Osmosis seeks legal cure for financial ills

Troubled distributor cites increasing number of insolvencies as adding to difficulties.

Osmosis is holding a third party outsourcing firm partiallys as adding to difficulties. responsible for its troubles and is taking legal action in a bid to recover from its cash-flow difficulties.

The distributor, which closed its PC components and hardware business Osmosis Technologies in an attempt to stem a cash-flow crisis (PC Dealer, 28 April), said it would be taking legal action against Kay O'Neill, the logistics and freight company which took over Osmosis' warehousing and product returns business in August 1998.

In a statement, Osmosis admitted the decision to outsource its warehousing operation had proved to be a bad one and the anticipated service failed to live up to the original proposal, resulting in numerous service issues.

A representative at Kay O'Neill said no one was available for comment.

Meanwhile, John Fenton, managing director of Osmosis, unveiled a credit control strategy that aims to clear between 70 per cent and 80 per cent of its creditors in the next four to five months.

Fenton told PC Dealer: 'This company is not going into a CVA or anything.

We will strive to pay our debts while continuing to trade, and although it will be very tough, I feel that this is the ethical way to do it.'

He added: 'How many insolvent companies, owing a lot of money, have reappeared in a different guise a month later with the same stock at a lower valuation and the same customer database? We have suffered and lost money hand over fist as a result. It's been dire, but it has become normal and acceptable.'

Fenton revealed that Osmosis is running on a skeleton staff of 19, a massive fall from its peak of about 120 last year. The company will concentrate its attentions on the commodity brokerage Tradelink, which Fenton described as the group's 'cash cow', its Microsoft OEM franchise and its SME internet product PPIS.

Steve Mann, director of the OEM division at Microsoft, said the business plan proposed by Osmosis had the full support of the software giant: 'Too many individuals are walking away from their debt and distributors cannot continue to be hit for it. Osmosis' decision is commendable.'

He added that it remained to be seen whether Osmosis' Microsoft sales would suffer as a result of the closure of its hardware operation, but suggested the focus on software might be beneficial.

In addition, Osmosis Ireland is undergoing a management buyout, which is expected to be completed by the end of May. Graham Foster, managing director of the Irish operation, declined to comment on the cost of the move, but Fenton said the sale of the distributor to its management would be good for Osmosis' UK creditors.

Commenting on the situation, Eddie Pacey, credit manager at Ideal Hardware, said: 'This is the first time this has happened in the channel and it's a good precedent to establish. Fenton has been upfront and honest with everyone involved. This informal moratorium is a good way of dealing with such a problem - there is no need for a firm to be pushed into receivership if we can do this.'