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Date Posted: 04:47:19 01/21/03 Tue Reversal of prior year profit, exchange movement and equity losses applicable to Prepayment Cards Limited 13,990--30/6/2001 to the 30/6/2002 reported 12/9 audited 1/10 02) being at 47.1%-- ( N.E. Renton "Understanding The Stock Exchange Chapter 823 page 157.) If more than 50% is owned, then the company becomes a subsidiary and this latter principle again applies: credit is taken for all the profits, less the proportion belonging to the outside minority shareholders. (if any) percentage is not the only way to measure it, if it was, it is looking excellent on this front--another measure is do the directors of the consolidated group have decision making control (-AASB 1016 (paragraph 9) as:Significant influence is defined by i) The capacity of an entity to ii)...affect substantially but not control iii)....the financial and/or operating policies of an investee.) With ERG taking out Sema's stake to bring them up to the 47.1% level--looking good also in authors opinion.The recoverability of the carrying amount is reviewed annually at ERG in accordance with accountancy practice. (IAS36).The technological benefits of the commercialisation of Proton, acquired March 15th 02, did not flow through till late June 2002.Depreciation is a non cash expense appearing in the profit and loss but not the cash flow.P Fogarty was reported to have stated at the ERG AGM on the 28/11/02 in the Australian I.T.newspaper on the 29/11/02 (AAP) a reiteration that ERG did not expect to report a net profit for 2003. He has in the company announcement section stated the following in inverted commas--12/9/02. "Profitability at the EBITDA level in the 2003 year will be, to a large extent, dependent upon both the timing of signing and commencement of new projects." He stated at the AGM on the 28/11/02 as reported by the same paper The Australian, IT section on the 29/11/2002 the Sydney contract had been budgeted to commence in August of 2002 but was unlikely to start till January or February 2003. Previously have posted the fixed vacation periods for Supreme Court N.S.W. shut 23/12/02 open 3/2/03--re Cubic verses NSW--re Cubic's holding appeal which is estimated to have expired last November. (lasting 3 months.) Further to the above Sandy Murdoch stated in the chairman's address to the AGM ASX announcement 28/11/2002 the following also in inverted comma's "We expect the Sydney contract to be signed very soon and we are ready for commencement of work."That would mean, that the expensing that has gone on for different contracts in FY02 in relation to partcular contracts---will not negatively impact the next financials as they have already been expensed. Down below is the first half of financial year 2---ie 30/6/2001 to 30/6/2002 reported 12/9 audited 1/10The exact sentence is Provision is raised against pre-contract costs until ERG has won the contract or is identified as the sole preferred tenderer. (Expensing hurts your bottom line in the year it is done--but the pain is over and done with---then it leaves things free going forward.) By expensing you make things recurring. Expensing. Date Of Media Release 26/11/2001 EBITDA for the year at $36.5 million shows a fall on the prior year. The impact of removing the telecoms business, whilst still maintaining the existing corporate structure, has impacted this line. We continue to undertake significant effort in bidding for new city projects. All such bid costs are expensed, until such time that a project is won by ERG. My words.By expensing the bidding,the entity can claim this as recurring. As stated above if you have already expensed certain things that has affected you in the year it was done--so it will not then negatively impact you in the next financial year---which we are in now.--ie 30/6/2002 to the 30/6/2003.Revenue is unlikely to be constant,ERG has reduced in percentage,the amount it is spending on R&D which in terms of profits is a good thing as it directly impacts profatibility--in prior years, R&D costs have been as high as 23% of revenues. Anyway the below figure is just an estimate made. In real terms if R&D grows to 30.16 mill this will be an increase on the FY2 the company though would also be earning more.Revenue for the full year 30/6/2001 to 30/6/2002 reported 12/9 audited 1/10 was 301.6 million excluding the revenue from the telecommunications business that was sold and comparing it with prior years without that it grew by 25%.If it were constant and were to grow by the same percentage again--25% in this financial year 30/6/02 to 30/6/03 it would grow to 377 million of this the entity has stated it will spend 8% on research and development this works out at 30.16 million The excitement of the announcements being made will make the share price go up (in estimation) the actual fundamental benefits of them both will be felt in the 2nd half of the financial year.Assuming the authorities in San Francisco say yes to phase 2 and all going well with the signing of Sydney.They are both outsourced with the equipment being purchased by the customer ERG subject to everything going okay receive a sum of money up front for them both--provision is raised against pre-contract costs until ERG has won the contract or is identified as the sole preferred tenderer.We are now actually in the 2nd half--as the first half has finished---it will not be reported though till September. (ie 31/12/02 to 30/6/03)Gross margin. 30/6/2001 to 31/6/2002 was negative at minus (19.44%) rounded.If you do it without depreciation amortisation and tax it still works out as negative much better though at (5.4%)Figures used on that are (52866 and 14,708)The Group states that it hopes to be ebitda cash positive I see them achieving that, as the management states depreciation and amortisation is hampering profitability, the underlying result will be fine based on the cost savings that have occurred post June 30 2002. With some things depending on which contracts are finalised and what projects are launched the revenue earn't will be matched out with the relevant portion of depreciating equipment used to produce the goods or service. 10 to 12 contracts are imminent ASX announcement 28/11 Phase2 San Francisco decision expected soon Sydney (these particular 2 relate to the MOT settlement made in 2001 as does Washington.Peter Fogarty has stated he does not expect to be profitable for the 03 year (depreciation and amortisation), he is deliberate in his choice of language and has not built up unrealistic expectations. He states 12/9/02 "Profitability at the EBITDA level in the 2003 year will be, to a large extent, dependent upon both the timing of signing and commencement of new projects." Washington is the Infrastructure and cards side of the business and adds to a picture emerging, where longer term recurring revenues are becoming more important than the installations side. Revenue increased significantly Infrastructure and cards for period 30/6/01 to 30/6/02 reported 12/9 audited 1/10 from 51.3m to 140m, growing 173%. The focus of the company is now the software development and backend processing components of AFC systems.. In light of this, it is important to correctly analyse the way forward. In relation to the prior audited period 165.3 million in one-off write-downs and provisions in assessment,N.E. Renton Understanding the Stock Exchange BRW business library Chapter 10--Factors affecting the market prices of shares, paragraph 1029 "How realistic are the various provisions in the balnce sheet? For example, is the provision for doubtful debts either too large or too small? Setting up a provision or writing down an asset reduces the profit of the year concerned." as the company announcement section states one off. One provison for dimunition in value has been touched upon previously, (Hi Phillip, recovereability Prepayment Cards ERG--18/1/03 in Forum.) there is an itemised list of improvements. (ERG somesavings/points identified/period 30/6/02 to 31/12/02-report 11/3/03--13/1/03.) Gross margin, negative last financial year, it included the one off writedowns and provisons and was affected by this, the next result due in early February will show it improving as it moves through time, giving weight to events that have.occurred post June 30th.The company's new business model, is intended, that customers will own and pay for the infrastructure installed, this is in place for San Francisco, Sydney and Seattle.With Sydney contracted through 100% controlled entity ITS (Integrated Transit Solutions) having been capitalised in past accounts, reversing an earlier decision to write it off, the effect is to increase income in absolute terms with earnings rising more than the equity further as earlier stated by outsourcing to the customer.remedying the depreciation and amortisation charges in future years.Of interest with announcement 20/1/03 is an averaging formula given for a period of 5 years.(Phone convo tax department ERG Group---answers to questions in Forum 14/1/03) A bb poster has asked a question today, quoted in inverted comma's "Does this mean ERG has to pay Northrop out of the US$4m each year as a subcontractor? And as usual ERG is talking about the contract sum but not the profit to be made after doing the labour intensive work of fulfilling the contract." Will add this to some further questions, that I'm compiling to ask of Sean Duffy of Investor Relations. Washington does have an impact on recoverability. in past accounts. Specifically equipment being used comes from San Francisco, "ERG will use its existing central computer processing system installed in the San Francisco Bay Area to perform these functions 20/1/03." which was part of the sum the entity paid Motorola, in it's settlement with it on the 26/2/01. 1) 30/5/2002 The total annualised savings achieved have reached approximately $27million and the cost of the restructure is approximately 6 millionwhich is being expensed in the current half-year.2) Investments accounted for using the equity method (unlisted companies) 58,876 minus 5 million Ecard equals 53,876 14/11/02(ERG have retained ownership to the technology) ('clear evidence') (tangibility)3) As at 13/1/03 the net value of the assets is greater than the value of the company as a going concern, the writedowns were one off and won't be there next time it reports. 4) 1 million nine hundred and forty three thousand dollars redundancy costs 30/6/2001 to the 30/6/2002 reported 12/9 audited 1/10. Won't negatively impact period 30/6/02 to the 31/12/2002 to report on or around 11/3/03. (retrenchements only need to be done once.) 5) Sale of EDI Downer shares released from escrow occuring on the 9/7/02 announced to the ASX 10/7/02 13 million realised. (part consideration ERG Connect)6) All up annualised savings confirmed 30 million on the 28/11/02 for most of the 6 month period half of 27 million. (ie approx 27 m on the 30/5/02) 13.5 mill.7) Melbourne Settlement within ten days announced 25/10/02 20 million paid to OneLink 12.4 mill flowing through to ERG. (recurring ongoing payments 4.75m p/a)8) Reversal of prior year profit, exchange movement and equity losses applicable to Prepayment Cards Limited 13,990 47.1% equity accounted---regardless of it's status with it possibly moving above 50% the reversal of profit in last years accounts negatively impacted the entity--this has not occured in period 30/6/2002 to 31/12/2002. 9) Singapore commencing 13/4/2002 beginning with 1 million transactions a day.4 million transactions each day by end of 2002 2/5/02 10) Proton acquired 100% (previously 10%privately-owned by its shareholders and had no publicly-quoted shares).March 15th 2002 only 3 months of revenues---period 30/6/2002 to 31/12/2002 six months of revenues. As part of ERG Group with a publically traded valuation reported 12/9 audited 1/10 (technological benefits from the commercialisation of it's technology flowing through late June 02.) 11) Triumphaunt Launch acquired 100% (previously 50%) March 15th 2002. 12) 165.3 million all up in writedowns and provisions some of which such as Prepayment Cards above and Ecard are already detailed occurring in period 30/6/2001 to the 30/6/2002 reported 12/9 audited 1/10. being one off not occurring in the 1st half of the new financial year 30/6/02 to the 31/12/02 reporting on or around 11/3/02 (going on last years calendar)13) Total R&D costs dropped from 42.3 million in 2001 to 23.2 million period 30/6/2001 to 30/6/2002 reported 12/9 audited 1/10 research and development savings have a direct impact on operating profit for period 30/6/02 to the 31/12/02 contained at 8% of revenue. for 30/6/2002 to 31/12/02. 14) 28/11/02 finalisation of ten to twelve new contracts imminent.15) 28/11/02 Repayment of more than $60 million bank debt in the last nine months. (16 million was generated from the sale of EDI Downer 13 million realised) proceeds used to repay CBA.16) two announcements concerning the unlisted convertible notes one dated the 10/10/02 the other the 16/10/02 the first one is in relation to Utilico and the former with respect to SUIT--4.95 million dollars in non current liability reduced. ERG as it announced on the 12/9 stated it would pay the difference between what the share price was trading at and the face value---each note converted into 3 shares--equaling a price of 55c--the two issue prices to the institutions involved were 17.66 and 17.48.1.51875m saving in interest---the payments were due to be made (interest to the noteholders) on the 1/10/02--the announcement from ERG states that the entity made prior arrangement s with both SUIT and Utilico--from announcement section"The notes were converted in accordance with the arrangements made with the Subscriber and announced on 12 September 2002." therefore I would think they have saved for this coming half year 30/6/02 to the 31/12/02 reported on or around 11/3/03--the estimate made above. (1.51875m) essentially though I guess this transaction would be part of the 30 million in annualised costs savings announced by the entity 28/11/02. issue prices were 17.66 and 17.48. The operational margin as he states varies from place to place all around the world,say an average of 5 to 7%, (some greater)with many contracts such as Singapore they are only now coming to fruition after first being installed (different divisions of the company)(recurring revenues that the entity receives once the system is installed are nearly up to the installations side now) on the Rome contract it is 7.8% over 9 years. The multi application side that is becoming more evident as time goes by improves the amount of profit from each card by having more applications, so instead of having to issue more cards you are getting more money from those that already exist, this is one of the good things on that side of it. Revenues aren't profits--as N.E. Renton states in his book "Understanding the Stock Exchange" 'revenues are vanity profits are sanity' agreed. With the upcoming result a number of cost savings have been made post June 30th, that have improved free cash flow net working capital and it's margin. The entity states that a lot depends on the timing of contracts--re profitability and that it is hampered by non cash expenses such as depreciation and amortisation which are charged to the profit and loss statement, it is aiming to be ebitda cash positive when it reports March. It has also limited research and development spending to 8% of revenue which is a decrease from prior years in percentage terms. in many places of the world ERG and Cubic are both competitors and partners, depends on which sphere of business that they are competing in---whether it be the actual installation of a system from the ground up---the back office that controls the financial processing (as is the case in San Francisco) or the personalisation of the actual card that is used as is the case in London with Cubic's Oyster card---which is supplied to the Transys consortium of which Cubic is the senior partner by Proton certified vendor Schlumberger Sema.In London's case EDS (and once again in other parts of the world) EDS do the procrurement and overall management. Intellect to is a Proton vendor--refer Proton website. Proton/SchlumbergerSema/Procurement andoverall management EDS Transys consortium Prestige--EDS Cubic ICL WS Atkins.London. Cubic's paper based magnetic paper ticketing system would be upgraded to smartcard giving it full multi application and interopearability as has occurred elsewhere in the world in such places as Cubic's London.Melbourne itself is still paper based magnetic it may be upgraded to in time Interim-Appendix 4B lodged with the ASX on 11 March 2002.AUS 708.'emphasis of matter'AASB 1029December 31st to June 30th 2002 18/3/2002.'emphasis of matter'-accordance-Australian Auditing Standard AUS 708. Note# AUS 708 does not apply when a liquidation basis has been used in a preparation of a financial report in a liquidation report standard AUS 802 is used. The importance (this is opinion) of the directors making the statements was to get an audit done, so that ERG would receive an investable weight factor.The auditors have issued an unqualified independent review report with an emphasis of matter in accordance with Australian Auditing Standard AUS 708. This review indicates the auditors believe the Directors have provided an adequate disclosure of the risks associated with the company and the industry in which it operates in Note 1 - Basis of Preparation of Half Year Financial Report. The qualification was made on an interim reporting date/ valid for 6 months--if it is done for a 12 month end of year, it is valid for 12 months, in this case note no qualification was given by the entity when it next reported on the 12/9/2002 audited the 1/10/02 (Price Waterhouse Coopers) for financial period December 31st to June 30th 2002, (second half)which was reported to the ASX 12/9 audited on the 1/10-ratified 28/11 announced 29/11/02 which was made in accordance not with standard AUS 708 but with AASB 1029This is the second payment of 3---so far the entity has collected post balance sheet date--(ie the previous reporting period was the audited period June 30th 2001 to June 30th 2002 as reported 1/10/2002.) 20 million of which 12.4 million was paid directly to the Consolidated Group as opposed to the 100% owned subsidiary OneLink who received 7.6 million. The previous payment of 25 million was made immediately on May 30th 2002. (see below) "Of this, $25 million will be paid immediately and payment of a further $20 million will be made when the full agreement has been documented (which is expected in the next 30-90 days). The previous payment falls within last years financial period.The significance of the announcement dated the 25/10/2002,is the payments have now been legally and irrevocably signed, subject to the entity continuing to meet performance guidelines it will receive both the staggered payments and the ongoing recurring side.The announcement dated the 25/10/2002 states that the settlement agreements for OneLink have been signed--the significance of this is--that the entity has fullfilled the requirements of the Victorian Government in relation to the claim--officially the same announcement states within ten days--which makes it no later than the 4/11/2002.Announcement dated 30/5/2002---part B--extract--no words have been altered.Settlement of OneLink's claims will be implemented in three stages,with payments tied to performance milestones. Full and final settlement will follow successful completion of a trial period.The recurring side of it that will be included in ERG's profits for 5 years--is the following:The entity is paid additionally for 5 years a sum of 2.85 million (all up totalling 14.26 million)---in addition to that sum OneLink (wholly owned by The Consolidated Group) will pay ERG a fixed fee of 1.9 million per year for 5 years.Adding the recurring side of it up-----2.85 mill plus 1.9 mill equals 4.75 million. per year.All of the above is subject to OneLink continuing each year to meet the performance criteria in the management of vandalism, failure to do so for more than an eight month period results in a maximum penalty of 2 million---and additionally The Victorian Government are then given expanded rights in terminating the contract--which is worth approximately 250 million over 5 years for the remaining life of the contract--that estimation given on the 30/5/2002.Securities Institute of Australia.Topic 5 Accounting policies painting the picture.Overview of the requirements of the standard. The accounting standard AASB 1027--Earnings per share, (EPS) requires the disclosure of basic and diluted earnings per share. The standard applies the following formula.Basic earnings per share equals weighted average number of ordinary shares outstanding during the year.The diluted earnings per share also includes the number of potential shares eg--convertible notes which can be converted to ordinary shares. Earnings is defined by the accounting standard as operating profit after tax and preference dividends.The definition includes abnormal items as part of operating profit. Extraordinary items are excluded.Analysts generally use EPS before (excluding) abnormal items. When analysts calculate the price earnings (see topic 7) ratio (pe) which is derived from earnings per share they exclude abnormal items.The accounting standard takes a different view from that generally adopted by analysts.Earnings are generally more volatile when abnormal items are included. Abnormal items. Abnormal items are defined as items of revenue and expense included in the operating profit... which are considered abnormal by reason of their size and effect on operating profit (AASB 1018--paragraph 9) Some examples are:Large bad debt writeoffs Large inventory writedowns Profits or losses on sale of non current assets such as properties.Extraordinary items.As discussed in topic 4, the approved accounting standard on profit and loss, AASB1018, defines extraordinary items as non recurring revenues or expenses occurring outside the normal course of business. The requirement that the items be of a non recurring nature severely limits what can be called extraordinary items.AASB 1018 suggests only two circumstances that may, on rare occasions, be defined as extraordinary:1) The sale or abandonment of a significant segment of a business and it's related assets.2) The condemnation, expropriation or destruction of a property.Where a transaction takes place outside the normal operations of the entity and is unlikely to recur, it is said to be extraordinary.An example of an extraordinary transaction would be when a manufacturing entity closes a very substantial operation selling the associated assets. The cost of the closure and the profit and/or loss on the sale of plant, equipment, etc., would probably be an extraordinary item. Another example might be where a factory burns down and items are lost are not covered by insurance.I would think the payments from the Victorian Gov are abnormal items--as they are linked to performance criteria (for it becomes to a degree recurring)--so under accounts it is included in ERG's financials next March, stockmarket analysts though--disregard (as it states above)--this is in difference of opinion with accountants. In share trading abnormal items can lead to spikes in the share price on the day.On Rome---the classification of goodwill ERG have made is extremely important--as it has a direct bearing on the March result.You can split it up under different headings--and it makes real difference. The extract from Securities Institute has been abbreviated.Traps can be found in accounting rules.Barrie Dunstan----Australian Financial Review 15/9/1993.Which share on the stockmarket is selling at a price earnings ratio of more than 100 times earnings? And which stock theoretically is very cheap at a price earnings ratio of less than 1 times earnings per share?The answer to the first question is shares in national eyeware group OPSM while Victorian and Tasmanian TV and radio operator Southern Cross Broadcasting can claim the very, very low price earnings award.The market has not pulled down the OPSM share price or rushed to push up the price of Southern Cross shares simply because share market analysts don't believe either of the ratios--cause by a very low earnings per share figure for OPSM and a very high eps figure for Southern Cross.Nor would many accountants believe the numbers though the figures have emerged simply because of reporting standards enforced by Australian accounting standards.The two cases show that the accounting standard setters are out of touch with some of the main users and that can produce meaningless results which in some cases could prone to be traps for unsuspecting investors.The accounting standards on profits and eps now have the force of law and the Australian Stock Exchange enforces these in its pro forma for listed companies to report profits.The appropriate net profit figure according to the standards is the profit including abnormal items and the eps figures are based on this profit. This may be fine for accountants but it is not the figure most share analysts want which is the profit before abnormal items.In fact thanks to the accounting dominated standards, nowhere in the official ASS pro forma can you find the eps figure based on profit before abnormal items.Those companies which comply with the pro forma produce an eps which pleases the accountants annoys share analysts (who have to calculate their own pre abnormal figure) and potentially misleads unsuspecting investors.Anyway the article above which is quite long goes on to explain the differences in OPSM's profits and Southern Broad Casting's reported profits and eps for that year and the distortion that arises because of the situation outlined above in the first part of the article. Tremendous differences to both company's are noted depending on whether you include abnormal items or not.The residual value of an intangible asset should normally be assumed to be nil unless either there is a commitment by a third-party purchaser to buy the asset or there is an active market for this kind of intangible asset. [IAS 38.91] The amortisation period and method should be reviewed annually. [IAS 38.94] The residual value of an intangible asset should normally be assumed to be nil unless either there is a commitment by a third-party purchaser to buy the asset or there is an active market for this kind of intangible asset. [IAS 38.91] The Daily Telegraph , 24-12-02 , Ed: 1 - State , Pg: 025 , 691 words , FINANCE Bid rumours creep up around ERG A CATSPAW of a rumour ruffled Harbour's oily surface yesterday, bringing with it the smell of fear and the first inklings of a takeover bid. The target, we hear, is none other than Peter Fogarty's much-pulverized smart... (below excludes a number of things, just solely on the money proposed to be raised by the rights issue)The 50 million proposed from rights issue (part of the restructuring process)divided by the maximum number of shares and options together is 1.70816712154080968011857738125908 1.7c rounded This will appear in financing and investing activities in the the statement of cash flows reconciled to the profit and loss and balance sheet not in the half yearly due in March, if the proposal goes ahead as is likely in the full year report f/y03. 8 times 1.7 equals 13.6 10 times 1.7 equals 17 12 times 1.7 equals 20.4 15 times 1.7 equals 25.5 25 times 1.7 equals 42.5 12/9---for full FY/2 30/6/2001 to 30/6/2002 audited 1/10 Total expenditure on R&D in the current year was $23.2 million compared with $42.3 million in the 2001 financial year. 28/11/02 AGM--extract. This has given us the comfort to reduce R&D spend to 8% of revenue in 2002 compared to 18% of the comparable revenue base, which excludes telecommunications revenue, in 2001. To assess the earning power of the business, independently of how it is financed, analysts will add back the interest expense to the operating profit. ERG will have an improved result, when next reporting in March, in analysis, the writedowns which are non recurring occurred in the prior financial period, which is the 30/6/2001 to the 30/6/2002 as reported on the 12/9 audited the 1/10.It is currently waiting on a number of contracts, some of which it is the preferred tenderer--all up the value of them ERG itself gives at approximately 700 million.All of the goals the entity set for itself with the acquisition of Proton, on the 15/3/2002, where it picked up the remaining 90% it did not own are beginning to be seen the world over, in the growth of the multi application function coming off the transit side. MASS is being successfully wedded to Proton--in a number of projects which include by estimation places such as Hong Kong and The U.K.Incidentally note the purchase date for PWI the entity has only experienced 3 months of revenues from March 15--along with Triumphant Launch, that handles the Asian side 100% revenues for the full six months of the new fy first half, rather than just three. A number of recoverability issues in ERG accounts, PCL sits at 47.1% for those familiar with equity accounting.The restructure is quite simple and straight forward net assets rise to 462.1 million, a figure given by the company itself on the 28/11, if you add all shares and options together equating to NTA of 15.78 (above the present share price.) [ Next Thread | Previous Thread | Next Message | Previous Message ] |
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