Iq-ai Ltd Regulatory News (IQAI)

Flying Brands Limited ("Flying Brands" or the "Company")

Posting of Circular to Shareholders

Flying Brands announces that, further to its interim management statement on 3 November 2011, a circular (the "Circular") relating to the disposal of the Retreat Farm Disposal Property and the Meadow Springs Property was approved by the UK Listing Authority and posted to shareholders yesterday.

Stephen Cook, Chief Executive, commented: "These proposed disposals form part of our strategy to maximise value for the benefit of shareholders. The bulk of the proceeds will be used to pay down debt and thus strengthen the financial position of the Company. We continue to explore ways of securing additional working capital for the Company, should the Board consider this to be necessary or desirable."

The Circular was posted to shareholders yesterday and copies of the Circular will shortly be available for inspection at the UKLA's National Storage Mechanism, which can be found at www.hemscott.com.

In addition, the Circular will shortly be available to view on the Company's website (www.flyingbrands.com). Copies of the Circular will also be available from the Company's offices at Retreat Farm, St Lawrence, Jersey, JE3 1GX, Channel Islands.

Unless otherwise defined herein, terms in this announcement shall have the same meanings as those defined in the Circular.

For further information, please contact:

1. Introduction

On 26 September 2011, the Company announced that it had reached agreement with JAJ Properties for the sale of the Retreat Farm Disposal Property for a consideration of £2.1 million, payable in cash at Completion, plus up to 10 per cent. of any eventual development profits.

On 3 November 2011, the Company further announced that it had reached agreement with Jersey Choice for the sale of the Meadow Springs Property for a consideration of £1.225 million, payable in cash at Meadow Springs Completion.

In view of their size, each of the Retreat Farm Disposal and the Meadow Springs Disposal is a class 1 transaction for the purposes of the Listing Rules. Accordingly, each of the Disposals is conditional, amongst other things, upon Shareholder approval.

Each of the sale agreements in respect of the Disposals contains a liquidated damages provision pursuant to which, if either party fails to pass and execute the relevant contract of sale before the Royal Court of Jersey, that party will be obliged to pay an agreed amount in respect of liquidated damages. These clauses are treated as break fees for the purposes of the Listing Rules and, as such, these liquidated damages clauses are also subject to Shareholder approval.

The Company is of the opinion that, taking into account the net proceeds of the Disposals and the available bank facilities, the Group does not have sufficient working capital for its present requirements, that is, for at least the next 12 months.

The Company's short term cash forecasts indicate that the Group is experiencing an immediate funding shortfall. The October banking covenant tests referred to in the Company's announcement of 23 September 2011 have been waived by the Bank pending the receipt of the net proceeds of the Disposals and the subsequent repayment of the amount outstanding under the Facility Agreement. If the Resolution is not passed and the Disposals do not complete, the Group does not expect to have sufficient funds immediately available to repay the amount outstanding under the Overdraft (which at the date of this announcement is approximately £1.1 million), to repay the amount outstanding under the Facility Agreement (which at the date of this announcement is approximately £1.5 million) or to pay the £0.25 million in deferred consideration which is due at Completion under the Flowers Direct Transaction. The Directors estimate that the total immediate shortfall would therefore be in the sum of approximately £2.85 million. If the Bank demands the immediate repayment of amounts outstanding under the Overdraft and/or the Facility Agreement and the Board is unsuccessful in renegotiating terms with the Bank, the Bank would be entitled to take steps to enforce its rights which could result in the immediate commencement of insolvency proceedings against the Group. In addition, if the Board in unsuccessful in negotiating an extension of the Overdraft and/or Facility Agreement to fund payment of the £0.25 million of deferred consideration due at Completion under the Flowers Direct Transaction, the recipients of such consideration may elect to bring proceedings against the Company and/or Flying Flowers to recover this amount. This could result in the immediate commencement of insolvency proceedings against the Group.

Further, if the Resolution is passed and the Disposals complete, the net proceeds of the Disposals may not be sufficient to meet the Group's working capital requirements for the next 12 months. After taking into account the receipt of the net proceeds of the Disposals and the proposed use of proceeds, the Directors are relying on trading to fund the business. After payment of the final amounts due under the Flowers Direct Transaction of £0.5 million on 3 January 2011 and £0.5 million on 31 January 2011, the Group could run out of working capital in June 2012 to the amount of £0.4 million. However, to the extent the Group is unable to secure further support by June 2012, the Group may no longer be able to trade as a going concern which may result in the commencement of insolvency proceedings against the Group, which could commence in June 2012.

The Company has received irrevocable undertakings to vote in favour of the Resolution from Shareholders holding in aggregate 15,460,298 Ordinary Shares representing 55.07 per cent. of the Company's issued share capital.

2. Background to, and reasons for, the Disposals

The Company has recently experienced very difficult trading conditions with performance in all divisions being below management expectations. This has led to pressure on the Company's banking covenants. The Board has been seeking ways to realise the value inherent in the assets and businesses of the Company both to ease the Company's short term cash flow difficulties and also to enhance shareholder value. The Disposals are the first steps in this strategy. The Board continues to explore further opportunities to maximise the value of the Company's assets and businesses for the benefit of shareholders.

As announced in the Interim Financial Statements, on 28 July 2011, the Group obtained a waiver from the Bank for the breach of its banking covenants in respect of the Facility Agreement for the first half of 2011. In addition, the covenants attaching to the Facility Agreement were reset for the second half of 2011 and for the financial year 2012. The debt service covenant and the net interest covenant were disapplied until the first quarter of 2012 and the second quarter of 2012 respectively. New covenants based on absolute EBITDA and cash were introduced for the period up to the fourth quarter of 2012, based on a sensitised forecast.

On 23 September 2011, the Company announced that, in the absence of further action, it would breach its banking covenants when these came to be tested in the second half of October 2011.

On 27 October 2011, the Company agreed with the Bank that the maximum amount available under the Overdraft would be increased to £1.475 million. This increase took effect on 1 November 2011. The Overdraft, which is repayable on demand, will expire on 31 December 2011.

On 2 November 2011, the Bank agreed to waive the October banking covenant tests referred to in the Company's announcement of 23 September 2011 pending the receipt of the net proceeds of the Disposals and the subsequent repayment of the amount outstanding under the Facility Agreement.

As at the date of this announcement, the amount outstanding under the Facility Agreement is approximately £1.5 million.

Retreat Farm Disposal

The Retreat Farm Disposal Property has a current book value of £0.3 million and consists of unutilised office space and employee accommodation. The Retreat Farm Disposal Property is surplus to requirements of the Company and incidental to the activities of the business and, in September 2011, the Board decided to sell the Retreat Farm Disposal Property.

The Board appointed Benest Estates Limited, an independent agent, to advise on valuation and on marketing of the Retreat Farm Disposal Property and then entered into initial discussions with a number of potential purchasers. Following these initial discussions, the Board agreed to enter into more detailed negotiations with the highest bidder, JAJ Properties.

Meadow Springs Disposal

The Meadow Springs Property has a current book value of £1.15 million and consists of a glasshouse which is currently used by the Group in spring each year for the growing of bedding plants for sale. As part of its ongoing programme to make the best use of all the assets of the Company, in October 2011, the Board decided to sell the Meadow Springs Property to provide further working capital for its operating business.

The Board appointed CBRE, an independent agent, to advise on valuation and marketing of the Meadow Springs Property and was approached in relation to the facility by a potential purchaser. Following on from this, detailed negotiations were entered into with Jersey Choice.

3. Impact of the Disposals on the Continuing Group

Impact of the Retreat Farm Disposal

The proposed sale of the Retreat Farm Disposal Property will not affect the Group's growing and dispatch operation that is carried out from nearby but separate properties and, as the Retreat Farm Property is incidental to the activities of the business, it will have no effect on trading.

Impact of the Meadow Springs Disposal

The Meadow Springs Property has been used for growing bedding plants during the spring each year but has remained unused for the remainder of the year. The Directors consider that this has been an inefficient use of the Group's assets.

The Meadow Springs Disposal will reduce the capacity of the Group's growing operation. This reduction in capacity will be offset by a reorganisation of the Group's remaining growing operation to maximise capacity. As a result, at peak trading periods, the Group's remaining glasshouses will be used to grow more bedding plants than has previously been the case.

Where the demand for bedding plants exceeds the capacity of product grown in-house during the Group's peak spring trading period, the Group will purchase additional products from third parties. Such purchases, if required, will take place during the spring season which, owing to the cyclical nature of the business and the increased sales at this time of the year, is the peak of the Group's working capital cycle. The Directors therefore expect that any such purchases would be financed from the Group's own working capital resources.

In view of the intended reallocation of space and the adoption of different operating methods at its other glasshouse facilities, the Board expects that the efficiency of its remaining assets will be increased. As such, the effect of the Disposal of the Meadow Springs Property on the Group's profitability and cash position is expected not to be material in the context of the Group's overall financial results.

4. Principal terms of the Disposals

Retreat Farm Disposal

Flying Flowers has agreed to dispose of the Retreat Farm Disposal Property to JAJ Properties, subject to the fulfilment of a number of conditions precedent, of which the following remain outstanding as at 14 November 2011:

It is expected that Retreat Farm Completion will take place shortly after shareholder approval has been received.

The parties to the Retreat Farm Sale Agreement acknowledge that JAJ Properties intends to develop the Retreat Farm Disposal Property for the Intended Use, described as the development of the Retreat Farm Disposal Property into units of residential accommodation. The parties further acknowledge that the Retreat Farm Disposal Property is charged to the Bank in the amount of approximately £1.7 million as at the date of the Retreat Farm Sale Agreement.

The consideration for the Retreat Farm Disposal is £2.1 million payable in cash on the Tuesday following Retreat Farm Completion. In addition, JAJ Properties has agreed to pay to Flying Flowers an amount equal to 10 per cent. of the profits which it realises at the time of its eventual disposal of the Retreat Farm Disposal Property.

If, following satisfaction of the Retreat Farm Conditions, either party fails in its obligation to pass and execute before the Royal Court of Jersey the Retreat Farm Contract(s) of Sale (a formality required under Jersey law), the failing party will pay to the other £0.5 million as agreed liquidated damages.

Meadow Springs Disposal

Flying Flowers has agreed to dispose of the Meadow Springs Property to Jersey Choice, subject to the fulfilment of the following conditions precedent:

The consideration for the Meadow Springs Disposal is £1.225 million, split as to £0.925 million for the land and £0.3 million for the fixtures and fittings to be transferred with the land. The consideration is payable in cash on the Tuesday following Meadow Springs Completion (less a retention of £2,500 in relation to the replacement of a boundary stone, if applicable).

If either party fails to pass and execute before the Royal Court of Jersey the Meadow Springs Contract of Sale (which is a formality required by Jersey law), the failing party will pay to the other £350,000 as agreed liquidated damages.

5. Use of the proceeds

The net proceeds of the Disposals of approximately £3.1 million will be applied as follows:

6. Financial effects of the Disposals

The repayment of the outstanding balance under the Facility Agreement following completion of the Disposals will have a positive effect on the Group's ongoing earnings. In the six months to 1 July 2011, the interest payable on the balance outstanding under the Facility Agreement was £49,000.

Retreat Farm Disposal

The effect of the reduced interest charge referred to above will be partially offset by the loss of rental income previously generated by the Retreat Farm Disposal Property. In the six months to 1 July 2011, this income amounted to £12,700. The Retreat Farm Disposal will have no effect on trading.

There will be a profit on disposal of the Retreat Farm Disposal Property of approximately £1.5 millionas the consideration of a minimum of £2.1 million less the cost of disposal of £0.3 millionwill be in excess of the book value of the Retreat Disposal Property which at 30 September 2011 was £0.3 million.

Meadow Springs Disposal

The sale of the Meadow Springs Property will reduce the Group's overheads by £0.2 million per annum. The Group will reorganise its remaining growing operation to maximise capacity. However, as a result of the disposal, some bedding plants may be purchased from third party suppliers. It is anticipated that this would lead to an increase in the cost of sales in 2011 of £0.14 million.

There will be a small profit on disposal of the Meadow Springs Property of £0.04 million as the consideration of £1.225 million less the cost of disposal of £0.04 million will be in excess of the current book value of the Meadow Springs Property which at 30 September 2011 was £1.15 million.

7. Working capital

The Company is of the opinion that, taking into account the net proceeds of the Disposals and available bank facilities, the Group does not have sufficient working capital for its present requirements, that is, for at least the next 12 months.

If the Resolution is passed and the Disposals complete, the net proceeds from the Disposals may not be sufficient to meet the Group's working capital requirements for the next 12 months.

Flying Flowers will be obliged to make the final deferred consideration payments under the Flowers Direct Transaction of £0.5 on 3 January 2011 and £0.5 on 31 January 2011.

After payment of the final amounts due under the Flowers Direct Transaction in January 2012, the Group could run out of working capital to the amount of £0.4 million in June 2012.

After taking into account the net proceeds of the Disposals and the proposed use of proceeds, the Directors are relying on trading to fund the business. However, in the event of a further working capital shortfall in June 2012, the Directors would seek to raise additional funds. Actions may include approaching the Bank to discuss new credit facilities. The Board cannot be confident that these discussions would be successful.

An alternative option for the Group would be to seek additional equity financing. Given the current economic and financial environment and the fact that the Group's recent trading has been below expectations, the Board cannot be confident that the Group would be able to raise sufficient funds on terms that are favourable to the Group and its Shareholders.

The Board could also consider the disposals of further assets or businesses. However, the Board cannot be confident that such further asset disposals would be implemented.

To the extent the Group is unable to secure further support by June 2012, the Group may no longer be able to trade as a going concern which may result in the commencement of insolvency proceedings against the Group, which could commence in June 2012.