"The year ending 31st December 1999 was a demanding yet disappointing year as for the first time in over 25 years we are reporting a loss for the year amounting to $181,921. This loss is the result of operating losses of The Computer Store combined with an inventory write-off in connection with the carrying cost of PC spare parts and equipment. A more detailed explanation of the reason for the loss, which is mainly attributable to the rapid change in the personal computer market and the way product is delivered to the end consumer, is explained elsewhere in this report.
Total assets of the group as at December 31st, 1999 amounted to $5,087,025 including fixed assets of $2,462,050 compared with total assets of $6,357,225 and fixed assets of $2,437,095 a year ago. The Company had cash and time deposits of $446,164 as at December 31st, 2000 compared with $1,581,400 last year. Shareholders' equity has decreased from $2,786,991 to $2,020,070 this year as a result of the payment of a dividend of $585,000 in respect to the prior year's record earnings and the loss for the year of $181,291 referred to earlier.
BCS Agencies Limited
The sector of our business that handles all of our IBM agency business, other than PCs and Communications, is covered by this subsidiary company. The contribution to earnings (before corporate overheads) amounted to $370,000 as compared to the record year in 1998 when agency earnings totalled $572,337. In 1998 many companies prepared well in advance for the Year 2000 and made hardware and software commitments in preparation for compliance with any foreseeable Year 2000 issues. In the latter half of 1999, however, most of our major customers had already made a heavy investment in IT (information technology) equipment and devoted the remainder of the year to ensuring that their systems were going to have a stable transformation through the change in the century. New hardware and software budgets were, therefore, frozen and our customers attention was devoted to testing existing systems for possible Y2K flaws.
This decision reduced the potential for new hardware and software sales and our services were generally limited to providing non-hardware related services to those clients whose primary goal was a smooth migration to the Year 2000. It should be noted that, through an exhaustive BCS Agencies Millennium Project with our customers during 1998 and 1999, we were trouble-free during the actual transition period.
The IT industry continues to mature where innovation and manufacturing productivity is resulting in hardware with higher function and much lower customer costs. These trends have a direct impact on the revenue stream of our agency business as the lower prices mean less commission. To offset the lower revenues related to hardware, our strategy is to focus on packaging skilled non-hardware related services which will enable our customers to maximize their investment in total solutions. Even though we have a competitive advantage in that our agency agreement allows us uniquely to draw on all of the skills available through the IBM Global Services Team, we must still maintain and grow a core of highly skilled and technical individuals here in Bermuda as our front line response team to the increasingly complex IT requirements of our customers. Although the margins (and therefore net profit) are generally less that the more traditional hardware lines of business, these types of consulting services are growing exponentially and should be enhanced with the expansion of E-Commerce.
It is obvious, therefore, that we must be able to source, on a global basis, the skill sets required to respond to these complex problems. Whereas our Company has always been the leader in training the available pool of local talent and we continue to be committed to training, we are increasingly aware that with a squeeze on margins and the rapidly changing IT environment, we may not be able to afford the time required nor the cost of training programs if we wish to survive in this increasingly demanding field.
The Computer Centre
This division of the Company handles sales of IBM personal computers and other peripherals. During the year under review the division had an operating loss of $556,199 on sales of $3,994,157 compared with profits of $642,190 on sales of $6,127,042 a year ago. These results are exclusive of any corporate overhead and/or revenue.
Herein lies the greatest problem and the major contributor to the disappointing results for the year under review. Several factors contributed to these results:
Globally, and in Bermuda, the personal computer marketplace is going through significant changes and new competitive threats. Consumer and Corporate customers are price shopping and purchasing directly over the Internet. Current technology is such that modular components and reliability have simplified the hardware to such an extent that down time is at a minimum and customers are willing to take the risk of direct purchasing for price advantages. As manufacturers, including IBM, compete to maintain and grow their market share, not only are prices and margins under increasingly downward pressure but also the manufacturers are having to find new and efficient ways of delivering their products to market. It is expected that this method of direct sales through the Internet and "build to order" personal computers will eventually dominate the market. Certainly we felt the impact of these changes in this division of the Company. Coupled with this shift in customer buying habits we were also faced with the same freeze we encountered in the mainframe business where in the second half of the year under review customers froze their IT budgets and dealt with Year 2000 issues and hence our sales were materially affected.
Due to this shift in customer buying habits and the fast pace of new products coming to market, the Directors took a prudent approach to our financial condition and in the first half of the year we took a one time write-off in the amount of $225,000 to reduce the carrying cost of inventories of equipment and spare parts. In the second half of 1999, the staff of BCS worked diligently to reduce the impact of this write-off and held several "knock-down" sales in order to recover some of the value of these parts. Fortunately for the Company, there are several customers who had need of this old equipment and spare parts and by year end we were able to recover some costs and the final write-down for the year amounted to $131,685 rather than the $225,000 that had been anticipated at the half-year.
Our market strategy for the future is somewhat dependent on how our suppliers (mainly IBM) decide to go forward with the distribution of personal computers and whether there will be sufficient add-on value that will support additional pricing through a dealer. At the very least we can continue to market personal computers to our corporate customers as an adjunct to our agency business but the Directors are actively looking at other alternatives so that we will not have this continued negative impact on our annual earnings. Although for the first quarter of this current year we are still experiencing a loss in this division, the quantum of the loss has been reduced and will not have as great a significance on our current financial results.
Transact-e-Biz.com (Bermuda) Limited
This year the communications subsidiary made a marginal contribution to the overall result in the amount of $ 30,641. The Company incurred development costs in the amount of $47,828 which were expensed as incurred.
Although we had a growing revenue base in this division, as the Bermuda node of the IBM Global Network (IGN) in mid-1999, IBM sold IGN to AT&T and we found ourselves caught up in delays associated with this transaction.
Bermuda's fibre optic links to the US have traditionally been expensive. Only since the late fall of 1999 have we been able to secure the necessary bandwidth and connectivity, at reasonable costs, which is required to expand this business. We look forward to growth in this area over the next several years.
Recognizing that the communications business is going to be the bedrock of the future of IT solutions, the Company has invested and directed its resources in this area but expanded on its original intent so that we can now host and maintain internet and E-Commerce business requirements on state-of-the-art equipment with the finest e-commerce and security software supported 24/7 in Bermuda. Given the speculative nature of any start-up, the Directors have taken the conservative approach to expense all development and start-up costs, including expenses that hopefully will have an impact on future earnings, on an as-incurred basis for the year ended December 31st, 1999.
Conclusion
As mentioned in our report last year, we advised shareholders that these downward pressures on margins and the directional shift of the IT business would negatively impact our results. We must also advise shareholders this year that, although we are forging ahead with the communications business investment, it is highly speculative in that we are unsure if the global indicators concerning E-Commerce will materialize for Bermuda. It will only be with minimal regulation and Government encouragement that Bermuda can position itself globally to capture some of the offshore E-Commerce business. It is hoped that the E-Commerce regulatory approach will be "light-handed" and mirror that of the other sectors of the international business thereby allowing this infant business to flourish.
It has been a very difficult year and the Directors wish to express their appreciation to the Management and Staff of our companies who have worked tirelessly on behalf of the Company."