Report illuminates fiscal discrepancies

Leading Edge creditors angered by mismanagement revelations.

Leading Edge Computers' collapse into voluntary liquidation two weeks ago has taken much of the industry by surprise.

But evidence that has emerged since liquidators were officially appointed on 16 February shows a trail of inconsistencies in the reseller's financial reporting and business practices that goes back two years.

According to a director's report submitted at the creditors' meeting on 16 February and obtained by PC Dealer, Leading Edge's woes began in 1997 when the reseller recorded turnover of more than #7 million.

The report, written on behalf of Paul Brenchley and his wife - the company's two directors - states: 'Due to its size, Leading Edge could not compete for larger based contracts and had to move into the mid-sized customer base. However, the company found itself either too costly against its smaller based competitors or unable to offer the one-stop based solutions required by a significant part of the market.'

The reseller then introduced a specialised sales and marketing management team. It resulted in a significant hike in costs, but no increase in revenue and margins. Compounding the effects of these costs were 'problems with regard to the financial information being produced and supplied to directors', added the report.

Financial reports filed and audited by Leading Edge during 1997 and 1998 contained huge inaccuracies concerning the reseller's debts to Microsoft.

According to the company's statement of affairs as on 16 February, Microsoft was owed #753,571.

As revealed by PC Dealer (27 January), Microsoft revoked the company's large account reseller (Lar) status in January after it was deemed non-credit worthy.

Jonathon Downes, volume licensing programme manager at Microsoft, said Leading Edge had been given three months to pay its debts before Microsoft Europe cancelled its Lar status.

He added the vendor had 'no indication' that Leading Edge was in financial trouble, but PC Dealer has learned this was not the first time the company had been warned about its tardiness in paying outstanding bills to Microsoft.

A source within the vendor admitted: 'We'd had problems with it before.'

Microsoft's decision to terminate the relationship was apparently the final nail in the coffin. Leading Edge's directors resolved on 25 January to 'take the necessary steps' to place the company into voluntary liquidation.

But while the directors blamed inaccurate financial reporting for the reseller's downfall, it appears precise information was accessible to certain parties.

It is understood that Barclays Bank withdrew Leading Edge's overdraft facility in October 1998 after a source within the reseller supplied the bank with financial data - apparently without the directors' approval - highlighting its true position. A third director, Mrs Walden, resigned that month after being appointed in July 1997.

The discrepancies in Leading Edge's financial reporting were also reflected in its final statement of affairs, dated 16 February. On the company's books, outstanding trade debts total #353,254. Receivers estimate they will realise less than #111,000.

According to a report, it was understood that fixed assets are assessed to be worth only about #17,000, instead of the approximate #284,000 recorded on the balance sheet.

Eddie Pacey, credit manager at Ideal Hardware, claimed: 'The quality of internal reporting was amiss and the directors probably knew it. 'It's highly unlikely they were not aware of the situation.'

Leading Edge is not the first company to fail under Brenchley's tutelage.

He was director of Planet Data Systems and Power Data Systems, which went into liquidation in 1994 and 1998 respectively.

Brenchley and his wife attended the first creditors' meeting on 6 February, but offered few answers about business practices within Leading Edge.

One source said: 'Last year, a lot of company cars were sold, including a couple of Jaguars that had been used by Brenchley and his wife. But when asked about them, Brenchley said he couldn't remember the transactions.'

Fred Satow, corporate recovery partner at Pannell Kerr Forster and one of two joint administrators appointed to oversee the liquidation, described the chances of commercial creditors being repaid any of the money owed to them as 'very remote'. But he added: 'There is some prospect of preferential creditors, including government departments and former employees, being paid in part.'

However, that could take more than three years, Satow warned.

 TOP 10 TRADE AND EXPENSE CREDITORS
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 Ideal Hardware                              25,689
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 Advance Logic Research                       9,618
 The GUI+CHIPS                                7,873
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 PC Docs Group Europe                         6,116
 Northamber                                   5,259