Brian Gaynor: Accountability questions for Tranz Rail

Who will take the blame for another profit downgrade at Tranz Rail and a further slump in the company's share price?

In most other countries institutional shareholders would be demanding accountability and chief executive Michael Beard and chief financial officer Wayne Collins would be at the top of their list.

When Beard was appointed to the top position on May 15, 2000, Tranz Rail's share price was $2.70 and it was just about to report net earnings of $46.9 million for the June 2000 year and pay a dividend of 17c a share.

The immediate response to Beard, who was the former chief executive of Australia-New Zealand Direct Line, was positive. Tranz Rail's share price rose to $3.70 a month after his appointment and peaked at $4.11 on July 13.

Since then it has been virtually all downhill. Net earnings fell to just $5.6 million in the June 2001 year and the company reported a loss of $122.7 million last year and slashed its dividend from 17c a share to nothing.

Meanwhile, Beard's remuneration has gone in the opposite direction, from $783,000 in his first full year to $1,157,000 in his second.

The latest profit downgrade relates to detailed profit forecasts delivered by Beard and Collins in July and November 2002.

In July, they forecast net earnings of $28.9 million for the current June year and in November, as part of the $65 million rights issue, the forecast was downgraded to $27.4 million. On Monday the company reduced this by a further 23 per cent to $21.2 million.

Beard and Collins should know that it is vitally important for financial forecasts to be conservatively struck, particularly when they are included in a rights issue prospectus. It is unacceptable that the rail operators forecasts have been downgraded less than four months after shareholders subscribed to the issue.

Tranz Rail shareholders now have three major concerns: senior management's credibility, the group's profitability and its financial or balance sheet risks.

The Takapuna-based company needs to sell assets now as it has $284 million in long-term debt and $175 million in current liabilities and just $130 million in current assets.

Institutional shareholders may be fairly docile, but the credit rating agencies and the group's bankers will be leaning heavily on Beard and Collins over the next few months.

Feverpitch/KidiCorp The back door listing of KidiCorp through Feverpitch is a big event for the Stock Exchange. It is the first new listing of the year and a welcome development for the beleaguered shareholders of the failed internet betting group.

Feverpitch was listed on the New Capital Market in December 2001 following the issue of 1,200,000 shares to the public at 50c each and 800,000 shares to directors at 25c.

The directors were Richard Waddell (chairman), Derek Handley, John Handley, John Hart, Jock Irvine and Len Ward.

Wayne Collins, now Tranz Rail's chief financial officer, was the stockbroker behind the float.

A month later Feverpitch purchased the intellectual property associated with its proposed international internet betting operation from Derek and John Handley. The consideration was 5 million Feverpitch shares issued at 50c each.

Feverpitch struggled to raise additional capital and its sales revenue was minimal. On January 14 the company told the exchange it was effectively quitting its internet betting operation and would buy 100 per cent of KidiCorp. The vendors received 117 million Feverpitch shares at 10c each, or the equivalent of $11.7 million.

KidiCorp was established in Tauranga in 1996. According to the information memorandum it owns and manages over 40 licensed childcare centres throughout the North Island and has over 350 employees. It also contract manages 14 independently owned childcare businesses.

The company generates revenue and profits from fees paid by parents (approximately 40 per cent of revenue) and the Ministry of Education (60 per cent).

KidiCorp recorded a net loss of $202,000 for last March year but is forecasting net earnings of $350,000 this year and $954,000 next year on revenues of $3.8 million, $7.3 million and $11.5 million, respectively. This year's earnings growth is expected to be strongly influenced by acquisitions, the details of which are sparse.

At yesterday's closing price of 25c the company has a total market value of $33.5 million and a current year prospective price earnings ratio of 35. This price earnings ratio is high given the poor track record of New Zealand companies in achieving their prospectus forecasts and the labour intensiveness of KidiCo's operations and its heavy reliance on Government funding.

John Handley, Hart, Irvine and Ward have resigned and been replaced by Jan Ballantyne, Liz Hickey and Wayne Wright (snr). Wright and his son Wayne Wright (jnr), who is the company's chief operating officer, are the driving force behind KidiCorp.

The Wrights and other KidiCorp shareholders have turned an estimated equity investment of just $20,000 into $29,250,000.

Original Feverpitch non-director shareholders are not so lucky as their original investment has halved in value.

Richmond The battle for control of Richmond is far from over. PPCS has extended its offer six times but is still well short of the winning post and is facing a crucial test over the next two weeks.

PPCS is struggling because of two major decisions by Justice William Young against it. These are:

* The Dunedin-based company must forfeit 6.9 million Richmond shares representing 16.8 per cent of the Hawkes Bay company.

* If PPCS does not obtain 90 per cent of Richmond by April 22 then it loses its voting rights over a further 14.7 million shares or 35.8 per cent of the company.

When the takeover offer was announced in January, PPCS had effective ownership of 21.5 million Richmond shares or 52.5 per cent of the company. These shares are covered by the court order and all of them will be either forfeited, or PPCS will lose its voting rights over the remainder, if it fails to reach 90 per cent. Under the offer PPCS has received acceptances for just 6.5 million shares or 15.8 per cent of the company, bringing its current holding to 68.4 per cent.

But the court ruling has the following impact on PPCS' voting rights:

* When the 6.9 million shares are forfeited PPCS' holding falls to 62 per cent.

* If PPCS doesn't reach 90 per cent it loses its voting rights over a further 14.7 million shares and its voting entitlement, based on the number of shares it now holds, falls to just 33.4 per cent.

The next 10 days are extremely important for the Dunedin-based company because its offer closes on April 20 and it must reach 90 per cent acceptance or lose its voting rights.

Every acceptance is vital because PPCS should be able to control Richmond if it holds 45 per cent or more of securities that it can vote.

Opponents of the offer will be in a strong position if they can hold PPCS' voting entitlement below 40 per cent because it will be difficult for the South Island company to control Richmond at this level.

PPCS has appealed against Justice Young's decision and the hearing is set down to begin on July 28.

* Disclosure of interest: none.

* Email Brian Gaynor