Coral Products Regulatory News (CRU)

14 Aug 2007 12:10

Coral Products PLC14 August 2007 Press release Coral Products PLC Sale and leaseback of property For immediate release 14 August 2007 The board of Coral Products plc (the "Company") announces that the Company hastoday entered into a conditional agreement to sell the freehold interest in itsproperty at North Florida Road, Haydock Industrial Estate, Haydock, Merseyside,(the 'Property' and the 'Disposal'). The Company will concurrently enter into a new lease, enabling the Company to continue to operate from most of theProperty. Under this proposal, the Company will sell the Property for cash considerationof £3 million to the purchaser of which £250,000 will be held in escrow as arental deposit for the duration of the Company's occupation of the Property. In view of the size of the Disposal relative to the market capitalisation of theCompany, the Disposal is conditional upon the approval of shareholders. Thisapproval will be sought at an Extraordinary General Meeting to be convenedshortly. Current trading and future prospectsThe Directors issued an unaudited trading update to shareholders on 23rd March2007, based on management accounts. It included the following text: "Trading hasremained difficult and the improvement we saw towards the end of 2006 has notbeen maintained in 2007. Volumes in media based packaging have reduced andmargins have continued to be affected by discounted selling prices and increasesto the cost base. Consequently the trading account for the year to 30th April2007 will result in a loss. We are presently moving into other markets where weare of the opinion that the future may be more predictable". The media markets continue to be under strain with lower margins resulting frommarket over-capacity. As a result, the Company is developing and seeking out newrelationships in other markets and has a clear strategy for moving forward. Since the publication of the above trading statement in March 2007 raw materialprices (mainly plastics) have continued to rise. However there are indicationsthat some raw material prices may stabilise. The Company has been revising itsselling prices upwards in response to increased raw material costs andanticipates that this will be accepted by its customers. Furthermore the Companyhas obtained new contracts for storage boxes and has developed a sub-contractingrelationship with a local company both of which are expected to increase itssales. These new operations are at better margins than its existing mediaproducts. The future prospects look somewhat better and the Board expects thatby the end of this financial year it will have a better outlook. The change in emphasis of the business is expected to lead to increases inworking capital requirements as demand builds. Background to and reasons for the DisposalThe recent trading losses have reduced the Company's cash resources andborrowing capacity. This led the Board to consider the Company's ability toservice its debts and finance its working capital requirements. Its financialprojections indicate that the working capital needs of the business could exceedits present facilities by the end of September 2007. Rather than remainingdependent on the continuing availability of bank overdrafts which are repayableon demand, the Company sought alternative finance, resulting in offers ofinvoice discounting facilities being received, one of which will be accepted.It is the nature of invoice discounting that the facility fluctuates in linewith business activity and the use of such facilities does not give the Companyas much freedom of action to develop into new markets as would be the case if itsold the Property and had surplus cash balances to employ as the board sees fit.The decision to sell the Property would, if approved, lead to the repayment ofall the Company's bank borrowing and leave it with a cash surplus. At the sametime a leaseback of the production facility and main warehouse will enable it tocontinue its operations. The Company already rents a warehouse facility, whichhas recently been empty, close to the factory and will have enough storage spaceto manage without two storage areas which will not be leased back. The Disposal is expected to generate initial gross cash proceeds of £3 million.After estimated transaction costs and the retention of a rental deposit, the netcash proceeds are expected to be approximately £2.6 million. No tax is expectedto be payable as a result of the Disposal. In the context of the above, the Board gave consideration to the offer by HXRUKII Ltd, a wholly owned subsidiary of Highcross Limited, to purchase the Propertyfor £3 million. Details of the transaction.The Sale and Purchase Agreement with HXRUK II Ltd for the Disposal of theProperty was arrived at on a willing buyer willing seller basis after theProperty was put on the open market. This Agreement was conditional upon aleaseback agreement enabling the Company to have occupancy for another 6 years.The Property will be sold for a consideration of £3 million, exclusive of VAT.An amount of £2.75 million will be paid in full in cash at completion with theremaining £250,000 held as a rental deposit to be held in escrow for theduration of the occupation. The main warehouse and factory premises are to be leased back to Coral Productsplc on a 6 year lease at an exclusive rental of £270,000 per annum. The lease isto provide for a tenant only break option at the end of the third year of thelease, subject to a break penalty of £135,000. The lease will be held on fullyrepairing and insuring terms, subject to a schedule of condition. The lease isto be contracted out of the security of tenure provisions of the Landlord andTenant Act 1954 (Part II). Rights of way have been agreed for the period of thelease. The Property currently occupied is 110,769 square feet in total size and theCompany will lease-back 90,630 square feet of this. Information on the PropertyThe property is a 4.59 acre site situated next to the A580 which connectsManchester and Liverpool. It is situated is within 1.5 miles of the M6. Theproperty consists of a production plant with warehouse and offices combinedtogether with two further warehouses at separate buildings. The Companycurrently owns the freehold title to the property. The gross and net book value of the property as at 30th April 2006, the date ofthe last audited financial statements, was £2,510,000 and £2,127,000 respectively. Financial effects of the Disposal and use of proceedsThe Property had an unaudited book value of £2,116,153 as at 31st October 2006(being the date of the date of the most recently published balance sheet). Theconsideration payable under the terms of the Sale and Purchase Agreement issupported by an independent valuation of the Property dated 1 August 2007 on thebasis of an arms' length sale between a willing buyer and a willing seller at£2.94million. If approved, the Disposal for gross proceeds of £3 million would result in again (by reference to the book value as at 31 October 2006) of approximately£734,000 after providing approximately £150,000 for professional costs relatingto the Disposal. The net assets of the Company are therefore expected to increase by £734,000 asa result of the Disposal. The Company does not generate any income from theproperty. The rent payable of £270,000 per annum will be partly offset by thereductions in interest payments of approximately £160,000 and the receipt ofinterest on cash deposits, until such time as the cash is employed in thebusiness. No additional warehouse premises are required as the Company alreadyleases a building which is presently empty. The initial gross cash proceeds of the Sale are expected to be £3 million, fromwhich estimated transaction costs of around £150,000 will be payable. The netcash received after providing a rental deposit of £250,000 and payment of thefirst quarter's rent of approximately £67,500 (or less) are expected to amountto approximately £2.53 million. Approximately £1.8 million will be applied torepay borrowings and the balance of approximately £732,000 will be held ondeposit until required as additional working capital. Quote from Chairman:"In light of the present circumstances, the Directors confirm this disposal tobe in the best interests of the Company and should provide a better platform forits future development". This information is provided by RNS The company news service from the London Stock Exchange