Gaynor on Wednesday: RMG's problems prompt two tough questions

What is going on at RMG, the debt-collection offspring of Eric Watson and Stuart Cairns of DF Mainland, which is domiciled in Melbourne but listed in New Zealand with many local shareholders?

Are the company's accounting difficulties and poor interim result indicative of much deeper problems?

In the middle of last year, 15 Australian and New Zealand debt-collecting agencies were consolidated into a number of companies, one of them substantially owned by Mr Watson, and these were onsold to Frontier Petroleum NL.

Frontier, which later changed its name to RMG, paid $A79 million ($95.8 million) for these assets; $A20 million in cash and 296 million RMG shares valued at 20Ac each. Cullen Investments, Mr Watson's private company, received 114 million RMG shares or 38.4 per cent of shares issued as part of the deal.

Frontier's purchase price was an amount equal to twice historical net revenue plus the value of the acquired companies' net intangible assets. It is not clear what Mr Watson and the other shareholders paid for these agencies, but as Frontier purchased mainly goodwill, not physical assets, one can assume the middlemen profited handsomely.

The fair and reasonable opinion in the independent expert's report was almost totally based on forecast earnings for the year to June 2001. It stated that management of the acquired companies prepared the profit projections and "we have not undertaken an independent investigation or analysis of the bases and assumptions."

DF Mainland adopted a particularly optimistic view of the new backdoor listing. Although the broker claimed that the simultaneous merger of 15 companies had never been attempted in Australia or New Zealand, it believed that RMG would succeed because the vendors received shares and most continued to hold important management posts.

It now looks as if DF Mainland was wrong. RMG's recently released interim report for the six months ended December 31 contained the sobering comment: "Issues concerning accounting records, controls and procedures occurred which permeated throughout the year resulting in difficulties with the year-end close, including the reconciliation process. Management is currently addressing all related matters and the audit process is continuing."

Not only is RMG having difficulty balancing the books, it may also fall well short of its profit projections. In the six months to December 31, revenue growth was well ahead of forecast but the company recorded a net loss of $A4 million and is highly unlikely to achieve its full-year profit forecast of $A5.6 million.

RMG is technically insolvent and will need a capital injection as current liabilities exceed current assets by $A35.4 million to $A18.8 million and goodwill exceeds shareholder funds.

The situation warrants two simple questions. Why was RMG backdoor listed before its accounting system had been sorted out? And why were the vendors, which included Mr Watson, paid $A79 million for their unproven debt collection activities?

Genesis

Shareholders of Genesis Research and Development keenly await tomorrow's annual general meeting.

The Auckland based biotechnology company was listed late last year after issuing 5.75 million new shares at $6 each. These have fluctuated wildly between $8.48 and $3.78 as investors struggled to assess the group's potential, particularly for its psoriasis vaccine PVAC.

Recent optimistic comments by the company on PVAC were perceived to contain too much biotech and PR hype, and shareholders will want a realistic and updated assessment of the vaccine from chairman David Irving and chief executive Jim Watson tomorrow.

* bgaynor@xtra.co.nz