There have also been problems with a new software package. Ahmed ElAmin reports About 290 holders of preferred shares in Staples Holdings Ltd. have been told they will lose the $5 million they invested in the company in 1995.

The shareholders range from people who put from $1,000 in the company to those who invested $348,000. The shareholders are now questioning what went wrong in a company that holds the largest market share in the office supply business in Bermuda, and was taking in some $13 million in revenues.

In a interview about what went wrong, Staples Holdings chairman Bill Midon yesterday was keen to make the distinction between the holding company and the operating entities Staples Ltd. and Atlantic Medical International Ltd.

Office supplier Staples has about 55 employees while medical supplier Atlantic Medical has about five employees. Mr. Midon said the operating entities were viable and revenue had stabilised after three years of declining revenue.

Staples has had a 19 percent drop in sales to $2.86 million for the first half of its fiscal year to September 30, 1998.

However, the companies were being drained of profits to pay off $588,316 in dividends and bank debt interest of about $190,000 a year, he said. In the face of financial difficulties Staples earlier this month halted dividend payments to preferred shareholders.

Staples continues to make monthly payments on its debt to the Bank of Bermuda and the Bank of N.T. Butterfield and Son Ltd. 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.

Mr. Midon said the operating entities had had a cash outflow for debt repayment and to preferred shareholders of about $4.4 million over 3.5 years, crippling the operating entities' ability to compete effectively.

The board of directors is therefore attempting to sell off the operating entities for as much as possible and pay off the Bank of Bermuda, staunching the flow of funds out of Staples Ltd. and Atlantic Medical.

The bank made the original loan of $2 million to Staples to top up the $5 million contributed by preference shareholders in the $7 million purchase of competitor Chips Ltd. The bank loan is down to about $1.9 million.

By his calculations Staples Holdings currently has a $2 million book value, enough to pay off the Bank of Bermuda, which acted as negotiator and advisor in the Chips purchase.

Mr. Midon said a number of buyers had expressed interest in the companies.

Staples' shareholders in $5m loss Also under consideration was an employee buy-out of the companies, although he stressed no such offer had been made.

The company has hired Ernst & Young to assist in the evaluation and re-engineering of the company to determine the best alternatives available for shareholders.

He blamed four factors contributing to declining revenues at Staples Ltd. The main factor in Staples demise was the loss four months later of two key executives, the chief financial officer Claude Guay and senior manager Jim Ferguson who started up competitor Tops Ltd.

In the first year after the purchase, Staples' revenues were $1 million below the projected $14 million in revenue forecast in the initial public offering prospectus. Profits were 50 percent below the $2 million projected.

"The strategy in the buy-out was to consolidate the industry,'' Mr. Midon said. "Four months later we realised that we had not consolidated the market and we had new competition right out of the box.'' Mr. Midon also blamed other factors such as the loss of president Mark White in 1997, problems implementing a new financial software package, and the failure of Sharp to bring new digital office products on the market quickly, he said.

Mr. White was subsequently replaced by Joan Hug on an interim basis. Michael Johnson then replaced Ms Hug. The change in management caused disruptions to the running of the business, said Mr. Midon.

Despite these explanations Mr. Midon refused to put the finger of blame on anyone, including himself for decisions. He still stands by the decision to purchase Chips and said only the benefit of hindsight reveals the "challenges'' facing the company.

According to a shareholder who attended the annual general meeting Mr. Midon responded to a question from one of the 35 who attended that Staples had probably overpaid for Chips.

But Mr. Midon said he was referring to the failure of the company to meet projections.

"If you look at the performance then we probably overpaid,'' he said.

Another shareholder questioned whether the Bank of Bermuda had a conflict of interest in acting as negotiator for the deal, being involved in issuing the initial public offering, and loaning $2 million to the company.

The shareholder, who didn't want to be named, asked how the bank could have negotiated a non-competitive clause with only the principal Bill Gresham and not ensuring any other management was involved.

Mr. Midon said he was hampered in the negotiations as he did not deal directly with Chips Ltd.'s owner. The bank was designated to do the due diligence and advise on the worth of Chips. Mr. Gresham didn't want a competitor looking into the company's books directly beforehand.

Mr. Midon also said the legal validity of a non-competitive clause for management was in question. Share options and an employee share purchase plan were seen as incentives for management to stay with the merged companies.

A total of 583,334 convertible redeemable voting 10 percent preferred shares were sold at $9 each.

"How can you justify $7 million if you can't get a non-competition clause,'' a shareholder said. "The due diligence was done by the bank. If senior management is not locked up in a services' company that depends on personnel how can the company be worth $7 million? They also loaned $2 million and floated the preferred shares. Now the bank is pulling the plug when there is $2 million left in the company. The bank is getting their $2 million back while the preferred shareholders are getting screwed.'' Mr. Midon said in response to questions at the annual general meeting he had referred the matter to the company's lawyer for consideration.

Another shareholder questioned whether the bank had a conflict of interest in floating the shares through one arm while at the same time advising clients to buy 247,231 shares through another division. The $2.2 million worth of shares sold by the Bank of Bermuda represents about 44 percent of the offering.

"Had I known about this nonsense I would never have invested,'' a shareholder said.

Mr. Midon said all the information was available in the issuing prospectus.

Preferred shareholders have so far made 35 cents on the $1 in dividends. He is one of the biggest losers, he said. Staples Ltd., which was wholly owned by the Midon family, was valued at $4.8 million before the merger for which Mr.

Midon received common shares.

Mr. Midon said he had also invested $4.4 million in purchasing the warehouse in which Staples is now relocated. A further $900,000 was spent on renovations. He is not charging rent to the company.

"Clearly it's an experience that teaches you no matter how hard you work you are not infallible,'' he said.

Staples' shareholders in $5m loss Also under consideration was an employee buy-out of the companies, although he stressed no such offer had been made.

The company has hired Ernst & Young to assist in the evaluation and re-engineering of the company to determine the best alternatives available for shareholders.

He blamed four factors contributing to declining revenues at Staples Ltd. The main factor in Staples demise was the loss four months later of two key executives, the chief financial officer Claude Guay and senior manager Jim Ferguson who started up competitor Tops Ltd.

In the first year after the purchase, Staples' revenues were $1 million below the projected $14 million in revenue forecast in the initial public offering prospectus. Profits were 50 percent below the $2 million projected.

"The strategy in the buy-out was to consolidate the industry,'' Mr. Midon said. "Four months later we realised that we had not consolidated the market and we had new competition right out of the box.'' Mr. Midon also blamed other factors such as the loss of president Mark White in 1997, problems implementing a new financial software package, and the failure of Sharp to bring new digital office products on the market quickly, he said.

Mr. White was subsequently replaced by Joan Hug on an interim basis. Michael Johnson then replaced Ms Hug. The change in management caused disruptions to the running of the business, said Mr. Midon.

Despite these explanations Mr. Midon refused to put the finger of blame on anyone, including himself for decisions. He still stands by the decision to purchase Chips and said only the benefit of hindsight reveals the "challenges'' facing the company.

According to a shareholder who attended the annual general meeting Mr. Midon responded to a question from one of the 35 who attended that Staples had probably overpaid for Chips.

But Mr. Midon said he was referring to the failure of the company to meet projections.

"If you look at the performance then we probably overpaid,'' he said.

Another shareholder questioned whether the Bank of Bermuda had a conflict of interest in acting as negotiator for the deal, being involved in issuing the initial public offering, and loaning $2 million to the company.

The shareholder, who didn't want to be named, asked how the bank could have negotiated a non-competitive clause with only the principal Bill Gresham and not ensuring any other management was involved.

Mr. Midon said he was hampered in the negotiations as he did not deal directly with Chips Ltd.'s owner. The bank was designated to do the due diligence and advise on the worth of Chips. Mr. Gresham didn't want a competitor looking into the company's books directly beforehand.

Mr. Midon also said the legal validity of a non-competitive clause for management was in question. Share options and an employee share purchase plan were seen as incentives for management to stay with the merged companies.

A total of 583,334 convertible redeemable voting 10 percent preferred shares were sold at $9 each.

"How can you justify $7 million if you can't get a non-competition clause,'' a shareholder said. "The due diligence was done by the bank. If senior management is not locked up in a services' company that depends on personnel how can the company be worth $7 million? They also loaned $2 million and floated the preferred shares. Now the bank is pulling the plug when there is $2 million left in the company. The bank is getting their $2 million back while the preferred shareholders are getting screwed.'' Mr. Midon said in response to questions at the annual general meeting he had referred the matter to the company's lawyer for consideration.

Another shareholder questioned whether the bank had a conflict of interest in floating the shares through one arm while at the same time advising clients to buy 247,231 shares through another division. The $2.2 million worth of shares sold by the Bank of Bermuda represents about 44 percent of the offering.

"Had I known about this nonsense I would never have invested,'' a shareholder said.

Mr. Midon said all the information was available in the issuing prospectus.

Preferred shareholders have so far made 35 cents on the $1 in dividends. He is one of the biggest losers, he said. Staples Ltd., which was wholly owned by the Midon family, was valued at $4.8 million before the merger for which Mr.

Midon received common shares.

Mr. Midon said he had also invested $4.4 million in purchasing the warehouse in which Staples is now relocated. A further $900,000 was spent on renovations. He is not charging rent to the company.

"Clearly it's an experience that teaches you no matter how hard you work you are not infallible,'' he said.