Reply to thread

Re: BXP Bill Express

Some reading for those who missed  it.

The Australian Financial Review Nov 04

Pierpont

Waiting for some fruity accounts

As the Melbourne Cup field flashed past the winning post (or in the case of Franklins Gardens, limped past it), Pierpont found himself thinking about that dashing bookie Mark Read, who retired to Darwin to float International All Sports.

Back in the early days of this century, IAS was in a syndicate of venture-capital partners that invested $9.3 million in a technology group called On Q, which was into e-commerce products and smartcards. The venture capitalists had no sooner injected the money than they were in mortal combat with the founding shareholders, with writs and affidavits flying like confetti.

IAS's share of the investment in On Q was $1.1 million and it wrote off the lot. The venture capitalists - including the Liberman family and the Arthur Andersen spin-off Accenture - were exceedingly upset by three items.

The first was the discovery that the finances of On Q were considerably worse than they thought when they invested. The second was the sudden arrival of Australian Pure Fruits Ltd on the share register without their knowledge or approval. The third was the appointment of Peter McDougall, Australian Pure Fruits' managing director, to the board without their knowledge or approval.

After a great deal of angst and threats of litigation, the parties settled out of court, so Pierpont cannot say whether Mark ever retrieved much of his million dollars.

However, Mark may be amused to learn that four years later, Australian Pure Fruits is seeking to change its name to On Q Ltd at its annual general meeting on November 30. Any reader who happens to be in the Melbourne suburb of Eaglemont on that day might consider dropping in to the meeting because there will be several points of interest.

The first item on the agenda is the tabling of the financial report. This could be an intriguing document because nobody has yet seen it. Indeed, the company's shares have been suspended for the past month because of its failure to produce accounts.

On September 30, the directors of Australian Pure Fruits advised the Australian Stock Exchange that finalisation of its accounts for the year to June would be delayed until October 5. On October 13, it told the ASX the audit was expected to be finalised on October 21. On October 20 it told the ASX that significant work remained to be done to finalise the audit and directors were unable to give a precise date by which accounts would be lodged.

That was still the last heard from Australian Pure Fruits until October31 when it released the agenda for the AGM on November 30. Item one on the agenda is for shareholders to raise questions about the accounts, which none of them has yet seen.

Item four is to change its name to On Q. Australian Pure Fruits is flogging its fruit and vegetable juice business and specialising On Q's electronic banking.

Australian Pure Fruits describes On Q as the cornerstone of the technology now licensed by the company to its 42 per cent-owned spin-off Bill Express Ltd.

Asking Pierpont to explain electronic banking is like asking Paris Hilton to lecture on chastity, but your correspondent will try anyway.

Bill Express offers several varieties of electronic banking but let's take the simple example of a young geek who wants to top up his prepaid Optus mobile phone. He can walk into a newsagency that is equipped with a Bill Express terminal and hand over $30.

After a bit of technical wizardry that Pierpont will never fathom, the mobile is suddenly able to make another $30 worth of calls. On the money side, Optus pockets something like $29 and the other dollar is split between the newsagency and Bill Express. Bill Express then kicks back a licensing fee to Australian Pure Fruits.

So far, so good, but there are several points about the financial intercourse between Australian Pure Fruits and Bill Express that Pierpont doesn't understand.

To begin with, the Bill Express prospectus said the staff for its day-to-day operations would be provided by Technology Business Systems Pty Ltd (TBS) at cost plus 7.5 per cent. The only jarring note about this relationship is that the Victorian Commissioner of State Revenue applied to that state's Supreme Court on October 5 for TBS to be wound up.

Bill Express's chief finance officer, Marc Lichtenstein, assures Pierpont that the matter has been settled, but Pierpont would be more comfortable knowing his staff was working for a contractor that didn't get into such a situation in the first place.

It's a small point (and all over now, anyway), but Bill Express never told the ASX about this potential difficulty - mainly because TBS hadn't told Bill Express.

Which just shows that electronics companies aren't necessarily perfect communicators.

Another point is that Pierpont cannot reconcile the previous accounts of Bill Express. In its prospectus of October 2004, Bill Express showed its unaudited accounts for June 30, 2004. Those accounts showed no debt to the parent company.

However, the Bill Express accounts for June 2005 show that at June 30, 2004, nearly $12million was owing to Australian Pure Fruits.

OK, the prospectus accounts for 2004 were unaudited but that's a very big rabbit to pull out of the hat a year later. The 2005 cash-flow statement of Bill Express shows it repaid the debt to Australian Pure Fruits during the year. However, those accounts give no indication of how or why this debt arose.

Not only has Bill Express repaid a $12 million debt to Australian Pure Fruits which was not revealed in the prospectus, it has lent Australian Pure Fruits a further $1.6 million during 2004-05 plus $6 million to On Q Technologies. That's more than Pierpont would lend to a company that is in dispute with its auditors.

Marc explained to Pierpont that these were amounts owing for research and development done by Bill Express for Australian Pure Fruits.

There must be a two-way traffic in technology between Bill Express and Australian Pure Fruits, because note 22(d) to the Bill Express accounts shows that Bill Express sold On Q Technologies Pty Ltd to Australian Pure Fruits during 2004-05 for $100,000, which was only $3000 more than the value of its assets. So On Q Technologies doesn't sound as though it was very valuable. Which is strange, because On Q Technologies is the company that licenses the On Q technology to Bill Express.

Note 28 to the Bill Express accounts shows that Bill Express owed Australian Pure Fruits $587,455 in royalties for the use of On Q Technology last financial year. In other words, a company it sold to Australian Pure Fruits for a mere $100,000 is now gouging it for $587,000 a year.

Marc explained that On Q Technology had been a shell when it was sold to Australian Pure Fruits, but Australian Pure Fruits had then injected technology into it upon which Bill Express was now paying a royalty.

So there are two bits of technology. Australian Pure Fruits owns one bit, which it is charging Bill Express $587,000 a year for (probably more in a full year), and Bill Express owns another, which it has charged Australian Pure Fruits and On Q $7.6 million for but hadn't been paid by June 30.

Which is a pity, because Bill Express could have done with the money. Bill Express raised the not inconsiderable sum of $40 million during and after its float last year.

The cash-flow statement shows operating cash flow was $19.4million negative in 2004-05, while investments soaked up another $19.3 million.

Bill Express is still liquid, but only because it has borrowed $21million from its bankers.

Marc explained that the tightness was caused by the telcos. "If you owe a telco a million dollars, they're fairly relaxed," he said. "But if you owe them $10 million, they tighten their credit." This could be described as a problem that comes with success, because Bill Express has expanded its electronic banking business significantly in 2004-05.

Just in case readers are wondering, the 2005 Bill Express accounts were given a clean bill of health by the auditors, Pitcher Partners. Pitcher Partners are also the auditors that have been giving Australian Pure Fruits such a hard time for the past month. Given that Bill Express and Australian Pure Fruits have much the same electronic banking interests, Pierpont can only presume Pitcher Partners spotted a few rotten apples in the fruit and vegetable business.

Meanwhile, Mark Read must be wondering what happened to On Q Technology. He and his partners invested $9.3 million in the group five years ago but by the time the Bill Express prospectus came around, it was worth only $100,000. That's an even worse performance than Franklins Gardens.