ISA International PLC
7 May 2002
ISA International plc ('ISA' or 'the Group')
PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2001
BOARD STATEMENT
2001 has seen the Group make further progress towards profit
recovery following the problems of 1999 and 2000. Revenue grew by
22 per cent. to £361.6 million (2000: £296.8 million) as a result
of continuing strong performance in the UK and Scandinavia allied
to significant increases in Continental Europe. During the first
nine months of the year, the return to profitability was
significantly held back by the lack of sufficient cash resources.
This was in part addressed by the investment of £6.9 million (net)
in September 2001 by Daisytek International Corporation
('Daisytek'), a US based, quoted, wholesale distributor of
computer and office supplies. For the full year, the Group
recorded a pre-exceptional operating profit (before share of
associates) of £1.4 million (2000: loss of £0.6 million), of which
approximately £0.9 million was generated in the final quarter of
the year. However, the Group's indebtedness has increased
significantly leading to a higher level of gearing and increased
interest expense. The long-term financing of the Group therefore
still remains a concern.
OFFER ANNOUCEMENT
The Board announced on 16 April 2002 that it was in discussions
with Daisytek regarding a possible cash offer to shareholders at
7.5p per share, with a Daisytek share alternative at or around 10p
per share. Today the details of that offer (the 'Offer') are being
announced, although the making of the Offer and the posting of the
Offer Document are conditional upon the approval and signing by
the Board of the audited consolidated financial statements of the
Group for the year ended 31 December 2001, that those financial
statements do not vary in any material respect from this
preliminary announcement and that the audit opinion in respect of
those financial statements is not subject to any qualification nor
refers to any fundamental uncertainty save in respect of matters
identified in this preliminary announcement. In recommending the
Offer by Daisytek, the Board has considered a number of factors,
which are detailed further below, relating to the financial
position of the Group, the short term requirement for capital and
the financing options available which, under the terms of
Daisytek's investment, are very restricted without its support.
The Board has concluded that the Offer provides the only viable
solution to ensure the continuation of ISA's business, and
provides an acceptable exit for shareholders in the circumstances.
Daisytek has provided £3.0 million of interim funding to support
the business during the Offer process.
INVESTMENT BY DAISYTEK
In late 2000, the Board identified that the Group's balance sheet
had been severely weakened by the losses attributable to the
outsourced European logistics arrangement made in 1999. The
related increase in debt combined with working capital
requirements to finance growth was likely to jeopardise the
recovery process. The Board therefore began to seek potential
funding sources and was later able to announce that a funding and
strategic partner had been found in Daisytek.
Following shareholders' approval on 3 September 2001, the Company
issued 8 million Convertible Cumulative Redeemable Preference
Shares at £1 per share ('Preference Shares') to Daisytek,
providing a net £6.9 million cash injection to the business and an
initial strengthening of the balance sheet. It was anticipated
that this funding, combined with the associated Strategic
Alliance, would lead to an increased level of supplier credit in
support of the continuing revenue growth. However, although the
investment strengthened ISA's balance sheet, it did not materially
change the availability of trade credit, nor did it allow ISA to
increase its bank facilities.
FINANCIAL RESULTS
Revenue for the year ended 31 December 2001 increased by 22 per
cent. to £361.6 million (2000: £296.8 million). Gross profit,
excluding exceptional costs in 2000, grew by £5.3 million to
£53.2 million (2000: £47.9 million). The fall in the overall
gross margin is predominantly a function of the change in sales
mix by business channel. Our end user business has grown by 15 per
cent. year on year but the lower margin wholesale and retail
channels have grown faster, primarily due to the recovery of our
Continental European businesses where these channels are a larger
proportion of the sales mix.
Exceptional items, excluding our share of associates, were £1.7
million (2000: £7.7 million). In 2001, the principal exceptional
items were the relocation of the UK National Distribution Centre
(£0.9 million) and central and German senior management
settlements (£0.6 million). Further exceptional items of £2.6
million (2000: £1.2 million) were incurred through our associate,
Kaye Office Supplies Limited ('Kaye'), which trades as Kingfield
Heath. Including exceptional items, the loss on disposal of the
Group's 32 per cent. holding in EXY Group Limited ('EXY') and
amortisation of goodwill, the associates added £2.5 million to the
loss before interest and tax (2000: £0.5 million loss).
Net interest charges increased by 28 per cent. to £3.9 million
(2000: £3.1 million) reflecting the higher level of net debt,
despite a reduction in the average rate of interest for the year.
Kingfield Heath contributed £1.1 million (2000: £1.1 million) to
the Group's overall interest charge. A tax charge of £0.6
million (2000: £0.4 million) arises as the tax due in profit-
making territories exceeds the tax relief available in loss-making
areas. The total loss after tax reduced from £12.4 million in the
previous year to £7.4 million in 2001. After accruing a dividend
of £0.2 million on the Preference Shares, £7.6 million has been
transferred from reserves.
INDEBTEDNESS AND WORKING CAPITAL
The strong sales growth coupled with the reduced commercial credit
lines referred to earlier has increased the Group's indebtedness
and level of banking facilities required. Net debt at 31 December
2001 was £37.3 million, an increase of £11.5 million on the prior
year. Net working capital increased by £10.9 million reflecting
the growth in stock and trade debtors to support the 22 per cent.
increase in revenue. However, trade creditors remained relatively
flat year on year despite the revenue increase as the credit terms
available to the Group were tightened. This can be seen by
average creditor days reducing from 47 to 39 days.
In October 2001, the Group invested £3.2 million (which was
advanced by Daisytek) to maintain its 47 per cent. interest in
Kaye. Daisytek also provided cash and trading facilities
amounting to £0.9 million at 31 December 2001, resulting in total
advances of £4.1 million by Daisytek in the final quarter of 2001.
Subsequent to the year end, debt has increased further due to the
usual seasonal movement in working capital, and to support this,
Daisytek provided a further £4.8 million of finance. Daisytek has
also provided an additional £3.0 million of interim funding to
support ISA during the Offer process. Despite the issue of the
Preference Shares, the losses incurred during 2001 have reduced
net assets to £11.9 million (2000: £12.7 million) resulting in
gearing of 313 per cent. at 31 December 2001.
GOING CONCERN
The accumulated losses and the growth achieved by the Group have
placed a significant strain on the Group's capital resources. In
this respect, your attention is drawn to notes 1 and 12 to the
Financial Information. We operate in a market where robust
financing can lead to significant competitive advantage. In this
environment the Board believes that, without a solid balance sheet
and the availability of adequate credit lines, both trade and
bank, then it will be extremely difficult to return the Group to
sustainable profitability.
The subsequent funding amounting to £11.9 million received from
Daisytek since its £8.0 million (£6.9 million net of costs)
investment in September 2001 has in part bridged the financing gap
that has arisen. Under the terms of a loan facility agreement
entered into by ISA and Daisytek, a significant proportion (£7.9
million) of this funding is due to be repaid to Daisytek on 30
June 2002. If ISA does not repay the loans which are due to be
repaid on 30 June 2002, ISA must immediately seek to undertake an
equity issue to Daisytek (subject to clawback for shareholders) to
raise sufficient funds to repay the full amount advanced by
Daisytek, any Special Dividend (as defined in the Company's
Articles of Association) called for by Daisytek and to provide
further funds not to exceed £10 million to satisfy the ongoing
requirements of the Group.
The Group is currently operating at or around the maximum limit of
its borrowing facilities and the Board anticipates that existing
facilities will be insufficient to cover the Group's trading
requirements in the coming months. Though remaining supportive,
negotiations with the Group's principal bankers have been
unsuccessful in materially increasing the level of facilities. It
is the Board's view that a significant capital injection is
required within the next few months. Daisytek has agreed to
underwrite an equity issue by the Company in the event of the
Offer being declared unconditional. If the Offer is not declared
unconditional and the capital required is not forthcoming, it is
highly unlikely that the Group would be able to continue to meet
its obligations as they fall due.
Under the terms of the Preference Shares, Daisytek was entitled to
receive a preference dividend of £141,278 on 1 April 2002 which
was not paid. If a preference dividend is not paid on the due
date and remains in arrears for more than 14 days, this
constitutes an event of default under the provisions of the
Company's Articles of Association unless waived by Daisytek.
Daisytek agreed to defer the outstanding payment but this
agreement expired on 6 May 2002, at which point an event of
default occurred.
The consequences of the event of default are that Daisytek is
entitled to exercise voting rights in respect of its Preference
Shares such that it may cast a majority of the votes at any
general meeting of the Company; it may appoint additional
directors to the Board so that up to 50 per cent. of the Board is
appointed by Daisytek; and it may within 120 days call for the
payment of a Special Dividend.
If called for, the Special Dividend is to be satisfied either by a
cash payment equivalent to the Kaye Value (as defined below) or,
with the consent of Daisytek, a distribution of assets of the
Company equivalent in value to the Kaye Value. The Kaye Value
means the value of the Company's shareholding in Kaye at the time
when payment of the Special Dividend is required less the costs
incurred by the Company in subscribing or otherwise acquiring
further shares in Kaye after 9 August 2001, such value to be
determined by ISA's auditors if not agreed with Daisytek.
Daisytek has agreed to not exercise its right to vote, as
described above, until the earlier of 30 June 2002 or the date
when clearance is obtained from German competition authorities in
relation to the Offer by Daisytek. It has also waived its right
to call for a Special Dividend until 30 June 2002 and has
indicated that it does not presently intend to appoint further
directors to the Board of the Company.
Due to the level of debt in the balance sheet and the reduction of
net assets following the results of 2001, the Financial Statements
for 31 December 2001 cannot yet be finalised and we draw your
attention to note 2 to the Financial Information. If they were
audited, then the restrictions on borrowing in the Company's
Articles of Association would operate so that the Directors could
not permit any further borrowing whatsoever without the approval
of shareholders by means of an Ordinary Resolution at a General
Meeting. The Board has today sent notice to shareholders of an
Extraordinary General Meeting ('EGM') to be held on 22 May 2002 to
deal with this matter. Irrevocable undertakings to vote in favour
of the resolution at the EGM have been received in respect of 51.1
per cent. of the votes eligible to be cast at the EGM, which is
sufficient to ensure that the resolution is passed. Full details
are contained within the circular which contains the notice of
EGM.
OPERATIONAL REVIEW
ISA deploys the Hybrid business model in selling to the three
principal sales channels:
* Direct - Corporate, Government, Education, Health and SME
customers (End User)
* Wholesale - Contract Stationers and Computer Supplies Re-
sellers
* Retail - Major Supermarket Chains and Computer Supplies
Retailers
The business model maximises growth opportunities in both existing
and emerging markets; leverages Original Equipment Manufacturer
distribution agreements; balances sales volume with sales margin -
all within a low cost infrastructure.
Revenue has grown 22 per cent. year on year against a background
of slowing demand as the key European economies experience lower
growth levels. We have been able to increase market share as our
competitors adjust their business models to a lower growth and
lower margin environment. However, we have not pursued a strategy
of chasing volume at any price. Conversely we have sought to
increase our customer base by offering a good level of service at
a competitive price, leveraging the infrastructure developed
during the last 24 months.
In late 2000 we formed a Pan-European Sales team dedicated to
providing Corporate customers with a high quality and consistent
service through a network of ISA companies and strategic
partnerships. By the end of 2001 this division had gained 16 new
Pan-European customers with estimated annual revenues of £23
million.
We have seen the level of business being conducted electronically
double this year and it now represents more than 12 per cent. of
our total sales value. The solutions we have developed have proven
to be very successful in gaining new customers who see the
benefits of conducting business this way. This increase in the
level of electronic sales traffic is one of the key reasons why we
were able to hold the increase in overheads, prior to exceptional
items, to 7 per cent., substantially below the rate of growth in
revenue.
UK & Ireland
* Revenue increased by 27 per cent. to £141.5 million (2000:
£111.4 million)
* Operating profits pre exceptional items increased by 26 per
cent. to £5.6 million (2000: £4.4 million)
A continuing strong performance from the UK and Ireland saw
significant revenue growth translate into incremental profit.
Despite tough pricing conditions, the UK division's ability to use
the Hybrid business model to maintain an operating return on sales
at 3.9 per cent. is very pleasing. This growth has been achieved
across all channels, though we have seen a spectacular 59 per
cent. volume rise in the retail channel. This channel now accounts
for 11 per cent. of total sales (2000: 8 per cent.). Within our
end user division we have seen a substantial increase in turnover,
22 per cent. year on year. This has been driven by a focus on
attracting large corporate accounts with a good product range,
including a limited selection of general office supplies, high
levels of service and the ability to reduce customer procurement
cost. Our wholesale channel has also seen a very strong
performance, increasing revenues by 26 per cent..
To support the continuing profitable growth of the UK business, we
successfully relocated the National Distribution Centre at the end
of 2001 to a new 114,000 sq.ft. state-of-the-art facility at
Wakefield, West Yorkshire. This unit is more than double the size
of the previous facility. There was no service disruption to
customers during the relocation and we are already seeing many
benefits in terms of cost, efficiency and levels of customer
service. One-off costs of £0.9 million relating to this move,
including asset write-offs and provisions for future expenditure,
have been recognised in the 2001 accounts.
Continental Europe
* Revenue grew 24 per cent. to £175.7 million (2000: £141.6
million)
* Operating losses pre exceptional items decreased to £4.2
million (2000: £4.4 million)
The increase in revenue from this region is extremely encouraging,
a clear indication that we have been successful in regaining
customer confidence following the problems of 1999 and 2000.
The turnaround of the French and German businesses is in progress,
albeit slower than the Board had anticipated. The shortage of
cash during the first nine months of the year directly affected
the French and German businesses as discount and rebate
opportunities were missed. Also, we have not been able to
significantly increase the levels of profitability during the year
due to very aggressive pricing in the market, particularly in
Germany. In order to address this lower margin environment, we
reduced the German headcount by approximately 10 per cent. in
October 2001. With the cost base reset and with additional funding
in place, it is pleasing to report that the levels of losses in
the European businesses substantially reduced in the final
quarter.
In France we successfully opened a new 64,000 sq. ft. warehouse
and office facility at the end of March 2002 within 1km of our
previous location. This more than trebles our warehouse capacity
in France enabling us to provide a broader range of services to
the Paris region.
Further year on year volume growth in Europe during the first
quarter of 2002 has delivered a significantly improved result
compared with the previous year and a continuation of the
encouraging performance seen in the last quarter of 2001.
Scandinavia
* At constant exchange rates, turnover grew 4 per cent. to
£44.4 million
* Operating profits more than doubled to £1.1 million (2000:
£0.5 million)
Within a relatively low growth region, our strategy has been to
focus on margin improvement and productivity gains. In Norway this
strategy, supported by a doubling of the sales volume in general
office products has helped it to return to profitability after a
period of losses - now delivering a 1.2 per cent. return on sales.
In Sweden, the profit growth was less spectacular but still
satisfactory at 17 per cent., producing an increase in the return
on sales from 2.7 per cent. to 3.2 per cent.. Sweden continues to
set the benchmark for the Group in sales ordered electronically,
consistently achieving a level of around 30 per cent. by value.
KINGFIELD HEATH
The Group's 47 per cent. holding in Kaye (which trades as
Kingfield Heath), the second largest wholesaler of general office
supplies in the UK, contributed an operating profit of £0.6
million before our share of their exceptional items amounting to
£2.6 million. In a difficult market, Kingfield Heath revenue was
static at £206.9 million. Profitability suffered due to the
competitive state of the market, the location closure programme
and the commissioning of Arrow, the new state-of-the-art
Distribution Centre at Lutterworth in Leicestershire. This was
opened in November 2001 and after a few teething problems is
operating satisfactorily. The majority of exceptional items
booked by Kingfield Heath in 2001 relate to this project and the
related branch closure plan. It is anticipated that further
exceptional items will be incurred during 2002 as the remainder of
this plan is implemented.
During 2001, Kaye replaced its Chairman, Chief Executive and
Finance Director and simplified its senior management structure to
meet current business challenges.
To assist the business in completing the Arrow project and to
provide sufficient funds to carry out the remainder of its plans,
the Group participated in the refinancing exercise that took place
in October 2001, investing a further £3.2 million to maintain the
Group's equity holding at 47 per cent.. Earlier in the year, the
Group had taken the opportunity to increase its holding from 46.85
per cent. to 47.0 per cent. by purchasing shares offered for sale
by a director of Kaye.
An impairment review has been performed in respect of the
investment in Kaye. The recoverable amount of the goodwill has
been assessed by reference to the net present value of estimated
future cash flows, incorporating the planned costs and expected
benefits of the reorganisation (that was planned at the time of
the acquisition of the Group's interest in Kaye and that is
currently in process) and applying a discount rate of 10 per
cent.. The Board has concluded that no provision is required in
relation to this investment.
DISPOSALS
We exchanged contracts in late December 2001 for the sale of our
32 per cent. holding in EXY Group Limited ('EXY'), whose principal
trading activities consist of the recycling, manufacture and
distribution of consumable office products. Total consideration
was £0.8 million, of which £0.4 million was received in cash in
February 2002, with the balance in the form of non-voting
redeemable 7 per cent. preference shares, redeemable in equal
tranches on 30 April 2002 and 31 August 2002. The first
redemption took place on 30 April 2002. In the year ended 31
December 2001, EXY contributed £0.3 million to the Group's
consolidated profit before tax.
On 22 January 2002 we completed the sale of our Austrian
subsidiary, Supplies Team EDV-Zubehor Handel GmbH ('ST Austria').
Total cash consideration of approximately £1.4 million was
received of which £0.7 million was applied to settle intra-group
balances. In the year ended 31 December 2001, ST Austria had
revenue of £7.4 million and a profit before tax of less than £0.1
million. Net assets of ST Austria at 31 December 2001 were £0.5
million. Our Austrian business had a minor share of a small and
low growth market and therefore was unlikely to provide the Group
with an adequate level of return in the medium-term.
BOARD CHANGE
After three years as Chairman, David Heap left the Board by mutual
consent on 31 December 2001.
DIVIDENDS
The Board does not propose an ordinary dividend for the year ended
31 December 2001.
OUTLOOK AND OFFER CONSIDERATIONS
The Group has made significant progress on the road to profit
recovery from the events of 1999 and 2000. However, this has
placed a heavy burden on the balance sheet and it remains very
stretched, with the level of debt and therefore interest expense
restricting further substantive progress. The Group's business is
characterised by volume growth and low margins, demanding
significant cash resources with the correct balance of equity and
debt.
The UK and Scandinavian operations continue to perform in line
with expectations and the recovery in the European businesses is
progressing well as they have received substantial funding from
the Group. Assuming the funding issues can be addressed, we now
have in place an infrastructure platform where we can leverage
future growth.
Though the Group has, in an operational sense, turned the corner
following the problems of 1999 and 2000, it remains extremely
vulnerable due to an undercapitalised balance sheet. Without
adequate funding, it is highly unlikely that the Group will be
able to continue to meet its obligations as they fall due and the
prospects for creating shareholder value are extremely difficult.
The Board believes that the Offer from Daisytek is the only viable
solution to refinance the business and without the Offer and the
subsequent financing support from Daisytek, the ability of the
Group to continue to trade is at risk.
For further information:
ISA International plc 01274 306 787
Mike Murphy, Chief Financial Officer
Weber Shandwick Square Mile 020 7950 2800
Terry Garrett/Louise Robson/Stephanie Smart
ISA INTERNATIONAL plc
GROUP PROFIT & LOSS ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2001
2001 2000
Note £000 £000
Unaudited Audited
Turnover 5 361,554 296,803
_________ ________
Cost of sales - normal (308,333) (248,916)
- exceptional 6 - (2,836)
_________ ________
(308,333) (251,752)
_________ ________
Gross profit 53,221 45,051
_________ ________
Operating expenses
Distribution costs - normal 7 (30,527) (27,308)
(2000: as restated)
- exceptional 6 (1,013) (3,165)
_________ ________
(31,540) (30,473)
_________ ________
Administrative expenses - normal 7 (21,301) (21,177)
(2000: as restated)
- exceptional 6 (709) (1,701)
_________ ________
(22,010) (22,878)
_________ ________
Operating loss (329) (8,300)
Share of associates' operating
profit (2000: as restated) 1,001 1,527
Share of associates' exceptional
items (2000: as restated) 7 (2,636) (1,245)
Loss on disposal of associate (71) -
Amortisation of goodwill arising
on associates (814) (799)
_________ ________
Loss on ordinary activities
before interest & taxation (2,849) (8,817)
Interest receivable 128 115
Interest payable and similar
charges (2000: as restated) 7 (4,069) (3,199)
_________ ________
Loss on ordinary activities
before taxation (6,790) (11,901)
Tax on loss on ordinary activities 8 (631) (449)
_________ ________
Loss on ordinary activities after taxation (7,421) (12,350)
Dividends - Non-equity (208) -
========== =========
Transfer from reserves (7,629) (12,350)
========== =========
Losses per ordinary share 9
Basic (13.0)p (21.4)p
Before exceptional items
(2000: as restated) 7 (6.1)p (5.9)p
Diluted (13.0)p (21.0)p
ISA INTERNATIONAL plc
GROUP BALANCE SHEET
AT 31 DECEMBER 2001
2001 2000
£000 £000
Fixed assets Unaudited Audited
Intangible assets - goodwill 13,965 14,993
Tangible assets 5,777 6,085
Investments 2,297 2,609
_________ ________
22,039 23,687
_________ ________
Current assets
Stocks 22,320 18,488
Debtors 56,116 46,268
Cash at bank and in hand 4,178 4,153
_________ ________
82,614 68,909
Creditors due within one year (88,521) (79,233)
_________ ________
Net current liabilities (5,907) (10,324)
_________ ________
Total assets less current liabilities 16,132 13,363
_________ ________
Creditors due after more than one year (4,202) (544)
Provisions for liabilities and charges - (81)
_________ ________
Net assets 11,930 12,738
_________ ________
Capital and reserves
Called up share capital 3,739 2,939
Share premium account 7,154 1,041
Other reserves 5,069 5,069
Profit and loss account (4,032) 3,689
_________ ________
Shareholders' funds 11,930 12,738
_________ ________
Equity interests 5,017 12,738
Non-equity interests 6,913 -
_________ ________
Total shareholders' funds 11,930 12,738
_________ ________
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
2001 2000
£000 £000
Unaudited Audited
Loss on ordinary activities after taxation (7,421) (12,350)
Dividends - Non-equity (208) -
New share capital issued 6,913 9
Adjustment to unrealised gain on disposal of
subsidiary - (182)
Translation differences on foreign currency net
investments (92) (808)
_________ ________
Net deduction from shareholders' funds (808) (13,331)
Opening shareholders' funds 12,738 26,069
_________ ________
Closing shareholders' funds 11,930 12,738
_________ ________
ISA INTERNATIONAL plc
GROUP CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2001
2001 2000
£000 £000
Unaudited Audited
Net cash (outflow)/inflow from operating activities (9,159) 2,427
_________ ________
Returns on investments and servicing of finance (3,147) (1,639)
_________ ________
Taxation (915) (55)
_________ ________
Capital expenditure and financial investment
Purchase of tangible fixed assets (1,903) (3,209)
Sale of tangible fixed assets 91 226
_________ ________
(1,812) (2,983)
_________ ________
Acquisitions and disposals (3,285) (161)
_________ ________
Equity dividends paid - -
_________ ________
Net cash outflow before financing (18,318) (2,411)
_________ ________
Financing
Proceeds from preference shares issued 6,913 -
Issue of ordinary share capital - 9
New loans 3,982 -
Capital element of hire purchase payments (358) (443)
_________ ________
10,537 (434)
_________ ________
Decrease in cash in the year (7,781) (2,845)
_________ ________
Analysis of movement in net debt
Balance at beginning of the year (25,834) (22,351)
Decrease in cash in the year (7,781) (2,845)
Cash outflow from decrease in lease financing 358 443
New loans (3,982) -
New hire purchase contracts - (261)
Effect of foreign exchange rate changes (74) (820)
_________ ________
Balance at end of the year (37,313) (25,834)
_________ ________
NOTES TO THE FINANCIAL INFORMATION
1.Basis of preparation
The unaudited financial statements are prepared under the
historical cost convention and in accordance with applicable
accounting standards.
The unaudited financial statements have been prepared on a
going concern basis which the Directors believe to be
appropriate for the reasons summarised below and set out in
more detail in note 12 of this preliminary announcement.
The Directors have prepared cashflow forecasts for the period
up to 31 December 2003 which show that the Group requires
further funding in order to be able to continue as a going
concern. As set out in the Board's statement, an Offer has
been announced for the Group by Daisytek and, as explained
below, the Directors believe that the various matters that
cause the Group to require further funding will be resolved as
a consequence of the Offer having been announced and under the
terms of the loan agreement with Daisytek.
Having taken all of the factors set out in note 12 into
consideration, the Directors have prepared the unaudited
financial statements on the basis of a going concern as they
expect that either the Offer will become unconditional in due
course or that, if it does not, then the resolutions described
in that note to effect a fund raising in the form of equity
shares would be passed. Under either of these circumstances,
the Directors believe that the necessary funds would become
available to the Group.
However, there can be no certainty about these events and,
without the continued financial support of Daisytek, in
whatever form, it is unlikely that the Group would be able to
continue to operate as a going concern. The unaudited
financial statements do not include any adjustments that may be
necessary in these circumstances such as the revision of the
carrying values of assets, the requirement for further
provisions for additional liabilities that may arise and the
reclassification of fixed assets and long-term liabilities as
current.
2.The Articles of Association of the Company provide for a
maximum borrowing limit for the Group of no more than 3 times
the amount of the Group's consolidated share capital and
reserves as shown in the latest audited consolidated balance
sheet of the Group. The Articles of Association provide that
subsequent issues of capital can be incorporated in the net
asset measure. As at 31 December 2001 the draft consolidated
balance sheet has net borrowings of £37.3 million and share
capital and reserves of £11.9 million, after including the net
proceeds of £6.9 million received from the investment by
Daisytek in September 2001. If the 2001 accounts were signed
off the Company would be immediately in breach of this
borrowing limit and would not be able to further increase its
borrowings. Shareholders have been asked to sanction an
increase in the borrowing powers from 3 to 5 times the Group's
consolidated share capital and reserves and an Extraordinary
General Meeting has been called for 22 May 2002. Irrevocable
undertakings to vote for the resolution have been received from
the holders of 51.1 per cent. of the votes eligible to be cast
at the EGM, which is enough to ensure that the resolution is
passed. Upon conclusion of the EGM it is anticipated that the
Statutory Accounts for 2001 will be duly signed and that no
breach will have occurred.
3.An impairment review has been performed in respect of the
investment in Kaye Office Supplies Limited ('Kaye'). The
recoverable amount of the goodwill has been assessed by
reference to the net present value of estimated future
cashflows incorporating the planned costs and expected benefits
of the reorganisation (that was planned at the time of the
acquisition of the Group's interest in Kaye and that is
currently in process) and applying a discount rate of 10 per
cent..
4.There has been no change to any of the accounting policies set
out in the 2000 Statutory Accounts.
5.The segmental analysis of turnover and operating profit/(loss),
before exceptional items, by origin is as follows:
Turnover Operating profit/(loss)
before exceptional
items
2001 2000 2001 2000
£000 £000 £000 £000
United Kingdom and Ireland 141,481 111,421 5,589 4,430
Scandinavia 44,416 43,798 1,072 504
Continental Europe 175,657 141,584 (4,165) (4,348)
Unallocated central costs - - (1,103) (1,184)
________ _______ _______ ________
361,554 296,803 1,393 (598)
________ _______ _______ ________
6.The exceptional items consist of the following:
2001 2000
£000 £000
Cost of sales
Stock losses and customer claims - 2,836
Distribution costs _______ _______
Relocation of distribution centre 939 -
Duplicated costs during logistics transfer - 1,745
Contract termination costs 74 1,420
_______ _______
1,013 3,165
_______ _______
Administrative expenses
Board and senior management settlements 592 513
Property and location rationalisation 117 270
Non-recoverable debts - 1,197
Exceptional bad debts - (279)
_______ _______
709 1,701
_______ _______
Total before share of associates 1,722 7,702
Share of associates 2,636 1,245
_______ _______
4,358 8,947
_______ _______
7.The definition of distribution costs and administrative
expenses has been refined to apply a consistent measure
throughout the Group, following the termination of the
outsourced logistics contract and an ongoing project to
standardise accounts coding structures. The comparative figures
for 2000 have been restated to take account of this revised
definition.
The allocation of the Kaye result for 2000 between operating
profit, exceptional items and interest was altered in the
period between the Group accounts being signed and the Kaye
accounts being signed, although the overall result for this
associate remained the same as that previously disclosed. The
comparative figures for 2000 have therefore been restated as a
result of these amendments.
8.The taxation charge comprises UK corporation tax £33,000 (2000:
£736,000), overseas tax charge £505,000 (2000: credit of
£5,000), deferred tax credit of £52,000 (2000: charge of
£52,000) and share of associates tax charge £145,000 (2000:
credit of £334,000).
9.The calculation of basic loss per ordinary share is based on
the loss after taxation and non-equity dividends of £7,629,000
(2000: £12,350,000) and on 58.8 million (2000: 57.8 million)
ordinary shares being the weighted average number of shares in
issue during the year. The calculation of loss before
exceptional items per ordinary share is based on a loss of
£3,594,000 (2000: £3,647,000). The calculation of diluted loss
per ordinary share is based on 58.8 million (2000: 58.9
million) ordinary shares as the outstanding warrants and share
options have no dilutive effect.
10.Reconciliation of operating loss to net cash (outflow)/inflow
from operating activities
2001 2000
£000 £000
Operating loss (329) (8,300)
Depreciation 2,058 1,809
Loss on disposal of fixed assets 1 39
(Increase)/decrease in stocks (3,832) 385
(Increase) in debtors (8,929) (866)
Increase in creditors 1,872 9,360
_______ _______
Net cash (outflow)/inflow from operating activities (9,159) 2,427
_______ _______
11.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 & Loss Account and the unrealised
gain on disposal of a subsidiary and translation differences on
foreign currency net investments which are both shown in the
Reconciliation of Movements in Shareholders' Funds.
12.As explained in note 1, 'Basis of preparation', the
Directors have prepared the unaudited financial statements on a
going concern basis, having regard to the following
circumstances:
The Directors have prepared cashflow forecasts for the period
up to 31 December 2003 which show that the Group requires
further funding in order to be able to continue as a going
concern. As set out in the Board's statement, an Offer has
been announced for the Group by Daisytek and, as explained
below, the Directors believe that the various matters that
cause the Group to require further funding will be resolved as
a consequence of the Offer having been announced and the terms
of the loan agreement with Daisytek detailed below.
The Offer is preconditional upon the approval and signing by
the board of the consolidated financial statements of the Group
for the year ended 31 December 2001, that those financial
statements do not vary in any material respect from this
preliminary announcement and that the audit opinion in respect
of those financial statements is not subject to any
qualification nor refers to any fundamental uncertainty save in
respect of matters identified in this preliminary announcement.
The Group failed to make a payment of a preference dividend of
£141,278 that fell due on 1 April 2002. The Preference Shares
are held by Daisytek which provided the Group with a waiver of
this non payment until 6 May 2002 and consequently an event of
default has occurred. Following an event of default certain
rights accrue to the preference shareholders, inter alia the
right to call for a Special Dividend (as defined in the
Company's Articles of Association) within 120 days of the event
of default. The amount of the Special Dividend is to be
equivalent to the 'Kaye Value', defined by the Articles as the
value, at the date the Special Dividend is required, of the
ordinary shares, rights to shares or warrants of Kaye held by
the Company less the costs incurred by the Company in
subscribing or acquiring such shares, rights to shares or
warrants after 9 August 2001. If the Kaye Value is not agreed
between the Company and Daisytek, it is to be determined by the
Company's auditors as an appropriate percentage of the value of
the whole of the issued share capital of Kaye (provided that
the value of any shares, rights to shares or warrants which
have been sold by the Company shall be equal to the proceeds of
sale). At 31 December 2001, the carrying value of Kaye in the
Company's balance sheet was £21.8 million and the cost incurred
by the Company in subscribing for further shares in Kaye after
9 August 2001 (all of which shares were subscribed prior to 31
December 2001) was £3.2 million. However, the carrying value in
the Company's balance sheet may not be relevant to the
valuation process described above, which may ascribe a lower
value to the Company's interest in Kaye at the time when the
payment of the Special Dividend is required. Upon receipt of
notice that the Special Dividend is to be called for, it is
deemed as payable. The settlement of the Special Dividend is by
way of cash or, with the consent of the preference
shareholders, by the distribution in specie of assets
equivalent to the Special Dividend payable. If this Special
Dividend was called for then, dependent upon its value, it is
uncertain whether the Company would have sufficient
distributable reserves to make the payment. No further rights
are acquired by Daisytek in the circumstances where the Special
Dividend is unable to be paid. If this Special Dividend was
called for in cash, then it would be funded under the terms of
the loan agreement set out below. Daisytek has waived the right
to call for the Special Dividend prior to 30 June 2002.
Under a loan agreement with Daisytek effective from 12 October
2001, borrowings amounting to £7.9 million fall due for
repayment on or before 30 June 2002. If this repayment has not
been made, then the Directors are obliged to procure that a
fund raising be proposed to the members in the form of a
placing of ordinary equity shares to Daisytek, subject to
clawback to the extent members subscribe as part of this fund-
raising. The agreement prescribes that the amount to be raised
be sufficient, net of expenses of the issue, to repay in full
the amounts outstanding under the loan agreement, any cash
payment due in respect of the Special Dividend and an amount,
to be determined by the Directors, to provide additional
working capital for the Group (subject to this amount being
less than £10 million). If the Company is seeking to procure
the fund-raising then Daisytek has agreed not to seek
repayment of the loans (other than following an event of
default), nor to seek payment of the Special Dividend if it has
been called for, until 30 September 2002. If the required
resolutions to effect this fund raising are not passed at the
meeting called for members to consider them, then it is
unlikely that the Group would be in a position to repay the
amount owed to Daisytek or to pay the Special Dividend in cash.
The Group is currently operating at or around the maximum limit
of its borrowing facilities which it expects to continue to be
made available to the Group in the current circumstances of the
Offer and associated terms of the loan agreement. Daisytek, as
part of the terms of the Offer announcement, has provided £3.0
million of interim funding to support the cash needs of the
business during the Offer process. Consequently, between now
and 30 September 2002 (the later of the likely dates when the
Offer, if made, is expected to be declared unconditional and
the date when any fund-raising proceeds are expected to be
received), the Directors believe that the Group has sufficient
funds to be able to continue to meet its debts as they fall
due.
Once the Offer from Daisytek is made and becomes unconditional,
the Directors believe that, on the basis of current discussions
with Daisytek, the following will occur:
A That the right to receive the Special Dividend will be waived.
B That either:
- The repayment date of the loans due under the loan agreement
with Daisytek will be extended with any further funding that is
necessary also being made available from Daisytek; or
- If the loans are required to be repaid, the required resolutions
to effect a fund-raising in the form of a placing of equity shares
will be passed and the funds necessary to provide sufficient
working capital to the Group, including funding the Special Dividend
payment if A does not happen, would be available.
Should the Offer be made but not become unconditional, then the
Directors believe that the Special Dividend will be called for
and the loans will be required to be repaid. Following the
event of default, and taking account of the voting rights
conferred by this, Daisytek would control 50 per cent. plus one
vote of the voting rights of the Company. In these
circumstances, it is not certain that the required resolutions
to effect a fund-raising in the form of a placing of equity
shares would be passed since these resolutions require a 75 per
cent. majority. Without the passing of these resolutions, it
is unlikely that the Group would be able to continue as a going
concern and consequently, the Directors would expect the
resolutions to be passed as it would be in Shareholders' best
interests to do so, and that the funds necessary to provide
sufficient working capital to the Group, to repay the loans
and to fund any payment, if required, of the Special Dividend
in cash, would be available.
On the basis of the information currently available to them the
Directors believe that the Offer will be made and will not
subsequently lapse.
On these bases, whether or not the Offer becomes unconditional,
the Directors believe that the Group will have sufficient funds
for the foreseeable future.
Should the Offer not be made, lapse, become unconditional but B
above not then occur, or not become unconditional and the
resolutions to effect a fund-raising in the form of equity
shares as set out above not then be passed, then the Directors
would need to consider what other funding options were
available to them. In these circumstances, if the Special
Dividend became payable in cash, then it is unlikely that the
Group would be able to continue as a going concern. If the
Special Dividend were not payable the Group would still require
additional funding and the Directors would seek alternative
forms of funding but it is unlikely that such funding would be
available and any such funding would require the consent of
Daisytek in accordance with the Articles of Association.
13.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 31 December
2000 is based on the statutory accounts for that year. These
accounts, upon which the auditors, Arthur Andersen, 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. The auditors, KPMG
Audit Plc, have not yet reported on the full statutory accounts
for the year ended 31 December 2001, which should be posted to
shareholders in due course. After that time they will also be
available at the Company's registered office: 66/70 Vicar Lane,
Bradford, West Yorkshire, BD1 5AG.
This information is provided by RNS
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