(TSX VENTURE: SAR)
SALE OF DISTRIBUTIONS CAR-TEL Inc. ("Car-Tel")
On July 29, 2011, Saratoga Electronic Solutions Inc. (the
"Corporation") (TSX VENTURE: SAR) announced that it had entered
into an agreement to sell its wholly-owned subsidiary,
Distributions Car-Tel Inc. ("Car-Tel"), to Luc Charlebois, a member
of management of Car-Tel, for a purchase price of approximately
$1.36 million, to be paid through a combination of cash and the
assumption of certain specified liabilities. Car-Tel is in the
business of distributing to consumers point-of-sale activated
prepaid cellular telephone PINs and long distance calling cards,
and offering to retailers a variety of electronic gift card
solutions. This transaction is a result of the previously announced
strategic review undertaken by the Corporation.
Closing of this transaction is subject to the negotiation and
execution of definitive transaction documents, as well as the
receipt of all requisite regulatory approvals, and is expected to
occur in the Corporation's second quarter.
Description of the transaction
On the closing of the transaction, Mr. Charlebois will pay to
the Corporation an amount of approximately $1.2 million in cash. In
addition, as part of the transaction, Car-Tel will forgive debt
owed to it by the Corporation's other wholly-owned subsidiary,
Saratoga ATM Corporation Inc. ("Saratoga ATM"), in an amount of
approximately $0.16 million, and Car-Tel will pay in full the
amounts owing by it to Saratoga Leasing Inc., being approximately
$0.3 million.
As the pre-paid cellular, long distance and gift card business
is currently in a state of evolution and certain changes to the
revenue model may likely occur, the parties have negotiated for
potential adjustments to the transaction purchase price. In
particular, the parties have agreed that in the event that an
end-user charge is implemented in respect of the distribution of
any prepaid cellular, long distance or gift cards within the next
two years, the Corporation shall be entitled to a fee equal to 9%
of such charge for each prepaid cellular, long distance or gift
card transaction occurring during the thirty-six month period
following the implementation of such charge.
Reasons for the transaction
The Corporation believes that the prepaid cellular and long
distance card market reached maturity in 2010, with sales having
declined on a quarterly basis since such time. The decline in the
number of POS machines in Car-Tel's network, as well as in the
overall number of transactions, is indicative of end users using
other methods of communications.
Furthermore, in the last four-month period, three prepaid
cellular or long distance service providers have reduced the
margins on their products by 3%, which is expected to directly
impact future cash-flows generated by Car-Tel. The Corporation has
therefore concluded that it is in the best interest of shareholders
for the Corporation to exit the prepaid cellular, long distance and
gift card business segment.
Effect on the Corporation
The Corporation will use the approximately $1.2 million in cash
which it expects to receive as a result of this transaction to
reduce long-term debt by approximately $0.7 million and to provide
working capital of approximately $0.5 million. The Corporation's
consolidated long-term debt will be reduced by a further
approximately $0.3 million as a result of the repayment by Car-Tel
of the debt due to Saratoga Leasing Inc.
Related Party
The sale of Car-Tel to Luc Charlebois, the president of Car-Tel
and a member of the Corporation's board of directors, is considered
to be a related party transaction within the meaning of
Multilateral Instrument 61-101 - Protection of Minority Security
Holders in Special Transactions. Mr. Charlebois is one of the
original founders of Car-Tel and believes that the business could
be viable if operated through a privately-held vehicle.
As a result of the related party nature of this transaction, in
the absence of any available exemptions from such requirements, the
transaction will be subject to the approval of a majority of the
unrelated shareholders of the Corporation. In addition, the
Corporation will be required to obtain, and provide the
shareholders with, an independent valuation of Car- Tel.
Approvals
The closing of the sale of Car-Tel is subject to the receipt of
all requisite approvals, including the approval of the TSX Venture
Exchange and of the shareholders of the Corporation. Further
information in this regard will be communicated to the shareholders
in future press releases.
TREASURY
As reported in the Corporation's March 31, 2011 financial
statements and MD&A available on www.sedar.com, the
Corporation's strategy for capital risk management was driven by
external requirements from one of its lenders. The cash flow of the
Corporation is supported by revolving operating lines of credit in
the aggregate amount of $2,000,000 bearing interest at the
Corporation's bank's prime rate plus 1% per annum, of which
$1,618,000 was used as at March 31, 2011. The line of credit is
secured by a hypothec on the universality of all property and
receivables of the Corporation in the amount of $1,000,000 and a
personal guarantee for $1,000,000 from the majority shareholder of
the Corporation.
Under this line of credit, the Corporation must meet certain
commitments and financial ratios. The ratios and requirements are
monitored on an ongoing basis by management and require the
Corporation's subsidiary Saratoga ATM (on a stand-alone basis) to
meet the following requirements:
-- a minimum debt coverage ratio of 1.25 to 1
-- a maximum debt to equity ratio of 1.5 to 1
-- refrain from redeeming any preferred shares without obtaining the
consent of the lender
As at March 31, 2011, the Corporation has not met all of these
requirements. However, as of March 31, 2011, in order to satisfy
the requirements of its lender, the Corporation had verbally agreed
to cease to redeem the non-controlling interest preferred shares in
Saratoga ATM. In addition, the Corporation's principal shareholder
injected $100,000 in Saratoga ATM for the purpose of reimbursing
the line of credit owed to the lender, thereby reducing the line of
credit available to the Corporation on a corresponding basis.
The Corporation's lender, in a leniency letter dated August 15,
2011, accepted that the Corporation derogate from the conditions
attached to its financing until September 30, 2011, at which time
the Corporation intends to renegotiate financial terms as part of
the annual review of its credit facility. However, there is no
guarantee that the amount available under the line of credit will
be sufficient to support the future working capital needs of the
Corporation, or that the Corporation will be able, if required, to
gain access to additional working capital.
STRATEGIC ALTERNATIVES
On October 8, 2010, the Corporation announced that the board of
directors had initiated a process to explore and consider possible
strategic alternatives for enhancing shareholder value, including a
possible sale of the Corporation. A Special Committee of the board
of directors was formed in order to oversee this process and KPMG
Corporate Finance Inc. was retained as the Corporation's financial
advisor to assists and advise in this process.
The proposed sale of Car-Tel as described above is one of the
results of such strategic review. The Corporation has also received
expressions of interest for the purchase of its wholly-owned
subsidiary Saratoga ATM, which places and operates a network of
automatic teller machines in Eastern Canada. The Corporation has
not set a definitive timetable for completion of its evaluation of
these expressions of interest and there can be no assurance that
this process will lead to the approval or completion of any
definitive agreement or other transaction. The Corporation does not
intend to disclose developments regarding this process unless and
until the board of directors approves a specific transaction or
otherwise concludes the review of strategic alternatives.
Forward-Looking Statements
This news release contains certain forward-looking statements
concerning our future operations, economic performance and
financial condition and our proposed sale of Car- Tel. These
statements are based on certain assumptions and analyses made by us
in light of our experience and our perception of historical trends,
current conditions and expected future developments, as well as
other factors we believe are appropriate in the circumstances.
However, whether actual results and developments will conform to
our expectations and predictions, and whether we are ultimately
successful in consummating the sale of Car-Tel, is subject to a
number of risks, uncertainties and assumptions, including our
ability to successful conclude definitive documentation and obtain
the requisite approvals in connection with such sale, as well as
those discussed in our Annual Information Form and Management's
Discussion and Analysis. Consequently, all of the forward-looking
statements in this news release are qualified by these cautionary
statements, and there can be no assurance as to the Corporation's
ability to consummate the sale of Car-Tel or as to the
Corporation's ability to enhance shareholder value through this
process. Moreover, there can be no assurance that the results or
developments anticipated by us, including as regards our financial
resources and our ability to renegotiate the terms of our
financing, will be realized or, even if substantially realized,
that they will have the expected consequences to or effects on us
and our subsidiaries and their business or operations. We undertake
no obligation and do not intend to update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise, except as may be required under
applicable law.
Neither TSX Venture Exchange nor its Regulation Services
Provider (as that term is defined in policies of the TSX Venture
Exchange) accepts responsibility for the adequacy or accuracy of
this release.
Contacts: Mr. Georges Durst President and Chief Executive
Officer Saratoga Electronic Solutions Inc. 514-529-0663
Saratoga Electronic Solutions (TSXV:SAR)
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