Chairman’s Report

The performance of the companies we have invested in,was generally as expected except for South Africa,where our subsidiary in Johannesburg,Plush Products (pty) Limited (Plush),went into a spiral of losses following the recession in South Africa. A decision was made to close this subsidiary,sell the assets to pay off bank debt and consider re-entering the market on a significantly leaner model that does not deal with the large retail chains in South Africa.

The company had advanced loans to a Cape Town based manufacturing business called Natural Wooden Products (pty) Limited (Natwood),in which there was a conditional offer to purchase. As at the reporting date the sale purchase agreement had not yet been effected and since the company’s operations had also adversely been affected by the current recession in South Africa,the board was of the opinion that these loans should be provided for in full.

In view of these two developments in South Africa,your board felt it prudent to provide for the worst case scenario in terms of investment loss and contingent liabilities. We have thus provided a total of Ksh 114,644,000 in our books for this. Any savings in the closure of Plush and the successful acquisition of Natwood would be written back to our books at the appropriate time.

It is important to note that neither Plush nor Natwood have contributed to the group’s profitability since our involvement with them. This action has resulted in a net reduction of bank borrowings of Ksh 140 million and elimination of Ksh 180 million in debtors factoring.

In order to give our stakeholders an accurate view of the financial affairs of the group,we did not consolidate the South African businesses and have totally provided for the investments and loans in both.

Financials:

In comparing the period under review which is a twelve month period,we must remember that the previous period was a fourteen month period. Due to not consolidating any South African business,our group turnover dropped from Ksh 1.3 billion to Ksh 521 million. Despite the reduction in turnover,profit from operations increased from Ksh 68 million to Ksh 77 million.

There was a reduction in interest costs from Ksh 36 million to Ksh 11m. This reduction in interest costs and increase in profit from operations resulted in an increase in profit from continuing operations from Ksh 32 million to Ksh 66 million. However due to the provision for discontinuing operations of Ksh 200 million,which has to be looked at with the credit to the minority account of Ksh 85 million,we have thus provided for Ksh 114 million due to the closure of Plush and restructuring of Natwood.

Unfortunately,the net result due to the provision is a loss of Ksh 56 million in the year under review as opposed to a profit of Ksh 20 million in the previous year. The company still has positive revenue reserves of Ksh 79 million.


Greedy when others are fearful,Very fearful when others are greedy - to paraphrase WB