Limited and Grant-Warden Limited as guarantors (each, a "Guarantor") entered into a sterling revolving credit loan facility agreement dated 6 September 2010 (the "Facility Agreement") with HSBC in an aggregate amount of £9.0 million (the "Facility"). In light of the level of professional expenses incurred by the Company in relation to the Proposed Acquisition, the Facility Agreement was amended by side letter dated 25 January 2011 in order to provide increased headroom under the financial covenants described below. The Facility Agreement was further amended in light of the Proposed Acquisition on 1 April 2011 as set out in paragraph (a)(vi) below.
The Facility is to be used by the Company for financing its working capital requirements. It is capable of being utilised by way of redrawable loans, each of which must be repaid together with interest on the last day of each interest period falling up to 6 months after the relevant drawdown date. The principal terms of the Facility Agreement are described below.
(i) Interest rates and fees
Utilisations under the Facility Agreement will bear interest for each interest period at a rate per annum equal to LIBOR (as defined in the Facility Agreement) plus a margin of 3 per cent. and any mandatory regulatory costs incurred by HSBC. If the Company fails to pay any amount on its due date under, among others, the Facility Agreement or the Overdraft (described below) or any of the first legal mortgages held by HSBC over the freehold properties owned by the Company inYeovil and Kendal and by JEB in Bedford (the "Properties"), further interest shall accrue on the overdue amount at a rate which is the sum of 2 per cent. above the rate which would otherwise have been payable. Such default interest shall be immediately payable by the Company on demand by HSBC.
A commitment fee is payable on the undrawn portion of the Facility at a rate of 1.5 per cent. per annum, payable quarterly in arrear. An up-front arrangement fee of £112,500 was paid to HSBC in return for it making the Facility available.
(ii) Covenants
The Facility Agreement requires the Company to observe certain undertakings, including undertakings relating to delivery of financial statements; shareholder and creditor documents; details of material litigation; compliance with laws; all insurances and authorisations being obtained and maintained; payment of taxes; and notification being provided to HSBC of any default.
The Facility Agreement requires that the Company and each of the Guarantors comply with certain negative covenants, including covenants restricting the creation of security or guarantees; disposals; mergers or corporate reconstructions; acquisitions and changes in business. Neither the Company nor the Guarantors may declare, pay or make any dividend, save (in respect of the Company) of such amount of its post tax profits in any financial year as exceed £300,000 where no default is continuing or would as a result occur.
In addition, the Facility Agreement originally required the Company to comply with four financial covenants:
(a) a loan to value covenant which required that the ratio expressed as a percentage of aggregate loans outstanding under the Facility to the most recent market value of the properties (including the Properties) owned by the Group may not exceed at any time 75 per cent.;
These financial covenants were to be tested by HSBC as at 30 April and 31 October in each year.
(iii) Maturity
The Facility was originally to be repaid in full by 31 August 2012 (since extended to 31 October 2012) but will cease to be available from one month prior to that date.
(iv) Prepayment
The Facility is required to be prepaid in full immediately upon the occurrence of certain events, including a change of control (as defined in the Facility Agreement) of either the Company or a Guarantor. Subject to an indemnity for broken funding costs, the Company may voluntarily prepay amounts outstanding under the Facility Agreement, without penalty or premium (except for certain break costs), in whole or in part, in minimum amounts of £100,000 together with accrued interest, upon not less than five business days' prior notice to HSBC. Any prepayment shall be made with accrued interest on the amount prepaid.
(v) Events of default
The Facility Agreement contains certain customary events of default which may trigger immediate cancellation and repayment of the Facility, including events relating to failure to pay; misrepresentation; cross-default; breach of certain undertakings; breach of any of the financial covenants; insolvency and insolvency proceedings; material litigation; material adverse change and change of control.
(vi) Facility amendment
In consideration of the Company agreeing to pay an arrangement fee of £40,000 on the earlier of 31 August 2011 and Completion, the Facility Agreement was further amended by an agreement dated 1 April 2011 between HSBC and the Company to the effect that:
accountants to conduct a full independent business review on the Group (or, as the case may be, the Enlarged Group);
On 2 September 2010, the Company and JEB entered into a collective facility agreement with HSBC for the provision by it of an overdraft facility of £112,000, a forward exchange contracts and currency option of US\$10,000 and an engagements facility of £516,000 sufficient to allow HSBC to provide a guarantee in an equivalent amount (in respect of which it was indemnified by JEB) to HSBC Merchant Services LLP in relation to the provision by it of credit card processing services (the "Overdraft Facility").
An up-front arrangement fee of £1,120 was paid to HSBC in return for it making the Overdraft Facility available. The Overdraft Facility is secured in the same manner as the Facility Agreement as described in paragraph 12.1(a)(i) above. Utilisations under the Overdraft Facility bear interest at a rate of up to 3 per cent. per annum above the prevailing Bank of England base rate or, in respect of multi-currency drawings, above HSBC's relevant prevailing currency base rate, payable quarterly in arrear. The Overdraft Facility was made available by HSBC on its customary standard terms and is repayable on demand but, subject to this, has a review date of July 2011.
(c) Pensions guarantee
Under the terms of a deed of guarantee (the "Guarantee") dated 3 July 2009 between the Company, BES Trustees Plc and the individual trustees of the Beale pension scheme (together, the "Trustees"), to the extent that JEB is in default of its payment obligations thereunder, Beale guarantees to pay, immediately on demand by the Trustees, and fully indemnifies the Trustees against any loss or liability suffered by them which relates to the present and future obligations and liabilities of JEB to make payments to the scheme up to a maximum amount of £6.0 million in aggregate.
All payments made by the Company must be made without set-off or counterclaim and it must also make all payments due under the Guarantee without any tax deduction, unless required by law.
The Directors consider the likelihood of default by JEB to be remote, and accordingly assessed the fair value of the Guarantee as at 30 October 2010 to be £500,000.
Under the terms of a sale and purchase agreement dated 3 June 2010 (the "Hexham Agreement"), Vergo Retail Limited (in administration) ("Vergo") and its administrators (the "Administrators") sold and JEB acquired certain of the business and fixed assets (the "Hexham Business") comprising shop fittings, fixtures, furniture, office equipment and information technology infrastructure, contracts, goodwill, stock in trade, inventory and stores, forward orders and cash floats in the Hexham department store, ownership of which transferred to JEB on 4 June 2010. Beale guaranteed the obligations of JEB under the Hexham Agreement. Existing employees of the Hexham Business also transferred to JEB on completion of the purchase.
The aggregate consideration paid by JEB on completion of the acquisition of the Hexham Business was £250,000, funded entirely from JEB's existing cash resources. JEB occupies the Hexham store under the terms of a lease granted by the landlord on 1 August 2010 for a term of 15 years excluded from security of tenure.
On completion, Beale received a payment from the landlord of £250,000 by way of a reverse premium and a further £250,000 was received on 1 April 2011.
As the acquisition of the Hexham store was made by JEB from an insolvent company, as is customary, neither Vergo nor the Administrators gave any representations, warranties or indemnities to JEB in respect of the sale of the Hexham Business. Accordingly, under the Hexham Agreement, JEB acknowledges that neither Vergo nor the Administrators will incur any liability to it by reason of any fault or defect in all or any of the assets acquired or any breach of the obligations of Vergo impliedly arising under statute.
As is also customary, JEB agreed to indemnify Vergo and the Administrators against any loss incurred by either of them which arises as a result, inter alia, of JEB's use of any of the assets acquired pursuant to the Hexham Agreement; its use or possession of any of the information technology or intellectual property transferred to it; any claim brought by any person in relation to JEB's use of the name "Robbs of Hexham"; any breach by JEB of the Data Protection Act 1998; any failure by JEB to obtain and maintain the correct licences in respect of the sale or consumption of alcohol at the Hexham store premises; and any breach caused by JEB under any assumed supply contract, customer contract or concession agreement or in relation to its treatment of concession stock or any stock held subject to a reservation of title arrangement.
Under the terms of a sale and purchase agreement dated 5 August 2010 (as amended on 3 September 2010) (the "Rochdale Agreement"), ARCS sold and JEB acquired the business and fixed assets (the "Rochdale Business") (comprising shop fittings, fixtures, furniture and machinery and office equipment), contracts, goodwill (excluding the name "Westgate Department Store" and its logo, branding and stationery), stock in trade, inventory and stores, forward orders and cash floats in the Westgate department store in Rochdale. Existing employees of the Rochdale Business also transferred to JEB on completion.
Following the satisfaction of various conditions contained in the Rochdale Agreement, completion of the purchase of the Rochdale Business occurred on 5 September 2010. The aggregate consideration paid by JEB in relation to the acquisition of the Rochdale Business was £153,000 (principally in respect of stock). The Rochdale Acquisition was funded entirely from JEB's existing cash resources.
JEB occupies the Rochdale store under the terms of two sub-leases granted by Co-Operative Group Limited for a period of 25 years from 5 September 2010 subject to a tenant's right to terminate on the fifteenth anniversary of commencement of the term on not less than nine months' notice in writing. In addition, JEB was paid a lease incentive of £1.0 million on completion with the landlord agreeing to underwrite rent, insurance, service charge and business rates payable in respect of the property up to a value of £1.7 million.
ARCS gave certain warranties and indemnities to JEB in respect of the Rochdale Business customary (subject to normal limitations) for a transaction of this nature. JEB is able to bring claims for breach of any warranty for a period of up to two years following the date of completion. The aggregate liability of ARCS under the warranties is £250,000.
ARCS agreed not to carry on or be engaged, concerned or interested in the ownership, operation, trading or management of any retail department store or similar business within a radius of 20 miles from the Rochdale store for a period of 5 years from completion. In addition, ARCS agreed for a period of two years from completion not to induce any supplier of goods or services to the Rochdale Business to cease to supply, or to restrict or vary its terms of supply, or without the prior written agreement of JEB, to employ or engage any employee of the Rochdale Business having a base salary of £25,000 per annum or more. ARCS continues to operate an in store furniture concession at the Rochdale store.
The Rochdale Agreement provides that, in the event any restructuring of the Rochdale Business is required following completion, ARCS will indemnify JEB in respect of any obligation to make redundancy and notice payments and any pension contributions to any of the employees associated with up to three separate restructuring exercises commenced or announced by JEB in relation to the Rochdale Business and some or all of those employees, on or before the date falling within 18 months from completion.
Under the terms of an agreement dated 12 October 2010, ARCS and JEB agreed certain key provisions in relation to the joint buying of goods in China and Hong Kong for resale by ARCS and JEB in their respective stores (the "Buying Agreement").
Under the terms of the Buying Agreement, ARCS was given responsibility for raising and making payment for orders delivered (pursuant to the requirements of both parties), liaising with suppliers (to ensure the smooth progress of orders) and arranging shipping, insurance, customs clearance, payment of duty (if applicable), quality control costs and the content of shipping containers. The parties agreed that JEB would take responsibility for the design of all packaging and labelling on products ordered. JEB was also permitted to recommend a retail price for all products purchased pursuant to the Buying Agreement, however neither party is obliged to follow this recommendation.
On delivery of any stock to it, ARCS is permitted four days in which to pick and repack all goods delivered for onward shipping to JEB's individual stores before invoicing it for the cost of goods delivered for payment within seven working days. The parties were also required to agree a breakdown and allocation of costs for freight, insurance, customs duty, quality control, agent's costs (if applicable) and foreign exchange payments.
In addition, as consideration for the services provided by ARCS under the agreement, JEB agreed to pay ARCS a fee equivalent to 7 per cent. of all goods purchased by it. Onward delivery charge by night freight was to be included in this percentage, which may be varied by the agreement of both parties to meet cost recovery by ARCS.
Under the terms of an agreement which took effect on 1 February 2011 between JEB and ARCS (the "Outsourcing Agreement"), ARCS agreed to transfer all its buying functions associated with the Westgate department stores (excluding those in respect of furniture, electrical items and concessions) and any employees who worked previously in ARCS' buying teams to JEB. The Outsourcing Agreement will operate until Completion or until the Acquisition Agreement is otherwise terminated.
Under the Outsourcing Agreement, ARCS fully indemnifies JEB in relation to all additional employment costs incurred by it during the operation of the agreement and all costs (if any) associated with the giving by JEB of any notice period and the making by JEB of any redundancies (whether in respect of the JEB buying team employees or the ARCS buying team employees whose employment was transferred to JEB) which result from Completion or termination of the Acquisition Agreement.
In consideration of the performance by JEB of its obligations under the Outsourcing Agreement, ARCS also agreed to pay JEB a consultancy fee based on certain additional employment costs incurred by it and a fixed monthly management fee of £10,000.
Under the terms of the Outsourcing Agreement, ARCS was to remain responsible for all store layouts, buying team administration functions, marketing, stock management and supplier and concession payments. ARCS was also required to provide to JEB such office space as may be required by it at no cost; any information required by the buying team of JEB and any access to the Target Stores reasonably required by JEB to properly perform its functions under the Outsourcing Agreement.
ARCS has not, in respect of the Target Stores, entered into any contract (other than contracts entered into in the ordinary course of business) within the two years immediately preceding the date of this document which is or may be material or at any time which contains provisions under which the Business has any obligation or entitlement which is material to it as at the date of this document and which, in either case, will transfer to JEB under the terms of the Acquisition Agreement.
| Property | Tenure | Approximate trading square footage (if applicable) |
Expiry date | Use |
|---|---|---|---|---|
| The Granville Chambers 21 Richmond Hill Bournemouth BH2 6BJ |
Leasehold | N/A | 31 December 2017 | Head office |
| 545 Wallisdown Road, Poole BH12 5JB |
Leasehold | N/A | 1 March 2013 | Warehouse |
| OPP 44, Central Street, Bolton BL1 2AB |
Leasehold | N/A | N/A | Warehouse |
| Harpur Street/ Silver Street, Bedford MK40 1PE |
Freehold Part leasehold |
25,000 | N/A 28 September 2014 |
Department store |
| Old Christchurch Road, Bournemouth BH1 1LJ |
Leasehold | 79,000 | 20 January 2023 | Department store |
| The Forum, Horsham RH12 1PQ |
Leasehold | 33,000 | 31 May 2031 | Department store |
| Finkle Street, Kendal LA9 4AL |
Freehold Part leasehold |
24,000 | N/A 3 February 2021 |
Department store |
| Dolphin Centre, Poole BH15 1SQ |
Leasehold | 44,000 | 15 March 2067 | Department store |
| Angel Centre, Tonbridge TN9 1SF |
Leasehold | 37,000 | 23 June 2031 | Department store |
| The Brooks, Winchester SO23 8TL |
Leasehold | 19,000 | 21 January 2021 | Department store |
| South Street, Worthing BN11 3AN |
Leasehold | 56,000 | 10 March 2027 | Department store |
| Deansgate, Bolton BL1 1HE |
Leasehold | 55,000 | 10 March 2021/ 6 November 2029 |
Department store |
| Lord Square, Rochdale OL16 1ED |
Leasehold | 30,000 | 4 September 2035 | Department store |
| Property | Tenure | Approximate trading square footage (if applicable) |
Expiry date | Use |
|---|---|---|---|---|
| Lord Street, Southport PR8 1NY |
Leasehold | 34,000 | 28 September 2025 | Department store |
| High Street, Yeovil BA20 1RU |
Freehold Part leasehold |
54,000 | N/A 23 September 2020/ 24 March 2030 |
Department store |
| Fore Street, Hexham NE46 1NA |
Leasehold | 65,000 | 1 August 2025 | Department store |
Note:
Total rents payable in the year ended 30 October 2010 on the above properties amounted to approximately £4.19 million. Rents receivable in the year ended 30 October 2010 from these properties were £145,000.
The Group operates, through its main trading subsidiary JEB, two defined benefit type pension schemes, being the Beale pension scheme (the "Beale Scheme") and the Denners pension scheme (the "Denners Scheme"), the assets of each of which are held in separate trustee-administered funds and are independent of the Group's finances.
The Denners Scheme was closed to new entrants and future accrual on 30 June 1999 following the acquisition by the Group of Denners Limited. The employees of Denners Limited were offered the opportunity to transfer into the Beale Scheme with effect from 1 July 1999 and certain employees opted to do so. The Beale Scheme was then closed for future service accrual from 30 April 2009, having been closed to new entrants on 6 April 1997.
The Beale Scheme has two sections, one providing benefits on a defined benefit basis with a money purchase underpin and the other on a defined contribution basis. New entrants to the scheme after 6 April 1997 and final salary actives who ceased accruing pension in the final salary section as of 30 April 2009 were invited to join the defined contribution section from that date.
The closure of the Beale Scheme and the Denners Scheme to future accrual does not affect the pensions of those who retired, or the deferred benefits of those who left service or opted out, before 1 May 2009 and 1 July 1999 respectively. The Group offers all new qualifying employees the opportunity to join the defined contribution section of the Beale Scheme.
The Group agreed to contribute approximately £1.55 million per annum from 1 May 2010 to fund past service benefits in the Beale Scheme and to contribute £6,000 per calendar month from 1 November 2006 to fund past service benefits in the Denners Scheme. From 1 March 2011, no further contributions are payable in relation to the Denners Scheme. The estimated amount of contributions expected to be paid to the Beale Scheme and the Denners Scheme during the year ending 29 October 2011 in respect of final salary benefits is £1,574,004. The Group has also funded all administrative expenses in relation to the Denners Scheme and the Pension Protection Fund levy expenses in relation to the Beale Scheme. Group contributions to the defined contribution section of the Beale Scheme totalled £212,000 for the year ended 30 October 2010.
The pension cost of the Beale Scheme and the Denners Scheme is assessed every three years in accordance with the advice of a qualified actuary. The most recent triennial valuation of the Beale Scheme for funding purposes was performed as at 3 November 2007 and has been updated and measured using the projected unit credit method at each relevant financial year end for the purposes of IAS 19 "Employee Benefits" (as revised in December 2004) by Mercer, a professionally qualified independent consulting actuary. The Beale Scheme was assessed to have an IAS 19 deficit of £2.90 million as at the year ended 30 October 2010. Under the current schedule of contributions and recovery plan agreed with the trustees of the Beale Scheme, JEB aims to eliminate the current deficit by February 2016. The Group monitors funding levels annually and the funding schedule is reviewed between the Group and the trustees every three years, based on actuarial valuations. The next triennial valuation will be drawn up as at 30 October 2010. Agreement as to that valuation and a new schedule of contributions is required to be reached by January 2012. The Group considers that the contribution rates agreed with the trustees are sufficient to eliminate the current deficit over the agreed period.
The most recent triennial valuation of the Denners Scheme for funding purposes was performed as at 1 November 2008 and has been updated and measured using the projected unit credit method at each relevant financial year end for the purposes of IAS 19 "Employee Benefits" (as revised in December 2004) by Legal & General, a professionally qualified independent consulting actuary. The Denners Scheme was assessed to have an IAS 19 surplus of £0.40 million as at the year ended 30 October 2010. Under the current schedule of contributions and recovery plan agreed with the trustees of the Denners Scheme, JEB eliminated the current deficit in February 2011 and under the terms of the most recent triennial valuation, no further contributions are due. The Group monitors funding levels annually and the funding schedule is reviewed between the Group and the trustees every three years, based on actuarial valuations. The next triennial valuation will be drawn up as at 29 October 2011. Agreement as to that valuation and a new schedule of contributions (if any) is required to be reached by January 2013. The Group considers that the contribution rates agreed with the trustees are sufficient to maintain an appropriate funding position over the agreed period.
Because of changing market and economic conditions, the expenses and liabilities actually arising under the Beale Scheme and the Denners Scheme in the future may differ materially from the estimates made on the basis of these actuarial assumptions. Declining returns on equity markets and the markets for fixed-income instruments could necessitate additional contributions to the schemes in order to cover future pension obligations. Higher or lower withdrawal rates or longer or shorter lives of participants may have an impact on the amount of pension income or expense recorded in the future.
The Beale Scheme has approximately 261 deferred and 426 pensioner members. The Denners Scheme has approximately 49 deferred and 47 pensioner members. The defined contribution section of the Beale Scheme has 256 active members and 208 deferred members.
17.1. The Company is of the opinion that, after taking into account the bank facilities available to it, the proceeds of the Term Loan and the issue by it of the Preference Shares and the £2.3 million cash contribution payable to the Group by ARCS on Completion under the Acquisition Agreement, the Enlarged Group has sufficient working capital for its present requirements, that is, for at least 12 months from the date of this document.
Preference Shares and will, under the provisions of the Term Loan Agreement, be restricted from paying interim or final dividends on the Ordinary Shares prior to it having made in any particular year all repayments of the Term Loan required to be made by it pursuant to the Term Loan Agreement and having paid all dividends due on, and made all redemptions of, the Preference Shares provided for under the New Articles. The payment of any final dividend will in any event be subject to the approval of Shareholders at a general meeting.
Under current UK tax law, the Company will not be required to withhold tax at source from any dividend payments it may make. Liability to tax on dividends will depend on the individual circumstances of the Shareholder.
21.3. Save for the Proposed Acquisition, there are no investments in progress which are significant to the Group.
21.4. Shore Capital has given and has not withdrawn its written consent to the issue of this document with the inclusion herein of references to its name in the form and context in which they appear.
Copies of the following documents will be available for inspection during normal business hours on any weekday (Saturday, Sunday and public holidays excepted) at the registered office of the Company, which is located at The Granville Chambers, 21 Richmond Hill, Bournemouth, Dorset BH2 6BJ and at the offices of Blake Lapthorn, which are located at Watchmaker Court, 33 St John's Lane, London EC1M 4DB, from the date of this document to and including the date of Readmission:
A copy of this document may be inspected at the Financial Services Authority's National Storage Mechanism located at www.hemscott.com/nsm.do and copies are also available for collection free of charge from the offices of Shore Capital.
Dated: 20 April 2011
The following documentation, which was sent to Shareholders at the relevant time and/or is available for inspection in accordance with paragraph 22 of Part X of this document, contains information which is relevant to the Proposed Acquisition. This information has been extracted without material adjustment.
The tables below set out the sections of those documents which contain information incorporated by reference into, and forming part of, this document. Only information contained in those parts of the documents identified in the list below is incorporated into and forms part of this document. Information in other parts of those documents is either covered elsewhere in this document or is not relevant to a prospective investor's or Shareholder's assessment of the assets and liabilities, financial position, profit and losses and prospects of the Company and of the rights attaching to the Ordinary Shares. Shareholders and prospective investors should, therefore, ignore cross references in those parts of the documents listed below to parts of the documents not so listed.
| Page number in |
|---|
| reference document |
| 16-17 |
| 18 |
| 21 |
| 19 |
| 20 |
| 22 |
| 23 |
| 24-53 |
| 54-58 |
| Page number in | |
|---|---|
| Information incorporated by reference | reference document |
| Independent Auditors' Report | 17 |
| Consolidated Income Statement | 19 |
| Consolidated Balance Sheet | 20 |
| Company Balance Sheet | 21 |
| Consolidated Cash Flow Statement | 23 |
| Company Cash Flow Statement | 24 |
| Shareholders' Equity – Note 21 | 22 |
| Notes to the Financial Statements | 25-49 |
| Board Report on Directors' Remuneration | 50-54 |
| Page number in | |
|---|---|
| Information incorporated by reference | reference document |
| Independent Auditors' Report | 16-17 |
| Consolidated Income Statement | 22 |
| Consolidated Balance Sheet | 23 |
| Company Balance Sheet | 24 |
| Consolidated Cash Flow Statement | 26 |
| Company Cash Flow Statement | 26 |
| Shareholders' Funds – Note 20 | 46 |
| Notes to the Financial Statements | 27-53 |
| Board Report on Directors' Remuneration | 54-57 |
Any information that is itself incorporated by reference in the above documents is not incorporated by reference in this document. These documents may be inspected at the Financial Services Authority's National Storage Mechanism located at www.hemscott.com/nsm.do.
(Incorporated and registered in England and Wales with registered number 2755125)
NOTICE is hereby given that an Extraordinary General Meeting of Beale PLC (the "Company") will be held at the Norfolk Royale Hotel, Richmond Hill, Bournemouth BH2 6EN at 11.00 a.m. on 17 May 2011 for the purpose of considering and, if thought fit, passing the following resolutions of which resolutions 1 to 3 (inclusive) will be proposed as ordinary resolutions and resolutions 4 and 5 will be proposed as special resolutions:
Dated: 20 April 2011
By order of the Board
Company Secretary
The Granville Chambers 21 Richmond Hill Bournemouth BH2 6BJ
7.1 answering the question would interfere unduly with the preparation for the meeting or involve the disclosure of confidential information;
The following definitions apply throughout this Prospectus unless the context requires otherwise:
| "1985 Act" | the Companies Act 1985, as amended and for the time being in force |
|---|---|
| "2006 Act" | the Companies Act 2006, as amended |
| "Acquisition Agreement" | the conditional agreement to effect the Proposed Acquisition dated 5 April 2011 between ARCS, Westgate, JEB and the Company, a summary of which is set out in Part IX of this document |
| "ARCS" | Anglia Regional Co-operative Society Limited |
| "ARCS Group" | ARCS and its subsidiaries and any holding companies as at the date of this document |
| "Audit Committee" | the audit committee of the Board |
| "Beale" or "Company" | Beale PLC |
| "Beale Group" or "Group" | the Company and its subsidiaries as at the date of this document |
| "Business" | the department store businesses operated by ARCS from the Target Stores and a related warehouse operation |
| "business day" | any day, other than a Saturday or a Sunday, on which banks are open for general business in London |
| "Capita Registrars" or "Registrar" | Capita Registrars Limited |
| "certificated" or "in certificated form" |
a share or other security, title to which is recorded in the relevant register of the share or security as being held in certificated form (that is, not in CREST) |
| "City Code" | the UK City Code on Takeovers and Mergers |
| "Completion" | completion of the Proposed Acquisition in accordance with the Acquisition Agreement on or about 8.30 a.m. on 22 May 2011 or, if the condition to completion contained therein has not been satisfied on or before 20 May 2011, such later date (if any) being the first Sunday falling after satisfaction thereof |
| "Completion Date" | the date on which Completion takes place |
| "CREST" | the relevant system (as defined in the CREST Regulations) for the paperless settlement of share transfers and the holding of shares in uncertificated form in respect of which Euroclear UK & Ireland Limited is the operator (as defined in the CREST Regulations) |
| "CREST Regulations" or "Regulations" |
the Uncertificated Securities Regulations 2001 (S.I. 2001/3755), as amended from time to time |
| "Daily Official List" | the daily record setting out the prices of all trades in shares and other securities conducted on the London Stock Exchange |
| "Disclosure and Transparency Rules" or "DTRs" |
the rules relating to the disclosure of information made in accordance with section 73A(3) of FSMA |
|---|---|
| "EEA" | the European Economic Area |
| "Effective Date" | the second business day immediately following Completion which, subject to the satisfaction of certain conditions, is expected to occur on 24 May 2011 |
| "Enlarged Group" | the Group as enlarged by the Proposed Acquisition |
| "EPoS" | an electronic point of sale till system used by retailers |
| "Existing Articles" | the existing articles of association of the Company adopted on 3 March 1995 |
| "Extraordinary General Meeting" or "EGM" |
the extraordinary general meeting of Shareholders convened for 11.00 a.m. on 17 May 2011 to consider and, if thought fit, approve the Resolutions or any adjournment thereof |
| "Form of Proxy" | the form of proxy accompanying this document for use in connection with the Extraordinary General Meeting |
| "FSA" | the United Kingdom Financial Services Authority |
| "FSMA" | the Financial Services and Markets Act 2000 (as amended) |
| "Governance Code" | the UK Corporate Governance Code published in June 2010 by the Financial Reporting Council as amended from time to time |
| "HMRC" | HM Revenue & Customs |
| "HSBC" | HSBC Bank plc |
| "IFRS" | International Financial Reporting Standards |
| "Introduction Agreement" | the introduction agreement dated 20 April 2011 between the Company and Shore Capital, a summary of which is set out in paragraph 12 of Part X of this document |
| "ISIN" | the international code for a listed security |
| "IT Services Agreement" | an agreement for the provision of various IT support services to be entered into between ARCS and JEB on Completion, a summary of which is set out in Part IX of this document |
| "JEB" | J E Beale Public Limited Company, the principal trading subsidiary of the Company |
| "Listing Rules" | the rules and regulations made by the UKLA pursuant to Part IV of FSMA, as amended from time to time |
| "London Stock Exchange" | London Stock Exchange plc |
| "NED Agreement" | the agreement, a summary of which is set out in Part IX of this document, to be entered into between ARCS and Beale on Completion pursuant to which ARCS will (subject to the terms thereof) be entitled to appoint a director to the Board and to the board of directors of JEB |
| "New Articles" | the new articles of association of the Company proposed to be adopted at the Extraordinary General Meeting, a summary of which is set out in paragraph 5 of Part X of this document |
|---|---|
| "Nomination Committee" | the nomination committee of the Board |
| "Notice" or "Notice of Extraordinary General Meeting" |
the notice convening the Extraordinary General Meeting set out on pages 140 to 142 of this document |
| "Official List" | the official list maintained by the UKLA pursuant to Part IV of FSMA |
| "Ordinary Shares" | ordinary shares of 5 pence each in the capital of the Company |
| "Performance Share Plan" | the Beale PLC Performance Share Plan 2011, a summary of which is set out in paragraph 6.2 of Part X of this document |
| "Preference Shares" | unlisted redeemable preference shares of £1.00 each in the capital of the Company, such shares having the rights and being subject to the restrictions summarised in paragraph 4.5 of Part X of this document and set out in the New Articles |
| "Proposed Acquisition" | the proposed acquisition by JEB of the Business in accordance with the terms set out in the Acquisition Agreement |
| "Prospectus" | this document dated 20 April 2011, comprising a combined shareholder circular and prospectus relating to the Company, the Enlarged Group and the relisting of the Ordinary Shares on the Official List (together with any supplements or amendments thereto) |
| "Prospectus Rules" | the rules made for the purposes of Part VI of FSMA relating to offers of securities to the public and the admission of securities to trading on a regulated market |
| "Readmission" | readmission by the UKLA of the Ordinary Shares to listing on the Official List and to trading on the London Stock Exchange becoming effective |
| "Registrar of Companies" | the Registrar of Companies in England and Wales, within the meaning of the 2006 Act |
| "Regulatory Information Service" | a regulatory information service approved by the FSA and that is on the list of regulatory information service providers maintained by it |
| "Remuneration Committee" | the remuneration committee of the Board |
| "Resolutions" | the ordinary and special resolutions to be proposed at the Extraordinary General Meeting, which are set out in the Notice of Extraordinary General Meeting and "Resolution" means any one of them |
| "Shareholders" | holders of Ordinary Shares and "Shareholder" means any one of them |
| "Shore Capital" or "SCC" | Shore Capital and Corporate Limited, sponsor and financial adviser to the Company |
| "Shore Capital Stockbrokers" | Shore Capital Stockbrokers Limited |
| "Target Stores" | the 19 department store businesses located in Abingdon, Beccles, Bishop Auckland, Chipping Norton, Cinderford, Diss, Harrogate, Keighley, Kings Lynn, Lowestoft, Mansfield, Peterborough, Redcar, Saffron Walden, Spalding, St. Neots, Skegness, Skipton and Wisbech proposed to be acquired by JEB from ARCS pursuant to the Acquisition Agreement |
|---|---|
| "Term Loan" | the unsecured £2.5 million term loan to be provided by ARCS to JEB |
| "Term Loan Agreement" | the agreement, a summary of which is set out in Part IX of this document, dated 5 April 2011 between ARCS, JEB and the Company pursuant to which the Term Loan will be made available |
| "UK" or "United Kingdom" | the United Kingdom of Great Britain and Northern Ireland |
| "UK Listing Authority" or "UKLA" | the FSA acting in its capacity as the competent authority for the purposes of Part VI of FSMA |
| "uncertificated" or "in uncertificated form" |
a share or other security, title to which is recorded in the relevant register of the share or security as being held in uncertificated form, in CREST, and title to which, by virtue of the CREST Regulations, may be transferred by means of CREST |
| "US Securities Act" | the US Securities Act 1933, as amended and the rules and regulations promulgated thereunder |
| "Westgate" | Westgate Properties (Anglia) Limited, a subsidiary of ARCS |
All references to legislation in this document are to the legislation of England and Wales unless the contrary is indicated. Any reference to any provision of any legislation shall include any amendment, modification, re-enactment or extension thereof.
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