Hanny Magnetics comes clean over Memorex issue
THE loss-ridden activities of Hanny Magnetics have finally been thrown open to shareholders, following intense pressure from the stock exchange.
But trading in the stock, which was suspended last Friday, will not resume until the group clarifies its prospects and reviews comments made by chairman Wong Sun in its annual report.
Last month, Hanny shocked investors with a full-year profit of $30.8 million, down 73 per cent on the previous year's $130 million.
It has now been shown that losses at Memorex, which it acquired in December last year, are much higher than analysts had expected. Sales have been hit by intense price competition and margins are falling.
Hanny has revealed it notched up a $17 million trading loss in its Memorex division in the first three months of operations, while operating expenses for the whole group blew out by $93 million over the year.
Major expenses were in the area of promotion and distribution. A price war in January with one of its main competitors forced the company to respond in kind and boost its marketing.
Hanny was forced to increase advertising and promotional costs by $21 million, while selling and distribution costs rose $31 million.
In its statement, Hanny said it would closely monitor these costs and try to cut them by reducing the sales commission paid to outside sales representatives, but acknowledged that 'these costs will continue to be incurred'.
The Memorex acquisition also saw Hanny lose some major original equipment manufacturer (OEM) customers.
The company was forecasting a 35 per cent increase in sales in the second half, but instead they fell 10 per cent to $515 million.
'The directors believe the reduction was principally a result of OEM and commercial sales, and a drop in the selling price of floppy diskettes,' it said.
Industry insiders said now that Hanny was seen as a major competitor rather than just a disk supplier, some companies would look for alternative sources of supply.
The company's level of borrowings also affected profitability, with interest costs increasing $14 million.
One key question relating to the management of the company was why shareholders were told profit growth would continue in the interim report, issued in January, which turned out to be incorrect.
In its statement, Hanny appeared to blame sluggish accounting practices.
Mr Wong said the company did not produce monthly consolidated management accounts, and that the extent of the downturn in operations was not known until shortly before the results were announced in January.
The company's is now preparing a separate statement of its prospects, which may contain new information.
