RT Tanner & Co Ltd

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Contents
Conclusions
Management
Operations
Accounting Systems
Review of Balance Sheet
Future Prospects
Appendix

Bank Report

6 Trading Performance
6.1 Introduction
In this section, we review the trading performance of the Company. Included at Appendix C are detailed profit and loss accounts for the Company for the four years to 31 March 1991. These have been extracted from the audited accounts and, for 31 March 1991, from the management accounts. The 1990/91 figures have yet to be audited and management considers that the final loss of the Company is likely to be greater, albeit not material, than that currently shown. We understand that there may still be further adjustments to increase bad debt and stock provisions and for further late accruals. The Company’s trading results for this period are be summarised as follows:

Ł'000	Y/e 31 March 91	Y/e 31 March 90	Y/e 31 March 89	Y/e 31 March 88
Sales	7,781	7,883	7,396	6,694
Cost of sales	(6,141)	(6,096)	(5,534)	(4,915)
Gross profit	1,640	1,787	1,863	1,779
Overheads	(1,787)	(1,676)	(1,661)	(1,567)
Loss/profit before interest	(147)	111	202	212
Interest	(164)	(106)	(76)	(52)
Loss/profit after interest	(311)	5	126	160
Exceptional items	-	(282)	-	-
Loss/profit after exceptional items	(311)	(277)	126	160

6.2 Past Sales
We show, at Appendix D, a monthly analysis of sales for the three year period ending 31 March 1991. Turnover is analysed between own manufacture, merchanting and supplies direct from mills to end users. Due to the current problems with the computer system, this breakdown was not available for the period January to March 1991 and we have, therefore, apportioned sales on a pro rate basis from the results to December 1990.

It is acknowledged that there may be some inaccuracy in the apportionment but consider it to be relatively insignificant to the analysis. We show below a summary of recent sales performance compared with budget:

Ł'000	Y/e 31 March 91	Y/e 31 March 90	Y/e 31 March 89
Actual sales
Own manufacture	4,272 (55%)	4,384 (56%)	4,195 (57%)
Merchanting	3,265 (42%)	3,348 (42%)	3,040 (41%)
Direct Mill	244 (3%)	151 (2%)	161 (2%)
Total	7,781	7,883	7,396
Budget	9,060	8,432	7,510
Increase/(decrease)	(1.3)	6.58	10.48
Sales/budget	(14%)	(6.51%)	(1.52%)

Following modest growth of 10.48% and 6.58% in total sales in the two years ended 31 March 1990, turnover has remained virtually static throughout 1990/91. However, growth in total sales over the period under review has not kept pace with inflation and turnover has declined in seasonal influences on trading apart from the comparatively quiet month of December, when Tanner closes for two weeks.

As a percentage of total sales, the three divisions have remained reasonably constant during the review period. However, own manufactured goods have fallen from 57% to 55% with merchanting and direct mill sales each rising by 1%. The impact of the closure for the roofing repairs (para 4.1 refers) can be seen during August and September 1989 when merchanted goods sales were higher than the monthly average compensating for the loss of own manufactured turnover. MK told us that merchanting sales for 1989/90 included a considerable, but unquantified, amount of bought in envelopes. This aspect was negligible during the following year.

At Appendix E, we include an analysis of sales by geographic area. During the last three years House accounts turnover at Crayford, which includes exports, has increased by 145% (Ł473,000). The majority of this has been achieved in the year ended 31 March 1991.

We understand that the principal factor underlying this growth has been a new contract with a Swedish based company, Svenskt. This has produced orders totalling Ł150,000 in the last three months. MK also told us that another major contributor was Mellotex products, produced by Tullis Russell, which are supplied to Austria. Appendix E also illustrates the declining contribution from East Anglia/Essex. As a result of this a representative has been dismissed with the area being reallocated to existing staff.

Sales to major House accounts, both at Crayford and Leeds, appear to have held up reasonably well although North London and City have dramatically declined, perhaps as a consequence of the downturn in the economic climate.

Whilst we understand that the Company has an active customer base, in excess of 1400, current information was not available to permit any further analysis nor were we able to break down sales by product/group.

6.3 Cost of Sales and Gross Margins
a) Cost of sales
Cost of sales comprise paper, packaging, bought in envelopes and other merchanting goods, gum, ink and other consumables and direct labour. A detailed analysis of materials was not available. The percentage of materials and labour within cost of sales has remained virtually static throughout the review period at 79% and 21% respectively. Given the constant sales mix discussed at para 6.2 and the similar production system in use throughout the period this is not altogether surprising. In fact prices of materials, particularly paper, have not kept pace with inflation due overcapacity in the market (para 4.3 refers). Although labour costs have kept pace with or, probably, modestly exceeded inflation, some savings have been achieved through natural wastage etc.

In our opinion, it is unlikely that more competitive paper or merchanting prices are achievable in the near future. Therefore, any future reduction in cost of sales and improvements in gross margins are only likely to be obtained by the reduction in labour costs. This in turn will only achieved through further capital investment in more efficient equipment and, where possible, by replacing bought in goods by internal production.

b) Gross margins
Gross margins have deteriorated steadily over the four years to 31 March 1991 from 26.6% to 21.1% in 1987/88 to 1990/91 respectively. The largest decrease occurred in 1989/90 which was affected by the roofing repairs (para 4.1 refers) when more expensive envelopes had to be bought in when the factory closed down. In general, the reduction in gross margins is attributable to market pressures on prices. Prices have not increased significantly over the period under review. The market for standard envelopes has become very competitive with the big suppliers looking to take market share by offering large discounts.

6.4 Overheads A detailed analysis of overheads is included at Appendix C is summarised by major category below:

Ł'000	Y/e 31 March 91	Y/e 31 March 90	Y/e 31 March 89	Y/e 31 March 88
Salaries (incl directors)	710	653	692	615
Rent and rates	148	162	122	110
Repairs and renewals	97	113	113	156
Carriage	320	295	297	248
Advertising	17	21	27	13
Management charge - Auctor	16	16	16	16
Bad debt	38	-	5	4
Depreciation	139	137	140	142
Interest	164	106	76	52
Other	302	279	249	263
	1,951	1,782	1,737	1,619
Exc roof repairs	-	282	-	-
Total	1,954	2,068	1,739	1,621

In total, excluding the roofing repairs, overheads in 1990/91 increased by 9.4% over the previous year. If interest rates are also excluded, overheads increased by only 6.5%.

a) Salaries
Salaries, including directors emoluments, have increased by nearly 9% over last year, this being broadly in line with the market rates. Salaries are normally increased with effect from 1 April each year but an indefinite freeze has been applied this year. No significant reduction in staff levels has been made and it is our opinion that consideration should be given to a review of staffing levels immediately (para 4.8 refers).

b) Rent and Rates
This cost relates to the rental of the Leeds offices (Ł20,000) and on the Dartford warehouse (Ł50,000) along with rates on all three premises. Management is aware of the considerable expense in maintaining warehouse space separate to the manufacturing site (para 4.7 refers). Although the Leed’s premises cost is less than at Dartford the question of whether the expense is justified should be considered. Salesmen are normally out of the office and stock could be distributed direct from Dartford. We suggest that any review of the Company’s future should undertake a detailed costing of the Leeds operation to ensure that it is cost effective to maintain premises of this magnitude.

c) Carriage
Virtually all of the delivery operation is subcontracted to one company (para 4.7 refers). Carriage costs have risen, principally, as a result of the sub contractors price increases since under the current agreement daily runs are undertaken by each van to the locations irrespective of the volume of goods being carried. Although there can be cost advantages in subcontracting the transport operation, this is an area which we suggest is thoroughly reviewed with a view to potential cost savings.

d) Advertising and marketing
The annual marketing spend is small for a business of this size and nature. It is our view that such a low marketing spend could be detrimental to the long term future of the Company.

e) Interest
Interest costs have arisen steadily over the review period as borrowings have increased to finance the losses being made aggravated by the recent high interest rates. Without a reduction in the borrowings, perhaps by way of an equity injection, any significant reduction in the interest costs in the short term is unlikely.

f) Other costs
Other costs have risen steadily over the review period primarily due to inflation since the overhead base has been fairly fixed. Although costs are regarded as fixed, we suggest, that a detailed review of all overheads be undertaken in an attempt to maximise savings. The Company pays Ł16,000 per annum to Auctor. From Auctor’s accounts this would appear to be passed to Maxim to provide its working capital. It is our view that Maxim should stand alone and that no management charge be paid by Tanner.

6.5 Net Profit Before Tax
Excluding the exceptional roofing repair costs, net profit before tax is summarised as follows:

Ł'000	Y/e 31 March 91	Y/e 31 March 90	Y/e 31 March 89	Y/e 31 March 88
(Loss)/profit before interest	(147)	111	202	212
Interest	(164)	(106)	(76)	(52)
(Loss)/profit after interest	(311)	5	126	160
Interest cover	N/a	1.05	2.66	4.08

Interest cover has deteriorated dramatically to the current position where the Company is unable to service its borrowings from its trading activities. In our opinion, this serves to emphasise the need for the Company to appraise its future strategy, as without significant changes in the direction of the business, matters may be unlikely to improve.

We would also add that the loss of Ł311,000 for the year ended 31 March 1991 is, as yet, unaudited. Management have indicated that, in its view, this loss may eventually be larger. Specifically, it has highlighted the fact additional accruals may be required, further bad debt provisions may be made and it is possible that the auditors may seek to make a number of stock provisions. Additionally, the loss is calculated using management’s estimate of closing stock. This estimate may, in management’s view, differ by up to Ł30,000 either way to the final figure.

6.6 Conclusions
The Company has experienced two years where the severe competition in the market place has led to static turnover and a decrease in margins. The trading losses realised coupled with the large roofing repair costs have led to increased borrowings such that, currently, the Company is unable to cover its interest cost from its trading results.

Continuation of losses at this level cannot be sustained by the Company. In our opinion, management must address this situation immediately and formulate strategies to return the Company to profitable trading. This thorough review will need to address the marketplace that Tanner should be in, the level of capital investment required in more efficient, new technology machinery, its funding and the need to reduce overheads. These issues are discussed further at para 8.2.