RT Tanner & Co Ltd

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Contents
Conclusions
Management
Operations
Accounting Systems
Trading Performance
Future Prospects
Appendix

Bank Report

7 Review of the Balance Sheet as at 31 March 1991
7.1 Introduction
In this section, we review the assets and liabilities of the Company, commenting on any significant weaknesses in the balance sheet.

Attached at Appendix F are summarised balance sheets as at 31 March 1988, 1989, and 1990, extracted from the audited management accounts. The management accounts had not been finalised at the time of our visit and certain adjustments have been made by the Unit. These are, principally, transfers between overdraft and creditors representing March annual payments not yet posted to the nominal ledger. The balance sheet has yet to be audited and there is clearly a degree of further work before it is finalised. In our opinion, it is likely that further adjustments will reduce the net assets although the figures should be materially correct.

7.2 Tangible Assets
The cost and net book value of the tangible assets are as follows:
Ł’000s 31 March 1991 31 March 1990 Cost Depn NBV NBV Freehold properties 183 - 183 170 Plant and machinery 1,418 714 704 636 Office machinery 112 77 35 84 Fixtures and fittings 26 14 12 Installations 81 49 32 46 Motor vehicles 225 117 108 105 2,045 971 1,074 1,129 Fixed asset registers were not maintained until last year and thus our review has been limited by this fact.

a) Freehold properties
The Company owns the freehold of the Crayford site and various plots of land in Herne Bay. The Crayford site was acquired in 1961 and the original cost, cost of extension and sundry other small improvements thereafter total Ł160,000. All costs relating to the roof repairs discussed at para 4.1 have been expensed. No formal valuation of this site has been undertaken. PT commented that an adjacent site was currently on the market for Ł1.25m on the basis of industrial use. This site is larger than Tanner’s and the asking price, in PT’s view, is unlikely to be achieved in the current climate.

The Company originally acquired land in Herne Bay in 1905 by way of a bad debt settlement and no value was ever placed on this in the balance sheet. Further plots were acquired in 1989/90 for a total consideration of Ł23,000. The plots are close together, albeit not adjacent, and are situated in an area designated for residential use. The plots do not currently have planning permission but PT believes that this would not be a problem. The land was acquired for speculative purposes when land prices were at their lowest. PT’s intention had been to wait for property prices to recover, obtain planning permission and to sell the plots. In the current depressed property market it is unlikely that their current market value is significantly above cost although PT believes that he could sell the plots for approximately Ł50,000. In view of the Company’s current cash position and the uncertainty as to when and if the property market will recover management may wish to consider realising this investment.

b) Leasehold Properties
The Company has two leasehold premises, its warehouse at Dartford and its sales centre at Leeds. The rent on the 24,000 sq ft at Dartford is currently Ł50,000 per annum. This lease terminates in 1997 and there is a further rent review in 1992. The rent on the 9,000 sq ft at Leeds is Ł20,000 per annum. This lease also terminates in 1997 with a further rent review in 1992. No value is placed on these leases in the balance sheet, although PT believes the freeholders of the Dartford premises, Wellcome, might be willing to pay a small premium for Tanner to vacate these premises prior to the termination of the lease term.

c) Plant and machinery
Plant and machinery comprises the various envelope making, printing and cutting machines. There are about twenty machines in total which range from four to over thirty years old. On average the machines are twenty years old. The most recent additions were made in 1987/88 being a printing machine (Ł100,000) and an envelope making machine (Ł350,000). Several of the older machines were acquired second hand. The age profile of the machines highlights the lack of capital investment made over the years.

Excepting two fork lift trucks, no assets have been acquired under leasing arrangements, although, the Bank 2 loan (para 1.5 refers) was taken out to assist the purchase of the envelope making machine noted above.

d) Other Assets
Most vehicles are bought on three year lease/hire purchase agreements through the Rover Goup. Of the 21 vehicles in the books, twelve are now fully paid for (net book value Ł39,000) and nine are still being financed (net book value Ł69,000).

No analysis of office machinery, fixtures and fittings or installations is available. Certain recent additions, a photocopier and a heating system, are being acquired on lease purchase agreements.

e) Depreciation Rates
The rates of depreciation adopted appears to be reasonable except for freehold property on which no depreciation is provided. Although accounting standards normally require depreciation to be charged on buildings the Company believe it inappropriate in view of the value of the property.

7.3 Investments
The Company has a third interest in the issued share capital of Kroller which was acquired for Ł3,000 (para 1.1 c) refers).

7.4 Stock and Work in Progress
Due to the computer problem (para 5.2 refers), actual figures for stock were not available. The following analysis is that included in the management accounts and are management’s estimates only:

Ł'000s	31 March 1991	31 March 1990
Chemicals	11	11
Work in Progress	55	37
Raw Materials	86
Finished Goods	869	877
Total	1,021	925

Raw materials stock records are still maintained manually by the Production Department and the value above represents the actual year end stock value at standard cost (para 5.3 refers). Raw materials comprises, almost exclusively, paper and packaging materials. No ageing of the stock was available and no provision for slow moving or obsolete stock has been made. Paper is normally supplied under reservation of title clauses and those items not yet utilised in production could be identified by suppliers as goods are stored carefully and are separately identifiable.

Finished goods comprise own manufactured stock, bought in envelopes and other paper base merchandise. The value is simply management’s estimates since no reliable information as to the breakdown of finished goods, nor its ageing was available. It was apparent from our visit to the Dartford warehouse that certain stock was slow moving. MK expressed a view that possibly up to 10% might be considered slow moving or obsolete.

Bought in goods and merchandise are supplied, normally, under reservation of title clauses and items could in all probability be separately identifiable. Additionally, included within own manufacture stock are various special stock lines which bear corporate names, logs etc.

Manufactured finished goods are valued at standard cost which includes an element of production overheads. For financial accounts purposes , the 10% mark up included in the standard cost is correctly excluded although no further provisions for slow moving or obsolete stock are made. In view of MK’s comments, this might be incorrect and it is possible that stock may have been over valued in the balance sheet in the past.

Although the stock records are inaccurate, there are at least 800 stock lines in existence. An approximate distribution of the stock lines by value is as follows:

Value by stock lines	Number of stock lines
Over Ł20,000	2
Ł15,000-Ł20,000	1
Ł10,000-Ł15,000	1
Ł5,000-Ł10,000	30
Ł1,000-Ł5,000	200
Ł0-Ł1,000	566
Total	800

This table highlights the large number of small value stock lines that the Company continues to carry. Once reliable stock figures and standard costs are available it is, in our opinion, essential that the Company undertakes a full review of all stock lines with a view to reducing the number of lines held. Lines deemed surplus to requirement or unprofitable should be sold immediately wherever possible or alternatively written off.

7.5 Debtors
Debtors are analysed as follows:

Ł'000	1991	1990	1989
Trade debtors	1,563	1,663	1,640
Prepayments and sundry debtors	10	29	17
C Tax recoverable (para 7.8 refers)	28	53	-
	1,601	1,745	1,657

A detailed analysis of trade debtors is shown at Appendix G. The Company’s normal terms of trade are 30 days net although, generally, about 60 days are taken. The Company does not offer any settlement discounts for early payment nor does it charge interest to late payers. Debtor days at 31 March 1991 were 64 days, being a marked improvement on that at 31 March 1990 and 1989 of 67 and 70 days respectively.

The level of debtors over 90 days, approximately 3% is relatively small but management believes that further provisions may be made by the Auditors. The improvement in debtor days, although highly commendable in the current climate, has been achieved relatively painlessly by implementing credit control procedures over the past three years where previously few existed. Debts over 50 days are sent a written reminder but actual chasing of debtors is not undertaken by the accounts department until they are approximately 65 days old. If this is unsuccessful customers will then be put on a stop list. Salesmen are provided with list of overdue debtors and those on the stop list and are encouraged to chase them. Salesmen’s commissions is not dependent upon cash receipt.

Although credit control procedures appear sound, it is our view that a more aggressive policy could be adopted with debtors being chased at an earlier stage. Furthermore, salesmen could be incentivised to take a more active credit control role by making a percentage of their commission payable only on receipt of cash. Clearly a reduction in debtor days would help relieve the pressure on the Group’s cashflow and to provide additional working capital. Each days improvement in debtor days would reduce the cash requirement by approximately Ł25,000.

The largest debtor is an oversees customer, Svenskt Paper. Monies are received in Swedish Krona but Tanner hedge the currency exposure by selling forward. No insurance of export debts is taken out by the Company.

Tanner has, in our view, quite correctly not taken account of the possible receipt from the insurance claim in connection with the roofing repairs. PT is confident of a successful action which could result in a settlement in favour of Tanner of over Ł250,000.

7.6 Bank Overdraft
The Company maintains current accounts with the Bank and with Bank 2. The Bank 2 overdraft has been utilised, specifically, to assist the ongoing legal costs etc of the roof repairs. It is not used trading purposes and currently there is no formal repayment term (para 1.5 refers). The balance outstanding, at 31 March 1991 subject to accrued interest, was Ł103,000. All trading is done through the Bank’s current account.

Under the new computer system the purchase ledger automatically produces supplier cheques for the total of the previous months invoices at the end of each month. Thus, at 31 March 1991, cheques for all purchase invoices up to 1 March 1991 have been produced and deducted from the cashbook. All cheques produced are, initially, held by DT who releases them as and when he feels necessary. Each month a manual total of all cheques withheld is added back to the creditors figure in the accounts.

The Bank reconciliation as at 31 March 1991 and the previous three months is as follows:

	31 March 91	28 February 1991	31 March 90	31 March 89
Balance per bank statement	(392)	(503)	(439)	(298)
Less unpresented cheques	(1,020)	(829)	(756)	(1,000)
Plus outstanding lodgements	63	53	51	75
Balance per cash book	(1,349)	(1,279)	(1,143)	(1,223)
Less cheques withheld	(650)
Balance per management accounts	(699)

The cheques withheld represent approximately 1.25 months purchases, i.e. all of February and part of January purchase ledger items. The computer system need not produce cheques automatically as it can be overridden by inputting the required payment date when invoices are initially posted to the system. DT prefers the existing system as he feels this gives him greater control over cash payments. Although we understand DT’s view, this procedure is not, in our opinion, good practice and as a result meaningful information on the spread of creditor days by supplier is not available to management.

7.7 Creditors due within one year
Creditors due within one year are analysed as follows:

Ł'000	31 March 91	31 March 90	31 March 89
Trade creditors	1,140	1,178	1,206
Finance lease commitments	45	58	60
Other tax and social security	97	144	177
Accruals	151	125	71
Preference dividend	1	1	1
Amounts due to Auctor	20	20	20
Other creditors	-	4	27
Corporation tax	-	-	27
Bank overdraft (para 7.6 refers)	699	483	189
Total	2,153	2,013	1,778

a) Trade creditors
Due to the payment procedures adopted, trade creditors comprise March invoices as per the purchase ledger (Ł490,000) and February and earlier cheques withheld (Ł650,000) (para 7.6 refers). Ana analysis of the purchase ledger showing the principal suppliers is given at Appendix H. No analysis by supplier or by age was available for cheques withheld. The major suppliers are all paper manufacturers. The terms of trade are normally stated as 30 days net but the Company will normally take something approaching 60 days. Overall, creditor days have decreased marginally to 70 at 31 March 1991 from 73 at 31 March 1990. The Company has been subject to stop orders in the past and management believes, and we concur, that the Company is fully utilising available credit periods.

Management told us that no writs are outstanding against the Company.

b) Finance Lease Commitments
These relate to amounts due on hire purchase/lease purchase agreements for the acquisition of motor vehicles, fork lifts and other equipment (para 7.2 b) c) refer)

c) Preferential creditors
Other taxation and social security comprises VAT payable of Ł448,000 and PAYE/NI payable of Ł53,000. The VAT liability represents the quarter ended 31 March 1991 and returns are up to date. The companies the Auctor group are not registered as a group for VAT purposes. Custom and Excise visited the Company in June 1990 and only raised minor queries. No assessment for further VAT liabilities was raised.

The PAYE/NI liability represents the liability for March only and payments are up to date. Wages are paid one week in arrears based on clock cards but all factory staff are paid one weeks’ wages in advance when they start. As a result no wages accrual is required at the year end. Factory staff are entitled to holiday pay immediately they start work and therefore no holiday pay accrual is required. The total weekly payroll is approximately Ł24,000 and the total monthly payroll is approximately Ł60,000.

The Company operates a defined benefit pension scheme with Friends Provident for salaried staff only (subject to number of years service). Staff contribute 5% of salary and the Company makes an additional contribution as directed by the actuaries. There have not been any contribution holidays nor are there any planned.

c) Accruals
Accruals include the normal items such as goods received and not yet invoiced (Ł24,000), audit fees (Ł11,000) and bank interest (Ł23,000). Also included are all March carriage costs (Ł29,000) which the Company always posts to the purchase ledger in the following month. It also includes Ł60,000 relating to expenses on the roof repairs last year which Tanner is disputing and refusing to pay. This amount has been included as part of the monies being claimed. Management anticipates that additional accruals will come to light by the time the auditors have completed their work.

7.8 Taxation
The taxation affairs of the Company are looked after by the Auditors. The computation for year ended 31 March 1989 has been submitted although it has not yet been agreed. We understand that the Revenue are querying the method used to determine stock values but the amounts concerned are considered not material by management. The tax recoverable of Ł27,000 in the balance sheet relates to the tax already paid for 1988/89 which is now recoverable due to losses in 1989/90. A draft computation for the year ending 31 March 1990 has been prepared but not yet submitted. Tax losses carried forward from 1989/90 will be approximately Ł200,000 which, with further losses in 1990/91 of at least Ł300,000, will leave the Company with over Ł500,000 of tax losses to carry forward.

No provision was made for deferred taxation in the accounts to 31 March 1990 nor was any reference made to the amount of any unprovided tax. We have calculated that, due to the losses in 1990/91, there is no unprovided deferred tax at 31 March 1991.

7.9 Creditors due after one year – Bank Loans
Bank loans comprise a loan from the Bank (Ł115,000) and a loan from Bank 2 (Ł200,000) (para 1.5 refers).

7.10 Reserves
Other reserves comprise an Investment Grant Reserve (Ł4,000) and a Capital Reserve (Ł139,000). Management was unable to explain the original source of these two reserves and reference would need to be made to the auditors fro an explanation. PT has resisted any temptation to improve the balance sheet by revaluing the fixed assets, but there may be hidden reserves, albeit unquantified, in the property assets.

7.11 Gearing and Liquidity
The statement of source and application of funds is shown at Appendix I. Figures for 31 March 1991 have been prepared by the Unit based on the Company’s management accounts. To improve clarity and comparability small minor amendments have been made to the previous years losses of the past two years and modest capital expenditure have been financed by increases in the overdraft facilities. The last substantial capital investment was in 1987/88 (Ł451,000) which was financed by bank loans and the trading profits of that year.

Gearing, interest bearing debt expressed as a percentage of shareholders’ funds, has increased to 90% at 31 March 1989. This deterioration reflects the increased trading losses in 1991 and the roofing repairs in 1989/90. In view of the potential valuation of the freehold site, not reflected in the balance sheet and the potential claim outstanding, a higher level of gearing could be sustained. However, we are of the opinion that this should only be undertaken if the monies borrowed are invested so as to improve the production and marketing capabilities of the Company so as to ensure a return to profitable trading in the future.

b) Liquidity
The liquidity ratios are as follows:

	31 March 91	31 March 90	31 March 89
Current ratios	1.22:1	1.33:1	1.49:1
Quick ratios	0.74:1	0.88:1	0.98:1

The reduction in both the current and quick ratios over the past three years highlight the absorption of cash through trading losses and the roofing repairs. The ratios are below those generally accepted for a company of this type (of, say 1.3 and 0.8 respectively) and demonstrate the tight liquidity within the Company. The difference between the two ratios demonstrates the large value of stock maintained by the Company.

7.12 Conclusion
The balance sheet has experienced a reduction in net assets from Ł1.8m at 31 March 1989 to Ł1.2m at 31 March 1991 due to trading losses and the roofing repair costs. This large reduction in the Company’s net worth cannot be allowed to continue and, in our opinion, drastic action is urgently required to redress the position.

In an industry that is highly capital intensive, Tanner has made relatively small investment in machines over the last decade. In our view, additional capital investment is urgently required and new sources of finance will be required to fund this investment. Stock levels have continued to rise over the last four years although sales have remained relatively static. It is the Unit’s view , that stock levels and the number of lines currently held are far too high. Unfortunately, due to the current problems with the computer, accurate information as to product profitability and turnover by product line it is not available in order that management can make decisions as to which lines should be eliminated.

Although debtor days have reduced it is our view that Tanner could be more aggressive with respect to credit control thus providing urgently needed working capital.

Although gearing is approaching 100%, the Company owns the freehold site at Crayford which is currently in the books at its historic cost of Ł163,000. No valuation of this site is available but it is our view that the raising of finance in the future may be on the back of this property. This may be by way of refinancing on a long term mortgage or possibly by sale of this property with relocation of the operating and warehousing site to new rented premises.