ERG = WORLDCOM a disaster in the making, page-2

Hi Informer and ERG shareholders,

Personally, I think the analogy of ERG with Worldcom is somewhat unfounded. Undoubtedly, everyone who has invested in ERG is taking a risk, but one which could in the long term prove well worth the wait. I am prepared to wait, because the seeds have been planted, and of course there has been some bad weather along the way, but eventually those seeds will grow into fruit trees and start to blossom. The smart card technology is undoubtedly the way the world is heading, and ERG is definitely a leader this arena.

You have stated that ERG has revolved around questionable accounting treatments. I have included a snippet from their media release "ERG Result Affected by Revenue Recognition Deferral" for Sep 2001.


"Whilst accepting that the transaction was completed during the year, they are not willing to accept for audit purposes that the consideration receivable is sufficiently measurable or that there is sufficient probability that economic benefit will flow. The Directors of ERG disagreed with this view and believe the licence fees should have been included as revenue consistent with the previously adopted practice. Had that occurred, as was expected by the Board, the revenue would have been approximately $331 million and pre tax profit $37.5 million.

The Directors are unanimously of the view that licence fee revenue derived by the Group is an important and recurring part of the Group’s business and should properly be recognised in the year of the transaction. In this case the recognition of the revenue has been deferred."


This disclosure was indeed alarming for all of us, yet I believe there are several positives to take from this disclosure and subsequent events. Although the auditors would not recognise a portion of the revenue on their Profit and Loss statements, the revenue exists and ERG stated that it would be defered to be recognised at a later date.

Subsequent to that particular event ERG's share price fell drastically, yet, they managed some notable achievements. i.e
- NRMA Aliance, Transurban Aliance, Hong Kong Contract, Proton World acquisition, San Fransisco trial, rollout of Singapore smartcard system, Melbourne settlement, reduced their costs by 27 million, and have won 2-3 other contracts in Europe (France, Netherlands, and Germany I think).

It seems to me a little strange that if ERG was in such dire striaghts as Worldcom is at the moment, that they would manage to achieve the aforementioned. The companies which they have formed alliances with are reptutable, and they are continuing to win contracts. Surely these companies have placed their faith, time and money into ERG because they believe they are capable, surely they do their risk analysis before they put pen to paper and sign the contracts.

You have stated the "Most Boards can not seem to deal with the critical issues in a single sweep of the broom. In this case, ERG has been lacking in its disclosures and unrealistic accounting treatments. The auditors must be nervous and concerned about there underlying exposures."

Is it a FACT that most boards cannot seem to deal with the critical issues in a single sweep? ERG did handle it's lack of disclosures by disclosing an after tax loss of $199.4 million for the six months ended 31 December 2001. The decision by ERG Directors was to substantially write down the carrying value of ERG’s assets. (A few months ago, PACIFIC Dunlop, now Ansell did exactly the same thing, their share price subsequently went up.) As for auditors being nervous, I think they'd all be nervous about keeping their own jobs more than anything else at the moment. ERG did the right thing, they reported a loss, they fullfilled the auditor's requirements.

Informer, I am very curious to know why you have such a negative view of the company, and furthermore why you would post a message in an ERG newsgroup where I would say most readers would be ERG shareholders or potential shareholders. Why would you waste your time really? I mean, if I thought say Telstra for example, was going to go bust and that they would be a let down, I wouldn't go to the trouble of going to the Telstra newsgroup and writing how bad I think they are. Are you into SHORTING?

I think ERG has proven that they can and will survive, they have managed to meet accounting regulations set by their auditors, they have kept the market informed, they have won new contracts, cut their costs and furthermore, just recently had a $65 million cash injection from the settlement of the Melbourne claim.

Messages form the company may not reflect the nature of the relationship between their financers, but then again how do we know whether it is good or bad. I think that the worst is behind ERG and if they were going to collapse it would have happenned earlier. The board has defended the company well with strategic announcements, i.e announced a substatial loss but at the same time announced the winning of 2 major contracts in Europe. Obviously, the company will not disclose contractual information to the ASX as it would be breaching confidentiality agreements with it's customers.

"Are we going to see a positive outcome for the company at June 2002?"
I believe the answer is YES. Without disregarding all the negative events and press about ERG, their products and services are sought after world-wide, they are the best at what they do, and given their latest alliances they will only improve.

"Will the company generate a second half profit as eluded too? "
Again I believe they will. The statements of the board in their releases have thus far been accurate and not proven to be false. And given the amount of publicity and close checking they have had, I doubt they would be attempting to commit a daylight robbery. Unlike ENRON and Worldcom, which came crashing down, the ERG situation has been distressfull to all shareholders, yet we have seen positive and defensive action being taken by the company. Unfortunately, the results are not reaped overnight.

I somehow doubt the alikeness of ERG to a trip to the casino, or even to the "Titanic" or "Temple of Doom". Unless a shareholder sells they only have a paper loss.
The future seems bright and share value will increase again, it's a matter of patience. I wish I had another 100k to buys some more right now!

Good luck to everyone!!!