SuperGroup Regulatory News (SGP)

3 Feb 2006 07:01

Sanctuary Group PLC03 February 2006 3 February 2006 NOT FOR RELEASE, PUBLICATION, OR DISTRIBUTION IN OR INTO THE UNITED STATES OF AMERICA, AUSTRALIA, CANADA, THE REPUBLIC OF SOUTH AFRICA OR JAPAN The Sanctuary Group plc (the "Company" or "Sanctuary") Proposed Placing and Open Offer of new Ordinary Shares by Evolution Securities Limited Sub-division and Consolidation of Existing Ordinary Shares, and Amendment of borrowing powers • £110 million to be raised (gross) through the Placing and Open Offer • Placing and Open Offer conditionally underwritten by EvolutionSecurities • Proceeds of the Placing and Open Offer to be used to pay down existingdebt • Cancellation of £35m of the Group's outstanding indebtedness • New Banking Facilities of £65 million agreed with Bank of Scotland • Proposed share capital reorganisation Andy Taylor, Executive Chairman, commented: "I am pleased to announce the fund raising in the form of a placing and openoffer which is conditionally underwritten by Evolution Securities. This will help put a line under the events of 2005, and, with the underlyingstrength of the business model and the continued backing and loyalty of ourartists and trading partners, will allow the Company to move forward." For further information please contact: The Sanctuary Group plc Philip Ranger, Director, Corporate & Investor Relations 07768 534641 020 7300 1323Merlin Paul Downes / Rebecca Penney 020 7653 6620 Evolution Securities Limited ("Evolution Securities"), which is authorised inthe United Kingdom by the Financial Services Authority, is acting exclusivelyfor the Company as sponsor, broker and underwriter in relation to the Placingand Open Offer and no-one else in connection with the arrangements described inthis announcement and will not be responsible to anyone other than the Companyfor providing the protections afforded to customers of Evolution SecuritiesLimited or for advising any other person in connection with the arrangementsdescribed in this announcement. Neither the Existing Ordinary Shares nor the New Ordinary Shares have been, orwill be, registered under the United States Securities Act of 1933, as amended(the "Securities Act") or under the securities laws of any state of the UnitedStates nor do they qualify for distribution under any of the relevant securitieslaws of Canada, Australia, the Republic of South Africa or Japan. Accordingly,subject to certain exceptions, the New Ordinary Shares may not be, directly orindirectly, offered, sold, taken up, delivered or transferred in or intoAustralia, Canada, the Republic of South Africa, Japan or the United States,except in the United States to persons reasonably believed to be qualifiedinstitutional buyers, as defined in Rule 144A(a)(1) of the Securities Act. Overseas Shareholders and any person (including, without limitation, nomineesand trustees) who have a contractual or other legal obligation to forward thisannouncement into a jurisdiction outside the UK should seek appropriate advicebefore taking any action. This announcement contains forward-looking statements, which are based on theBoard's current expectations and assumptions and involve known and unknown risksand uncertainties that could cause actual results, performance or events todiffer materially from those expressed or implied in such statements. It isbelieved that the expectations reflected in these statements are reasonable, butthey may be affected by a number of variables which could cause actual orresults or trends to differ materially, including, but not limited to: theGroup's ability to obtain capital/additional finance, a reduction in demand bycustomers, the limitations of the Group's financial reporting controls; anincrease in competition; an unexpected decline in turnover; legislative, fiscaland regulatory developments, including but not limited to, changes in copyrightregulations; currency and interest rate fluctuations; and the adoption of IFRS.Each forward-looking statement speaks only as at the date of the particularstatement. Except as required by the Listing Rules, the Disclosure Rules, theProspectus Rules, the London Stock Exchange or by law, the Company disclaims anyobligation or undertaking to release publicly any updates or revisions to anyforward-looking statements contained herein to reflect any change in theCompany's expectations with regard thereto or any change in events, conditionsor circumstances on which any such statement is based. This announcement does not constitute an offer or an invitation to purchase orsubscribe for any securities. NOT FOR RELEASE, PUBLICATION, OR DISTRIBUTION IN OR INTO THE UNITED STATES OF AMERICA, AUSTRALIA, CANADA, THE REPUBLIC OF SOUTH AFRICA OR JAPAN The Sanctuary Group plc (the "Company" or "Sanctuary") Proposed Placing and Open Offer of new Ordinary Shares by Evolution Securities Limited Sub-division and Consolidation of Existing Ordinary Shares and Amendment of borrowing powers 1. Introduction On 27 January 2006 your Board announced that it was close to implementing asignificant equity fundraising through Evolution Securities who have agreed tobecome broker to the Company. Your Board is pleased to announce that EvolutionSecurities has now conditionally agreed to underwrite a proposed Placing andOpen Offer. Your Board can today confirm that it proposes to raise approximately £110.0million (gross) by way of a Placing and Open Offer of, in aggregate, 219,931,148new Ordinary Shares at 50 pence per new Ordinary Share conditional, inter alia,upon the passing by Shareholders of the Resolutions at the EGM referred tofurther below, the publication of a Prospectus by 14 February 2006 and Admissionoccurring by 13 March 2006. The Issue Price on a pre-consolidated basis is 0.25pence which values the Existing Ordinary Shares at approximately £927,000. Theequity fundraising will result in substantial dilution to existing Shareholderswith the Existing Ordinary Shares accounting for less than 1 per cent. of theEnlarged Share Capital. The Placing and Open Offer comprises 180,000,000 PlacingShares to be conditionally placed with institutional investors and 39,931,148Open Offer Shares to be conditionally placed with institutional investorssubject to clawback to satisfy valid applications by Qualifying Shareholders.The Placing Shares are not available for subscription under the Open Offer.Qualifying Shareholders and the holder of the BMG Warrants will be given theopportunity to participate in the fundraising by way of the Open Offer, which,following the publication of a Prospectus, will be made by Evolution Securitieson the Company's behalf. Under the Open Offer, new Ordinary Shares will beoffered to Qualifying Shareholders on the basis of: 8 Open Offer Shares for every 75 Existing Ordinary Shares or BMG Warrants held at the Record Date and so in proportion to any number of Existing Ordinary Shares or BMG Warrantsthen held. The Placing and Open Offer has been conditionally underwritten by EvolutionSecurities and is conditional, inter alia, on Admission. The Company has now concluded new arrangements with Bank of Scotland, which areconditional on the completion of the Placing and Open Offer. The Directors wereadvised by Evolution Securities that an equity fundraising would only bepossible if some of the existing indebtedness of the Company were to becancelled. As part of these new arrangements, the Bank has agreed to thecancellation of £17.0 million of indebtedness and the holder of the ConvertibleLoan Notes has agreed to the cancellation of £18.0 million of indebtedness, ineach case conditional, inter alia, upon completion of the Placing and OpenOffer. The purpose of the Placing and Open Offer is to make a repayment of £4.7million of the principal amount of the Convertible Loan Notes with the balanceof approximately £96.2 million to be applied to the repayment of some of theindebtedness to the Bank, following which the Bank will make available to theGroup new facilities totaling £65.0 million. The New Bank Facility will consistof a term loan facility of £20 million and a revolving credit facility of £45million. On completion of the Placing and Open Offer, £7.3 million of theConvertible Loan Notes will remain in issue. The Issue Price, which is stated on a post-consolidated basis, represents aneffective discount of 66.67 per cent. to the prevailing Closing Price of 0.75pence per Existing Ordinary Share on 2 February 2006, being the latestpracticable date prior to the publication of this announcement. The Directorswere advised by Evolution Securities that an equity fundraising could only becarried out successfully if priced at a significant discount to the prevailingClosing Price of an Existing Ordinary Share. The Directors therefore propose toseek specific approval of the Issue Price and the above-mentioned discount fromShareholders at an EGM, in accordance with the Listing Rules. Since the Companyis not permitted under English company law to issue shares for less than theirnominal value (which for the Company is currently 12.5p), and to avoid having avery large number of shares in issue which would be quoted at a very low price,the Board has decided that it should undertake the Sub-division andConsolidation in order to be able to effect the Placing and Open Offer at aprice of 50 pence per New Ordinary Share. The relevant approvals required to effect the Sub-division, the Consolidationand the Placing and Open Offer and to amend the Company's borrowing powers willbe sought at the EGM. Shareholders should be aware that if the Resolutions to be proposed at the EGMare not passed and Admission does not take place, the net proceeds of thePlacing and Open Offer will not be received by the Company and the Company willnot be able to draw down under the New Bank Facility referred to above. In thesecircumstances, the Company's cash requirements would exceed the amount availableunder its existing facilities with the Bank by the end of March 2006, and in anyevent would be subject to immediate review. The Directors consider that, in this scenario, they would seek to agree newfacilities with the Bank. However, the Directors believe that any suchfacilities (on the assumption that such facilities could be agreed) would be onsignificantly worse terms than those that are currently in place and maynecessitate the Group undertaking to effect certain actions and grant certainrights. In these circumstances the Directors believe that the Group would not beable to retain all of its key existing clients and employees. The Directorsconsequently believe that any such arrangements would not be in the bestinterests of the Group or Shareholders. Any new facilities from the Bank are also likely to require the approval of theholder of the Convertible Loan Notes, who may impose conditions on such approvalthat the Directors do not believe would be in the best interests ofShareholders. There is also no guarantee that the Bank (or the Group's otherfinanciers) would not seek to place certain companies in the Group, or theCompany itself, in some form of insolvency proceedings. Further, if the Resolutions are not passed and the Placing and Open Offer doesnot take place, the holders of the Convertible Loan Notes would have the rightto demand immediate repayment of all outstanding amounts due, which the Companywould not be in a position to repay. Shareholders should note that the Resolution concerning the Group's borrowinglimits (as referred to in paragraph 14 of this announcement) will need to bepassed at the EGM in order for the Company to be able to borrow any further sumsfrom the Bank and that the passing of the Resolution concerning the Group'sborrowing limits is not conditional upon the other Resolutions being passed orupon Admission. In the event that the Resolution is not passed, the Company willnot be able to borrow further funds from Bank of Scotland or elsewhere. In thissituation, the Board considers that there would be no alternative other than toenter into some form of insolvency proceedings immediately. 2. Background Since 1998, the Group has pursued a strategy of expanding its business rapidly,both organically and through acquisitions. The Group's acquisition strategyfocused on consolidating smaller industry players and was financed principallythrough equity issues and, more recently, through available bank facilities andthe issue of the Convertible Loan Notes. During this period, the cost base ofthe Group was increased in line with management's expectations of revenue growthand cash flow. Whilst the Directors believe that this strategy was initially successful, it isclear that in the last two years a number of factors have arisen which havecontributed to cash generation and trading performance across the Group beingbelow expectations. These relate principally to the poor performance of certainrecent acquisitions and the US Recorded Product division. The Directors consider that a number of the acquisitions that the Group has madesince 2003 have not performed in line with expectations. These include theUS-based Urban management businesses, which have generated substantially lessthan the levels of income forecast for those businesses at the time of theiracquisition. The Recorded Product division, which accounted for approximately half of theCompany's turnover in 2004, has experienced difficult trading conditions sinceApril 2005, particularly in its Urban Records operation and, on 17 June 2005,the Company announced that its interim results would be significantly lower thanin the same period in the prior year, principally due to significant delays inrecord releases. Trading conditions were particularly poor in the US RecordDivision where, due to one off costs experienced in 2005 of approximately £10.4million, an EBITDA loss of £12.7 million was reported in the financial year to30 September 2005. Overheads in this division are expected to be £5.1 millionlower in the current financial year than in the year to September 2005. A number of releases in the Urban Records operation were cancelled orrescheduled, and, while some of those that were rescheduled were released in theearly part of the second half of 2005, most of the remainder have now beencancelled and the Group will make no further releases under its Urban Recordsoperation. The Directors believe that, as a result of the problems with theUrban Records operation, cash receipts were significantly lower than budgeted.During 2005, overheads that reflected the expectation of higher revenuecontinued to be incurred as budgeted, resulting in an increased working capitalrequirement. The delays and under-performance led to turnover from the RecordedProduct division falling 17.5 per cent. to £67.7 million for the financial yearended 30 September 2005. The cash impact of the shortfall in sales wascompounded by advances made to artists against the royalty earnings those recordsales would have generated. The Directors have now taken steps to mitigate theselosses as set out in paragraph 3 of this announcement. During the last year, the Directors have considered a number of strategicoptions and alternative funding arrangements. Although no offer was made for theCompany significant management time and effort was diverted from the day-to-dayoperations of the Group in pursuit of these options. The Directors believe thatthis compounded the effects of the trading difficulties that were beingexperienced. On 23 August 2005, the Company announced that, whilst trading remaineddifficult, it had obtained appropriate waivers and amendments to its financialcovenants from both the Bank and the holder of the Convertible Loan Notes. TheDirectors believe that the effect of the Company's various announcements and thecircumstances referred to above were particularly damaging to the Company'sstanding in the industry due to the uncertainty this created over the financialviability of the Company. The Directors believe that this led to higher levelsof recorded product returns from retailers which led to a decline in advancesfrom its distributors and also led to difficulties in signing up new artists.The uncertainty surrounding the Company's financial position was not resolvedand has been exacerbated as the Group has incurred further debt and theCompany's share price has declined. The level of debt and the difficult trading environment led to the Bankundertaking a review of the Group's facilities and the future availability offacilities. Whilst the Bank has been supportive and has made available furtherfacilities to the Company to date, the most recent of these have been made onthe basis that the Company was planning a substantial equity issue. As set outabove, if the Placing and Open Offer is not completed, the Company would need toobtain new or further facilities from the Bank, which the Directors believewill, if granted, be on significantly worse terms than those that it currentlyhas and may necessitate the Group undertaking to effect certain actions andgrant certain rights. 3. Strategy As a result of the poor trading performance of, and the increased debt taken on,by the Group, the Directors have undertaken a review of the Group's globaloperations. The Directors have concluded that the Company should pursue astrategy that focuses only on the Group's core business areas of RecordedProduct, Artist Management, Merchandising and Live Agency. Despite the Group'spoor trading, the Company has had some successes over the last year. It hasacquired, and successfully integrated, Twenty-First Artists Limited, themanagement company for Elton John and James Blunt, and, in the Merchandisingdivision, which has experienced organic growth, has successfully exploitedcertain new opportunities in retail and has recruited the former CEO of one ofthe Merchandising Division's key competitors. The Directors also consider that anumber of other significant acquisitions that have been made over the last fewyears have been successful, these include Castle Records and Trojan Records(which form the foundation of the Group's catalogue of recorded music and wereacquired for a combined consideration of £56.3 million), Bravado and TrinifoldManagement, which manages The Who and Robert Plant. Cost reduction has been a key focus for the Company in recent months andnon-core and under-performing businesses have all been reviewed. To address theissues in the under-performing Recorded Product division, a significantreorganisation and headcount reduction of the US Recorded Product business hasbeen undertaken. The Company has already closed its Urban Records operation, hasclosed its Canadian office and has integrated Bravado's Los Angeles operationsinto the Group's Los Angeles office and is in the process of closing offices inNorth Carolina. The Company also announced on 10 October 2005 that globalheadcount had been reduced by 25 per cent. In addition to this certain of theDirectors voluntarily waived a portion of their salary. The Directors estimatethat these actions will result in a reduction in overheads in the year to 30September 2006 of £14.6 million. The Company has incurred exceptionalrestructuring costs of £7.1 million in the year ended 30 September 2005 inconnection with its cost-cutting programme, which has continued in the firstquarter of 2006. Approximately £3.2 million of the cash impact of therestructuring will fall in the year ended 30 September 2006 but, to the extentthat the anticipated costs relating to these headcount reductions, relatedoffice closures and contract terminations were not incurred prior to 30September 2005, they were provided for at that date. There will also be renewed focus on artist managers who have higher earning actsand who have experience in signing new acts in the Artist Management division toaccompany the Group's existing Tier 1 clients who, between them, provide stablerevenues to the Group. A number of under-performing managers have had theiremployment contracts terminated. The Directors continue to focus theMerchandising division on organic growth via signing artists and expanding itsgeographical reach as well as further penetration of the retail market throughdeveloping the rights that the division controls. In line with the focus on these core business areas, the Directors anticipatethat certain non-core assets will be disposed of and the Directors are currentlyin active discussions with a number of interested parties in connection withsuch disposals. Whilst there can be no guarantee as to the disposal of thesebusinesses or certainty as to the timing, the Directors will seek disposalproceeds in the region of £5 million during the year to 30 September 2006. TheGroup sold its mobile recording studios business for an undisclosed sum on 18November 2005. Overall, the Directors believe that focus in core areas and a much strongeremphasis on cash generation will help to provide a solid base from which todeliver improved results in this financial year and beyond. 4. Reasons for the Placing and Open Offer and Debt Restructuring As at 30 November 2005, the Company had unaudited total indebtedness of £155.9million (of which £30.0 million was attributable to the Convertible Loan Notesand the balance to the Bank and certain other banks) and, prior to the date ofthis announcement, the Bank has extended further facilities totaling £22.125million since 27 November 2005. The Directors are of the opinion that thecurrent debt levels are unsustainable for the Group and have led to significantconcerns over the viability of the Group amongst customers, artists andemployees which has had an adverse effect on the trading of the Group. As set out above, the Directors believe that without a successful outcome to thePlacing and Open Offer, the Company would breach its existing facilities withthe Bank, including the additional facility of £5.0 million extended on 2February 2006, by the end of March 2006. The Directors, having considered theavailable options, are seeking further equity financing for the Company toreduce its indebtedness and to create a foundation for the Group to restore itsfinancial health. The Directors were advised by Evolution Securities that equityfinancing could only be raised on the basis that some of the existingindebtedness of the Company would be cancelled. Consequently, as set out in moredetail below, the Bank has agreed to cancel £17.0 million of its existing debtand the holder of the Convertible Loan Notes has agreed to cancel £18.0 millionof the Convertible Loan Notes, in each case conditional on and with effect fromAdmission and in consideration for a total of 400,000 Ordinary Shares. The Directors believe that the Placing and Open Offer is the most appropriatemethod of achieving the required equity fundraising. A key factor in obtaining the support of a number of institutions has been theability to offer a placing of new Ordinary Shares that are not subject toclawback and therefore give the institutions some level of certainty as to theamount to be invested. The Directors are, however, mindful of the needs ofShareholders and will therefore make the Open Offer to Qualifying Shareholdersto partially mitigate the dilutive effects of the Placing. QualifyingShareholders will be able to apply for any whole number of Open Offer Shares upto their Basic Entitlement and, if they so wish, may apply for Open Offer Sharesin excess of their Basic Entitlement. Valid applications up to their BasicEntitlement will be satisfied in full. Valid applications for more than aQualifying Shareholder's Basic Entitlement will be treated as valid for theirBasic Entitlement, but applications in excess of the Basic Entitlement will onlybe satisfied to the extent that applications made by other QualifyingShareholders are for less than their Basic Entitlements and may therefore bescaled down. Allocations of Open Offer Shares in respect of these excessapplications will be entirely at the discretion of Evolution Securities and theCompany. 5. Use of Proceeds The net proceeds of the Placing and Open Offer, which are expected to beapproximately £100.9 million, less £4.7 million to be paid in part redemption ofthe Convertible Loan Notes, will be utilised in full to repay some of theindebtedness to the Bank. 6. Proposed Board Changes As previously announced, during the year Sir Christopher Meyer and DouglasMcArthur stepped down from the Board and a new Group Finance Director, PaulWallace, has been appointed. As part of the Group's business restructuring it is intended to revise the Boardstructure and to make a number of new appointments. These revised arrangements envisage that Andy Taylor will retain his position asChief Executive but will step down as Executive Chairman, and a newnon-executive Chairman will be appointed. Mike Miller, Merck Mercuriadis, Rod Smallwood, Aky Najeeb and Joe Cokell willform an Operational Board, which will also include Andy Taylor and Paul Wallace,and will thereafter resign from the parent Company Board. Mr Taylor, Mr Wallaceand the Group's non-executive directors will thereafter form a newly-constitutedboard under the direction of the new non-executive Chairman. The process ofidentifying new non-executive Directors is progressing. 7. Current Trading As announced by the Company on 27 January 2006, since 30 September 2005, theunderlying trading of the Group has been, at a consolidated level, in line withthe Directors' expectations Within this, the performance of the RecordedProduct, Live Agency and Merchandising divisions has been ahead of budget whilstArtist Management has been slightly behind, mainly due to delays in commissionsto be received. Additional one-off costs have been incurred across the Group asa result of the proposed equity financing. The cost cutting exercise referred to above in paragraph 3 of this announcementhas been largely completed and the Directors expect a reduction in overheads inthe year to 30 September 2006 of £14.6 million. The Group incurred exceptionalrestructuring costs of £7.1 million in the year ended 30 September 2005 inconnection with its cost-cutting programme, which has continued in the firstquarter of 2006. Approximately £3.2 million of the cash impact of therestructuring will fall in the year ended 30 September 2006 but, to the extentthat the anticipated costs relating to these headcount reductions, relatedoffice closures and contract terminations were not incurred prior to 30September 2005, they were provided for at that date. The Directors believe that the cost savings that have been made have not, andwill not, affect the ability of the Group to generate revenue. As announced on 28 October 2005, Elton John is continuing his sold outworld-wide tour and Joss Stone has recently completed her debut film role andher tour dates with the Rolling Stones. Within the Recorded Product divisionthere are strong sales from artists such as Status Quo, Ray J, Simple Minds, TheStrokes and Babyshambles. In addition, Morrissey has now completed his new albumwhich is scheduled for release in Spring 2006. Within the Merchandisingdivision, sales have been ahead of budget and the Directors remain confidentthat this division will benefit from additional financing made available to itif the Placing and Open Offer is successful and it is able to better penetratethe retail market. The Directors are also optimistic that a tour by The Who andElton John's 60th birthday events will provide good revenue opportunities in thefuture. The completion of the Placing and Open Offer and the consequent reduction inGroup debt are expected to remove the doubts over the future funding of theGroup. The Board anticipates that the removal of this doubt will benefit thebusiness across all of its divisions and lead to improved financial performancein the future. The Board also anticipates that the Group will have the financialflexibility to attract some of the bigger artists to the Merchandising division. The Directors are mindful that whilst the first few months of the year have beenin line with expectations, the performance of the Group is dependent upon albumreleases and activity by artists over the summer months when the majority ofrevenue is earned. However, on the basis of trading since 30 September 2005, thecost-cutting that has been implemented to date and current expectations ofrevenue for the year, the Directors view the prospects of the Group followingcompletion of an equity fundraising with confidence. 8. Accounting Policy Changes The Group announced its unaudited preliminary statement of results on 27 January2006. These results reflected changes in certain accounting policies, which giverise to prior year adjustments, and alterations in methods of estimation incertain areas, which gave rise to exceptional items. The Board has been in discussions with its auditors and the Board expect thatthe auditors will qualify their audit opinion in respect of certain changes toaccounting policies. The auditors have indicated that they will issue anadverse audit opinion in this respect. In addition the auditors will highlight the fundamental uncertainty surroundingthe Group's adoption of the going concern basis of preparation of the financialstatements, pending the successful completion of the Placing and Open Offer. The Board is confident that the changes it has made to the accounting policiesand its methods of estimation are appropriate. 9. The Placing and Open Offer Agreement Pursuant to the Placing and Open Offer Agreement, Evolution Securities hasagreed, as agent of the Company, to make the Open Offer to QualifyingShareholders and the BMG Warrant holder, and to use its reasonable endeavours toprocure placees to subscribe for the Placing Shares at the Issue Price. Insofaras the Open Offer Shares are not taken up by Qualifying Shareholders or the BMGWarrant holder, Evolution Securities has agreed, as agent for the Company, touse its reasonable endeavours to procure placees to subscribe for the Open OfferShares at the Issue Price. Evolution Securities has agreed to subscribe at theIssue Price for any New Ordinary Shares not subscribed for by Placees. The Placing and Open Offer Agreement contains certain warranties and indemnitiesgiven by the Company in favour of Evolution Securities. Evolution Securities' obligations under the Placing and Open Offer Agreement areconditional (inter alia) upon the satisfaction of the following conditions bythe time and/or date referred to below or such later time and/or date asEvolution Securities and the Company may agree: (a) the passing of the Resolutions without material amendment at the EGM(or at any adjournment thereof); (b) various conditions relating to the availability of the NewBank Facility and amendments to the terms of the Convertible Loan Notes; and (c) Admission taking place by not later than 8.00 a.m. on 13 March2006. Evolution Securities may, in its absolute discretion and on such terms as itthinks appropriate, waive fulfillment, in whole or in part, of any or all of theconditions in the Placing and Open Offer Agreement (to the extent permitted bylaw or regulations) by giving notice in writing to the Company. EvolutionSecurities and the Company may agree in writing to extend the time and/or dateby which any of the conditions in the Placing and Open Offer Agreement arerequired to be fulfilled to no later than 3.00 p.m. on 31 March 2006. The Placing and Open Offer Agreement may be terminated by Evolution Securitiesprior to Admission in its absolute discretion upon the occurrence of events(including, inter alia, if there is a material adverse change with respect tothe Group or any event of force majeure (as set out in the Placing and OpenOffer Agreement) occurs. 10. New Bank Facilities On 2 February 2006, the Company and other members of the Group entered into afacility letter with Bank of Scotland, pursuant to which Bank of Scotland hasagreed to make available to the Company: (a) a term loan facility of £20,000,000 (the "Term Loan Facility"); and (b) a revolving credit facility of £45,000,000 (the "Revolving CreditFacility") (together the "New Facilities"). It is intended that the net proceeds of the Placing and Open Offer,less £4.7 million, will be used to repay certain amounts outstanding under theexisting facilities provided by the Bank (less the £17 million of the principalamount outstanding to the Bank which the Bank has agreed will be cancelledsubject to, and with effect from, completion of the Placing and Open Offer) and,to the extent that such proceeds are not sufficient to repay the amounts infull, that funds drawn down under the New Bank Facility will be applied for thispurpose. The New Facilities will be secured by fixed and floating charges over the assetsand undertaking of the Group. The Term Loan Facility will be repaid on 31 March2008, save in the event that the Group's audited financial statements for theyear ended 30 September 2006 demonstrate that the Group has met certainspecified forecasts set out in its business plan, in which case an amount of theTerm Loan Facility shall be repaid, subject to other provisions, on 31 March2007. The Revolving Credit Facility will finally be repaid on 31 March 2008. Unless the Bank otherwise gives its prior written consent, the New Facilitiesare repayable in certain specified circumstances set out in the New BankFacility letter, including, inter alia, if any person or group of persons actingin concert becomes the beneficial owner of shares in the Company carrying theright to exercise more than 25 per cent. of the voting rights or upon thedisposal of all or substantially all of the assets of the Group. The New Facilities will also become repayable prior to their stated maturity onthe occurrence of certain events of default, which include the breach of certaincovenants by the Company and/or its subsidiaries, including certain financialcovenants. 11. Changes to the Convertible Loan Notes and cancellation of Existing Debt On 2 February 2006, the Company entered into a supplemental instrument (the"Supplemental Instrument") with the holder of the Convertible Loan Notes and theWarrants (the "Noteholder") pursuant to which (inter alia): certain amendmentshave been made to the level of permitted indebtedness that can be incurred bythe Group during the periods prior to and following Admission as set out below;the conversion price and exercise price applicable to the Convertible Loan Notesand the Warrants respectively will (with effect from Admission) be reset at 200pence or (if lower) an amount equal to four times the Issue Price; the maximumnumber of Ordinary Shares issuable on exercise in full of the Warrants will beamended with effect from Admission to 2,452,924 or, if higher, the figurederived by dividing 4,905,847.10 by the Issue Price; the Noteholder has waivedany right it would otherwise have to participate in the Placing and Open Offerand any right of redemption that it may have under the Convertible Loan Notesarising by virtue of the Placing and Open Offer, Sub-division, Consolidation orany other matters set out in the Resolutions excluding any breaches or defaultsby the Company of or in respect of the Supplemental Instrument or the deed ofcompromise referred to below. The provisions of the Supplemental Instrument (other than one provision amendingcertain definitions relating to the Convertible Loan Notes) shall cease to haveeffect if less than £100 million of net proceeds are raised pursuant to thePlacing and Open Offer or if Admission does not take place on or before 31 March2006. Conditional on Admission, the Company has, on 2 February 2006, entered into adebt compromise agreement (the "Debt Compromise Agreement") with Bank ofScotland and the Noteholder. Under the terms of the Debt Compromise Agreement,Bank of Scotland has agreed to cancel £17.0 million of the outstanding principalamount under the Bank Facility in return for the issue of 200,000 OrdinaryShares and the Noteholder has agreed to cancel £18.0 million of the principalamount of the Convertible Loan Notes in return for the issue of 200,000 OrdinaryShares. Bank of Scotland and the Noteholder have also agreed to waive any andall defaults under the terms of the Bank Facility and the Convertible Loan Notesthat are outstanding at the time of Admission. 12. Litigation In its preliminary announcement on 27 January 2006, the Company disclosed thefollowing information with respect to certain litigation in which the Group is,or may be involved. This is set out below in full. Sugar Hill Records Sanctuary Records Group Limited and Sanctuary Copyrights Limited are engaged inan action brought by Sylvia Robinson, Sylvia Inc. and others in the courts ofNew York, alleging that these companies failed to account and pay royalties tothe plaintiffs pursuant to certain contracts entered into between the plaintiffsand Sugar Hill Records (which were acquired by Sanctuary Copyrights Limited in1995) and seeking damages and rescission of those contracts or, in thealternative, an accounting of royalties. A default judgment was entered for theplaintiffs in May 2004 partially rescinding the contracts and awarding theplaintiffs the proceeds derived by the defendant companies from 15 May 1995 fromthe exploitation of the recordings which were the subject of those contracts. Aninquest was directed to determine the amounts derived by the defendant companiesto be awarded to the plaintiffs. In June 2004, the Group moved to vacate thedefault judgment but was unsuccessful. On 15 June 2005, the plaintiffs submitteda claim to the inquest referred to above in the sum of $232,272,626 plusinterest. On 22nd August 2005, the defendant companies submitted their ownassessment of damages to the inquest in various amounts according to differentheads of and bases for damages. The Group has been advised by US legal counsel that, in its opinion, the defaultjudgment is not consistent with prevailing law. On 10 November 2005, themagistrate conducting the inquest requested the parties to brief him on whetherthe rescission of the contracts was authorised by either New York State contractlaw or the United States Copyright Act and a brief was submitted on behalf ofthe Group accordingly. The Group will continue to seek to have the defaultjudgment vacated as unauthorised and/or to appeal in the event damages areassessed. Should the default judgment not be vacated or overturned, the Group isuncertain as to what the outcome of the claim might be and can offer noassurances on its prospects for successfully defending the claim. Shouldjudgment be awarded for the plaintiffs (either on the default judgment or in anysubsequent proceedings), the Company is not yet in a position to assess whetherthe damages to be awarded will have a significant effect on the Group'sfinancial position or profitability. However, the Company, having taken US legaladvice, believes that, based upon its estimates of actual sales of the offendingrecordings, associated costs incurred in connection with those recordings andthe royalty rates payable to the plaintiffs pursuant to the subject contracts,that damages are likely to be in the region of $300,000 to $5,000,000 (plusinterest) depending upon what basis a court may eventually determine thatdamages may be payable in respect of the claims made. 5.1 Label Group In January 2002, Sanctuary Records Group Inc ("SRGI") entered into an agreementwith 5.1 Label Group LLC ("5.1") pursuant to which SRGI was to license certainrecordings to 5.1. In July 2005, 5.1 made a claim against SRGI (and isattempting to join the Company to the action as a defendant) contending wrongfulbreach of that agreement as amended by a subsequent agreement dated 29 September2003, breach of warranty, fraud and conspiracy in an amount in excess of $50million plus the possibility of punitive damages. The Group, having taken USlegal advice, believes the claim for damages for these amounts to be withoutmerit and will not be awarded. The Group is contesting the claim and has filed across-complaint against 5.1. In particular, the Group will vigorously defend theclaims of fraud made against it. Reggae The Group has a substantial business in reggae music. In connection with itsexploitation of certain reggae recordings, the Group is the subject of a numberof claims in French courts (or has indemnified other parties who are the subjectof such claims) and expects to become subject to other claims, alleging thatcertain artists whose performances are contained on those recordings did notgive written consent for their performances to be exploited on records and, inparticular, on compilations. The amounts claimed or to be claimed are not yetfully known but are expected to amount to at least Euro 9.4 million. The Groupbelieves, having been advised by French legal counsel, that, whilst the claimsmay or may not be substantiated, the damages to be awarded are likely to be lessthan the amounts claimed. Urban Managers On 10 November 2005, Music World/Sanctuary Urban Group Inc ("Sanctuary Urban")terminated the employment of Troy Carter, Julius Erving III and Tony Davis forcause, specifically alleging that Mr Carter and Mr Erving were in materialbreach of their employment agreements with Sanctuary Urban and also in materialbreach of a stock purchase agreement dated 1 March 2004 relating to the sale oftheir business to Sanctuary Urban and that Mr Davis was in material breach ofhis employment agreement with Sanctuary Urban and also in material breach of astock purchase agreement dated 9 September 2004 pursuant to which the Companypurchased his business. In particular, Sanctuary Urban and the Company havealleged that Mr Carter, Mr Erving and Mr Davis made material misrepresentationsand omissions of material facts in connection with the execution of thoseagreements and in connection with their subsequent performance there under, noneof which, in the good faith judgment of Sanctuary Urban and the Company, isreasonably susceptible to cure. Since issuing those letters of termination and breach, Sanctuary Urban and theCompany have filed a Demand for Arbitration, seeking the return to it of thepurchase price paid for the businesses under the stock purchase agreementsreferred to in the previous paragraph (being $3,898,333 in the case of Mr Davisand $4,000,000 in the case of Mr Carter and Mr Erving) and the various salariesand other benefits paid to Mr Carter, Mr Erving and Mr Davis under theiremployment agreements, plus interest. Sanctuary Urban and the Company have been advised by US counsel that they have areasonable prospect of success in this action. However, the Company believesthat Mr Carter, Mr Davis and Mr Erving may make counter-claims against theCompany and Sanctuary Urban and possibly other members of the Group, whichcounter-claims may be material in amount and which may make allegationsconcerning the motives for the termination of the employment of Mr Carter, MrErving and Mr Davis with Sanctuary Urban, all of which Sanctuary Urban and theCompany will vigorously deny, having been advised by US counsel that such claimswould be contrary to what would be allowed under the employment contracts andpurchase agreements as well as inconsistent with the law and facts as theCompany knows them. 13. Details of the Sub-division and Consolidation It is proposed that every issued Existing Ordinary Share of 12.5 pence will besub-divided into one ordinary share of 0.01 pence and one Deferred Share of12.49 pence. Following the Sub-division it is proposed that each ordinary shareof 0.01 pence each will be consolidated on the basis of 200 ordinary shares of0.01 pence each to one Ordinary Share. The Deferred Shares will, in effect, beworthless. Fractions of Ordinary Shares created as a result of the Consolidationwill be aggregated and sold in the market for the benefit of the Company. The necessary approvals to effect the Sub-division and Consolidation and to makethe associated changes to the Company's articles of association dealing with thecreation of the Deferred Shares will be included in the Resolutions to beproposed at the EGM. Further details with respect to the effects of the Sub-division andConsolidation will be contained in the Prospectus. Application will be made to the UK Listing Authority for admission of the issuedOrdinary Shares (including, for the avoidance of doubt, the New Ordinary Shares)to the Official List and to the London Stock Exchange for admission to tradingon the London Stock Exchange's main market for listed securities. 14. Borrowing Limits At an extraordinary general meeting of Shareholders on 20 December 2005,Shareholders voted in favour of a resolution to effect a temporary change to thepowers of the Board to incur borrowings and indebtedness in the nature ofborrowings, which change was to continue in effect until the Company's next AGM. In the circular to Shareholders accompanying the notice convening the meeting atwhich such resolution was passed, the Company indicated that it would askShareholders to consider resolutions to effect a more permanent change to thoseborrowing powers at such AGM or at any earlier extraordinary general meeting. Itis now proposed that Shareholders will be asked to vote in favour of aresolution to amend the borrowing limits under the Company's articles ofassociation at the EGM. 15. EGM and Prospectus In order to effect the Placing and Open Offer, the Sub-division and theConsolidation, the amendment of the Company's borrowing limits under thearticles of association and to approve the related amendments to the Company'sarticles of association the Directors intend to convene an EGM. It is intendedthat a Prospectus, containing a circular and notice of EGM will be published indue course. The Prospectus will contain full details of the Placing and OpenOffer, the Sub-division and Consolidation and the amendment to the borrowingpowers in the articles of association. The Existing Ordinary Shares will be marked ex-entitlement to the Open Offerfollowing the establishment of record date prior to the posting of aprospectus. PLACING AND OPEN OFFER STATISTICS Issue Price (2) 50 pence Discount of Issue Price (on a pre-consolidation basis) to the 66.67 per cent.closing middle-market price of the Existing Ordinary Shares on2 February 2006, the last Business Day prior to the publicationof this announcement Number of Existing Ordinary Shares 371,098,866 Number of New Ordinary Shares issued pursuant to the Placing 219,931,148and Open Offer (2) Number of Open Offer Shares available under the Open Offer (2) 39,931,148 Number of Placing Shares available under the Placing(2) 180,000,000 New Ordinary Shares expressed as a percentage of Existing 9,700.43 perOrdinary Shares cent. Number of Ordinary Shares in issue upon completion of the 222,186,642Placing and Open Offer (1) (2) Gross proceeds of the Placing and Open Offer £110.0 million Estimated net proceeds of the Placing and Open Offer £100.9 million (1) Assumes no further exercise of options under the Share Option Schemes or theconversion of the Convertible Loan Notes or exercise of the Warrants or the BMGWarrants and no other issue of shares by the Company. (2)This assumes that the Sub-division and the Consolidation is completed. DEFINITIONS The following definitions apply throughout this announcement, unless the contextrequires otherwise: "Admission" the admission of the issued Ordinary Shares (including, for the avoidance of doubt, the New Ordinary Shares) to the Official List and to trading on the London Stock Exchange's main market for listed securities becoming effective in accordance with the Listing Rules and the London Stock Exchange's Admission and Disclosure Standards "AGM" annual general meeting "Bank of the Governor and Company of the Bank of ScotlandScotland" or"BoS" or "theBank" "Basic the number of Open Offer Shares for which a QualifyingEntitlement" Shareholder or the holder of the BMG Warrants is entitled to apply, being 8 Open Offer Shares for every 75 Existing Ordinary Shares or BMG Warrants registered in such Qualifying Shareholder's or the holder of the BMG Warrants' name at the Record Date "BMG Warrants" the warrants issued to SonyBMG to subscribe for up to 3,255,653 ordinary shares in the Company at a price of £0.35 per share issued on 31 March 2003 "Board" or the board of directors of the Company"Directors" "Business Day" a day (other than a Saturday or Sunday) on which banks are generally open for business in London "Closing Price" the closing middle-market quotation of an Existing Ordinary Share as derived from the Daily Official List published by the London Stock Exchange "Company" or The Sanctuary Group plc"Sanctuary" or"SanctuaryGroup" "Consolidation" the proposed consolidation of every 200 ordinary shares of 0.01 pence each (created pursuant to the Sub-division) into one Ordinary Share "Convertible Loan the £30,000,000 Convertible Loan Notes due 2008, issued by theNotes" Company in three tranches on 23 November 2003, 27 February 2004 and 31 March 2005 "Deferred deferred shares of 12.49 pence each in the capital of theShares" Company (to be created pursuant to the Sub-division) "EBITDA" earnings before interest, tax, depreciation and amortisation "EGM" or the extraordinary general meeting of the Company (or any"Extraordinary adjournment thereof) yet to be convenedGeneralMeeting" "Enlarged Share the issued share capital of the Company following the PlacingCapital" and Open Offer "Euro" or "•" the single currency of the member states of the European Communities that adopt or have adopted the euro as their lawful currency under the legislation of the European Union or European Monetary Union "Evolution Evolution Securities LimitedSecurities" "Executive Andrew John Taylor, Paul Frederick Wallace, Merck Mercuriadis,Directors" Roderick Charles Smallwood, Aky Najeeb, Joseph Cokell and Michael David Miller "Existing the ordinary shares of 12.5 pence each in the capital of theOrdinary CompanyShares" "Group" the Company together with its subsidiaries and subsidiary undertakings "Issue Price" 50 pence per New Ordinary Share "London Stock London Stock Exchange plcExchange" "New Bank the Company's new bank facilities with Bank of Scotland whichFacility" are conditional, inter alia, on completion of the Placing and Open Offer "Non-executive James Christopher Driscoll M.B.E, John Desmond Thomas GreenallDirectors" and Tina Mary Sharp "New Ordinary the Open Offer Shares and the Placing SharesShares" "Official List" the list maintained by the UK Listing Authority pursuant to Part VI of FSMA "Open Offer" the open offer being made by Evolution Securities Limited, as agent for the Company, to Qualifying Shareholders constituting an invitation to subscribe for 39,931,148 new Ordinary Shares (which shares have been conditionally placed with institutional investors, subject to clawback to satisfy valid applications by Qualifying Shareholders) "Open Offer an entitlement to subscribe for Open Offer Shares, allocatedEntitlement" to a Qualifying Shareholder or to the holder of the BMG Warrants pursuant to the Open Offer "Open Offer the new Ordinary Shares available for subscription under theShares" Open Offer "Ordinary ordinary shares of 2 pence each in the capital of the CompanyShares" to be created pursuant to the Sub-division and Consolidation and pursuant to the ordinary resolution increasing the share capital of the Company to be proposed at the EGM "Placees" subscribers of Placing Shares pursuant to the Placing "Placing" the conditional placing by Evolution Securities of the Placing Shares on behalf of the Company on the terms and subject to the conditions contained in the Placing and Open Offer Agreement "Placing and Open the agreement dated 3 February 2006 between EvolutionOffer Securities and the Company relating to the Placing and OpenAgreement" Offer the 180,000,000 new Ordinary Shares conditionally placed with institutional investors pursuant to the Placing "PlacingShares" "Pounds" or "£" lawful currency of the United Kingdomor the "PoundsSterling" "Qualifying holders of Existing Ordinary Shares on the register of membersShareholders" of the Company on the Record Date (other than certain overseas Shareholders) "Record Date" The record date as set out in the Prospectus "Resolutions" the resolutions to be proposed at the EGM "Shareholders" holders of Existing Ordinary Shares "SonyBMG" SonyBMG Music Entertainment (UK) Limited (previously BMG UK & Ireland Limited) "Sub-division" the proposed sub-division of the share capital of the Company to be set out in the Notice of EGM resulting in each issued Existing Ordinary Share being sub-divided into one ordinary share of 0.01 pence and one Deferred Share "US" or "USA" or the United States of America, each State thereof, its"United States" territories,possessions and all areas subject to its jurisdiction "US dollar" or the lawful currency for the time being of the US"$" "Warrants" the warrants to subscribe for up to 8,919,722 ordinary shares inthe Company issued in connection with the Convertible Loan Notes This information shall not constitute or form any part of any offer orinvitation to subscribe for, underwrite or otherwise acquire, or anysolicitation of any offer to purchase or subscribe for, securities including inthe United States. This information does not constitute an offer of securities for sale in theUnited States. Neither this announcement nor any copy of it may be taken ordistributed into the United States or distributed or published, directly orindirectly, in the United States. Any failure to comply with this restrictionmay constitute a violation of US securities law. The securities referred toherein have not been and will not be registered under the Securities Act, andmay not be offered or sold in the United States unless they are registered underthe Securities Act or pursuant to an available exemption therefrom. No publicoffering of securities of is being made in the United States. This information is provided by RNS The company news service from the London Stock Exchange