Here is the article on Hornby's financial difficulties:

StockMarketWire.com - Hornby expects to report a substantially wider trading loss than previously forecast in the current financial year and may breach a covenant of its banking facility. The group says it has made significant progress in implementing changes to its business model to modernise product sourcing, improve management of the supply chain, upgrade the logistics, warehousing, stock control processes and accelerate the distribution routes to customers. This, together with the rollout of the new ERP system, has required major investment and resulted in disruption which has had a significant impact on the trading performance of the business, as previously disclosed on 8 December. Hornby says the team has conducted a full stock take at the group's consolidated warehouse in Hersden and a balance sheet review following the reorganisation of the European subsidiaries which will result in a GBP1.0m write off. The disappointing sales performance experienced in the New Year is expected to result in a trading profit deterioration of between GBP2.5m - GBP3.0m, with approximately half due to UK performance. In total the group is now expecting to report an underlying loss before tax in the range of GBP5.5m - GBP6.0m, which represents a substantial setback in our recovery plan for the business. As a result the directors consider there to be a risk that the group will breach a covenant of the banking facility in March. The group has enjoyed a long and supportive relationship with its lender, with whom it is currently in discussions.

It sure seams that Hornby's reorganization plan has hit some major obstacles. Failing to cover it's financial obligation to the banks come March is something that can really come back to haunt them, as it would make it just that much harder for them the borrow money, especially at favored rates.

The conversion to modernize, streamline, and thus become more productive, efficient, and financially sounder is a rough path for any established brick and motor industry these days, as it has to convert to a global economy and business model. Yet at the same time become more competitive with the Asian markets.

Out sourcing is key to reducing the final cost of product to the consumer, as it's impossible to compete with the Asian labor force on a dollar to dollar basis. But with that out sourcing comes all sorts of associated problems of supply of resources, quality and consistency issues, and the list goes on.

Joel