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November 29, 1993

KALAMAZOO SURVIVES BEING A VICTIM OF THE LESS-PAPER OFFICE, AND RECOVERS TO REVIEW ITS SHARE STRUCTURE

By CBR Staff Writer

Kalamazoo Plc’s half-year profits – turnover up 7.2%; a healthy profit, after last year’s loss – hide a complex, but encouraging picture. The turnover figure, for example is an amalgam of a 10% increase in sales from its motor-trade computer services business and a 17% decrease from its printing activities. Both, however show a healthy improvement in profitability. The Birmingham-based company has always been a useful thermometer for gauging the UK motor industry’s health and now, after two years of deferring purchases, it seems that both manufacturers and traders are fingering their cheque-books. Well, probably not their cheque-books, actually: Kalamazoo’s Business Systems division used to make a tidy sum from printing these pieces of paper, but the advent of electronic data interchange and debit cards has seen the market wither. Chairman Peter Harrap predicts that the volume of cheques needed will fall by around 25% by the turn of the decade. The business forms market is suffering a similar fate in places, as the automation of some work practices has meant that the need for some stationery has simply melted away – yes, Kalamazoo is a bone fide victim of the paperless office, or at least, the less-paper office. As a result, Kalamazoo has been fighting to restructure Kalamazoo Business Systems. Marginal operations have been closed, new blood is being introduced, and with it, new products. Cheque printing may be down, but other forms of security printing such as badges with print that disappears after 24 hours, or labels with ultra-violet only bar-codes, are predicted to grow at 12% per annum. However these new offerings are still in their infancy, hence the 17% fall in turnover at the division, to UKP7.7m. The trimmed turnover was accompanied by an increase in productivity, however and the division made an operating profit of UKP0.7m after a loss of UKP1.5m. Kalamazoo Computer Services is made up of three parts: the self-explanatory maintenance services; software services, which is a reseller of accounting systems, and Kalamazoo Training Consultants, which provides technology training in the motor trade, general applications training and government technology training schemes. Figures for Kalamazoo Computer Services are not split out, but the operation is not a happy one: maintenance margins are slim, and training revenues have been hit by changes in the way that the government is paying for training. Software services is going down the acquisition trail. At the moment it resells the Tetra accountancy package, but has a yen to have its own high-end offering.

Looking for a software company to buy

This may lead to a software licensing deal, but the implication is that Kalamazoo is looking for an accounting software company to buy. Things are happier at Kalamazoo Motor Trade, which specialises in car dealer management systems. This has grabbed 43% of the UK annual spend in this sector and says that its nearest competitor is Kerridge with 15%. Growing market share any further will be tough, finance director Ian Davidson acknowledge, so instead the company is looking to the continent. The first overseas acquisition came in May when it bought CBA/Nederland BV of Eindhoven (CI No 2,171). Davidson says, however that France and Germany are the markets that he really has his eye on. Its way into Germany, especially, will be aided by the fact that the German motor trade is hurting badly, thanks to that country’s economic problems, leaving some very bombed out business ripe for acquisition. Harrap sees a two year period, during which the continental auto industry will shake out and Kalamazoo should find some rich pickings. Certainly the company has enough cash in the bank: UKP4.5m, which is up from just UKP2.9m last year. There is also likely to be a new infusion of share capital in the short term if Peter Harrap gets his way. The Kalamazoo Workers Trust, legacy of the company’s Quaker beginnings, currently owns 51.5% of the equity in the form of special trust shares, which pay out dividends to employees. Unfortunately the trust

does not form the basis of a sensible incentive scheme: As chairman I feel very sad that the share price tripled this year, and the employees benefited not one jot Harrap says, adding that he wants Kalamazoo to be a more normal company. Certainly the 51.5% stops any predation from potential hostile asset strippers, but 30% could be virtually as effective in this respect, Harrap says, while helping to open up what he sees as a rather tight market in Kalamazoo’s shares. The company is recommending an interim dividend of 0.85 pence a share – last year it caused consternation among its institutional investors by cutting the interim to 0.25 pence.

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