RNS Number:0634O
Hartstone Group PLC
29 July 2003
29 July 2003
(for immediate release)
THE HARTSTONE GROUP PLC
Announcement of Preliminary Results
for the year ended 31 March 2003
* US margins and sales under severe pressure
* Operating loss of #6.6 million (2002: #2.2 million profit)
* Shareholders' funds down to #13.0 million (2002: #23.5 million)
Commenting on the announcement, Hartstone's chairman, Shaun Dowling said:
"Despite cutting overheads by $4.1 million in the US, the downturn in sales and
reduced margins have led to very high losses. Future recovery depends on an
upturn in department store sales for good quality shoes and accessories. In the
meantime, given current market conditions, the directors are evaluating
strategic options for the future of the group."
PRESS ENQUIRIES
The Hartstone Group PLC Tel: 01494 787700
Shaun Dowling, Chairman
John De Morgan, Company Secretary
THE HARTSTONE GROUP PLC
RESULTS FOR THE YEAR ENDED 31 MARCH 2003
GROUP RESULTS
The Hartstone Group incurred a severe downturn in sales and profitability in the
year to 31 March 2003. Group turnover of #75.1 million was 25% lower than in
the previous year (2002: #99.6 million). There was an operating loss of #5.5
million (2002: #3.4 million profit) before central costs of #0.4 million (2002:
#0.7 million) and non-recurring costs of #0.7 million (2002: #0.5 million).
After finance charges of #0.5 million, the group incurred a loss after tax of
#7.0 million (2002: #1.8 million profit). This has had the effect of reducing
shareholders' funds from #23.5 million to #13.0 million. However, with a
substantial decrease in stocks and debtors, there was a cash inflow before
financing of #2.0 million (2002: #0.2 million outflow).
ETIENNE AIGNER
The relentless pressure on prices and sales volume in the US department stores,
our major customers, on which I reported at the half year, continued unabated in
the second half. Average unit prices of our footwear fell by 17% and the
allowances which we had to provide in order to keep our listings in the stores,
amounted to $9.8 million in the year. However, our secondary and recently
introduced range of footwear, "EA by Etienne Aigner", increased in sales by 76%.
Sales in our accessory business were down by 17%, largely due to stock
problems with one customer, whilst retail sales were down by 7%. In total, net
sales at Etienne Aigner were down by 17.3% and this led to an operating loss of
$9.1 million, inclusive of an impairment loss of $1.0 million on the property
and equipment in full price stores and higher reserves for inventories and
allowances. As reported at the half year, management responded by cutting
overheads by $4.1 million, but regrettably this was not enough to offset the
losses.
Over the last seven months we have been negotiating with a US purchaser and his
partners to divest the Aigner business and return cash to shareholders. The
issuing of the group results was delayed until negotiations were complete, the
principal terms having been agreed. However, I regret to report that the
negotiations were terminated on 21 July.
FUNDS FLOW
Etienne Aigner breached its banking covenants in September 2002 and again in
March 2003. This has triggered a halt on payments of group interest to the
parent company in the UK.
DIVIDENDS
The directors do not propose to recommend payment of a dividend on the ordinary
shares this year and the company was not in a position to pay the dividend on
preference shares due on 2 January and 2 July 2003.
PROSPECTS
We expected our business to recover last year from the effects of 11 September
2001, but it has certainly not done that. In these circumstances, it would be
foolish to forecast a recovery with any degree of confidence in the coming year.
However, forward orders at Etienne Aigner are higher than at this time last
year, and overheads in this year's budget have been cut back further. Aigner's
future therefore depends on the recovery of sales in the major department stores
and the willingness of American shoppers to buy better quality shoes and
accessories.
In the meantime, given current market conditions, the directors are evaluating
strategic options for the future of the group.
SHAUN DOWLING
Chairman
29 July 2003
THE HARTSTONE GROUP PLC
Preliminary announcement of results
Consolidated results for the year ended 31 March 2003
2003 2002
(restated)
(see note 2)
#000 #000
Turnover - continuing operations 75,080 99,588
Cost of sales (51,718) (62,742)
Gross profit 23,362 36,846
Net operating expenses (29,939) (34,683)
Operating (loss) / profit before non-recurring and central costs (5,491) 3,373
Non-recurring costs (725) (526)
Central costs (361) (684)
Operating (loss) / profit (6,577) 2,163
(Loss) / profit on ordinary activities before finance charges (6,577) 2,163
Net interest (payable) / receivable and similar (charges) / income (note 3) (464) (1,079)
Other finance (charges) / income - 36
(Loss) / profit on ordinary activities before taxation (7,041) 1,120
Tax credit on (loss) / profit on ordinary activities 75 703
(Loss) / profit on ordinary activities after taxation (6,966) 1,823
Dividends on non-equity shares (800) (818)
(Loss) / profit for the financial year transferred from / to reserves (7,766) 1,005
Basic and diluted (loss) / earnings per ordinary share (note 5) (4.9)p 0.6p
Adjusted (loss) / earnings per ordinary share (excluding non-recurring (4.4)p 0.9p
costs)
THE HARTSTONE GROUP PLC
Preliminary announcement of results
Consolidated balance sheets at 31 March 2003
2003 2002
(restated)
(see note 2)
#000 #000
Fixed assets
Intangible assets - 59
Tangible assets 3,948 4,683
3,948 4,742
Current assets
Stocks 18,019 25,230
Debtors 9,000 13,500
Cash at bank and in hand 1,151 2,144
28,170 40,874
Current liabilities
Creditors - amounts falling due within one year (16,428) (3,805)
Net current assets 11,742 37,069
Total assets less current liabilities 15,690 41,811
Creditors - amounts falling due after more than one year (876) (16,910)
Provisions for liabilities and charges (31) (560)
Net assets excluding pension liabilities 14,783 24,341
Pension liabilities (1,804) (793)
Net assets including pension liabilities 12,979 23,548
Capital and reserves
Share capital 2,584 2,584
Capital redemption reserve 329 329
Profit and loss account 10,066 20,635
Shareholders' funds 12,979 23,548
Shareholders' funds represent:
Equity interests 2,981 13,550
Non equity interests 9,998 9,998
12,979 23,548
THE HARTSTONE GROUP PLC
Preliminary announcement of results
Consolidated statement of cash flows for the year ended 31 March 2003
2003 2002
(restated)
#000 #000
Net cash flow from operating activities:
Operating (loss) / profit (6,577) 2,163
Depreciation 1,032 1,216
Impairment of fixed assets 607 -
Amortisation and permanent diminution in value 59 29
Other non-cash items 122 -
Working capital movement:
- decrease / (increase) in stocks 4,766 (1,159)
- decrease / (increase) in debtors 3,219 796
- increase / (decrease) in creditors 775 (350)
Net cash inflow from operating activities 4,003 2,695
Returns on investments and servicing of finance (808) (1,745)
Taxation 62 (298)
Capital expenditure and financial investments (1,208) (841)
Cash inflow / (outflow) before financing 2,049 (189)
Financing:
- purchase of own shares - (886)
- (decrease) / increase in debt (2,813) 473
(Decrease) in cash in the year (764) (602)
Reconciliation of net cash flow to movement in net debt:
2003 2002
#000 #000
(Decrease) in cash in the year (764) (602)
Cash outflow / (inflow) from movement in debt 2,813 (473)
Change in net debt resulting from cash flows 2,049 (1,075)
Other non cash changes - issue costs to be amortised (14) (10)
Translation difference 1,301 23
Movement in net debt 3,336 (1,062)
Opening net debt (13,754) (12,692)
Closing net debt (10,418) (13,754)
THE HARTSTONE GROUP PLC
Preliminary announcement of results
Statement of total recognised gains and losses
for the year ended 31 March 2003
2003 2002
(restated)
#000 #000
(Loss) / profit on ordinary activities after taxation (6,966) 1,823
Exchange (losses) / gains (2,086) 119
Release of deferred tax on exchange gains 362 649
(Loss) on pension assets (1,079) (537)
Total recognised (losses) / gains for the year (9,769) 2,054
Prior year adjustment - adoption of FRS 17 (523)
Total recognised (losses) since the last annual report (10,292)
Reconciliation of movements in shareholders' funds
for the year ended 31 March 2003
2003 2002
(restated)
#000 #000
Total recognised (losses) / gains for the year (9,769) 2,054
Dividends (800) (818)
(10,569) 1,236
Purchase of own shares - (886)
Net (decrease) / increase in shareholders' funds (10,569) 350
Opening shareholders' funds (originally #24.1m before deducting
prior period adjustment of #0.5m
prior period adjustment of #0.5m) 23,548 23,198
Closing shareholders' funds 12,979 23,548
Note 1: Going Concern
As of 31 March 2003, Etienne Aigner Inc, the group's principal US operating
subsidiary, was in breach of certain financial covenants in its loan agreement
with its external lenders and, as a result, the lenders have the right to demand
repayment of the outstanding balance of the loan at any time, which at 31 March
2003 totalled #11.6 million. Furthermore, based on its latest financial
projections, Etienne Aigner is unlikely to comply with the current covenants
under the present loan agreement throughout the next 12 month period. The
lenders have not issued a formal waiver of the existing covenant violations, nor
agreed revised covenants for the future, that would ensure that the facilities
remain available. The board and the lenders agreed to defer future negotiations
to revise the covenants until the outcome of a proposed sale of the US business
was known. After a very protracted period these negotiations were terminated on
21 July 2003 despite all the principal terms having been agreed. Until revised
covenants are agreed, Etienne Aigner is not permitted to make cash payments to
the parent company, except for management charges, which represents the parent
company's primary source of cash to cover UK expenses.
These accounts have been prepared on a going concern basis assuming a successful
outcome of the forthcoming covenant negotiations with the lenders. In parallel
with these negotiations the board is assessing and evaluating alternative
options to maximise the return to stakeholders in the group. These options
include, but are not limited to, the sale and/or licensing of all or part of the
US business. Under the potential options being considered the activities of the
group may change significantly in the future.
In the event of neither the successful renegotiation of the covenants, nor
alternative arrangements for the realisation of sufficient assets being
completed, and the group being unable to secure future financing arrangements,
the group may be unable to realise cash from its US assets and accordingly the
group would not continue as a going concern. The Company has not guaranteed the
borrowings of the US business and therefore, in the event that the lenders seek
to recover payment of the outstanding loan and their recovery actions result in
a shortfall, there would be no recourse to the Company in respect of the
shortfall. If this event were to occur then the amounts realised may be less
than those included in the consolidated balance sheet as at 31 March 2003 and
certain assets and liabilities may need to be reclassified.
In these circumstances, the Company would be required to rely solely on its own
cash resources. The directors have prepared cash flow forecasts for the period
to 31 December 2004 and consider that, in conjunction with potential contingency
plans that include but are not limited to raising finance secured against UK
assets, the Company (as opposed to the group) has sufficient working capital for
its present circumstances, that is, for at least the foreseeable future
providing: no preference dividends are paid; the potential liabilities under
the group's pension scheme are not crystallised; and no currently unforeseen
expenses arise during this period.
The carrying value of the investment in the US business has been written down to
its estimated net realisable value of #9.4 million in the Company balance sheet
for the year ended 31 March 2003. If the circumstances referred to above were
to occur then further write-downs in the carrying value of the investment may
need to be made.
The directors consider that in preparing these accounts they have taken into
account all information that could reasonably be expected to be available and
they consider that it is appropriate to prepare the accounts on a going concern
basis.
Note 2: Restatement of Comparatives
The adoption of FRS 17, Retirement Benefits, has required a change to the
accounting treatment of pensions and the prior year results have been restated
accordingly as follows:
(a) Consolidated balance sheet
Pensions Profit and
loss account
Accruals Liabilities
#000
#000 #000
As previously reported at 31 March 2002 (1,167) - 21,158
Adoption of FRS 17 at 31 March 2002 270 (793) (523)
31 March 2002 restated (897) (793) 20,635
Under FRS 17, the difference between the market value of the assets of the
group's UK and US defined benefit pension funds and the present value of the
accrued pension liabilities is shown as a liability on the balance sheet.
Previously, the only balance sheet item recognised was a provision representing
the deficit between the market value of the assets and the present value of the
liabilities of the US pension scheme which has been frozen since 1992. The
movement on this deficit has been charged to the profit and loss account in
prior years.
(b) Consolidated profit and loss account
Net Other Profit for
operating finance the year
expenses income transferred
to reserves
#000 #000
#000
As previously reported at 31 March 2002 (35,059) - 593
Adoption of FRS 17 at 31 March 2002 376 36 412
31 March 2002 restated (34,683) 36 1,005
The profit and loss charge, under SSAP 24, comprised a regular pension cost plus
spreading the UK pension scheme deficit over the average remaining service lives
of the relevant employees and the movement in the deficit on the US pension
scheme.
Under FRS 17, three new items are included in the profit and loss account:
* Charged to operating profit
- the full service cost of pension provision relating to the period,
together with the costs of any benefits relating to past service.
* Included in other finance income
- a charge equal to the expected increase in the present value of the
scheme liabilities because the benefits are closer to settlement; and netted
against this,
- a credit equivalent to the group's long-term expected return on assets
based on the market value of the schemes assets at the start of the period.
Included in the statement of recognised gains and losses is the difference
between the expected return on pension assets and that actually achieved along
with differences which arise from experience or assumption changes in pension
liabilities.
If FRS 17 had not been adopted in 2003, losses on ordinary activities before
taxation would have increased to #8.2 million and losses on ordinary activities
after taxation would have increased to #8.1 million.
Note 3: Net Interest (Payable)/Receivable and Similar (Charges)/Income
2003 2002
#000 #000
Net interest charge
- payable on loans and overdrafts 556 993
- interest receiveable (142) (66)
414 927
Foregin exchange losses 36 142
Refinancing costs 14 10
464 1,079
Note 4: Taxation
The tax credit arises from adjustments to the prior year deferred tax position
offset by a charge for US State taxes, which arise despite losses being suffered
in the US.
Note 5: (Loss) / earnings per Ordinary Share
Basic and diluted (loss) / earnings per ordinary share is calculated, after
having deducted accrued preference dividends, on a loss of #7.8million (2002:
#1.0 million profit) using a weighted average number of ordinary shares in issue
of 158,485,711 (2002: 168,001,305). The cumulative, convertible preference
dividends are anti-dilutive.
The adjusted (loss) / earnings per ordinary share is calculated, after having
deducted preference dividends and added back non-recurring costs of #0.7 million
(2002: #0.5 million), on a loss of #7.8 million (2002: #1.0 million profit)
using the weighted average number of shares stated above. This measure shows
the (loss) / earnings per share of the underlying business excluding one-off
charges for fixed asset impairments and transaction fees.
Note 6: Analysis of Debt
1 April Cash flow Exchange Non cash 31 March 2003
movements
2002 #000 #000 #000
#000
#000
Cash at bank and in hand 2,144 (764) (215) (14) 1,151
Debt due within 1 year - - - (11,569) (11,569)
Debt due after 1 year (15,898) 2,813 1,516 11,569 -
Total (13,754) 2,049 1,301 (14) (10,418)
As of 31 March 2003, Etienne Aigner Inc., the principal operating subsidiary of
the group, was in violation of its borrowing agreement with its lending
institution resulting from its inability to comply with certain financial
covenants required in the loan agreement. The lender has not issued a formal
waiver of the covenant violations and as a result of this, the lending
institution has the right to call the balance of the loan at any time. In
consideration of this the debt has been reclassified as due within one year.
Note 7: Post balance sheet events
Distribution of pension scheme surplus
The group had an additional defined benefit scheme in the UK that was closed and
all liabilities settled as of 9 October 2001. As at 27 June 2003 approval for
distribution of the scheme's surplus assets was obtained from the appropriate
authorities. The gross proceeds were approximately #0.6 million, which after
tax left a net amount received by the company of #0.4 million in June 2003.
The Trustees had not submitted a request for refund of the surplus prior to the
year end, and accordingly no amounts had been recorded on the balance sheet.
Closure of the Full Price division
Subsequent to the year end Etienne Aigner Inc. decided to discontinue its Full
Price division. An agreement has been signed with DJM Asset Management, Inc. to
close down the division's regional mall locations during the year ended 31 March
2004. The loss expected to be realised in the year to 31 March 2004 is
estimated to be approximately #0.7 million primarily in respect of lease
terminations as well as other costs.
Note 8: Preliminary statement
This preliminary statement, which has been agreed with the auditors, was
approved by the board on 28 July 2003. It has been prepared using accounting
policies that are consistent with those adopted in the statutory accounts for
the year ended 31 March 2003. However this statement is not the group's
statutory accounts as defined in section 240 of the Companies Act 1985.
The statutory accounts for the year ended 31 March 2002 have been delivered to
the Registrar of Companies and received an unqualified audit report and did not
contain any statements under s.237 (2) and (3) of the Companies Act 1985. The
statutory unqualified accounts for the year ended 31 March 2003 received an
audit report, modified to include an emphasis of matter in respect of the
uncertainty relating to the use of the going concern basis discussed above, and
will be delivered to the Registrar of Companies in due course.
A copy of the full Annual Report will be sent to shareholders shortly.
Note 9: Financial information
This announcement will be available for collection for a period of 48 hours from
the Company Announcements Office at the Stock Exchange and at any time from the
registered office of the company at Masters House, 107 Hammersmith Road, London
W14 0QH.
This information is provided by RNS
The company news service from the London Stock Exchange
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