Bruce Whitfield
Specialised Outsourcing could lose its biggest client and have to pay more than half its cash to Umgeni Water, which is claiming there were gross irregularities at the time the original contract was awarded.
An internal investigation at Umgeni Water has found evidence of bribery in the award- ing of the contract in 1997 to Specialised Outsourcing, which was under the control of former CEO Dave King at the time. King now runs Financial Insourcing Specialists in opposition to Specialised Outsourcing, which may have to pay Umgeni Water up to R82-million.
Umgeni terminated the Specialised Outsourcing contract last year and the company could be forced to repay all the fees collected from Umgeni since the start of the contract. Lawyers on both sides will negotiate the extent of Specialised Outsourcing’s liability once the investigation is complete.
But the King camp says it has no concerns about what the investigation may turn up.
“If there was a clear case of corruption, it would have been cleared up long before now,” says Financial Insourcing director Greg Morris, who left Outsourcing around the same time as King. Morris worked for Umgeni about the time the contract was negotiated.
“Umgeni has very clear procedures on how contracts are awarded. These things are not handled lightly. The contract was facilitated by experts, individuals were not involved. It was approved by the board.”
Outsourcing’s current CEO, Dave McLean, doesn’t think his company’s liability will be as high as R82-million. A payment of that size would wipe out more than half of its R130-million in cash. “That’s the worst-possible case scenario. That would be on the basis that we did not add value over the past three years, which I don’t think is the likelihood whatsoever. You’ve got to look at the award of the contract versus what was delivered under the contract as two separate legal issues.”
Umgeni Water CEO Cromet Molepo says their investigation has uncovered proof that there were serious irregularities in the awarding of the contract. “There were huge questions … certain parties were involved on both sides in concluding that contract, which was not in line with acceptable corporate governance.”
Says Morris: “There is a lot of noise around this. Umgeni have been fed up with the level of service they have received from Outsourcing since June. My assumption would be that if you are dissatisfied with service levels you do what you can to get out of the contract.”
Umgeni and Outsourcing agreed late last year that the contract should be terminated, but the company has continued to provide its services to the parastatal on an interim basis since then. The bill for that period (about R4-million) is unpaid, as is an invoice for more than R30-million sent to Umgeni last year. There is no contract between the companies. A joint working committee that was formed to draw up the document has not yet done so.
Despite McLean’s best efforts to keep Outsourcing’s biggest client happy, the company is not guaranteed of winning the contract when it is again put out to tender.
Last year King said he would bid for the contract and Morris says his company would be interested in providing its expertise to Umgeni, as long as it was on a treasury outsourcing basis. However, the parastatal may be more in favour of a company with stronger empowerment credentials to take care of those functions in future.
David Shapiro, MD of SG Securities, says previous directors will be called on to answer the allegations from the findings of the Umgeni investigation. “There might be recourse against the previous directors I still think the company is liable for those inducements. So I think it’s still going to put pressure on Specialised Outsourcing.”
But Morris says he has not been contacted by anyone at Umgeni as part of an investigation into how the contract was awarded and stresses the company has no need to be concerned by what might emerge from it.
Details of the alleged corruption will become public only once the parastatal’s investigation is complete, but Molepo says he is certain it was “not a normal business transaction”.
“I can safely say that when I brought it to the attention of the chief executive of Specialised Outsourcing, he agreed with me. This is why that statement clearly stated that we had an agreement, in terms of having that contract cancelled.”
A number of financial institutions seeking recourse for losses suffered by them when the share price plummeted from about R80 to its current levels of about R2 are still waiting for a legal opinion from one of South Africa’s foremost commercial lawyers, Michael Katz, on whether they have any recourse against King and some former directors.
@Be wary of groups that post results at the last minute
Bruce Whitfield
Investors have been warned by Moneyweb in the past to be wary of JSE-listed companies that leave their financial reporting to the last minute.
While there may be some with perfectly valid reasons for not reporting their figures early, experience has shown that more often than not those waiting till the last minute are doing so in the hope of getting a piece of late-breaking news to perk up an otherwise shabby performance.
There are always exceptions. But the JSE’s rules that listed companies inform shareholders of their results within three months of a reporting period is a useful tool for investors considering whether they should put their money into particular stocks.
The following companies, reporting results for the period ending December, scraped in with their results last Friday.
Perhaps one of the most surprising late reporters was Primedia, which released interim results for the six months to end-December. The company is looking to dispose of the parts of its business it says do not fit into its future strategy. Despite a 12% increase in group turnover, group earnings before interest, tax, depreciation and amortisation fell by 2% to R137,7-million.
Venter Leisure and Commercial Trailers was a late reporter with some good news. Its results reflected a return to profitability after a disastrous 1999. Turnover was up almost 70% and the company reported a profit of R300 000 as opposed to the R10-million loss in 1999. That translates into a profit of 0,3c a share, as opposed to a 54c a share loss. It’s long-term borrowings more than doubled, but the group said it is continuing to manage interest-bearing debt.
Platinum mining company Messina Limited changed its year-end from June to December after Southern Era International acquired 70% of its shares. Last Friday it reported figures for 18 months to the end of December 2000. Most of its R9-million income was from interest generated from the firm’s cash reserves.
Heritage Collection disappointed shareholders by showing operating profit of just less than R17-million. It blamed the fact that it had to write off R28-million in bad debts for a period in which inadequate computer systems were in place.
The fortunes of Daewoo Electronics were determined by its ailing South Korean-based parent company. The local operation recorded a headline loss of R60-million. That translates into 118,4c a share. The biggest issue facing the electronic goods importer was the difficulty it had getting sufficient imports from South Korea. Increased competition tightened margins and the company also lost a battle with South Africa’s customs authorities on how satellite receivers should be classified and taxed. The poor exchange rate also weighed on the firm, which had to accommodate an effective 24% rise in dollar costs.
Fertiliser and explosives holding company Omnia Holdings reported a significant drop in headline earnings a share from 129,6c to 28,8c. Although significantly lower than the 62c a share dividend declared in 1999, shareholders still received a dividend of 22c. Despite a 28% rise in revenues, a sharp rise in the price of ammonia drove costs up, narrowing its margins.
The slowdown in the global economy has affected Sotta Securitisation International. Its figures were four months overdue when it published its results on Friday. Revenues halved and its headline loss per share nearly tripled to 17,5c. The company, which raises venture capital and development capital, previously disclosed it had uncovered irregularities in the previous year’s reporting. It said in a statement that management was confident full provision had been made for a large number of non-performing loans.
Other companies that made it in the nick of time include Valuecom, Securedata and Viking.