Business and Commerce News

Dive equipment wholesaler Aquanaut Pty Limited has been ordered to pay $60,000 plus $5,000 costs in the Auckland High Court following an admission that it contravened the Commerce Act by trying to prevent a Canterbury dive shop from offering discounts on Aquanaut dive equipment.

Commission Chair Paula Rebstock said Aquanaut’s behaviour was a clear contravention of the provisions of the Commerce Act that prohibit anti-competitive behaviour.

“For a supplier to prohibit a retailer from discounting below a particular price in this way reduces competition in a most fundamental way – by limiting customers’ ability to obtain the best possible prices,” Ms Rebstock said.

The Commission laid charges against Aquanaut for alleged resale price maintenance in August 2002 following an investigation into the company.

Aquanaut admitted that over the period between November 1999 and July 2001, it induced or attempted to induce the Kaiapoi Dive Shop to refrain from selling any Aquanaut products below the supplier’s recommended retail price. Aquanaut agreed to having judgment entered against it and the Court accepted the suggested penalty of $60,000 as appropriate.

“The Commission acknowledges Aquanaut’s actions in assisting the Commission in achieving an early resolution of the court proceedings. However, its co-operation does not lessen the seriousness of the breach,” Ms Rebstock said.

“Aquanaut attempted to inhibit competition between its distributors by preventing its distributors from discounting Aquanaut products to the detriment of consumers.”

“Moreover, the conduct was undertaken by senior management, who should have been well aware that their conduct was likely to contravene the Commerce Act,” Ms Rebstock said.

In his judgment, Justice Williams commented that it was a determined effort by Aquanaut to ensure compliance with its resale price maintenance regime.

“In many instances breaches of the prohibition against resale price maintenance are difficult to detect, given they normally occur between close business associates. That increases the need for deterrence to be a factor in the penalty imposed for proscribed behaviour.”

In May 2004, there were more visitors from countries in Asia (up 16,400 or 82 percent), Australia (up 9,500 or 23 percent) and the United States (up 1,200 or 12 percent) than in May 2003. Visitor arrivals from countries in Asia dropped from 37,700 in May 2002 to 20,000 in May 2003, as a response to the SARS virus, and almost returned to the 2002 level in May 2004 (36,400).

The number of stay days for all visitor arrivals in May 2004 was up 8 percent on May 2003, from 2.22 million days to 2.40 million days. The average length of stay was 18 days in May 2004, compared with 22 days in May 2003.

In the year ended May 2004, there were 2.227 million visitor arrivals, up 173,900 or 8 percent on the May 2003 year. There were more visitors from Australia (up 117,600), the United Kingdom (up 29,800), Korea (up 7,200), the United States (up 5,900) and Malaysia (up 5,000), but fewer visitors from Japan (down 8,600), Taiwan (down 5,000) and China (down 2,400), compared with the year ended May 2003.

Seasonally adjusted monthly visitor arrivals fell 1 percent in May 2004, following a rise of 4 percent in April 2004.

New Zealand residents departed on 136,800 short-term overseas trips in May 2004, an increase of 28,500 (26 percent) on May 2003. There were more trips to Australia (up 7,400 or 13 percent), Fiji (up 3,100 or 53 percent) and the United Kingdom (up 2,100 or 24 percent).

In the year ended May 2004, New Zealand resident short-term departures numbered 1.501 million, up 16 percent on the year ended May 2003. This total is a significant milestone for New Zealand resident departures, as it surpasses the 1.5 million mark for the first time.

Permanent and long-term (PLT) departures exceeded arrivals by 600 in May 2004, compared with an excess of 1,100 PLT arrivals over departures in May 2003. This net PLT outflow can be attributed to 1,000 fewer PLT arrivals and 700 more PLT departures. The main reason for the drop in PLT arrivals was a fall in non-New Zealand citizen arrivals (down 700). China accounted for over half of this drop, with 400 fewer arrivals.

The seasonally adjusted series recorded a net PLT inflow of 1,400 in May 2004, up from 1,000 in April 2004.

In the year ended May 2004, there was a net PLT migration gain of 24,000. This is 44 percent lower than the net inflow of 42,500 people in the previous May year. This resulted from 85,200 PLT arrivals (down 12,800), and 61,200 PLT departures (up 5,700) in the May 2004 year. Compared with the May 2003 year, there was no change in New Zealand citizen arrivals, whereas New Zealand citizen departures increased by 1,700. In contrast, non-New Zealand citizen arrivals were down 12,800 and non-New Zealand citizen departures were up 4,000.

In the year ended May 2004, there was a net PLT inflow of 9,700 from the United Kingdom, up 20 percent on the May 2003 year figure (8,000). There was also a net inflow from China of 6,100, down from a net inflow of 15,200 in the May 2003 year. Overall, net PLT inflow from Asia has reduced considerably, from 31,800 in the May 2003 year, to 15,400 in the May 2004 year. Conversely, there was a net outflow to Australia of 11,900 in the May 2004 year.

The Casino Control Authority gave licencing approval to SKYCITY today, which follows the Commerce Commission’s and the Overseas Investment Commission’s approvals for the purchase of the 40.5% minority shareholding in Christchurch Casino.

SKYCITY Entertainment Group Managing Director, Evan Davies, said that SKYCITY would, now that all necessary approvals had been granted, complete the acquisition which was announced earlier this year.

“SKYCITY is looking forward to being involved with the Christchurch Casino operation, and we anticipate that the acquisition will be completed within the next 2-3 weeks.”

ABC Motor Group today pleaded guilty in the Auckland District Court to ten charges of breaching the Fair Trading Act. Judge Kiernan fined the company $31,000 plus $2,800 costs and fees, stating the offending involved a “particularly brazen breach with all the appearance of being deliberate and in full knowledge of its legal obligations”.

The charges, laid by the Commerce Commission, related to full-page and double-page advertisements placed by ABC Motor Group in The Motor Buyers’ Guide between June and August 2003. ABC Motor Group ran a banner headline that advertised $3,000 cash back and ‘half a beast’ (ie half a cow for the freezer) along with pictures of vehicles. The offer, however, did not apply to these vehicles.

In nine of the 10 advertisements, the fact that the offer did not apply to the pictured vehicles was referred to in the small print at the foot of the advertisements. In the tenth advertisement, the only disclosure was that ‘special conditions apply’.

Chair Paula Rebstock said that given ABC Motor Group had already been convicted under the Act for similar behaviour, the Commission was disappointed the company had re-offended.

“Businesses that re-offend can expect strong enforcement action from the Commission and should also bear in mind that the maximum penalties for breaching the Fair Trading Act were doubled last year to $200,000 for companies and $30,000 for individuals,” she said.

“Small print should not be used to materially alter the impression created in the main body of an advertisement.”

Judge Kiernan commented that the defendant had planned to attract customers with untrue statements and it was apparent there must have been premeditation in the drafting of the advertisements because of the fine print disclosure in all but one of the advertisements. The defendant “clearly knew its legal obligations”.

“By its nature it was aimed at attracting customers,” Judge Kiernan commented. It was therefore the “very kind of breach that goes to the purpose of the legislation – to protect consumers and rival traders”.

Background

In May 2001, the Auckland District Court fined ABC Motor Group Limited, trading as ABC Direct Imports Motor Group LMVD, $13,500 for misleading advertising, in breach of the Fair Trading Act.

The company used newspaper advertising to promote an offer of $6,000 off car prices or a $6,000 minimum trade-in. The advertisements featured photographs, specifications and prices of cars. Small print stated that the special offers did not apply to the cars featured in the advertisements.

The recent announcements that the company’s three major shareholders, the New Plymouth District Council, the Taranaki Electricity Trust, and the Powerco Wanganui Trust, are considering selling their Powerco shares have triggered the financial statement revision.

Under tax law, a significant change in shareholder continuity will lead to the Company potentially losing the benefit of its accumulated income tax losses. Powerco Annual Reports since 2000 have recorded the benefit of these available losses under current GAAP, noting that this future income taxation benefit asset is reliant on shareholder continuity.

Powerco Chairman Barry Upson said the potential sale meant the Company was now compelled to change its ownership continuity assumption, and this in turn has led to the restatement of the company’s financial results. He said the Company had sought extensive advice to ensure its actions were consistent with appropriate accounting standards. A change in shareholder continuity on carried forward tax losses is well understood by the market.

Mr Upson said the Powerco annual result announcement was made in April this year, before the major shareholders had informed the market of their intention to seek indicative bids for their shareholding.

“The result we announced in April complied with accounting standards at the time, but because shareholder continuity can no longer be assumed, we must now revise our financial statements since these are about to be released to all shareholders,” Mr Upson said.

“The potential change in shareholder continuity no longer makes the asset valuation of future income taxation benefits “virtually certain” as required by accounting standards. The write-down of this asset by $27.6 million in the balance sheet impacts the reported profit of $55.1 million announced in April 2004, down to a revised profit of $27.6 million”

Powerco has received an unqualified opinion from the Company’s auditor for the revised financial statements, which are included in the annual report shortly to be released.

Mr Upson noted that there would be no immediate cashflow or operational impact on the Company. If Powerco does lose the future income tax benefit asset, this will result in the Company becoming a cash taxpayer earlier than expected. This will have no financial impact for taxpaying shareholders, as once Powerco eventually becomes tax paying, they will receive imputation credits, which can be attached to dividends.

There will be no impact on the dividend paid to shareholders today the 18th June, said Mr Upson.

This release is consistent with the continuous disclosure obligations set by the NZX for listed issuers.

Powerco is New Zealand’s largest gas distribution business and second-largest electricity distributor, based in New Plymouth.

Key facts:

If Powerco’s major shareholder (or all three major shareholders) sell all or a significant part of their shares, under tax law Powerco will lose the accumulated tax losses which give rise to the future income tax benefit of approximately $27.6 million.

Under Generally Accepted Accounting Practice (GAAP), unless Powerco and its auditors are 95 certain (which is the generally accepted understanding of what “virtually certain” means) that its ownership will not change, it must revise its financial statements to reflect the loss of this future income tax benefit, notwithstanding the fact that Powerco’s three major shareholder may not sell their shares.

As Powerco cannot be 95 certain that its ownership will not change, it must revise its financial statements to reflect the loss of this future income tax benefit in order to present a true and fair view of the financial position of the company at the time of release of the annual report to all shareholders.

If Powerco’s three major shareholders do not sell their shares, Powerco will not lose the future income tax benefit asset and the accounting treatment will be reviewed by the Board when preparing the next set of financial statements.

The change has no effect on Powerco’s previously reported EBITDA, nor will it affect cash earnings per share or dividends per share.

If Powerco does lose the future income tax benefit asset, this will result in the company becoming a cash taxpayer earlier than expected. This will have no financial impact for taxpaying shareholders, as once Powerco becomes tax-paying, they will receive imputation credits which can be attached to dividends.

Powerco’s financial statements (and the results in announced in April, prior to the major shareholder announcements) gave a true and fair view of the financial position and complied with GAAP, and received sign-off by the auditor.

The impact of a change in shareholder continuity on carried forward tax losses is well understood (e.g. Tranzrail has recently made statements on this issue), and has been noted in Powerco’s Annual Reports and other company disclosed documents including investment statements and prospectus documents during recent periods.

Questions and answers about Powerco’s revised financial statements

Q. Will Powerco have qualified accounts from the Auditor?

A. The revision being announced today means that Powerco has received an unqualified opinion from the Company’s auditor for Powerco’s financial statements, which are included in the annual report.

Q. What is the reason for the revision to the accounts?

A. Powerco’s tax depreciation is significantly higher than the accounting depreciation expensed in the Company’s accounts. The higher taxation depreciation has resulted in the Company recording losses for taxation purposes since the Company commenced business on 1st September 2000. These losses are a future taxation benefit and can be used to offset against future taxation profits subject to the shareholding in the Company not changing by more than 51 between the time the loss was incurred and the time the loss is to be utilised.

Accounting Standards provide for the treatment of future income tax benefits as an asset if the Company is “virtually certain” that they will be realisable. Virtual certainty requires the Company and its auditor to form a view that it is more than 95 certain (1) that it will record taxable profits in the future and (2) that there will be a 49 continuity of shareholding.

Powerco has valued these losses at the current rate of company income tax as a future income tax asset in its Statement of Financial Position. The announcement by the three major shareholders, holding a combined 53.64 shareholding in the Company, has changed the view of the Company such that it can no longer be virtually certain there will not be a 51 change in the shareholding base.

This change in view has required the Company to write-down this asset amounting to $27.6m against the 2004 earnings at the time of providing the annual report to the shareholders. Because Powerco and its auditors cannot be 95 certain that its ownership will not change, GAAP requires Powerco to revise its 2003/04 results (announced in April 2004) to reflect the loss of future income tax benefit at the time of providing the annual report to the shareholders.

If Powerco’s major shareholders do not sell their shares, Powerco will not lose the future income tax benefit asset and the accounting treatment will be reviewed by the Board when preparing the next set of financial statements.

Q. What does this announcement mean for Powerco?

A. The outcome depends upon whether the major shareholders sell their shares or not. If they do not sell their shares, Powerco will not lose the income tax losses and associated future income tax benefit asset and the accounting treatment will be reviewed by the Board when preparing the next set of financial statements.

If they do sell their shares, Powerco will lose the future income tax benefit asset valued at $27.6 million. The loss of the future income tax benefit asset will not have a current cash impact on the Company. The revised financial statements report EBITDA as unchanged at $190.0 million with NPAT down from the $55.1 million, announced in April 2004, to $27.6 million.

Q. What does the announcement mean for shareholders?

A. There will be no immediate dividend impact for shareholders. In the future, when Powerco eventually becomes a tax-payer, tax paying shareholders will receive imputation credits, attached to dividends, which will offset any possible reduction in dividend at that time.

Q. Will shareholders have to repay dividends?

A. Dividend repayments will not be required.

Q. What effect will this announcement have on the cashflow of the company?

A. There is no immediate impact on the cash flow of the Company, other than the fact that the Company will eventually become a “cash tax-paying” entity earlier than anticipated.

Q. What effect will this announcement have on the operations of the company?

A. There is no impact on the company from an operational perspective. Powerco’s strategic and operational approach to business will continue as planned.

Adolphs is a full line-vending operator, whose service offering includes drink, snack and coffee and currently employs 35 staff. The purchase includes equipment, inventory, cash float, benefit of business contracts, benefit of asset leases, benefit of supplier warranty, business records, intellectual property and goodwill.

VTL Group entered the due diligence process earlier this year and has completed a rigorous business review, including the assessment of the current vending machines for retro-fitting with VTL Group’s leading-edge proprietary technology.

This acquisition is a strong strategic fit with VTL Group’s international vending franchise system 24seven? VTL Group intends to recruit 24seven franchisees, as the technology retrofitting is rolled-out. The 24seven brand is also represented in California - USA as well as Australia and New Zealand.

USA Chief Operating Officer Peter Holt said “We had earlier identified Texas as the next state for expansion in USA, following California, due to the size, general economic growth and demographics. We then focused on identifying quality vending companies that were in line with our strategic plan and complementary to our 24seven business, that also offered strong site placements and the right match of vending machines.”

“Acquisition is a key element of the USA growth strategy.” says Holt. “It enables us to overlay our proven franchise business model, provides greater leverage into new markets and significantly reduces the franchisee recruitment timeline - providing stronger cash-flow. The other significant factor is the ability to offer potential franchisees cash flow from day one, which makes our 24seven franchises a very attractive proposition.”

VTL Group Limited Chairman, Gary Stevens said, “The Board is very pleased with the acquisition and the continued growth opportunities that it provides for VTL Group. This provides VTL Group with an established market presence in Texas with room for further expansion. It will also contribute positively to earnings as we overlay our franchise model, 24seven. This is a good fit with VTL Group’s strategy of building a global vending business.”

Stevens goes on to say, “The VTL Group has a very strong international management team, lead by Joint Managing Directors John Hotchin and Mervyn Doolan, who have recently relocated to Europe to spearhead the growth for both 24seven and Shop24?rands in the European and USA markets.

The successful outcome of this purchase now provides the blueprint for future acquisitions. It also strengthens our position in the USA market as well as providing a broader platform to continue expanding the 24seven brand internationally.”

VTL Group had applied to NZX for a waiver from the requirement to disclose purchase price under Listing Rule 10.7.4(b). The Company believed that disclosing the purchase price would potentially and unreasonably prejudice its negotiating position in relation to other acquisitions under consideration. NZX declined to grant the waiver.

New Zealand Trade and Enterprise chief executive Tim Gibson and UK Trade and Investment Inward Investment Group chief executive William Pedder signed a memorandum of understanding between the two agencies in London yesterday.

NZTE group general manager capability development Jack Stephens said that access to UKTI’s inward investment and trade services would be invaluable for New Zealand companies serious about the UK market.

UKTI Inward Investment Promotion Manager Sarah McCourtie said UKTI recognises that New Zealand companies investing in the UK contribute to growth in the economy.

“New Zealand has a wealth of innovative, forward thinking technology companies and the UK is an ideal location for those companies to grow and meet their potential. I can only see this as a win-win situation for both New Zealand and the UK,” she said.

NZTE-London estimates that the UK subsidiaries of New Zealand ICT companies already employ more than 300 people in UK’s technology industry.

Mr Stephens said that while UKTI has assisted New Zealand companies in the past, the memorandum of understanding allowed both agencies to actively promote the benefits of using the services of the other organisation to New Zealand companies.

“We recently conducted a survey of 32 New Zealand companies already established in the UK and were astonished to find that none of them had approached any of the UK’s inward investment agencies.

“New Zealanders often have a DIY approach to the UK market and then are frustrated with how long it takes to get established.

“Even something as seemingly straight forward as setting up a bank account can take a long time and that is the kind of practical help UKTI can provide.”

The range of services New Zealand companies can access via UKTI include assistance with visas, finding premises, accommodation or even schools, access to UKTI’s trade promotion services, linking New Zealand companies with the network of UK regional economic development agencies and industry organisations such as Chambers of Commerce, trade associations financial services and networking organisations.

One of the key market entry strategies that UKTI will be supporting as a result of the memorandum is NZTE’s recently established UK Beachhead Programme for New Zealand high-tech companies in the UK.

The beachhead initiative is designed to help qualifying New Zealand high-tech companies set up a local office in the UK and build up their sales capacity and market opportunities in an environment that minimises financial, legal and real estate risks.

It provides companies with a phased approach to market entry and allows them to build confidence in the market. The beachhead currently has nine New Zealand companies participating and has capacity for more.

“The UK can be a great market for New Zealand companies wanting to internationalise but it is not an easy market. What we are saying to New Zealand companies is you don’t need to go it alone. We’re here to help,” Mr Stephens said.

Thirteen of 15 industries recorded increases in seasonally adjusted sales in the March 2004 quarter, compared with the December 2003 quarter. The two largest increases were for meat and dairy product manufacturing, up $155 million (3.8 percent) and wood product manufacturing, up $85 million (7.9 percent). Transport equipment manufacturing, down $77 million (12.1 percent) and petroleum and industrial chemical manufacturing, down $23 million (3.0 percent), were the only industries to record decreases in sales.

The trend in total manufacturing sales increased 2.5 percent in the March 2004 quarter, compared with the December 2003 quarter. This follows increases of 2.2 percent in the December 2003 quarter and 1.1 percent in the September 2003 quarter.

The value of finished goods stocks as at 31 March 2004 was 0.3 percent higher than at same time last year.