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| Subject: 2003 Half Year Review | |
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Author: 6/3/2003 |
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Date Posted: Thursday, March 06, 01:17:03am 2003 Half Year Review -------------------------------------------- ERG Group today announced its preliminary half-year results, coinciding with the announcement that it is at an advanced stage of negotiations for the sale of Proton World (PW), which has developed smart card transaction technology for the banking sector. -------------------------------------------- The Group also issued today its Notice of Meeting to listed noteholders seeking to obtain their approval for the conversion of all listed notes to equity. The meeting will be held on 28 March 2003. A meeting of shareholders to approve the conversion is scheduled for April as part of the reconstruction of the Group's balance sheet. -------------------------------------------- The balance sheet reconstruction is designed to provide ERG with a stronger net asset position and eliminate cash outflow in the form of interest payment on the notes. The proposal was foreshadowed at the Company's Annual General Meeting (AGM) in November 2002. -------------------------------------------- Half-Year Results -------------------------------------------- ERG incurred an overall operating loss totalling $124.9 million for the half-year to 31 December 2002, compared to $199.4 million in the previous corresponding period. ERG recorded an EBITDA loss of $19.6 million (compared to a loss of $17.0 million in the previous year), before one-off write-downs and significant items, representing the initial benefits of the aggressive cost-cutting program initiated last year. -------------------------------------------- The half-year result includes a provision of $52.4 million taken in contemplation of the PW sale, as compared to its book value at 31 December 2002. An amount of e22.5 million (A$40.9 million), representing payments due to ERG on a milestone earn-out basis under the proposed PW sale, has not been accounted for in determining the provision and will be brought to account as it is earned. As part of the proposed sale, ERG will retain access to the Proton technology by taking a 20 year global licence of the Proton technology. --------------------------------------------- The operating loss, before the one-off write-down, is in line with guidance provided at the AGM in November last year. -------------------------------------------- Total revenue was marginally lower at $120.9 million, compared to $136.4 million in the previous half year due to continued delays in the commencement of new projects, such as Sydney and Seattle, and the delay in expansion of the Rome project into the surrounding Lazio region. The Company warned at the AGM that profitability at the EBITDA level was dependent on the commencement of major new projects. -------------------------------------------- Since the end of the reporting period contracts for Washington DC, Sydney and Seattle have been awarded to ERG, approximately six months later than budgeted, and should commence this half. -------------------------------------------- Operating cash flow before interest, borrowing, finance and one-off restructuring costs was $3 million positive, a marked improvement over the prior half-year which was cash flow negative by $23.7 million. This demonstrates that the Group's increased focus on cash management is having the desired effect. -------------------------------------------- In the half-year, the Group paid out $25.5 million in bank debt and $21.3 million in unlisted convertible note debt. This was replaced by a $15.4 million secured loan with the major listed convertible noteholder, Special Utilities Investment Trust, and $14.2 million of debt drawn down under the Babcock & Brown facility - a net debt reduction of $17.2 million. -------------------------------------------- The net loss for the period was after the following one-off provisions or write-downs: the provision of $52.4 million for the write-down on the carrying value on the PW assets; an increase in the deferred contingent consideration payable by $8.9 million to the purchaser for the acquisition; and restructure and consultant costs of $9.4 million in relation to the Group's balance sheet. Depreciation and amortisation charges for the period were $22.2 million (December 2001 $11.2 million) and interest expense and borrowing costs were $12.1 million (compared to $11.9 million at December 2001). ERG Chief Executive, Peter Fogarty, said while the half-year results were disappointing, they showed the Company was improving its position despite very difficult trading conditions and continued delays in finalisation of new project contracts. -------------------------------------------- "An aggressive cost-cutting program and targeted reduction in R&D spend have greatly assisted the Group," Mr Fogarty said. --------------------------------------------- "Our reduced costs have allowed us to return to positive operating cash flow before interest, finance and restructuring costs and helped us to reduce bank and other debts by $17 million net over the six-month period. --------------------------------------------- "The recent contract announcements and the restructuring of the balance sheet make a marked difference to the Group's outlook from here. -------------------------------------------- "The Group has over $750 million of new contracts to deliver and is committed to ensuring those projects are profitable. Overall, the Group has committed projects that will generate approximately $1.2 billion of revenue. We continue to focus on building our cash reserves and strengthening our balance sheet," he said. -------------------------------------------- Proposed Sale of Proton World -------------------------------------------- The proposed sale of PW is in line with the strategy announced at the 2002 AGM to strengthen the Group's balance sheet and reduce cash outflow, ahead of the Group winning several major new projects. -------------------------------------------- Negotiations for the sale are at an advanced stage with final signing scheduled this month. The transaction is expected to realise approximately e60 million (A$110 million) at settlement. This excludes the e22.5 million earn-out payment that has not been brought to account in arriving at the PW provision in the first half. -------------------------------------------- Mr Fogarty said the proposed sale would allow a significant amount of capital to be redeployed to ERG's core transit ticketing business while ensuring long-term access to PW's core technology which will allow the Group to continue with its multi-application smart card strategy. -------------------------------------------- "The proposed transaction will provide a positive impact on operating results by reducing ERG's operating cash outflows and eliminating annual goodwill amortisation charges of approximately $15 million," Mr Fogarty said. -------------------------------------------- Highlights -------------------------------------------- In recent months, ERG has consolidated its position as global leader in transit ticketing through: -------------------------------------------- selection, with Northrop Grumman Information Technology, to install and operate a new Regional Customer Service Centre for the Washington DC, Maryland and North Virginia integrated transit fare collection project - a contract worth approximately US$20 million to ERG over five years; successful implementation of Phase 1 of the integrated ticketing system in San Francisco; securing the US$10 million contract for a smart card ticketing system for Las Vegas monorail system; signing the $320-370 million contract for Sydney's integrated ticketing system; signing the $110 million contract for Seattle's integrated ticketing system; and completion of delivery of the Singapore smart card transit system. Capital Restructure Mr Fogarty said the Company's current balance sheet highlights the need for the noteholders and shareholders to support the proposed capital restructure. -------------------------------------------- "The imperative for the proposed capital restructure (converting the listed convertible notes into shares) remains, as we must strengthen our balance sheet and be able to post the very large bid and performance bonds in order to bid on the new public transit ticketing project tenders coming up in the next twelve months or so," Mr Fogarty said. -------------------------------------------- "We have made significant progress in improving the Company's cost structure but with the level of debt the Company carries through the convertible notes, ERG's balance sheet is underpowered and this is what the restructure proposal addresses. --------------------------------------------- "As well as significantly strengthening the ERG balance sheet by removing the $250 million convertible note liability, the restructure would also remove the annual interest charges of $18.75 million on the listed convertible notes. The restructure also contemplates a $50 million rights issue to all shareholders. -------------------------------------------- "When combined with the proposed sale of PW the impact on the balance sheet would be dramatically positive. The proposed sale of PW will eliminate $15 million per annum in amortisation of goodwill, whilst the note conversion eliminates interest of $18 million, giving a total annual saving of $33 million," he said. -------------------------------------------- The Information Memorandum issued to noteholders today incorporates a pro forma balance sheet demonstrating the positive impact of the capital restructure. A copy of that pro forma balance sheet is appended. -------------------------------------------- Assuming the full restructure, including the rights issue of $50 million, had taken place as at 31 December 2002, and the PW sale had occurred, the effects on the balance sheet as at that date would have been: --------------------------------------------- Before After Net Assets $29 million $311 million Interest-Bearing Liabilities $329 million $87 million Cash $18 million $113 million Net Tangible Assets ($147) million $212 million Interest-Bearing Debt to Equity 1,134% 28% --------------------------------------------- Directors believe that the proposed sale of PW, together with the reconstruction which is subject to shareholder and noteholder approval, will provide a very sound and solid foundation from which the Company can grow and secure further significant transit ticketing projects and the long-term revenue streams that attach to them. --------------------------------------------- Noteholders will consider the proposal at a meeting on 28 March 2003. A separate meeting of shareholders will consider the proposal in April and separate documentation for shareholders is being prepared for dispatch shortly. --------------------------------------------- [ Next Thread | Previous Thread | Next Message | Previous Message ] |