Financial Reviews NOT RECOMMENDED

NZ Truth, Issue 1237, 15 August 1929, Page 22

Financial Reviews NOT RECOMMENDED

Prospective Venture of Fur Farms, Ltd. UNATTRACTIVE SCHEME

: (By "Fiat Lux.") -„■.. tun rriruuj i itrrrrrMiiMiitiiiiiiiiiiiiiioiiniiiiii ii 1 1 1 ttritiiiiiiiiiiitiiiiiiitiiiiiiiiii ii i M ititttitiiiiitiiiiiit iiiiiiiiiiiiiiiiiiiimiiiiiididiiiiiii^ 1 v Quite apart from any merit which may be attached | J to Fur Farms, Ltd., as a prospective fur-raising venture, § 1 the money-raising prospects are such, m this writer's j | opinion, as to render the undertaking- one to be avoid- | | ed by investors. . 1

HPHE proposition under review is vir--1 tually an increase of capital of

The Industrial Habit Breeders' Cooperative Association, Ltd., which commenced business m Auckland m October, 1928, but which recently changed its name to Fur Farms Ltd. According to the prospectus now under review; the nominal capital of the original company was £201 — (two hundred and one pounds sterling). What the extra one pound was. intended for this critic does not pretend to know, but it cannot be gainsaid that £201 is a curiously small amount upon which to. 'start a fur farm.

The capital was divided , into 4020 one shilling shares and the present prospectus states that 2454 of these shares have been allotted, a further 1485 being reserved until June 30, 1930, m favor of one Edward Fitzgerald, who has the right until that date; of taking up at par not more. than this number of ordinary shares. ■

It also appears that this same gentleman has some agreement relating to . the issue of some £ 500 worth of fully or partly paid-up preference shares m consideration of services rendered or to be' rendered. •• ; > It thus appears that of the 4020 1/shares only 77 remain available for issue and there is "no mention of any intention to issue these. The capital, of the new or re-named company is £15,201, divided into 15,000 £1 cumulative participating 10 per cent, preference shares and the original 4020 1/- shares. t The present ;issue is restricted to £30,000 of these so-called cumulative participating 10 per cent, preferreds, out of which has to be taken 'the 500 reserved for Mr. Fitzgerald, thus leaving £9500 for the ■ .

New. Zealand publi

'■ This critic believes that this amount Svill prove

to be a very op- j timifctic estimate of

the support the venture will receive,

The balance of the new shares, £5000, "are to be held m reserve for issue to potential subscribers m Great Britain or at the discretion of the directors." ; Let us look into the conditions attaching to these shares. ." Briefly, the prospectus sets out that the holders of preference shares are entitled to: — (a) A cumulative preferential dividend of 10 per cent, per annuni on the amount paid up thereon and, further, the whole preference issue is to participate m the. remaining profits available for dividend to the extent of one-quarter : of the total sum then available. (b) Priority over the ordinary shares ■m the distribution of the assets on a windihg-up. (c) On a winding up to share m the distribution of surplus assets bn ; the same basis and m the same ratio, as for. the distribution of profits. • The position of. the ordinary shares is that the holders are entitled to three r quarters of the net profits available for dividends after payment of the cumulative .10 per cent, per annum payable on the preference shares. What is the real and practical financial backing behind these preference shares? According. to the audited balancesheet of April 30, 192?, the paidup capital then amounted, to £120/7/-; and accumuated profits, based upon a valuation of stock, totalled £1120/6/3. The latter amount must, however, be disregarded as preference shareholders have no rights over this sum, the conditions covering the point being as follows:—- ' "SUch participation (m one quai-ter of the net profits available for dividend) shall, however,. be proportionate during the current financial year of thY company only to the period unexpired at the time of allotment.' The position boils down to this: The ordinary shareholders put up a maximum sum of £201 (when they take up and. pay for all the ordinary shares) and if the venture succeeds with the added £9500 which the public is asked to subscribe, then the public will be allowed to receive 10 per cent and onequarter of the profits estimated to produce £1500. ■■■.-...■.■•• This will mean a grand total return of 25 per cent, on the investment. The ordinaries would divide for the same period on the basis set out, no less that £4500 for the year, equal to a return of 2238 per cent. If these results can be achieved then, m the opinion of this critic, the Rothschilds and the Rockefellers combined would soon be minor lights m the world of finance. If the promoters' ideas of profits happen to be on the wrong side of the ledger and losses appear instead of these thousands per cent, of profit,, what of the public that has supplied the money, to give. the venture a start? Where is the 10 per cent, cumulative participating dividend coming frorii? It would appear as though there would be no dividend. i To give another concrete example of the provisions of this proposition which the promoters are backing with £200 of their own money against £9500 of public money, the following extracts from the Articles of Association will be read with interest:— (a) No person shall be eligible , for the office of director unless he holds a minimum of 40 fully-paid ; ordinary shares m the company; , (b) Any person holding 400 or

Share Conditions

more fully paid-up ordinary shares shall be entitled to hold the office of director; (c) Payment of directors' fees shall be provided m such sum as may be fixed from time ,to time by a general meeting; (d) The directors may, from time to time, appoint one or more of their body or other person to. be a managing- director or directors either for a fixed term or otherwise, and may .fix his or their remuneration either by way of salary or commission or both by giving a right to participate m the profits of the company or by a combination of two or more of these Methods."

As the prospectus sets out. in such detail the provisions of the articles relating to directors and ordinary shares is it not a fair assumption that no provision exists for representation of the preference shareholders c on the board?

If this assumption should be , correct, then we fin.d, that any person holding £2 worth of ordinary 1/- shares is eligible for the office of director. Also we find that any person holding £20 worth ipso facto is entitled to be a director, but what of the preference shareholder with £1000 m the venture? Apparently, unless he can induce a present holder of these potential 2238 per cent, dividend-bearing shares to part with £ 2 worth he has to stay out m the cold and watch the other fellow handle his money. Assuming money to be worth 10 per cent., the market value of £2 worth of ordinary shares would be just a trifle under- £448. ,

Now for a few pointed questions on what are termed m the prospectus "Draft accounts for 7 months' trading to April 30, 1929." The accounts

""""" published include a profit and loss account which shows a net profit for the seven months of (£ll2O odd and also a balance-sheet.

; The following auditor's certificate is printed after the two statements:— "I certify . . . that the above statement is drawn up from, and is m. accordance with, the books and records of the company. Stock is shown as certified to by Mr. iL.. R. Heywpod, values being stated at conservative selling values." . This certificate is followed again by three notes, but whether this emanated from the auditor or carried his O.K. is not clear. ■ . The only point arising out of ihe auditor's certificate is whether such actually relates to the two , statements or only to the balance-sheet as he uses the word "statement" m the singular and not m the plural. ■ . • There are many points m the statements themselves and m the three notes which, frankly, are very puzzling to this critic. For instance, Note 1 states: "Seven months' sales of stud stock made by the company reach the satisfactory total of £2400." . . "Fiat Lux" has searched the profit and loss account m vain for some entry of these sales, but the only item which might be related reads: "By amount paid to company by trustees of bond issue, being proportion of bonds to which the company is entitled under deed — £862/19/2." . Note 2 reads: "In arriving at the stock valuation all young rabbits ' included were already sold and were valued on the actual sales basis," Does this moan that the young stock was valued at the prici? it has to be delivered for m the future? If so, what provision, if any, has been made for the costs of upkeep until delivery, including proportion of overhead? If stud stock purchased cost £907, has it been taken into account and valued at "conservative selling values" as the audit certificate states? If so, why? It is a well-known accounting rule that stock on hand should be valued "at cost or present market cost price whichever is the lower." Note 3 states: "The bond capital carries no interest and is liquidated by the supply of rabbits. This liability should disappear within six months." If the' profit on all young stock has already been taken into account — and it is a fair inference from all the information .m the prospectus — do the next' period's accounts have to stand all the running expenses and overhead necessary to bring this stock up to delivery standard? %►"* Fur farming-may be a very profitable undertaking m which to use public capital, but this critic would much rather remain an interested onlooker than become a disappointed holder of these 10 per cent, cumulative preference shares which have the enormous backing of £200 worth of ordinary capital. , '...-••