ISA INTERNATIONAL PLC
3 September 1999
ISA INTERNATIONAL plc ('ISA')
PROPOSED DISPOSAL OF JOHN HEATH (HOLDINGS) LIMITED
('Heath')
&
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30th JUNE 1999
* The Board of ISA INTERNATIONAL plc, the European
market leader in the distribution of electronic office
supplies, announces the proposed disposal of its wholly-
owned subsidiary, Heath, to Kaye Office Supplies Limited
('Kaye')
* Heath is the second largest wholesaler of commercial
stationery and office products in the UK and Kaye,
through its subsidiary Kingfield Wholesale Supplies
Limited ('Kingfield'), is the third largest
* ISA believes the disposal will allow the Group to
concentrate on its core competencies and exploit the fast
growth areas of the office consumables market
* The consideration for the disposal is the issue of
such number of new ordinary shares in Kaye credited as
fully paid so as to represent 47 per cent. of its
enlarged issued share capital and a cash payment of
£520,000. The ISA holding in the combined business will
be treated as an associate investment
* In addition, on completion, ISA will receive £19
million in cash from Heath by the repayment of £16.5
million of intra-group debt owed by Heath to ISA and a
dividend of £2.5 million to ISA
* The acquisition of Heath by Kaye is expected to
result in cost savings and integration benefits, which
ISA will share in as a result of its 47 per cent.
interest in the combined business
* ISA has announced interim results for the six months
ended 30th June 1999
Interim Interim
1999 1998
Turnover £204.9m £180.2m
Operating profit £3.4m £3.3m
Pre-tax profit £2.1m £2.3m
Earnings per share 2.6p 3.1p
Gross profit margin 19.3% 18.1%
David Heap, Chairman and Chief Executive of ISA,
commented:
'I am delighted that we have reached agreement to sell
the Heath operation to Kaye, under a separate management
team, as this will allow ISA to exploit the fast growth
areas of the office consumables market, whilst retaining
the future benefits of ISA's participation in the
combined business for ISA's shareholders.'
This summary should be read in conjunction with the full
text of the following announcement. The interim results
for the six months ended 30th June 1999 are set out in
full in the Appendix.
Due to the size of the transaction, there will be an EGM
at 11.00 am on 27th September 1999 to gain shareholders'
approval.
For further information, please contact:
ISA 0181 614 7814
David Heap, Chairman & Chief Executive
NM Rothschild 0113 243 4347
David M Forbes
Square Mile Communications 0171 601 1000
Susan Ellis or Louise Robson
3rd September 1999
ISA INTERNATIONAL plc
PROPOSED DISPOSAL OF JOHN HEATH (HOLDINGS) LIMITED
&
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30th JUNE 1999
ISA INTERNATIONAL plc ('ISA'), the European market leader
in the distribution of electronic office supplies,
announces that it has conditionally agreed to sell the
entire issued share capital of Heath, the holding company
of the Heath Group, to Kaye. As consideration for the
sale ISA will receive such number of new ordinary shares
in Kaye, credited as fully paid, so as to represent 47
per cent. of Kaye's enlarged issued ordinary share
capital (equivalent to 40.2 per cent. of the diluted
share capital of Kaye, assuming that the maximum number
of options under the Kaye share option schemes are
granted and exercised) and a cash payment of £520,000.
On completion ISA will also receive £19 million in cash,
being the repayment of £16.5 million of intra-group debt
owed to ISA by Heath and a dividend of £2.5 million. ISA
will also receive deferred consideration of a maximum of
£2.1 million on the sale or flotation of the combined
business.
The combination of Heath and Kaye, the second and third
largest UK wholesalers of commercial stationery and
office products respectively, is expected to result in
cost savings and integration benefits which ISA will
share in as a result of its 47 per cent. interest in the
combined business.
In view of its size, the transaction is conditional on
the approval of ISA shareholders at an extraordinary
general meeting to be held at 11.00 am on 27th September
1999. A circular containing details of the proposed
transaction and notice of the extraordinary general
meeting will be posted to shareholders as soon as possible.
Background to and reasons for the transaction
ISA has traditionally supplied electronic office
consumables to both dealer customers and end users. In
contrast, commercial stationery wholesalers such as
Heath, Kingfield and Spicers Limited supply a wide range
of office stationery products to dealers rather than end
users.
In response to an increasingly competitive trading
environment in the stationery office products market, ISA
acquired Heath from Atapco International Inc. in March
1998 in order to provide UK customers with a product
range which included stationery and other office products
as well as its traditional consumable electronic office
supplies.
ISA's rationale for the acquisition was its belief that
the approach it had traditionally adopted in supplying
consumable electronic office supplies could be replicated
in the wider stationery and office products market.
Whilst certain benefits have indeed resulted from the
acquisition, particularly through the ability to offer a
'one-stop shop' service to dealer customers, concerns
have arisen amongst some of the Heath group's dealer customers,
who perceive a potential conflict arising from ISA's
existing direct selling activities.
Against this background, ISA has examined a number of
strategic alternatives and, following discussions with
Kaye, has concluded that the benefits that can be
achieved by merging its Heath business with one of its
major competitors exceed the benefits of retaining Heath
as part of the ISA group.
The board of ISA expects that this combination will
result in significant cost savings and integration
benefits, although the full extent of these benefits is
not expected to be realised for at least 18 months. In
order to allow ISA to maximise its share of these
benefits, the board believes that it is essential to
retain an equity interest in the combined business. ISA
expects short-term dilution in earnings per share
reflecting the costs of integrating the Heath and Kaye
businesses until such time as the benefits are fully
realised.
In order to facilitate investment and growth in the
combined business in the initial period following the
transaction, no dividends will be declared or paid by
Kaye from completion of the transaction until the
financial year commencing 1 January 2001. Thereafter, an
annual dividend will be declared and paid representing in
total 40 per cent. of the combined business's adjusted
post-tax profits.
The principal shareholders of Kaye have agreed that they
will work towards the sale or flotation of the combined
business around 2003 in order to allow them to realise
their investment.
The board believes that the transaction will allow the
ISA group to exploit the fast growth areas of the office
consumable market whilst still participating in the
benefits of the combined business as described above.
Management of the combined business
Jeff Hewson joined the board of ISA in November 1998 to
bring his extensive experience in the US stationery and
office products market to bear on the Heath business. In
particular, he was credited with developing the strategy
that took United Stationers, Inc from a turnover of
US$900 million to US$2 billion including the
consolidation of two US$400 million mergers with similar
product and operational characteristics to the combined
business. Jeff Hewson has agreed to apply this
invaluable experience to the combined business by
accepting the role as Chairman of Kaye following
completion. Accordingly, Jeff Hewson will resign from
the board of ISA at that time.
Following completion, the board of the combined business
will also include the Kaye management as executive
directors and David Heap, Hans Fristedt and John Forster
(a Bay Industrial Holdings Limited representative) as non-
executive directors. 3i Group plc will retain the right
to appoint a non-executive director to the board of Kaye,
but has indicated that it has no present intention to do
so.
Information on the Heath group
The Heath group is the second largest wholesaler of
commercial stationery and office products in the UK based
on turnover and is one of only three such wholesalers
operating on a national basis in the UK. The Heath group
is the only UK member of Euro Buro, a large European
office products buying group.
The Heath group acts as a wholesaler and distributor,
buying from stationery and office product manufacturers
in bulk and distributing to independent commercial
stationers and retailers. It does not supply directly to
end users. The Heath group has a database of
approximately 4,000 active customers. It sells its products
mainly through a combination of field sales and telesales
nationwide, supported by two annual catalogues and a number
of direct mailings that are published and produced for its
dealer customers. These catalogues cover over 13,000
product lines.
As at 31st December 1998, the Heath group employed
approximately 700 people across a network of 13 service
centres, 12 in the UK and one in Dublin.
For the year ended 31st December 1998, Heath's financial
statements reported turnover of £108.67 million (1997:
£101.81 million) and profit before taxation of £1.07
million (1997: £2.94 million) after exceptional charges
of £1.57 million (1997: £1.26 million) and profits on the
disposal of a subsidiary of nil (1997: £3.57 million).
As at 31 December 1998, Heath had net assets of £10.79
million (1997: £8.85 million).
Since 1st January 1999, Heath has achieved a material
increase in turnover when compared with the same period
last year have which has more than compensated for a
slight decline in gross margin percentage and increased
overheads caused by specific customer outsourcing
projects and the closure of two distribution centres.
Information on Kaye and Kingfield
Kaye is a holding company whose principal investment and
operating company is Kingfield. Kingfield is the third
largest wholesaler of commercial stationery and office
products in the UK based on turnover. Since September
1997, Kingfield has been a member of Inter ACTION Connect
S.A., a European alliance of eight wholesalers and
distributors.
Kingfield acts as a wholesaler and distributor, buying
from stationery and office product manufacturers in bulk
and distributing to independent commercial stationers and
retailers, who in turn supply corporate and small
business end users. Kingfield has a database of
approximately 2,500 active customers. It sells its
products through telesales, direct mailings and an annual
catalogue that covers approximately 16,000 product lines.
As at 31st December 1998, Kingfield employed
approximately 570 people in seven depots (including two
regional distribution centres) in the UK.
The principal shareholders in Kaye include Bay Industrial
Holdings Limited (which comprise the Kaye family
interests), 3i Group plc and Kaye senior management.
For the year ended 31st December 1998, Kaye achieved
turnover of £80.68 million (1997: £70.87 million) and
profit before taxation of £1.75 million (1997: £0.83
million). As at 31st December 1998, Kaye had net assets
of £5.73 million (1997: £4.92 million).
Since 1st January 1999, turnover has been materially
ahead of the comparative period for the previous year and
gross margins have been broadly maintained.
Consequently, the Kaye directors have stated that trading
performance to date is materially better than last year.
It is intended that at completion Kaye will pay a dividend
of £0.42 million, representing its shareholders' entitlement
to dividends for the current year pro-rated for the
period up to completion.
Kaye has arranged borrowing facilities for the combined
business of a maximum of £42 million to cover existing
indebtedness in Heath and Kingfield, amounts payable to
ISA as part of the transaction and to cover seasonal cash
flow requirements.
Summary and prospects
The development of a 'one stop shop' offering of
traditional office products and electronic office
consumables within Heath following its acquisition in
March 1998 has been successful. However, the new board
now believe it will be difficult to fully realise all the
benefits anticipated at the time of the acquisition and
that the Heath business should be sold to Kaye, one of
its major competitors. ISA will retain a 47 per cent.
interest in this separately managed operation for the
benefit of its shareholders.
Following the disposal of Heath, the Group will benefit
from being able to focus on its direct operations
supported by the advantages derived from the trading
volumes generated by its continuing electronic office consumable
wholesale activities across Europe. The board looks forward to
the challenges facing the Group over the next six months.
Commenting on the disposal, David Heap, Chairman and
Chief Executive said:
'I am delighted that we have reached agreement to sell
the Heath operation to Kaye, under a separate management
team, as this will allow ISA to exploit the fast growth
areas of the office consumable market whilst retaining
the future benefits of ISA's participation in the
combined business for ISA's shareholders.'
For further information, please contact:
ISA 0181 614 7814
David Heap, Chairman & Chief Executive
NM Rothschild 0113 243 4347
David M Forbes
Square Mile Communications 0171 601 1000
Susan Ellis or Louise Robson
Expected Timetable
Extraordinary general meeting of ISA
to approve the transaction 27th September 1999
Extraordinary general meeting of Kaye
to approve the transaction 30th September 1999
Estimated date of completion 30th September 1999
Appendix
ISA INTERNATIONAL plc
Interim results for the six months ended 30th June 1999
Chairman's statement
The first half of 1999 has been a difficult one for ISA
but we have continued to work hard at increasing margins,
and the overall trading performance of the Group is in
line with expectations.
The Group also announces that it has entered into a
conditional agreement to sell Heath to Kaye for £19.52
million in cash and a 47 per cent. shareholding in the
combined business.
The future benefits arising from combining these two
businesses are expected to be material and will allow the
Group to concentrate more fully on its other activities.
ISA's share of the future results of the combined
business will be included in the Group's profit and loss
account as an associate company.
Financial results
Total Group turnover for the six months ended 30th June
1999 was £204.9 million (1998: £180.2 million),
representing an increase of 13.7 per cent.
At the time of our AGM statement in May, I commented that
steps were being taken to increase our gross profit
margin and this has risen to 19.3 per cent. in the first
half of this year (1998:18.1 per cent). The gross profit
margin excluding the results of Heath was 17.3 per cent.
compared with 16.7 per cent. last year, and a number of
initiatives are expected to improve gross margins further
over the next twelve months.
Total operating profit increased slightly by 3 per cent.
to £3.4 million (1998: £3.3 million). Profit before tax
fell to £2.1 million (1998: £2.3 million) after increased
interest costs arising from the acquisition of Heath.
Earnings per share reduced to 2.6p (1998: 3.1p).
Operating review
Turnover in our Direct operations rose by 4.7 per cent.
to £73.3 million (1998: £70.0 million), with increases in
Germany, Norway and Sweden, offset by falls in France and
Austria with the UK being largely comparable with the
previous year.
Turnover in our Wholesale operations, which includes our
Retail and Export operations, rose by 19.4 per cent. to
£131.6 million (1998: £110.2 million). Turnover
excluding Heath fell by approximately 5per cent as a
result of lower dealer volumes offset by higher retail
sales.
A reduction in the level of overheads, together with
ongoing improvements in working capital, continues to be
a priority.
In May 1999, Priority Fulfilment Services Europe, BV
('PFS'), a wholly owned subsidiary of Daisytek
Incorporated, was appointed to handle our warehouse and
logistics operation in Germany. The agreement with PFS,
which specialises in this field, will allow our German
division to concentrate on expanding its sales
performance in the German market.
The introduction of a new executive share option scheme
for approximately 160 senior employees in March has been
very well received, and we are also extremely pleased
with the interest shown by employees in the Group wide
Save As You Earn Share Option Scheme launched in June.
Dividend
The Board did not recommend a final dividend in
respect of the year ended 31st December 1998 in view of
the challenges faced by the Group. The Board has
reviewed the interim results and does not consider it is
yet appropriate to recommence the payment of dividends
and has not therefore declared a dividend in respect of
the six months ended 30th June 1999. The future dividend
policy will remain under review in the light of the
proposed disposal of Heath and the future prospects of
the Group.
Prospects
The development of a 'one stop shop' offering of
traditional office products and electronic office
consumables within Heath following its acquisition in
March 1998 has been successful. However, the new Board
now believe it will be difficult to fully realise all the
benefits anticipated at the time of the acquisition and
that the Heath business should be sold to Kaye, one of
its major competitors. The Group will retain a 47 per
cent. interest in this separately managed operation for
the benefit of ISA's shareholders.
Following the disposal of Heath, the Group will benefit
from being able to focus on its Direct operations
supported by the advantages derived from the trading
volumes generated by its continuing electronic office
consumable wholesale activities across Europe.
Trading results in July have been adversely affected by
costs relating to the consolidation of our European
operations. Otherwise the Group's performance has
reflected the anticipated downturn caused by the
traditional holiday season. Consequently it is
difficult, at this stage, to draw any meaningful
conclusions about the trading outcome for the second
half.
The results for the Group for the year ending 31st December
1999 (including the relevant portion of the results of
the combined Kaye and Heath business for the period between
completion of the sale of Heath and the year end) will
reflect the re-organisation of the Group's European
operations as well as the costs of integration of the
Heath and Kingfield business, which is expected to give
rise to short-term dilution in earnings per share until
such time as the benefits are realised.
However, the conclusion of negotiations on the sale of
Heath and the improved clarity of our distribution
channels should allow management to move the continuing
ISA Group forward.
We look forward to the challenges facing the Group over
the next six months.
David Heap
Chairman & Chief Executive
3rd September 1999
ISA INTERNATIONAL plc
Group profit & loss account Unaudited Unaudited Audited
6 months to 6 months to 12 months to
30th June 30th June 31st December
1999 1998 1998
£000 £000 £000
Turnover 204,912 180,167 385,269
Cost of sales (165,330) (147,580) (314,205)
-------- -------- --------
Gross profit 39,582 32,587 71,064
Overheads (35,975) (29,177) (63,856)
Exceptional items - - (1,785)
-------- -------- --------
3,607 3,410 5,423
Amortisation of goodwill (221) (131) (355)
Operating profit 3,386 3,279 5,068
Interest (net) (1,318) (1,007) (2,349)
-------- -------- --------
Profit before taxation 2,068 2,272 2,719
Tax (682) (750) (1,004)
-------- -------- --------
Profit after taxation 1,386 1,522 1,715
Dividends - (537) (537)
-------- -------- --------
Retained profit 1,386 985 1,178
-------- -------- --------
Earnings per ordinary share
Basic 2.6p 3.1p 3.4p
Before exceptional items 2.6p 3.1p 5.8p
Fully diluted 2.4p 2.9p 3.1p
Dividend per ordinary share - 1.01p 1.01p
Summarised group balance sheet Unaudited Unaudited Audited
30th June 30th June 31st December
1999 1998 1998
£000 £000 £000
Fixed assets
Tangible assets 10,975 13,347 12,695
Goodwill 8,358 8,343 8,660
Investments - 126 -
-------- -------- --------
19,333 21,816 21,355
-------- -------- --------
Working capital
Stocks 27,269 27,953 37,759
Debtors due within one year 67,784 65,686 67,835
Creditors due within one
year (excluding borrowings) (49,192) (58,530) (61,086)
-------- -------- --------
45,861 35,109 44,508
-------- -------- --------
Net cash and bank (16,798) (9,168) (18,479)
Loans and hire purchase
obligations (17,639) (18,335) (17,953)
Deferred taxation (387) (847) (406)
-------- -------- --------
30,370 28,575 29,025
-------- -------- --------
Capital and reserves
Share capital and share
premium account 15,599 15,598 15,599
Shares to be issued 3,976 3,976 3,976
Reserves 10,795 9,001 9,450
-------- -------- --------
30,370 28,575 29,025
-------- -------- --------
Reconciliation of movements in
shareholders' funds Unaudited Unaudited Audited
6 months to 6 months to 12 months to
30th June 30th June 31st December
1999 1998 1998
£000 £000 £000
Retained profit for the period 1,386 985 1,178
New share capital issued - 12,504 12,505
New share capital to be issued - 3,976 3,976
Goodwill write off - - 227
Translation differences on foreign
currency net investments (41) (186) (157)
-------- -------- --------
Net addition to
shareholders' funds 1,345 17,279 17,729
Opening shareholders' funds 29,025 11,296 11,296
-------- -------- --------
Closing shareholders' funds 30,370 28,575 29,025
-------- -------- --------
Summarised group cash flow Unaudited Unaudited Audited
statement 6 months to 6 months to 12 months to
30th June 30th June 31st December
1999 1998 1998
£000 £000 £000
Net cash inflow (outflow)
from operating activities
Operating profit before goodwill 3,607 3,279 5,423
Depreciation 1,751 1,471 3,390
Increase in working capital (976) (1,448) (7,290)
-------- -------- --------
4,382 3,302 1,523
-------- -------- --------
Returns on investment and
servicing of finance (1,746) (880) (1,795)
-------- -------- --------
Taxation paid (459) (417) (2,132)
-------- -------- --------
Capital expenditure and
financial investment
Purchase of tangible fixed assets (1,345) (2,012) (3,710)
Sale of tangible fixed assets 1,255 189 689
-------- -------- --------
(90) (1,823) (3,021)
-------- -------- --------
Acquisitions
Purchase of subsidiary undertakings (68) (1,004) (3,807)
Net cash acquired with
subsidiary undertakings - 733 763
Repayment of acquired debt - (16,500) (16,500)
-------- -------- --------
(68) (16,771) (19,544)
-------- -------- --------
Equity dividends paid - (939) (1,477)
-------- -------- --------
Net cash inflow (outflow)
before financing 2,019 (17,528) (26,446)
Financing
New loan - 16,500 16,500
Repayment of amounts borrowed - (350) (445)
Capital element of hire
purchase payments (330) (251) (579)
-------- -------- --------
(330) 15,899 15,476
-------- -------- --------
Increase (decrease) in cash
in the period 1,689 (1,629) (10,970)
-------- -------- --------
Analysis of movement in net Unaudited Unaudited Audited
debt 6 months to 6 months to 12 months to
30th June 30th June 31st December
1999 1998 1998
£000 £000 £000
Balance at beginning of period (36,432) (8,516) (8,516)
Increase (decrease) in cash
in the period 1,689 (1,629) (10,970)
Cash outflow from decrease in debt 330 601 1,024
New loans - (16,500) (16,500)
New hire purchase contracts (14) (1,312) (1,319)
Effect of foreign exchange
rate changes (10) (147) (151)
-------- -------- --------
Balance at end of period (34,437) (27,503) (36,432)
-------- -------- --------
Notes to the financial information
1. The interim financial information has been prepared
on the basis of the accounting policies set out in the
1998 statutory accounts.
2. The taxation charge is calculated by applying the
directors' best estimate of the annual effective tax rate
to the profit for the period.
3. The calculation of earnings per ordinary share is
based on the profit after taxation of £1,386,000 (1998:
£1,522,000) and on 53.2 million (1998: 48.7 million)
ordinary shares being the weighted average number of
shares in issue during the period. The calculation of
fully diluted earnings per ordinary share assumes the
issue of the maximum number of shares under the terms of
the acquisition of John Heath (Holdings) Limited and
the dilutive effect of outstanding share options.
4. A statement of total recognised gains and losses is
not included as there have been no material movements
other than those reported in the Profit and Loss account
and the translation differences on foreign currency net
investments shown in the Reconciliation of Movements in
Shareholders' Funds.
5. There have been no discontinued operations in the
six months ended 30th June 1999.
6. The preceding financial information does not
constitute statutory accounts as defined in Section 240
of the Companies Act 1985. The financial information for
the year to 31st December 1998 is based on the statutory
accounts for that year. These accounts, upon which the
auditors issued an unqualified opinion, and which did not
contain any statement under 237(2) or (3) of the
Companies Act 1985, have been delivered to the Registrar
of Companies.