Distil Regulatory News (DIS)

30 Aug 2007 07:01

Blavod Extreme Spirits PLC30 August 2007 Blavod Extreme Spirits PLC (the "Company") Proposed disposal of the business of Blavod Extreme Spirits USA, Inc. And Notice of EGM The Company announces that it has today posted a circular to shareholderssetting out a resolution to be passed at an Extraordinary General Meeting to beheld on 24 September 2007. The resolution concerns the proposed disposal ("theDisposal") of BES USA to Black Diamond Spirits, LLC ("the Buyer"), a companycontrolled by Jeff Hopmayer, the Company's Chief Executive Officer. On completion of the Disposal, the Company will receive gross cash proceeds ofUS$800,000. In addition, the Buyer will assume the liability for the amountsowed by BES USA under the Laurus Facility which as at 31 July 2007 totalledUS$3,200,000. The EGM is to be held at 11.00 am on 24 September 2007 at the offices of Maclay,Murray & Spens LLP, 12th Floor, One London Wall, London, EC2Y 5AB. To be valid,Proxy Forms must be returned to the Company's registrars no later than 11.00 amon 22 September 2007. Extracts of the text of the Chairman's letter contained within the circular areset out below. Definitions in this announcement shall bear the same meaning asthose in the circular to Shareholders. For further information, please contact: Blavod Extreme SpiritsColin Campbell (Non-executive Chairman) +33 6 8781 1362 Brewin Dolphin Securities (Nominated Adviser)Mark Brady/Alison Barrow 0845 270 8600 PROPOSED DISPOSAL OF THE BUSINESS OF BLAVOD EXTREME SPIRITS USA, INC. Introduction The Company announces today that its subsidiary, BES USA, has entered into anagreement to dispose of its US Business to Black Diamond Spirits, LLC, a companycontrolled by Jeff Hopmayer, the Company's Chief Executive Officer. As a resultof Mr Hopmayer's interest in the Disposal, it is a related party transactionwithin the meaning of the AIM Rules. Mr Hopmayer and the other US-basedDirectors (Messrs Falk and Levin) will resign following Completion. Mr Murphy,the Company's Finance Director, resigned with effect from yesterday on thesignature of the Disposal Agreement to pursue other interests. Mr Hopmayer hastaken no part in the Board's consideration of the terms of the Disposal for thepurposes of making a recommendation to Shareholders. In view of the size of the US Business in relation to the Company, the Disposalis conditional upon the approval of Shareholders, which will be sought at theExtraordinary General Meeting which is being convened for 11.00 am on 24September 2007, at the offices of Maclay, Murray & Spens LLP, 12th Floor, OneLondon Wall, London EC2Y 5AB. A notice of the EGM is set out at the end of thisdocument. On Completion of the Disposal, Blavod will receive gross cash proceeds ofUS$800,000. In addition the Buyer will assume the liability for the amounts owedby BES USA under the Laurus Facility which as at 31 July 2007 totalledUS$3,200,000. The principal terms of the Disposal are described in more detailin the paragraph below headed "Details of the Disposal". The purpose of this circular is to explain the background to and reasons for theDisposal and why your Board considers that it is in the best interests of theCompany and its Shareholders as a whole, and to recommend that Shareholders votein favour of the Disposal at the EGM. Background to and reasons for the Disposal The US Business was acquired on 20 January 2004 from Extreme Beverage CompanyLLC, and is based in Franklin, Tennessee. It carries out the marketing andselling of various spirits and wines in North America. As well as importingBlavod Black Vodka, the US Business also handles other products including: • Players Extreme flavoured vodkas and rums; • El Diamante del Cielo tequila; and • A portfolio of Italian wines from various regions. The El Diamante tequila business is a joint venture with Suntory InternationalCorporation, which was formed in August 2005 to develop a new range of premiumtequila, initially for the market in the USA. Each partner owns 50 per cent. ofthe equity of the joint venture, with Blavod's contribution being solely interms of intellectual property. The October 2005 launch in selected US citieswas well received and distribution is currently being expanded to the broader USmarket and exports to international markets will begin in the near future. The results of the US Business for the past two financial years are summarisedbelow:-------------------- ---------- -----------Year ended 31 March 2006 2007 (audited) (unaudited) £000 £000-------------------- ----------- -----------Sales 3,152 3,787-------------------- ----------- -----------Operating loss (1,902) (1,960)Share of loss of joint venture - (91)Interest payable (464) (508)-------------------- ----------- -----------Loss before taxation (2,396) (2,559)-------------------- ----------- ----------- The unaudited net assets of the US Business as at 31 March 2007 are summarisedbelow:---------------------- -----------As at 31 March 2007 (unaudited) £000---------------------- -----------Fixed assetsTangible assets 12Investment in joint venture 255---------------------- -----------Total fixed assets 267---------------------- -----------Current assetsStocks 762Debtors 787Cash 39---------------------- -----------Total current assets 1,588---------------------- ----------- Total assets 1,855---------------------- -----------LiabilitiesCreditors 1,287Amounts owed to joint ventures 255Amounts owed to Group companies 8,673---------------------- -----------Total liabilities 10,215---------------------- ----------- Net liabilities 8,360---------------------- ----------- This spring the Directors carried out a review of the US Business and its futureprospects. The review found that: • whilst sales continued to grow overall, the rate of increase of theCompany's own brands was slowing so that the growth was increasingly coming fromagency brand business; • gross margins were suffering erosion in the US market; • the Company's advertising and promotional spending behind the brandswas falling as a consequence of sales and margin erosion; • it had not been possible to reduce costs further, because of the needto maintain a strong sales force to support the brands; and • the US Business would require a considerable further capital injectionto finance growth of the current portfolio or acquire new brands to enhancefuture growth prospects as its existing resources were largely exhausted. The Directors concluded that the likelihood of the business growing into profitwithin an acceptable timescale was insufficient to justify asking shareholdersfor further capital. Having reviewed possible alternatives, including the sale or merger of theCompany, the Directors concluded that the Company as it is currently constitutedis not attractive as there are few synergies between its UK operations and theUS Business, with Blavod the only brand sold in both geographic markets. Themanagement of these two geographically diverse businesses within a single,AIM-quoted company has proved complex, cumbersome and costly. Most importantly,the US Business continues to lose money, while the UK is operating profitably ona monthly basis before allocation of central overheads. It was with this background that the Independent Directors received an offerfrom Mr Hopmayer to purchase the US Business, on the terms set out in thisdocument. If the Shareholders approve the Disposal, the turnover of the Companywill be approximately halved, but its ongoing losses almost entirely eliminated.Whilst the remaining business of the Company will be smaller the IndependentDirectors believe it will have the following attractive qualities: • sales across all major brands are growing in both the UK and exportmarkets run from the UK; • supportive suppliers, who have been consistently loyal in the past; • a significantly reduced and tightly monitored cost base; • a business with no significant debt; and • the ability to achieve profitability within an acceptable timescale. Following the Disposal the Independent Directors believe that the Company willbe in an improved position to widen its portfolio of brands and thereby buildturnover and a track record of developing small and mid-sized brands. Details of the Disposal The Disposal is to be effected by the sale by BES USA of the US Businesspursuant to the terms of the Disposal Agreement. The key terms of the DisposalAgreement are as follows: BES USA has conditionally agreed to sell all its business and assets to theBuyer for US$800,000 in cash. The obligations of the parties under the DisposalAgreement are conditional on the passing of the Resolution. The DisposalAgreement may be terminated if it has not become unconditional on or before 28September 2007. The Buyer has agreed to assume all known liabilities and continuing obligationsof BES USA as listed in the Disposal Agreement including the sums due to Laurusunder the Laurus Facility but excluding any liability to any employee of BES USAfor any period prior to Completion. The total amount outstanding under theLaurus Facility as at 31 July 2007 was US$3,200,000. The Disposal Agreementprovides that on Completion releases of the Company and its subsidiaries fromthe terms of the Laurus Facility and all guarantees and security given to Lauruspursuant to the facility (except for the option for Laurus to subscribe for2,250,000 new Ordinary Shares at a price of 18.48 pence per Ordinary Share) willbe delivered to the Company and BES USA. BES USA has given certain limited warranties to the Buyer under the DisposalAgreement confirming its due incorporation and ability to enter into theDisposal Agreement. BES USA has not given any warranties regarding the USBusiness itself. The Disposal Agreement also contains similar limited warranties by the Buyer infavour of BES USA. In addition, Mr Hopmayer has given certain warrantiesregarding the liabilities of the US Business and confirming that, to hisknowledge, there are no other assets or liabilities of BES USA other than thoseto be acquired or assumed by the Buyer or specifically reserved to BES USA underthe Disposal Agreement. The Disposal Agreement contains indemnities, covenants and undertakings by BESUSA and the Buyer customary for transactions similar to the Disposal. On completion of the Disposal, Mr Hopmayer will resign from the Board. Inaddition Mr Falk and Mr Levin will resign as they are both based in the USAwhereas the Company's operations will be refocused in the UK. Mr Banks and Iwill continue as Directors and it is proposed to re-appoint Richard Ambler tothe Board as Managing Director and to re-appoint Willie Phillips to the Board aspart-time Finance Director. The Board will also be seeking to appoint a furthernon-executive director when appropriate. Under a service agreement dated 15 February 2001, as amended, Mr Ambler willwork for the Company as Managing Director. The service agreement is terminableby the Company on 12 months' written notice or by Mr Ambler on 6 months' writtennotice. His salary is £98,000 per annum and is reviewed annually by the Board.Mr Ambler is entitled to an annual discretionary bonus together with benefitstotalling £15,000 per annum. It is proposed that Mr Phillips will enter into a consultancy agreement with theCompany to provide his services as a director for 6 days a month for a monthlyfee of £2,500 plus £500 per diem if his time commitment is more than 6 days amonth. The consultancy agreement will be terminable on 3 months' written noticeby either party. Use of the Disposal proceeds and financial impact of the Disposal The Disposal will generate gross proceeds of US$800,000 (representingapproximately £396,700 at the exchange rate prevailing at the day before thedate of this document), which will be returned to the Company's cash balances tosupport its remaining operations in the UK. The Independent Directors anticipatethat, after payment of the costs of the Disposal and of a number of outstandingdebts to the Company's advisers, the Company will have cash reserves somewhat inexcess of its Working Capital requirements. The board of directors will reviewthe future of BES USA following Completion. The Company intends to continue exporting Blavod vodka to the US Business forthe time-being following Completion on an "arms-length" basis although thelonger term basis for such trade will be subject to mutual consent andagreement. Current trading The Company intends to publish its statement of preliminary results for the yearended 31 March 2007 in late September. The Independent Directors expect thatthese results, which are currently unaudited and are subject to adjustment onaudit and consolidation, will show a slightly increased net operating lossbefore taxation of some £3,200,000 on turnover of approximately £7,000,000. In the first quarter of the current financial year these trends have continued.Sales in the USA were approximately £630,000, compared with approximately£790,000 in the UK, which is now operating profitably on a monthly basis beforeallocation of central overheads. Extraordinary General Meeting The EGM is to be held at 11.00 am on 24 September 2007 at the offices of Maclay,Murray & Spens LLP, 12th Floor, One London Wall, London, EC2Y 5AB. To be valid,Proxy Forms must be returned to the Company's registrars no later than 11.00 amon 24 September 2007. The sole business of the EGM is to propose the Resolutionto approve the Disposal. Recommendation The Independent Directors, who have been so advised by the Company's nominatedadviser, Brewin Dolphin, consider that the terms of the Disposal are fair andreasonable insofar as the Shareholders are concerned. In advising the Board,Brewin Dolphin has taken into account the Board's commercial assessment of theDisposal. Accordingly, the Independent Directors unanimously recommend Shareholders tovote in favour of the Resolution, as they intend to do so in respect of theirown beneficial shareholdings amounting to 50,000 Ordinary Shares which representapproximately 0.08 per cent. of the Company's existing issued share capital. MrHopmayer, who is a related party has undertaken not to vote on the Resolution(and to procure that no other person shall exercise any voting rights in respectof the Resolution in relation to any Ordinary Shares in which he is interested). 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