Just received this reply from Glen Smith, company secretary...

Just received this reply from Glen Smith, company secretary ERG...

Dear Peter

Thank you for your enquiry.

As you have, or will, read in the Explanatory Memorandum accompanying the Notice of Annual General Meeting, the termination of our contract in Sydney has had a devastating effect on the company and its financial position. Regrettably it has left the company unable to repay borrowings on their due dates or continue to service these debts through its existing business model. The Company cannot escape the fact that its liabilities exceed its assets and, that shareholders' equity has been wiped out by the termination of the Sydney contract.

Whilst Directors have explored several different options they have come to the difficult decision that a sale of the business is the best way forward as it allows the Company to both repay its borrowings and preserve the opportunity to pursue the recovery of shareholders' funds lost through the termination of the Sydney contract. In the increasingly difficult market conditions during the course of 2008 the Board was unable to find an alternative solution to this approach. Despite the fact that shareholders may never see a return from this proposal the Board is adamant that ensuring the ERG businesses have an opportunity to complete project deliveries and realise the substantial working capital investment in projects, together with finding a way to fund the pursuit of the litigation in Sydney still represents the best opportunity to realise any return and is therefore in the shareholders best interests.

In the event that the restructure is voted down by shareholders at next month's AGM, shareholders are not likely to receive any return on their investment. The restructure give us the opportunity to continue to pursue the litigation with the NSW Government with a hope of returning some value to shareholders.

The Board decision has been supported by the independent expert concluding that the transaction is fair and reasonable to shareholders. We urge you to carefully read and consider the Explanatory Memorandum and Independent Experts Report and are confident that you will ultimately agree that the proposed restructure is in shareholders best interests and should be supported.

As to the Company's cash position, I would point out that it fluctuates significantly at different times during the month and year and a snapshot at a point in time is not necessarily representative of the recurrent levels of cash in the business. Bear in mind as well that this cash is not generated from profits, more so a realisation of working capital positions which would, together with future project receipts, otherwise be used to repay the company's borrowings. It does not alter the underlying financial position of the company - that is an excess of liabilities over assets.

With respect to your question surrounding the Beijing contract and an adequate level of disclosure I note that the Company has an ASX obligation to ensure balanced disclosure to investors is made. Whilst we are delighted with the achievements made in Beijing while the Company is facing insolvency without the support of the Ingot Entities it is questionable governance to be announcing positive results of small project milestones. Beijing is effectively a small contract that has been delivered. We won't announce news like this when the underlying nature of our situation does not change. The fact that the Company needs to restructure in order to survive cannot be overshadowed and needs to be of paramount importance to investors and potential investors alike.

The Company will not have the opportunity to recommence the Tcard project. You may be aware that the NSW Government has already called for expressions of interest for an alternative ticketing system. Whilst we continue to look for ways that could create a win-win for Government and ERG alike from the fallout of the Tcard contract termination there is no likelihood of the contract recommencing.

Although it is an unfortunate predicament for the Company and its shareholders to be in, you stand a much better chance of receiving some value from your investment if you vote for the restructure, as noted by the independent expert.

I am happy for you to pass this information on to fellow shareholders whom you're in contact with and will answer any other queries you have on this matter leading up to the AGM.

Thank you for your continued interest.

Regards

Glen Smith
Company Secretary

ERG Group
247 Balcatta Road, Balcatta
WA 6021, AUSTRALIA
Tel: + 61 8 9273 1669
Fax: +61 8 9273 1208
Email: [email protected]
Website: www.erggroup.com