More On Axis Inc

I just realised that Axis had made an announcement late last night.

This was the answer from Axis Inc posted on Bursa website.

• Reference is made to your letter of even date via fax to us this afternoon, the Board of Directors is pleased to reply the queries as follows:-
  
  1. Full detail of the material unresolved issues and the amount involved, if any, as raised by your external auditor, Messrs Horwath
  
  The external auditors, Messrs. Horwath have disclosed the following in the draft financial statements:-
  
  (i) Included in other receivables as at 31 March 2008 are amounts due from the Contract Manufacturers of approximately RM105 million. The amounts outstanding as at 31 March 2008 showed a significant increase compared to the amounts outstanding of approximately RM11 million in the previous financial year. Subsequent to the balance sheet date, approximately RM20 million have been settled by the Contract Manufacturers.*
  
  (ii) The Contract Manufacturers also owed the Group a total of approximately RM28 million as at 31 March 2008 for sales of fabrics by the Group to the Contract Manufacturers. This amount is included under Trade Receivables in the financial statements.*
  
  (iii) As at 31 March 2008, included in other receivables are prepayments of approximately RM32 million made to certain suppliers for the supply of embroidery services, purchase of fabrics and accessories. Subsequent to the balance sheet date, approximately RM11 million of these services and goods were received by the Group. As represented by management, the balance of approximately RM20 million are expected to be settled by the end of September 2008 through further delivery of services and goods.*
  
  * Note: All the numerical figures as stated above are mere estimates taken from the draft Audited Financial Statements and they are not the final figures agreed upon by the Audit Committee and the Board of Directors.
  
  The external auditor, Messrs Horwath are unable to obtain sufficient appropriate audit evidence and explanations to ascertain the following:-
  
  (a) the basis of the advances made to the Contract Manufacturers, and whether the advances and settlement thereof are in compliance with the strategic alliance agreement with the Contract Manufacturers;
  
  (b) the recoverability of the outstanding balances due from the Contract Manufacturers (net of the settlement subsequent to 31 March 2008) in relation to the trade receivables and advances;
  
  (c) the recoverability of the net balance of the prepayments made to suppliers as stated in (iii) above.
  
  In view of the significance of the matters set out above, Messrs. Horwath are unable to complete the audit and form an audit opinion, pending the receipt of information and explanations on the above matters.
  
  2. Expected timeframe required by your Company to resolve the issues mentioned above
  
  The expected timeframe required by the Company to resolve the issues affecting the financial statements as at 31 March 2008 will be known once the appointment of the auditors for the special audit is determined by the Board and Bursa Malaysia Securities Berhad (“Bursa Securities”) will be advised accordingly.
  
  3. Information on the Special Audit:-
  
  (a) Name of auditor
  
  The name of the auditor will be advised when it is determined by the Board.
  
  (b) Appointment date
  
  The appointment of the independent auditors will be with immediate effect once the Board of Directors made its decision.
  
  (c) Timeframe required to conduct the special audit
  
  The time frame required to conduct the special audit will be determined once the Board approves the appointment of the independent auditor and the Company will advise Burse Securities in due course.
  
  (d) Scope of the special audit
  
  The scope of the special audit has not been finalised as of now. However, the Board of Directors will ensure that the scope of the special audit will cover detailed investigations on all the issues raised by the external auditors, Horwath.
  
  4. The impact of material unresolved issues on your Company’s financial statement for the financial year ended 31 March 2008
  
  The Board is committed to resolve the material unresolved issues raised by Horwath. However, the full impact will only be known upon the outcome of the Special Audit.
  
  In the event that the figures under paragraph 1 (i), (ii) and (iii) above are confirmed, the Management will have to take steps to recover the said amounts totalling approximately RM161 million in full, failing which, they may result in the write-off of those amounts uncollected in the Audited Financial Statements for the financial year ended 31 March 2008.
  
  
  5. Relationship with Contract Manufacturers
  
  The Contract Manufacturers are LA. (Cambodia) Garment Pte. Ltd., Vivatino Design (Cambodia) Pte. Ltd. and United Garment (Vietnam) Co. Ltd. and have been the Contract Manufacturers for Chongee Enterprise Sdn Bhd ("Chongee"), a subsidiary of Axis for a number of years and have formalised their relationship through a Strategic Alliance Agreement entered between the parties on 5 May 2008. Under that Strategic Alliance Agreement, the strategic partners are entitled to be paid a 25% advance payment of the value of a confirmed order for the cutting and sewing of the garments. In return, the strategic partners are obligated to handle local licensing requirements and to always keep their factory and workplace in full compliance with USA and European environmental and human rights standards.
  
  We will continuously furnish to Bursa Securities all information that we have on the issues as and when available and shall cooperate fully with Bursa to resolve the issues.
  
  
  This announcement is dated 31st day of July 2008

The sentence highlighted in red is rather very significant.

• The external auditor, Messrs Horwath are unable to obtain sufficient appropriate audit evidence and explanations to ascertain the following:- (b) the recoverability of the outstanding balances due from the Contract Manufacturers (net of the settlement subsequent to 31 March 2008) in relation to the trade receivables and advances)

How would you interpret the above statement?

If the outstanding balances cannot be recovered then how? Write down?

As it is the total amount receivables is far too huge and the possibility is there for Axis Inc being asked to write down these debts.

I could be wrong but once the receivables it's written down, I would imagine that the impact should be rather severe.

And Axis Inc would be resuming trading this afternoon.