Failed companies
Criterion with Tim Boreham
The Australian
16 June 2005
WHEN it comes to mistakes, denial is a classic trait of investor behaviour.
We all like to brag about our hot buys that quadrupled in price, but are more reticent about the sure-fire winners that proved anything but.
By way of confession, Criterion has strived to forget that he invested in the Perth-based QuikTrak Networks, which had the bright idea of
developing vehicle tracking devices.
The stock looked a steal at 4c apiece, but regrettably management forgot the tenet that cash flow is king.
Criterion had better luck with another West Australian dud, the evocatively titled Wet Dreams, but it was touch and go. The ex-mining stock was touted as the next Billabong in the surfwear sector but quietly faded -- not before its share price spiked on spurious rumours of a diamond find at one of its old tenements.
Every decent investor should have a war story to tell. If they don't, there's bound to be one in the offing.
In any event, all is not lost because it's approaching the end of the tax year, time to pull the dusty certificates from the bottom drawer. There's a good chance that such scrip has value not just as wallpaper, but as tax losses to offset gains resulting from last year's bull market.
The problem is that companies are not deemed to have ``died'` for tax purposes until a liquidator (or an administrator) has declared there will be no return for shareholders.
Alternatively they must be deregistered, which usually follows the liquidation process. In a handy exercise, the private company deListed
yesterday named 105 public companies that have failed since 1997. Of these, 36 are subject to a liquidator's declaration so punters are free to claim the loss on this year's return.
The so-called A List (surely an ironic title) includes two recent high-profile failures: the gold and tantulum miner Sons of Gwalia and base
metals miner Pasminco.
Sons of Gwalia offers ripe pickings for tax losses, as the August 2004 collapse was highly unexpected. There was no Dunkirk in the form of a respectable retreat for these investors. While Sons of Gwalia's liquidator issued a certificate last week, often years elapse between the date of failure and this event.
For instance base metals miner Pasminco collapsed in September 2001 after its hedging went disastrously wrong, relieving its investors of $3 billion, but the death certificate was only issued in March of this year.
An extreme example is Bell Resources. Alan Bond's plaything went belly-up in the early 1990s but no certificate has been issued because of ongoing litigation which may return some value to shareholders.
Other household names on the A list include HIH Insurances (collapsed in 2001), retailer Harris Scarfe (2001), Pan Pharmaceuticals (2003) and the gay investment group Satellite (2000).
The B list -- undeclared failures -- contains 69 names, including Criterion's nemesis QuikTrak. This year's major failures were automotive
parts maker ION, contractor Henry Walker Eltin and debt collector RMG.
Rather than waiting for a liquidator's certificate, investors can satisfy tax rules by selling their shares to deListed for a token $1, plus a $76 fee. This places the shares in a trust situation so that the investor no longer has beneficial interest in the stock, thus satisfying the tax rules on capital losses.
A further eight companies are possible inclusions to the B List. In Monty Python argo they're bloodied and limbless, but they're not dead yet. These companies are suspended but still listed, and/or subject to a recapitalisation proposal. Also bear in mind that listed company shells have an intrinsic value of $500,000 or so.
These watch-list companies, for the record, are Australa Oriental Minerals, Commsoft Group, Koala Corporation, Media Corporation, Salus Technologies, Supersorb Environmental and Viculus.
DeListed chief executive Tony McLean said it was not unusual for investors to rack up $40,000 to $50,000 of losses, which made the fee irrelevant.
Of course, it's better to avoid such losses in the first place, whch raises the question of whether there's any pattern to the failures.
While the liquidator's adage that there's no new way of going broke still holds true, Criterion suggests some companies should be avoided by name alone.
Anything to do with seafood is decidedly fishy. Those on the piscatorial casualty list include Tassal (collapsed in 2002, later revived), Seafood Online.com (2001) and, recently, Sam's Seafood.
Lesser known technology and telco stocks are a definite avoid. The deListed shame file includes Phoenix Technology (it won't rise again), Salus Technologies, Safe Effect Technologies, DCS Technologies, Powerise Technology, Advantage Telecommunications, New Tel and, of course, One.Tel.
Criterion's other casual observation is that stocks starting with Q, S or W are also over-represented in the death lists, but that's no consolation to investors in HIH, Pasminco or ION.
