The financial performance of office and medical supplier Staples Holdings Ltd.

is about to get worse, before it gets better.

Faced with a 19 percent drop in sales for the first half of its fiscal year to September 30, Staples Holdings declared a six month loss of $236,019.

And the company has warned shareholders that further losses can be expected during the second half of the fiscal year, as well.

The latest loss compares to a 1997 first six month profit of $463,792 and follows the 1997 full year earnings of $434,636 -- a 31 percent drop from the year before.

And the company was up front with shareholders that more losses are ahead, as it writes off leasehold improvements and reviews inventory valuation.

But as first reported by The Royal Gazette (November 18, 1998), the firm insists there is a brighter future ahead if it succeeds in a much needed change in operations.

Staples president Michael A. Johnson said this year's six month loss "is a direct result of the shortfall of gross margin contribution of $707,470.'' It came after sales and rentals dropped by more than $1.5 million (19.1 percent) to less than $6.4 million, while the cost of obtaining those sales and rentals fell 19.9 percent, or $867,511.

An end of period deficit amounted to $477,815, as opposed to a surplus of $366,302 for the same period the year before.

Earnings per common share were a 60-cent loss, compared against a 19-cent per share profit last year. Paid dividends amounted to $284,784, slightly lower than the $294,158 paid during the same period the year before.

The company said the operating expenses are under control as internal restructuring has reduced staffing requirements, and savings in this area will be realised over time.

But total assets declined by nearly $700,000 to nearly $12.25 million.

Accounts receivable were significantly reduced to just over $2.3 million, from more than $3.1 million. Inventory rose from nearly $2.6 million to more than $3.8 million. Cash was used during the period to pay dividends to preferred shareholders and to repay long term debt.

In his report to shareholders, Mr. Johnson reiterated an earlier stance: "The performance sustained in the first six months of fiscal 1999 confirms that the company must change the way it is doing business if it is to return to profitability in the near future.

"A new team of senior management has been hired to drive the transformation.

This new team is confident that the core businesses are viable but is aware that there will be additional costs associated with the repositioning and restructuring of the organisation.

"In the second half of fiscal 1999, we anticipate significant adjustments to the balance sheet that will result in losses during that period.

"This transformation process must occur in fiscal 1999 such that the company can initiate a fresh start, going forward.

"Management has already established several initiatives that will differentiate the company from its competitors.'' These changes include: An agreement is in place with the Bank of Bermuda for supply chain management through e-commerce with an on-line catalogue capability to support the programme.

The sales force has been restructured using a team approach to combine the resources of supplies and equipment with technical service.

Senior management is building relationships with major customers.

The company has confirmed relationships with existing vendors and has established relationships with some major new vendors.

In December, the company consolidated operations in a newly renovated 37,000 square foot facility at 25 Serpentine Road.

Having re-engineered many operational processes, the new year will bring a major focus on growing the sales line.