Domenic had NO REGRETS
"Bad figures in the lingerie business"
31/01/2003
Today Pierpont is in underwear. To be a little more specific, he is writing about the No Regrets group. No Regrets sells lingerie through bricks-and-mortar stores and also through virtual stores on the internet.
Back in March 2001, Pierpont wrote a column about a prospectus in which No Regrets was selling franchises for its online business.
The concept underlying the prospectus was that the modern maiden was too busy to go shopping for lingerie and would save time by purchasing her intimate apparel via a mouse click. Further, the prospectus toyed with the possibility that the maiden's boyfriend would also buy lingerie for her online.
If any boyfriend out there is contemplating buying a brassiere for his inamorata, Pierpont should warn him immediately that it is a no-win game. If he chooses one that is too small, his girlfriend will be irate; and if he chooses one that is too large, she will be enraged. And the chances of his picking one that actually fits, that doesn't have a wire digging into her anywhere and that is in a colour and style she likes is about as remote as Saddam Hussein's chances of being elected President of Israel.
Nor does Pierpont believe that ladies are about to buy lingerie online en masse. It always seemed to Pierpont that the prospectus showed a grave misunderstanding of the female psyche, because where shopping is concerned men and women have evolved along different paths.
If Pierpont wants to buy a box of cigars or a pair of cufflinks, he walks into a shop, buys them and walks out again, because he doesn't want to shop, he wants to buy. But to the female of the species, shopping is an experience regardless of whether anything is bought.
Mrs Pierpont likes to stroll around the arcades, browse the boutiques, chat with the shopgirls (all of whom know her well, especially around the perfume counters) and try on shoes and dresses by the dozen.
Even if she were as computer literate as Bill Gates, she would never swap the joy of shopping for the internet. Two left clicks on a computer mouse just wouldn't be the same. And she certainly tries on bras before buying, because one size definitely doesn't fit all.
Since expressing these sentiments in his earlier column, Pierpont has been conducting a survey to discover whether ladies are prepared to buy lingerie online.
Starting the survey scientifically at the logical base point, Pierpont began by asking each lady: "Do you wear underwear?" The response to date has been 17 icy glares, one slap in the face and two telephone numbers.
So Pierpont's lingerie survey has so far been inconclusive. However, from what he can glean of No Regrets' finances, your correspondent's theory seems to be confirmed.
No Regrets was launched by Alister Norwood, the Perth entrepreneur who rose to fame with his Jeans West chain. By 2001, when Pierpont wrote his previous column, No Regrets also boasted Domenic Martino (managing partner of Deloitte and former star of New Tel) as chairman On the surface, No Regrets now looks as though it has enjoyed mushroom growth. It operates 640 managed retail franchises, including several overseas. But the occasional numbers Pierpont has glimpsed don't look so rosy.
No Regrets began as an unlisted group (the prospectus was selling online franchises, not shares) but has spent much of the past two years trying to backlist onto the ASX through the shell of some moribund company.
One choice was Global Business Solutions, an IT company with net assets of just $41,000. Global announced in September 2001 that it was going to acquire No Regrets by issuing 140 million shares at 8¢.
The deal put a notional value of $11.2 million on No Regrets and would have given Alister two-thirds of Global. One point Pierpont noted about this deal was that No Regrets didn't seem to have much cash. Part of the deal was that Global would raise $4 million in working capital, much of which would be spent expanding the No Regrets chain.
Also, No Regrets actually borrowed money from Global during the negotiations. Global lent No Regrets $580,550 unsecured. Given that No Regrets was supposed to be the saviour of Global, Pierpont is puzzled that Global had to lend No Regrets half a bar which - from the state of Global's accounts - it could ill afford.
Then a few days before Christmas in 2001, Global announced the merger with No Regrets was off. That left Global stuck with a debt from No Regrets, which has still not been repaid. No Regrets turned the loan into a convertible note. The auditor's report to the 2002 Global accounts said the recoverability of the $580,550 depended on the successful listing of No Regrets through a company named Fashion Intimates Ltd.
Fashion Intimates is the former Biologic - a company that Pierpont always meant to make the subject of a column, but never got around to. Biologic (then under the chairmanship of former federal treasurer John Kerin) raised $5million in 1998 on a plan to convert urban wastes into fertiliser.
Like many another green float, it proved uneconomic. The shares have been suspended for nearly three years. By June 2001, Biologic had blown the five bars and its balance sheet was showing a deficiency of $270,000, putting it in even worse shape than Global.
Biologic planned a backlist with the pharmaceutical group Cottee and, in anticipation, even changed its name to Cottee Health Ltd. But the merger fell through and all Biologic was left with was the new name.
Then in February 2002, Cottee announced it would merge with No Regrets (the No Regrets-Global merger having fallen through about six weeks before). Cottee/Biologic changed its name again, this time to Fashion Intimates Ltd.
Fashion Intimates would issue 50 million shares at 5¢ to buy 80 per cent of No Regrets. That put a value of $3.1million on No Regrets, sharply down from the $11million for the Global merger, but as we're talking notional values here, the difference probably isn't too important. Again, Alister would emerge with two-thirds of the backlisted vehicle.
A Perth accountant named Kelvin Westaway wrote an independent expert's report for Fashion Intimates' shareholders, which gave a few details of No Regrets' recent performance.
According to the report, No Regrets suffered dreadful teething problems. The primary marketing consultants for the franchise sales had suffered internal difficulties, which resulted in their selling no franchises during 2000. That had a severe impact on projected cash flow and profitability during 2000 and 2001.
No Regrets also had to withdraw a prospectus, and it does not seem to have sorted out its problems until May 2001.
The December 2001 accounts of No Regrets showed it had a deficiency of nearly $1.2million. It was then hoping to convert several of its debts into equity, so that it would have positive net assets again.
More interesting to Pierpont was the profit-and-loss account, which showed No Regrets making a profit of $537,000 in 1999-2000, a loss of nearly $3 million in 2000-01 and another loss of $1.3million in the six months to December 2001. Total revenue for the last six months was $1,034,000.
Revenue had slid from $9million in 1999-2000 to barely $1million in the six months to December 2001.
No Regrets makes part of its money from selling underwear, but more from selling the online franchises. The Westaway report showed No Regrets was forecasting that revenue was going to turn around spectacularly, rising to $8million in 2002-03 and then to $33 million in 2004-05.
Maybe that will happen, but until Pierpont sees the audited numbers, he has to rate the No Regrets prediction as a prime example of the Hockey Stick School of Forecasting. In the three years to June 2001, No Regrets had sold a total of 637 franchises, yet it was forecasting a sudden uptick in franchise sales to 710 this financial year, then onwards and upwards to a splendid 1,502 in 2004-05.
They're going to need a lot of mouse-addicted maidens to achieve that number.
Again, Pierpont is a sceptic. If there are already 640 franchises around, the market must be getting a little crowded. Also, the Australian Taxation Office is playing rough with the franchisees.
As part of its jihad against tax-driven schemes, the ATO has issued tax assessments against the franchisees who claimed deductions in the 1997 and 1998 tax years.
Your correspondent would guess that this would make the franchises a bit harder to sell in future.
It's academic in one sense, because the Biologic/Cottee shareholders have already agreed to the No Regrets merger: a logical decision because Cottee's accounts were so doggy that the shareholders had little to lose.
As he browsed through the accounts, Pierpont noticed an anomaly. The June 2002 accounts of Global showed that it was holding a convertible note of No Regrets with a value of $580,550. However, the Westaway report on No Regrets said it had issued convertible notes to Global with a value of more than $2.2million.
That seemed a large difference. Puzzled, Pierpont rang John Palermo, the company secretary of Global and former company secretary of Cottee Health. John said he thought the right number was $580,550. He did not know why there were different figures on the size of Global's convertible note holding in No Regrets.
Global was trying to reconcile the difference and hoped to do so soon. And until No Regrets works out how much it owes Global, Pierpont assumes Biologic/Cottee/No Regrets/Fashion Intimates (take your pick) will stay suspended.
Asked how Global had raised the $580,550 in the first place, John said Global had made a convertible note issue of its own which raised $1,666,000, and had lent $580,550 of the money to No Regrets. That raises another discrepancy.
The Australian Securities and Investments Commission took action in the Federal Court last year against Marshall Bell Hawkins Ltd, a financial adviser, which had been selling Global convertible notes to small investors.
On December 6 in the Federal Court, ASIC obtained an order from Mr Justice Ron Merkel that a receiver and manager be appointed to two companies named Private Equity Asset Management Pty Ltd and Spinofrere Pty Ltd, which were associated with Marshall Bell Hawkins and which had been dealing in the convertible notes.
In his judgement, Mr Justice Merkel said: "According to Bell, his clients have purchased $2,867,000 in convertible notes in Global, but Global's annual report only acknowledges the issuing of notes in the sum of $1,666,000.
While Bell has purported to give an explanation for the discrepancy, and has suggested it is in the process of being rectified, the evidence does not offer any satisfactory explanation as to how this problem has arisen, nor does it offer any assurance that the investments made will be acknowledged by Global.
"A similar problem appears to exist in respect of the Cottee convertible notes. Cottee's records disclose the issue of notes having a value of $310,000 less than Bell claims to have invested."
Marshall Bell Hawkins' lawyer has told Pierpont that his client denies the allegation and will be fighting the order. But for the moment, we are confronted with the prospect that Marshall Bell Hawkins and its associates may have sold their clients more Global and Cottee convertible notes than Global or Cottee had issued.
The clients, understandably, are deeply annoyed.
Incidentally, the judge said Global and Cottee had been prepared to pay Marshall Bell Hawkins commissions and marketing fees of up to 18 per cent.
"Those matters alone suggest the investments were in the very high-risk category," he said - and he put the word "very" in italics.
Further, we don't know whether No Regrets owes Global $580,550 or $2.2 million.
Any maidens whose figures were in as bad a shape as these companies would need more than lingerie to rescue them - they'd need major plastic surgery.
Contact Pierpont on www.pierpont.com.au
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