Paracon has received $750 000 (R7.6 million) for its 71% stake in Mercury International, which the existing management bought as it decided to try and ride out the tough US conditions.
Mercury offers Internet-based solutions, including application development and database design and integration, to predominantly large financial services companies in New York.
"Market conditions in the US continue to be tough with Mercury`s client base cutting costs and the company suffering continuing margin pressure," says Paracon group financial director Mireille Levenstein. "Mercury performed poorly in the first half of the financial year and its performance in the second half has not improved. The forecast for the next year reflects continued expected losses, exacerbated by a slim sales pipeline."
Levenstein says the cost of doing business in the US and other foreign markets has increased dramatically due to the falling rand. "People would be surprised to see by just how much."
Today the rand stands at R10.60 to the dollar, after having depreciated by as much as 37% against the dollar and other major currencies in 2001.
Total cash reserves in Mercury are at $1.5 million of which $400 000 is required for working capital. The disposal will result in an income statement goodwill impairment charge of R15.4 million as well as a loss on sale of subsidiary amounting to R5.6 million.
"Both these charges, while affecting attributable profit for the year, are exceptional items and therefore will not affect headline earnings," says Levenstein.
"The disposal allows Paracon to exit Mercury while protecting our share of Mercury`s cash resources and permits management to have greater focus on Paracon`s local operations in the future."
Paracon is in a closed period as its year-end is on 30 September. It plans to release its annual results on 18 November.
In the 2001 financial year, Paracon had R16 million in cash reserves and the Mercury sale will boost this.
"Despite ongoing tough market conditions both locally and abroad, Paracon`s local operations remain solid and the group has a strong balance sheet with significant cash reserves," says Levenstein.
She says Paracon has not yet decided what to do with the cash it has received, but would be looking very carefully before using it. "We are not in the same position as some of our competitors where we are sitting on piles of cash, but we are still in a healthy financial position."
Paracon`s share price rose 6c to 58c this morning after the announcement of this news.
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