3rd quarter reort, page-7

re: pierponts view on etc Sorry for posting something not so positive but many people do read 'Pierpont' & respect his tongue in cheek way of saying things - it was out yesterday on Shaw website...

Take the case of Entertainment Media & Telecoms Corp, or ETC if you want its ASX code.

If any reader out there is short of ideas on wallpapering his house, Pierpont strongly recommends buying stock in ETC.

At last count, this company had 1.1 billion shares on issue. Best of all, the shares are only 0.5c each, so if you can persuade the share register to issue them in 100-share lots, you should be able to wallpaper the entire house for about $500. That would be a great bargain for all the interior decorators out there, but whether it's a bargain on the sharemarket is a very open question as far as Pierpont is concerned.

ETC shares have been falling at a regular rate from a screaming peak of 2.7c last November. When it comes to chart analysis, Pierpont is well into the Neanderthal class, but, judging by their glide angle, if the shares continue their present rate of descent, they could go negative in a few weeks. So if you hang about until July, perhaps some desperate shareholder will pay you to take them off her hands.

Even then, Pierpont is by no means sure they'd be any great bargain, because the track form of ETC is dreadful. The company has racked up a net $7 million in losses over the past four years, cash flow has been negative for five years and net asset backing is hypothetical.

ETC provides in-room digital entertainment for hotels and motels. Being an old-fashioned soul, Pierpont has only ever used his hotel rooms for sleeping and brushing his teeth, neither of which occupations he ever found frightfully entertaining. Nor is he sure how he would go about fulfilling either function digitally.


However, some motel dwellers apparently can't sleep without watching some mind-numbing Hollywood movie. These used to be transmitted to the rooms by video tape, which meant there weren't many movies and they ran only at set times. The modern trend is to transmit them digitally, which means the films can be stored on the motel's computer and transmitted on demand.

Pierpont would have thought that staring at the ceiling was a better option, but apparently some punters with no other intellectual life actually watch the movies. Pierpont would regard these punters as lost souls, beyond redemption, and can only wish good luck to ETC if it can make money out of them.

Somewhere under the mountain of scrip it has issued, ETC may actually have a business. The company reckons it is now the fourth-largest provider of hotel in-room digital entertainment systems in North America, with more than 30,000 rooms installed.

That may sound good, but it amounts to only 1 per cent of the motel rooms in North America, and the biggest operators have about 1 million rooms each.

ETC owns the digital equipment that it installs in the rooms and gets income from the rent it charges to the hotels. So it's a cash-flow business but requires capital expenditure up front.

ETC is now on an expansion track. Recently it bought the hospitality entertainment business from the US giant Verizon. In the two months to December, ETC had revenue of $400,000 from that business, of which $200,000 was net profit. It helped reduce its loss for the half year to $700,000.

The directors are upbeat about ETC's prospects, but face a funding problem. About 450,000 American motel rooms are refurbished every year. ETC wants to maintain and, if possible, expand its share of this market, but that will take investment and ETC has only $1 million in the kitty.

It needs to raise money by issuing shares but it has already issued nearly enough to provide one apiece to the population of China. And the market price is 0.5 ? and heading south anyway. That's why ETC is holding a general meeting on May 6.

Directors are asking shareholders to approve a 1-for-25 share consolidation. On Pierpont's calculation, that will leave ETC with an issued capital of just under 45 million shares. The meeting will also be asked to give the directors power to raise money by placing up to 50 million shares at 80 per cent or more of market price. In addition, the meeting is being asked to give the directors power to issue 5 million shares each to themselves under the same conditions. As there are six directors (Peter Dykes, Vaz Hovanessian, Geoff Milne, Brad Schroeder, Dave Weisman and Greg Schratwieser), that could be another 30 million shares.

The directors who already hold 9 per cent of ETC are therefore proposing to massively dilute the existing ordinary shareholders. If all the proposed placements go ahead, the existing ordinary shareholders will be diluted from a 91 per cent holding in the company to less than 33 per cent, while the directors' stake will be increased from 9 per cent to 27 per cent.

That's what is proposed in the notice of meeting, but it may not happen. Vaz, the company secretary, told Pierpont that ETC would prefer to have a rights issue to shareholders, but had been advised by potential underwriters that it should first consolidate its capital.

ETC still hoped to be able to have a rights issue, but in case it could not find underwriters, the company was seeking approval from shareholders to have the power to make placements instead. He added that the provisions to place shares to directors were to give the directors the opportunity to provide funds to ETC. The company was so strapped for funds at present that the directors had not been drawing fees for the past six months.

It all looks pretty easy to Pierpont. If any financiers out there are happy to receive a placement at a 20 per cent discount to market, they should be happy to underwrite an issue on the same terms. All ETC has to do is persuade them to underwrite a 2-for-1 issue after the consolidation.

Another aspect that may puzzle shareholders is why the directors have been such heavy traders in the stock. Over the past 12 months, ETC directors have been net sellers. They have bought 58.4 million shares but dumped 60.6 million. The biggest operator in this market has been Peter Dykes, ETC's chairman, who has bought 57.3 million shares and sold 37.7 million. He now holds about 50 million pre the reconstruction.

The action just before Christmas was most interesting. Between December 13 and 14, according to Ian Huntley's Datanalysis, Peter bought 34 million shares at an average price of 1.3c. Then between December 8 and 29, he sold 31.8 million shares at an average price of 1.6c.

Peter was in North America installing TV sets when Pierpont rang ETC, but Vaz told your correspondent that Peter had been trying to protect the share price. Whenever friends of the company rang saying they were about to sell, Peter had been buying the stock from them off market so that a large block would not crunch the share price. Then Peter would sell some of the shares on market later.

As the stock is now down to 0.5c, Pierpont can't say this tactic has been frightfully successful. ETC shares are down some 80 per cent from a peak of five months ago, so the ETC register must have its share of wounded punters and if Pierpont's experience with share consolidations is a guide they're heading for another discount after the 1-for-25 goes through.

But Pierpont hasn't time to go further into this matter, because he's still drawing up the Speculator's Honour Roll. And he's leaving plenty of room at the bottom of the list.

You can contact Pierpont at www.pierpont.com.au