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| Subject: Is 2003 really 1997?--LOLremove market confusion | |
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Author: Directorssignificant abnormal write down |
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Date Posted: 06:48:45 02/01/03 Sat 1997 Full Year Review ERG Limited today announced that total revenue for 1997 increased 25% to $201 million, which gave rise to operating profit before tax of $12.5 million. The final operating profit before tax was reduced to a loss of $54.1 million after Directors took the decision to make a conservative one off abnormal write down of $70 million which comprised the carrying values of R&D and goodwill. Directors chose to take the significant abnormal write down to remove market confusion over technology carrying values. The 1997 result was achieved on the back of a strong contribution from GSM in the second half and the first revenues from licensing of the Company's smart card related technologies during the year. Three transactions were entered into which generated a total revenue of $37.7 million and contributed $24.6 million to operating profit. Directors indicated that the revenue growth had been achieved despite considerable delays in progress of the Melbourne AFC project (which impacted revenue, cashflow and profitability), increased non-operating costs and rescheduling of contract deliveries in the European Fare Collection operations. Confidentiality provisions make it difficult for the Company to comment on the Melbourne project without the consent of the customer. However, the following statement has been approved: The first phase of the Melbourne project has been installed and all equipment testing has been completed. The purpose of Phase I was to test a subset of the system and review the functionality of the system. Changes or enhancements could be made before the system is finally installed. The PTC and OneLink have been reviewing the results of the Phase I tests and the issue of a Phase I certificate awaits resolution of outstanding matters. ERG and OneLink have continued to roll out the equipment for the second phase of the system and this is expected to be completed on schedule before the end of the calendar year. The Company's Fare Collection division has recently completed delivery of the major project in Hong Kong which provides the Company with the world's best reference site for contactless smart card. Our customer, Creative Star, has confirmed that the Hong Kong Contactless Smart Card Project will commence public revenue service on 1 September 1997 with all Service Providers processing the contactless smart cards. Sales to the public of 3.5 million smart cards commenced on 17 August 1997. The launch of the public revenue service is the major milestone for the project. As part of that project the Company has developed and owns the intellectual property for the card issue management and clearing system known as APTOS. This technology is a world leader and is attracting significant interest from major global companies and other transit operators. The development of the APTOS technology during 1997 contributed significantly to total R&D expenditure increasing from $32 million in 1996 to $38 million in 1997 or 1% of revenue. This brings the total invested in R&D by the Company over the past eight years to approximately $117 million. Of that significant investment in R&D, $103 million has been invested in the Fare Collection/Cards division and $14 million in Telecommunications. Directors expect R&D as a percentage of revenue to reduce in 1998 having a corresponding positive impact on cashflow. Furthermore the abnormal write off of R&D and intangibles will reduce amortisation cost in future years. A number of key items affected performance during the year; namely: The impact of the Federal Government's policy change in the taxation concession for R&D which was reduced from 150% to 125% reduced profit by $2.2 million. Depreciation and amortisation increased by $1.7 million. Interest cost increased by $1 million as a result of Melbourne delays. R&D expense increased by $2.7 million. Earnings before R&D, interest, tax, depreciation and amortisation increased from $23.3 million to $33.6 million. Recently the Company has announced a number of exciting new projects, including the extension of the Nokia/Optus agreement with increased sales levels for ERG and the rollout of the QuickLink card project in Australia. The success of QuickLink has been further reinforced yesterday with the announcement by American Express that they will be joining the QuickLink network in Australia and forming an alliance with ERG. In addition to these projects the Company is also involved in a number of exciting new fare collection and card projects both in and outside Australia. Directors believe that ERG is a growth company and as such must focus on driving revenue growth, improved profit margins and cashflow. Directors believe that payment of unfranked dividends is contrary to this objective and accordingly Directors have elected not to pay a final dividend and conserve the funds which can be better utilised in the many investment opportunities the Company has. The abnormal write down will also assist profit margins in future years. Funding the Company's growth, delays in the Melbourne project payment, and high level of R&D expenditure has meant that operating cashflow in 1997 remains negative. However, your Directors are confident that the huge investment in R&D, which is one of the largest R&D investments by an Australian company, will bring substantial returns in the years ahead. The Company is currently negotiating further licensing joint venture agreements in respect to its major card and APTOS technologies and hopes to be in a position to announce more details in the coming months. DIVISIONAL PERFORMANCE Telecommunications The Telecommunications division had a mixed year, with a very strong second half in GSM supplies but slower sales than expected of the Company's Transpage product. The paging market was impacted by technology changes in 1997 and the increasing need to be a systems supplier. As a result, the Company is reviewing its role in the paging business and is involved in discussions with a number of parties in respect to joint ventures/alliances. Delays in the start up of the ADC production had a sizeable impact on revenue and profit. The forecast revenue and profit for ADC in 1998 is modest and we now expect higher revenue and profit to flow in the 1999 year. Revenue for the division increased from $53.6 million to $71 million whilst profit was down from $8.2 million to $1.1 million. This result is considered an aberration and in 1998 sales are expected to jump considerably with increased profit. Fare Collection/Card Divisions The activities of these two divisions are consolidated as R&D and marketing activities overlap. This overlap is increasing as major transit operators look to expand their systems into multipurpose cards. The completion of delivery of the Hong Kong system (with full revenue service commencing on 1 September 1997) is a major milestone for the Company's Fare Collection division, AES Prodata. The Company will now seek to capitalise on the excellent reference site and its APTOS and operating card software technologies developed as part of that project. During the year the important alliance with Banksys was strengthened with the formation of the joint venture company Triumphant Launch. The joint company has been based in Malaysia and has recently made application for Multimedia Super Corridor (MSC) status in Malaysia. MSC status will entitle the Company to tax incentives and the opportunity to participate in the MSC flagship projects in Malaysia. Although a number of fare collection customers delayed decisions on technology in 1997, we are now seeing an increase in the number of prospective projects as contactless technology becomes more broadly accepted. The division achieved sales of $130 million in 1997 up from $109 million in 1996. Profit was increased from $2.2 million to $16.7 million mainly on the back of sales of the Company's APTOS technology. The outlook for the Fare Collection division in 1998 has been strengthened by success on a number of new projects. The recently announced Moscow project is being delivered ahead of schedule and to date 30% has been delivered and $3.3 million has been paid for. The total contract is secured by Letters of Credit. Directors are pleased to be able to announce further new contracts in Belgium, Sweden and Brazil. These contracts have a total value of $48.4 million. A number of other contracts are in the final stages of negotiation. The contract in Brazil is an important one for the Company's Fare Collection Division and will see approximately 7,500 buses equipped with the Company's system in Sao Paulo. This is the largest bus contract ever let for modern fare collection equipment and was won after the Company established an office in Sao Paulo during the past 12 months. It is in addition to the contracts the Company has already won in Neuquén, Bahia Blanca, Resistencia and Mendoza in South America. Deliveries are scheduled to start in November with completion expected by May/June 1998. The system for Sao Paulo is a combined system of magnetics and contactless smart card. Each bus will be fitted with a combined magnetic/contactless reader, incorporate wireless data transfer and a bus turnstile linked to a depot computer system. The contracts in Belgium and Sweden are new contracts with existing customers, De Lijn and Göteburg. All equipment will be delivered during the 1997 calendar year. The Company's investment in QuickLink is already producing its first returns. The announcement yesterday by American Express adds significant credibility to the QuickLink technology. ERG's Chief Executive, Peter Fogarty, commented on the 1997 result highlighting how difficult the year had been: "The 1997 result is a reasonable one given the significant adverse impact of the Melbourne project. All operating divisions encountered adverse circumstances in 1997 and it is a sign of the Company's technological strength that revenue grew in the period. However, growth alone is not acceptable and our focus in 1998 is to improve profit margin and cashflow. The hard decision to restructure the balance sheet will better position us to become more active in the United States market. "The recent announcement of new projects in all divisions should underpin growth in 1998. The completion of the Hong Kong project is a critical milestone for the Company's Fare Collection division and proves the Company's ability to deliver major projects. "Although the 1997 year has not been a rewarding one for shareholders, Directors believe that new contracts recently announced and major negotiations underway will underpin a strong growth in revenue and earnings in 1998." [ Next Thread | Previous Thread | Next Message | Previous Message ] |