In the face of severe financial difficulties, office and medical supply company Staples Holdings Ltd. has suspended payment of preferred share dividends.

In a statement, the company said the suspension of the semi-annual dividend on the preferred shares -- adding up to $284,784 due March 31 -- was hurting the bottom line. Subsequent dividends were also on hold until further notice and added that additional changes will be put up for vote.

Trading on Staples shares on the Bermuda Stock Exchange was suspended a week ago pending an announcement. The suspension of trading is still in effect as the company is restructuring to deal with its cash flow crunch and loss of market share.

After the company maintained silence on what was going on, The Royal Gazette last week reported that analysts believed the company could be in talks with creditors or negotiating a possible buy-out from an equity investor.

Past financial statements to September 30 indicate that Staples is headed for a cash liquidity crunch, weighted down by interest payments on bank debts and payments to preferred shareholders.

Without the preferred dividend payment the company is still due to pay an estimated $364,045 in interest payments to the banks. In total, Staples owed about $3.32 million in short and long term loans to the Bank of Bermuda and the Bank Butterfield at September 30.

Analysts say the figure doesn't include funding for the purchase of a new warehouse to consolidate operations.

Staples president Michael Johnson said the company has hired Ernst & Young to assist in the evaluation and re-engineering of the company. The consultants are also in "communication'' with the banks.

"The company is currently in the process of reviewing all its asset values and operational processes, and its financial condition and capital structure, in order to determine the best plan for a complete corporate re-engineering,'' he said.

Company chairman William Midon said more information and changes will be revealed to shareholders at the company's annual general meeting on February 26. There was no explanation given why the annual general meeting is being held 11 months after the end of the company's financial year.

"A letter has been sent to the company's preferred shareholders to inform them that, regrettably, payment of the March 31, 1999 and subsequent dividends are being suspended, and that additional changes will be submitted to the preferred shareholders for consideration at the annual general meeting, or a special general meeting held shortly thereafter, contingent upon completion of the process now underway,'' he said.

Staples had $288,566 cash flow from operating activities in the 1998 financial year. The company declared a six month net loss of $236,019 to September 31 and forecast more losses were on the way.

After accounting for the semi-annual dividends to be paid by December 31, the company had a deficit of $477,815, or loss of 60 cents per common share for the six month period.

The cash problems have been compounding over the past year as Staples has lost sales to other market players due to a perceived lack of service support, according to a source.

Staples suspends dividends for preferred shares The lack of performance by its sales and support staff resulted in a 19 percent drop in sales to $2.86 million for the first half of its fiscal year to September 30, 1998.

After taking out $4.7 million in goodwill the company claims on its balance sheets assets at September 30 were $7.7 million and liabilities were $5.82 million. This leaves on balance a company worth about $2 million.

The assets included accounts receivable of $2.31 million and inventory of $3.83 million.

The liabilities included $1.91 million in long term debt, $1.41 million in bank advances and $1.47 million in accounts payable and accrued liability.

The company owes the Bank of Bermuda the advances through a non-revolving loan facility which expires on March 31, 2005. The first principal repayment of $194,642 is due on March 31 this year and rises to $269,765 by 2003. The loan is secured by a pledge of all the common shares in the company.

The Bank of Bermuda is also owed a further $700,000 through a line of credit facility.

Staples is also on the hook for $1 million owed to the Bank of Butterfield for subsidiary company Atlantic Medical International Ltd.

In 1995, the company funded the purchase of competitor Chips Ltd. by issuing 583,334 10 percent convertible redeemable voting preferred shares at $9 each to raise about $5 million.

The common stock and the preferred shares were listed on the Bermuda Stock Exchange. The preferred shares last traded at $7.50 on January 21. The shares were convertible to common shares at any time after December 31, 1998 following notice by the company and as long as fully diluted earnings per shares was a minimum of $1.50 a share. Because of the losses that is not an option for the company in an attempt to avoid the drain of $569,568 yearly from its bottom line. The other option is to pay $9 per preferred share.