Faced with severe cash flow problems Staples Holdings Ltd. may be attempting to save itself through negotiations with creditors and a possible buyout by an equity investor, according to local analysts.

The suspension of trading in the common and preferred shares of office and medical supplies company left Bermuda's financial analysts puzzled on Monday.

Their worry has grown as Staples maintained a wall of silence yesterday.

Analysts are asking why the shares have been suspended without any further word from the company.

"We have been worried about the company for some time now,'' said one investment manager.

Past financial statements to September 30 however indicate that Staples is headed for a cash liquidity crash, weighted down by interest payments on bank debts and payments to preferred shareholders. In total the company will have due an estimated $648,829 in interest payments to the banks and preferred shareholders on March 31.

That's more than double the $288,566 cash flow from operating activities in the 1998 financial year. When set against the six month net loss of $236,019 to September 31 the company's balance book looks dire.

The banks as creditors have first call on the company's assets. In total Staples owed about $3.32 million in short and long term loans to the Bank of Bermuda Ltd. and the Bank of N.T. Butterfield Ltd. at September 30. With only $2 million in assets the company may be on the verge of insolvency unless its problems can be solved.

The company may then have asked for suspension on its shares as it negotiates with the banks over problems paying interest on its debt and to holders of the 10 percent preferred stock.

Another scenario being floated in the market is that the company is attempting to solve the problem by negotiating a buyout with a potential equity investor.

The cash problems have been compounding over the past year as Staples has lost sales to other market players due to a perceived lack of service support, according to a source.

The lack of performance by its sales and support staff resulted in a 19 percent drop in sales to $2.86 million for the first half of its fiscal year to September 30, 1998.

The company declared a six month loss of $236,019 compared to a profit of $463,792 for the same period in 1997. And the company warned shareholders that further losses could be expected during the second half of the fiscal year.

After accounting for the semi-annual dividends to be paid by December 31 the company had a deficit of $477,815, or loss of 60 cents per common share for the six month period.

The company was weighed under by $2.81 million in costs for selling, general and administrative expenses and $117,400 in interest on long term debt of about $1.9 million the company owes to the Bank of Bermuda.

After taking out $4.7 million in goodwill the company claims on its balance sheets assets at September 30 were $7.7 million and liabilities were $5.82 million. This leaves on balance a company worth about $2 million.

The assets included accounts receivable of $2.31 million and inventory of $3.83 million.

The liabilities included $1.91 million in long term debt, $1.41 million in bank advances and $1.47 million in accounts payable and accrued liability.

The company owes the Bank of Bermuda the advances through a non-revolving loan facility which expires on March 31, 2005. The first principal repayment of $194,642 is due on March 31 this year and rises to $269,765 by 2003. The loan is secured by a pledge of all the common shares in the company.

The Bank of Bermuda is also owed a further $700,000 through a line of credit facility.

Staples is also on the hook for $1 million owed to the Bank of Butterfield for subsidiary company Atlantic Medical International Ltd. The first principal repayment of $169,403 is also due on March 31, 1999 and rises to $233,103 by 2003. The $1 million loan has been guaranteed by an unnamed director.

The interest on the debt plus the semi-annual dividend payment to preferred shareholders add up to $648,829 to be paid March 31.

Staples is a closely held company with 99 percent of the 2.28 million in common stock owned by its officers and directors, according to the annual report of the financial year ended March 31.

The board is made up of chairman Bill Midon. Other directors include his wife Hilary, William Cox, Richard DePiano, Peter Durhager and Jeffrey O'Donnell.

In 1995 the company funded the purchase of competitor Chips Ltd. by issuing 583,334 million 10 percent convertible redeemable voting preferred shares at $9 each to raise about $5 million. At the time the Midon family, through Villanova Investments Ltd. owned 850,045 common shares, a 55 percent interest in the company.

The common stock and the preferred shares were listed on the Bermuda Stock Exchange. The preferred shares last traded at $7.50 on January 21. The next dividend payment is to be declared for the end of the fiscal year March 31 and paid by the end of June.

The shares were convertible to common shares at any time after December 31, 1998 following notice by the company and as long as fully diluted earnings per shares was a minimum of $1.50 a share. Because of the losses that was not an option by the company so that it could avoid the drain of $569,568 from its bottom line.

The other option was to pay $9 per preferred share.

When questioned about the cash flow problems a company spokesperson maintained the stance that there was no announcement as of yet regarding the suspension.

The company had requested the suspension Monday pending a further announcement.

Bermuda Stock Exchange (BSX) chief executive officer William Woods has said the release of the announcement was up to the company. The BSX had discretion under its rules about the timing of the announcement.

"We do not want to prejudice what they are doing,'' he said. "Our preference is to get the information out to investors as soon as possible.'' William Woods