Upton sues former Reject Shop directors: Retail group's writs accompanied by pounds 5.5m rescue rights

UPTON & SOUTHERN, the northern retail group, yesterday issued writs against five former directors of The Reject Shop, the chain it bought nine months ago. The company also launched a pounds 5.5m rescue rights issue, without which it would have to cease trading.

'Without this fund-raising, RJS (The Reject Shop) will have no alternative but to cease trading and, as a consequence, Uptons will lose the support of its bankers and hence its ability to continue trading,' the company said.

U&S bought the troubled 33- shop chain for pounds 2.3m. It alleges that an internal audit discovered two months later that the stocks on the shelves did not match the accounts. The alleged shortfall is so crippling that it has driven both companies to the brink of collapse, U&S says.

The writs claim damages against Anthony Hawser, founder and former co-chairman of The Reject Shop, Anna Vinton, also a founder and former co-chairman, Geoffrey Frost, a former executive director, and David Barker, a former non-executive director.

The fifth writ is against Clive Strowger, a former non-executive director who this week was ousted as chief executive of APV, the engineering company, leaving with a pay-off of more than pounds 500,000.

The writs allege that the interim results approved by The Reject Shop's board in October 1993 did not give a true and fair view of the state of the company's business. In detail, they claim: Liabilities of pounds 289,000 were not provided for, including pounds 170,000 of rent, accountancy fees of pounds 60,000 and fictitious debts of pounds 27,000.

112 shelf units marked at sale for pounds 49.99 each were put in the books at pounds 2,900, even though many were sitting in skips awaiting disposal.

Managers, fearing they would be sanctioned for reporting many breakages, undervalued the amount of soiled stock.

Pre-paid goods bought at a discount as part of a promotion were booked without revealing future liabilities of pounds 232,000.

Certain unsaleable items returned from the shelves to the warehouse were booked at an artificially high level, increasing stock levels by pounds 551,000.

Upton & Southern complains that the cash flow problems caused by the stock shortfall sabotaged negotiations with an unnamed overseas investor who was prepared to make a substantial equity investment. It is seeking damages, costs, interest and further payments.

Anthony Hawser denied that he misrepresented the amount of stocks to U&S. He noted that for three months before the acquisition Ian Steven, U&S finance director, and auditors from BDO Binder Hamlyn were able to scrutinise the company and assess the value of stocks for themselves.

Mr Hawser said the recent cash flow problems were caused by the failure of the new management's marketing initiative.

'(They) were not caused by a shortage of stock but by the abandonment of The Reject Shop's well established policy of offering obvious value-for-money promotions following upon Messrs Gould (Jeffrey Gould, U&S chief executive) and Steven assuming effective control,' he said.

The origins of the dispute lie in the ambitions of Mr Gould to expand his recovering retail group into the south of England and in the decision by Mr Hawser and Ms Vinton, owners of 85 per cent of Reject Shop stock, to sell their troubled company.

Mr Gould was appointed chief executive of U&S in December 1992 by the newly installed chairman James Hodkinson, formerly of Kingfisher.

He launched a successful debt restructuring with a rights issue, renegotiated arrangements with banks, and started to turn around trading in the stores.

In May 1993 Mr Gould signalled his enthusiasm for an acquisition to double the size of the company.

Meanwhile, profits at The Reject Shop continued to decline. The company had tried to counteract the fall in the housing market by emphasising its giftware range but in doing so lost its core furniture and household products buyers. It also priced its giftware too high.

Mr Hawser was forced to slash the dividend as profits fell from pounds 652,000 in 1992 to pounds 345,501 in 1993. He warned that future trading prospects looked gloomy.

Since the takeover shares in U&S have fallen from 65p to a close yesterday of 5.5p.

(Photographs omitted) View From City Road, page 33