<p><strong>Current Position in the Harcourt Pubs Portfolio</strong></p>

<p>&nbsp;</p>

<p>Through a combination of<strong> </strong>poor management, reckless spending and the desire to build a pub group for which there was never a mandate, investment proposal, or consultation with shareholders, James McCulloch has dissipated huge sums of money. The result is that, prior to the impact of Covid-19, each of the SPVs have seen a very considerable drop in value, all are loaded with debt and cash, except in one or two, is so tight that the companies are on the verge of collapse. Valuations indicate that all pubs sit below the original purchase cost prior to the redevelopment spends. The Harcourt, KPH and Crown potentially have no shareholder value and are unlikely to be able to pay creditors in full, if at all. Only the Coach has any significant cash and that would probably be dissipated quickly in trading losses in it were to be re-opened under current Covid-19 conditions. Every pub will need urgent discussions with lender to ensure that they do not appoint receivers and active management will be required to engage with creditors and suppliers to ensure they do not precipitate collapse. It is likely that shareholders in each pub SPV will need to be approached to see whether they can be persuaded to invest cash to prevent collapse. In short the position is a disaster and shareholder value has been virtually wiped out. It is likely that a number of the pubs have potentially been trading by insolvent were it not for the de facto recycling of cash from one pub to another even though there is no legal group in place. The vast majority of shareholders are completely unaware of the true financial position due to a lack of reporting or provision of misleading information.</p>

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<p>Shareholders in each pub will wish to investigate the management of the SPV and to establish what steps have been taken by James McCulloch as principal director, the failure to provide any accurate financial information and whether there have been any actions taken which are illegal, &nbsp;contrary to company law and whether JM has benefited in any way from use of company assets.</p>

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<p>The major issues and areas of potential scrutiny are set out below</p>

<p>&nbsp;</p>

<p><strong>Creating a Pub group contrary to the best interests of each shareholder group</strong></p>

<ul>
	<li>Each pub was a standalone investment in a separate company with individual shareholders who were marketed to individually. An EIS&nbsp; prospectus was provided to investors for each pub which supposedly had its own business plan and was to be run on a standalone management basis and be exited at the optimum time after the expiry of the three-year EIS hold period.</li>
	<li>James McCulloch, without reference or agreement of shareholders in each pub SPV decided to attempt to create a pub group to promote his own ends, which created a central cost burden without any attention to the benefit derived by each pub or recognition that the offering needed to be different to cater to each pub&rsquo;s location, attributes and potential clientele. For example, Henry Harris was brought in on a salary double what a head chef should be paid and attempted to shoehorn the same type of offering into each pub even though it was largely inappropriate. The Harcourt had already been burdened with an operating agreement and a food offering which was unworkable and as a result has incurred a double overhead burden.</li>
	<li>Despite being asked by shareholders on many occasions to explain the basis of allocation of central overhead to each pub and benefit that was derived JM refused or failed to provide any information. It has become apparent that no such formal basis exists, and allocation has been arbitrary meaning that the respective interests of shareholders in each pub company have not been observed or protected</li>
	<li>In the normal course bulk buying agreements with suppliers would result in retrospective rebates &ndash; there is a concern that such rebates have not been provided to individual pub companies</li>
	<li>By charging and re-cycling Ducalian/Harcourt Investments management fees some pubs have in effect been cross-subsidising other pubs and shareholder interests have been compromised and the true financial position obscured. Without such subsidy it is now apparent that certain companies would have been effectively insolvent</li>
	<li>C-19 bounce-back loans have been used to pay the debts of other pubs or management fees</li>
	<li>Despite being challenged by certain of the Harcourt shareholders in May 2019 to provide an exit proposal and making repeated assurances that he would do so JM repeatedly failed to deliver anything</li>
</ul>

<p>&nbsp;</p>

<p><strong>Fundamental mismanagement leading to major loss of shareholder value</strong></p>

<ul>
	<li>The debt burden loaded onto pubs caused by a failure to complete building works within budget, large central overheads and operating losses means that most of the pubs were close to collapse prior to the impact of Covid-19. In a low interest rate environment, the Crown is paying interest at 11% pa and the KPH at 9% eroding shareholder value without any discussion with shareholders.</li>
	<li>There has been reckless spending and fundamental mismanagement across the pubs at large. Tight cost control and managing to KPIs is essential in running pubs effectively. The performance data for each of the pubs shows major underperformance against normal industry norms.&nbsp;</li>
</ul>

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<p><strong>Failure to obtain EIS certification</strong></p>

<ul>
	<li>EIS status was a critical part of the investment proposition. However, EIS certificates have still not been received for three of the pubs;
	<ul style="list-style-type:circle">
		<li>The Hero completed its 4-month trading period and could apply for its EIS certificate in June 2018.</li>
		<li>The KPH completed its 4-month period in February 2019</li>
		<li>The Crown completed its trading period in January 2019</li>
	</ul>
	</li>
	<li>It has become apparent that JM has shown a complete disregard to the interests of shareholders in enabling them to qualify for their 30% tax rebates (which totals approximately &pound;5million). The requests for certification could and should have been submitted immediately at the end of each 4-month period but this was not done. Subsequently it has become apparent that extended further delays have been caused by a failure to respond to HMRC enquiries. Enquiries from HMRC in December 2019 relating to the Hero and KPH were only responded to in June 2020. &nbsp;It has been suggested by HMRC that pubs are under common control. The supposed creation of a pub group by JM, for which there was no legal basis, has enabled HMRC to attack the EIS status. This is not true but it has undermined shareholders financial standing.</li>
	<li>The investment manager must not take any action which undermines the EIS process and negatively impacts shareholders&rsquo; positions. There are serious concerns that this duty of care has not been exercised</li>
</ul>

<p>&nbsp;</p>

<p>&nbsp;</p>

<p>&nbsp;</p>

<p><strong>Failure to report accurately to shareholders and providing misleading information</strong></p>

<ul>
	<li>A key part of JM&rsquo;s responsibilities as investment manager is to report regularly and accurately on the financial position of each pub. Over the course of each investment there has been a failure to issue regular reports to investors.</li>
	<li>Many shareholders have approached JM seeking information and have either been ignored, fobbed off, or led to believe that all was fine</li>
	<li>On the few occasions when information has been provided it has failed to show the true financial position of the pubs because balance sheets were deliberately not provided.
	<ul style="list-style-type:circle">
		<li>&nbsp;Large deficits have been racked up year by year</li>
		<li>The amount of bank borrowing, and terms have not been revealed. The loan facilities in the Crown and KPH, in particular, have been agreed at insupportable rates</li>
		<li>The amount of accrued third party debt including management fees has not been revealed</li>
		<li>Liquidity issues have been obscured by creating payment flows between individual pubs and Harcourt Investments</li>
		<li>The existence of a debt in the Harcourt of &pound;171k supposedly due to Sansar (Andrew Endean&rsquo;s company) who shareholders were told had been removed from the business over two years ago was not revealed. Andrew Endean was shown as a key individual in the original investment prospectus and this was a material issue</li>
		<li>Annual reports have not been filed on a timely basis and extending accounting periods has contributed to the failure to show the true financial position to shareholders</li>
	</ul>
	</li>
	<li>Many shareholders have consistently chased JM for information on the status of EIS. Shareholders were repeatedly told that delays were due to HMRC&rsquo;s failure to respond. In fact, various of these statements were false. In many instances requests for information from shareholders on EIS status went unanswered</li>
	<li>The existence of the deal between Harcourt Inns and Ducalian Capital, which has had a significant impact on shareholders interests was revealed to shareholders only months after it was done. Capital was raised on the track record of the Ducalian team, whose members are set out in each prospectus</li>
</ul>

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