Business Page – November 24th, 2002

Introduction

In today’s Business Page we review the 2000 and 2001 Annual Reports of Caribbean Containers Inc (CCL), formerly known as Seals and Packaging Industries Limited (SAPIL), which held its 19th Annual General Meeting on November 15, 2002 at the CCL Complex, East Bank Demerara. This is not the first time that the company has presented two sets of financial statements at one annual general meeting, having done so in 1999 when the directors presented three years’ accounts. It is clear that the company did not hold an Annual General Meeting in 2001 which seems to contravene the provisions of the Companies Act and the company’s by-laws which require the holding of annual general meetings annually. We understand, however, that permission for the late holding of the meeting was obtained from the Minister of Finance.

The Business

The principal activities of the company include the manufacture and sale of corrugated fibreboard containers and the manu­facture of paper using recycled cardboard boxes for sale and use in the production of corrugated fibreboard containers. The company has bad a series of problems particularly with the Paper Mill over the years and it is clear that it is not yet out of the woods. The story of the mill goes back to 1992, a year during which Ansa McAl acquired a controlling interest in the company. However, after several problems Ansa McAl in 1997 gave the Government of Guyana an ultimatum: sell us your shares for a nominal sum or buy those of Ansa McAl for a similar sum. It was a Hobson’s choice and the government thereby re-acquired control.

Then Rand-Whitney, the US corporation, came along and in 1998 acquired majority control promising to “fully complete the Plant in the first quarter of 2000.” However, after a brief period of operations, the plant was closed “pending resolution of certain process and energy related issues,” which apparently had not been anticipated despite the vast expertise of Rand-Whitney. It seems that there were other fundamental problems since it required both “modifications and installation of new power generating equipment” as well as the approval of the company’s bankers to a strategic plan before the mill was brought back into operation in September 2002.

The Restructuring Plan

While the restructuring plan has received the support of the company's bankers, the auditors still find it necessary to emphasise in their report on the 2001 financial statements that the company’s ability to continue is dependent on its ability to make substantial profits in the future and the provision of adequate financing. The company remains heavily dependent on its bankers and other creditors and the restructuring includes a search for equity participation with several potential investors.

We summarise below the 2000 and 2001 financial results of the company which are extracted from the audited accounts included in the report and offer some indicators which may be useful to readers.

The turnover of the company increased by 2.9% while pre-tax loss increased by 238% from G$121M to G$409M. The Managing Director reported that this was due mainly to the high cost of energy supply to the Paper Mill which resulted in a temporary closure of this plant and the failure of automatic scanning equipment. The company has initiated legal action against the overseas contractors to recover the substantial losses suffered as a result of the performance of this equipment. Despite the increase in sales the selling and distribution expenses of the company decreased by 13% from $61M to $53M.

Because of the capital structure and the application of accounting rules, the company’s finance and foreign exchange costs have increased quite substantially. In 2000, interest on loans taken out to acquire the Paper Mill and foreign exchange loss totaling $210M were not charged in the profit and loss statement but were capitalised. Financial charges in the profit and loss statement for 2000 amounted to $74.7M but this increased to $255M in 2001. Interestingly, in presenting the comparative figures for 2000, the 2001 statements are showing not the $74.7M but$66.SM.

Loss per share in dollars increased by 222% from 0.84 to 2.71. Despite having as one of its objectives the maximisation of “shareholder value creation,” it is now at least seven years since the company has paid any dividend.

Current assets have decreased from $264M to $162M while current liabilities have increased from $544M to $665M, with the result that working capital continues to decrease. This too has been referred to in the auditors’ report and the combination of interest charges and deteriorating working capital continue to put a severe strain on the company.

The increase of fixed assets by 37% is due mainly to the revaluation of land & building and equipment by $839M. While this has the effect of nominally increasing shareholder value, that too is being eroded by substantial losses which at December 31, 2001, amounted to $986M.

It should also be noted that the revaluation surplus would have to be realised in the normal course of business or by sale of the respective assets before it can be considered of major benefit to the shareholders, especially given that the company is currently being restructured.

Governance

It is regrettable that another of Guyana’s recently privatised public companies appears unable to comply with the requirements of the law with respect to the holding of annual general meetings. Under the restructuring, the Chairman of the com­pany has changed with R. Scogin taking over from J. Cobery, both of Rand-Whitney.

There has been a significant reduction in the number of directors since 1999, with the number of directors halved from eight in 2000 to four in 2001. No longer on the board are three Rand-Whitney directors and Mr. Azam Khan of Banks DIH who resigned during the year. Long-serving Company Secretary, Mr. Colin Wiltshire, was added to the board on July 6, 2001.

The Future

This company and the Paper Mill in particular had offered the country some hopes of economic diversification, and the government obviously recognised this in granting it a tax holiday on the profits of the mill. However, the company has suffered tremendously from a high consumption tax rate and competition from those who seem to evade the tax with impunity.

With all the difficulties experienced in the past, a small domestic market, high cost of transportation of both raw material and exports and prohibitive energy costs, the company’s failure to deliver value to shareholders is understandable. That raises the question, however, whether the current majority shareholders can persuade new equity into the company.