Balcatta-based ticketing company ERG Ltd plans to sell half of its business to its major shareholder and lender after reporting a $104.7 million loss for the half year to December 2007.
Balcatta-based ticketing company ERG Ltd plans to sell half of its business to its major shareholder and lender after reporting a $104.7 million loss for the half year to December 2007.
Its overall loss included a $80m loss on its contract with Sydney Tcard for the supply of an automated ticketing system.
In addition to losing the contract, the company has lost the opportunity to operate and maintain the Tcard system for 10 years and these direct losses will be the subject of a counterclaim expected to be in excess of $185 million.
In a statement, the company said the combined claims could approach $250 million when they are filed against the Public Transport Ticketing Corporation and State Government of New South Wales on 9 May 2008..
ERG recorded a net loss after tax of $104.7m for the six months ended 31 December 2007 and plans to sell its business operations for $125 million in a joint venture with its major shareholding group and major lender, the Ingot Entities.
A statement from ERG is pasted below:
ERG Ltd has today announced a restructure of its operations to facilitate a major recapitalisation following the loss of its major contract for the supply of an automated ticketing system in Sydney.
In a proposal expected to be voted on by shareholders in the September 2008 quarter ERG will sell its ongoing global business operations for approximately $125 million into a joint venture with its major shareholding group and major lender, the Ingot Entities.
The sale proceeds, when received, will enable ERG to fully repay secured loans, which at the date of this announcement total approximately $115 million.
It is expected that the joint venture company will be majority funded by preference capital issued to the Ingot Entities and that the ordinary share capital will be owned equally between ERG and the Ingot Entities.
ERG's Chairman Mr Colin Henson said the restructure was an important step in ensuring ERG's ongoing business operations were appropriately capitalised and for stakeholders to remain confident about the group's ability to supply and provide ongoing support for a number of important ticketing infrastructure systems around the world.
Also announcing a Net Loss After Tax of $104.7 million for the six months ended 31 December 2007, Mr Henson said the loss included a writedown of assets and relevant expenses associated with the loss of the Sydney Tcard contract of approximately $80 million.
In addition the Company has lost the opportunity to operate and maintain the system for ten years.
These direct losses will be the subject of a counterclaim expected to be in excess of $185 million to the claim lodged by the Public Transport Ticketing Corporation against ERG and its wholly owned subsidiary Integrated Transit Solutions Ltd.
Further the group has lost the rights to exploit the Tcard for other commercial purposes for which compensation will be claimed.
The combined claims could approach $250 million when they are filed against the PTTC and State Government of New South Wales on 9 May 2008.
"Our shareholders interests have been severely damaged by the wrongful termination of the Tcard contract and the group is determined to pursue recovery of these losses while at the same time ensuring our ongoing businesses are given the opportunity to continue and grow" said Mr Henson.
"We believe the course we have now initiated for the group is the best means by which to achieve this."
Corporate Restructure Proposal Subject to requisite approvals, ERG proposes to sell its ongoing businesses including relevant operating subsidiaries in to a joint venture with its major shareholding group, the
Ingot Entities.
The sale will leave ERG Ltd with a 50% ordinary equity interest in the joint venture and a 100% interest in the outcome of the current litigation with the Public Transport Ticketing Corporation in relation to the Sydney TCard project.
It is not intended that ITSL will be transferred to the joint venture.
Details of the proposed transaction, which are subject to final negotiation include:
- Joint venture company to be owned 50% by ERG Ltd and 50% by the Ingot Entities;
- Proposed sale price of $125 million subject to usual adjustment for pre completion events;
- Joint venture company expected to initially raise capital for acquisition by way of borrowings from
- and a preference share issue to the Ingot Entities;
- Proceeds to be used to repay current secured borrowings from the Ingot Entities of approximately
- $115 million and remaining proceeds available for general use including litigation defence and
- counter claim costs;
- All existing ERG staff will transfer with the existing businesses to the joint venture;
- The composition of the respective ERG and joint venture company Boards will be different.
The proposed sale is subject to requisite approval from relevant ERG shareholders.
It is expected that an Extraordinary General Meeting of shareholders will be held in the September 2008 quarter
with a detailed explanatory statement and accompanying independent expert's opinion on the transaction available at least one month before the meeting.
Pending the EGM, the group's secured lenders have agreed to the continued suspension of interest and fees associated with the borrowings together with an extension to the repayment date of approximately $21 million of loans which were due for repayment on or before 31 March 2008.
Commenting on the restructure proposal Mr Henson said "the restructure proposal provides the group the opportunity to retire the secured debt and allows the business units to pursue growth with a strengthened capital base.
The restructure provides shareholders an opportunity to retain a 50% ordinary equity interest in the ongoing value of the ERG business as well as an opportunity to defend the litigation and pursue a counterclaim in relation to the termination of the Sydney Tcard project.
In these difficult circumstances directors believe the proposal is in the best interests of all shareholders and will be recommending its approval by shareholders at the upcoming EGM."
As of 1 July 2007 the group has reorganised its business into country based operations in the functional segments of 'Solution Delivery' and 'Operations, Maintenance and Support'.
Solution Delivery comprises businesses for which development and delivery of Automated Fare Collection
systems is the predominant business function while Operations, Maintenance and Support comprises
businesses for which support of completed systems is the predominant business function.
Solution Delivery
During the six month period ended 31 December 2007 ("the half year") Solutions Delivery units generated revenue of $76.7 million but recorded a loss before interest tax, depreciation and amortisation of $15.5 million.
Strong profit results were recorded in the French, Belgian, UK and Italian operations where a number of new or recently awarded projects are being successfully deployed.
Highlights during the half included:
In the UK:
- the signing of a contract with major UK transport operator, Stagecoach Group plc for the supply
and maintenance over eight years of a fully ITSO compliant smartcard based ticketing system
for the Southwest Trains franchise in the UK;
- the successful deployment of the first 850 out of an order for 4,400 fully ITSO compliant bus
ticketing systems for a variety of bus operators in the UK and Scotland;
In France:
- successful commissioning for the French projects of Le Mans, Toulon, Air France Buses,
Strasbourg, Ille et Vilaine County, Lens and more than 10 other small city bus systems.
- new contracts to the value of approximately € 12 million being awarded in France in the regions
of Haute Garonne, Midi Pyrenees, Cote D'azur and a regional system for the French SNCF
- The commercial launch of a new generation of web based back office packages with extremely
good feedback from customers and prospects
- Record number of bids in first half 2008 with significant growth opportunity for the French entity; and
In the US:
- following the success of the ski bus trial in Salt Lake City, the Utah Transit Authority has selected ERG as its partner to implement a complete solution based on open payment systems;
- start of commercial operation in September 2007 for Golden Gate Ferries and Alameda County Transit in San Francisco
Despite the achievement of major milestones during the half year in each of its Major AFC supply projects in San Francisco, Seattle and Stockholm, the group has allowed approximately $15 million for additional anticipated costs to complete the remaining delivery phases of these projects, including the provision for potential delay penalties amounting to approximately $4 million in the Stockholm project.
The imposition of these penalties is in dispute and remains unresolved at the date of this report.
In addition, the group, in conjunction with its customer in the Stockholm project, Storstockholms Lokaltrafik, is in discussion with IBM to act as an independent project consultant to assist in project governance for the remaining phases of the Stockholm project.
This will selectively add local resources in Stockholm and be beneficial to the timely delivery of the remaining project phases.
Major projects in San Francisco and Gothenburg are now in commercial operation and Stockholm and
Seattle will both launch by the end of 2008.
A program to significantly increase the local strength of the group's regional entities has been initiated to ensure operational key performance indicators continue to be met as the customers' smart card base grows.
Several key staff from Australia will be seconded to support knowledge transfer to local recruits and ensure systems can not only be maintained but also expanded locally.
The additional capability will also enable regional entities to pursue new opportunities with less dependence on the group's headquarters.
Operations, Maintenance and Support
The Operations, Maintenance and Support division comprises the operating businesses in Melbourne (including OneLink Transit Systems), Brisbane, Hong Kong and Singapore.
The division recorded revenue of $28.9 million and generated earnings before interest tax depreciation and amortisation of $14.5 million, an increase of 18.5% on the corresponding prior period.
The profit improvement was primarily attributable to improved operating conditions experienced in relation to the extension of OneLink and ERG's service contracts in Melbourne for up to five years pending the introduction of a new ticketing system ("myki") in that city.
Due to delays in the development of the myki system, being supplied by parties not related to ERG, the Company expects the service contract and the improved conditions to continue until at least 2010.
Balance Sheet and Cash Flow
As a result of the Net Loss After Tax of $104.7 million for the half year, the group reported a Net Asset
deficiency of $7.5 million.
In addition, while significant project milestones were met during the half year for which milestone payments totalling approximately $15 million became due the uncertainty regarding the Sydney contract led certain customers to withhold those payments.
Whilst the group expects to recover these payments during the second half the retention of monies contributed to a net cash deficiency from operations of $16.8 million in the half year.
Directors expect the Net Asset deficiency, together with the existing secured borrowings to be extinguished by the proposed restructure.
In the interim the group has a substantial working capital investment in major contracts which is progressively being converted into cash as project milestones are achieved and expects that more than $70 million of major contract milestone receipts will be received in the 12 months following the date of this report.
Combined with receipts from other operations directors believe these receipts will allow the group to meet liabilities and commitments as they fall due until the proposed restructure.
In addition, subsequent to balance date the group has concluded with the Ingot Entities a conditional agreement for the disposal of non strategic assets for which deposit proceeds of $9.5 million have been received and has also secured a further credit facility of $5.5 million.
The cash raised and credit facilities available will maintain adequate liquidity until the proposed restructure.
Sydney Tcard Litigation
ITSL and ERG intend to vigorously defend PTTC's claim and will file a defence and counterclaim to recover the substantial losses they have suffered due to PTTC's wrongful termination.
ITSL and ERG's defence and counterclaim will be filed by 9 May 2008.
There is no contractual limit on PTTC's liability for direct losses suffered by ITSL should ITSL's counterclaim be successful.
ERG and ITSL believe that if their counterclaims are successful, they will be entitled to recover from PTTC and the government the full amount of their direct losses which are currently estimated in excess of $185 million together with the losses associated with the lost opportunity to exploit the Tcard for other commercial purposes.
The group expects its total claims willapproach $250 million when filed on 9 May 2008.
PTTC has notified ITSL and ERG that its damages claim in respect of pre-contract termination losses amounts to $88.6 million.
In this respect ITSL and ERG note that the Tcard Agreement contains provisions limiting PTTC's right to recover both direct and indirect loss suffered by PTTC under the Tcard Agreement.
ERG and ITSL believe, based on PTTC's claim, that such provisions would limit their liability to an amount not exceeding $44 million should their defences be unsuccessful.
Of this amount, PTTC has already seized approximately $27 million from a security deposit provided by ERG.
Therefore, under the contract provisions, the maximum additional liability the group would incur in the event of an unsuccessful defence of PTTC's claim would be approximately $17 million ERG is continuing to work with the Australian Securities Exchange to determine the date upon which the Company's shares will recommence trading.
