GREAT IMPROVEMENT SHOWN

NZ Truth, Issue 1305, 18 December 1930, Page 11

GREAT IMPROVEMENT SHOWN

Financial Reviews by "Fiat Lux "

Newton King, Ltd., May Not Yet Be Out of Wood, Despite Drastic Reorganization

WEIGHT OF DEBT TO KING ESTATE

The tenth annual report and balance-sheet for 1930 of ,the ill-starred stock and station firm of Newton King, Ltd., is of interest, m that it discloses the situation reached after carrying through the drastic reorganization effected last year. The position is much sounder and shows considerable improvement, but m view of the present outlook it is possible that the firm is not yet out of the wood.

THE concern -was' formed m the boom year of 1920 to take over the business of the late Newton King, who was one of the foremost protagonists of the Taranaki land boom, and who was fortunate m finding a company willing to pay him a grossly inflated price for his business assets and also a large sum for a nonekistent goodwill. „ v ». The business of the late Mr. King was always of a somewhat adventurous type, and never carried any true goodwill, m the economic or valuable sense, unless of a negative type, because of the hopelessly optimistic type of finance carried on m Taranaki m those days. ■ The company was haraiy incorporated when the boom, which raged more fiercely, m all probability, m Taranaki than m any other part of the Dominion, broke and left it m a condition of considerable embarrassment, with a heavy load of debt to Mr. King. As the pricey level dropped, and values m the dairy world m general, and Taranaki m particular, receded, the company languished; and, finding the situation impossible, faced it, and after expert advice completed a drastic reorganisation last year. Its troubles have been mainly, inflation of fixed assets, the weight of the debt to the estate of the late Mr. King, which debt was payable m sums of not less than £ 20,000 per annum, the existence of a £30,000 item for goodwill which did not exist, and was , consequently an entirely fictitious | asset, and the poor quality of part of I the large float of sundry debtors at £439,919, a considerable portion of which were worthless. Preference | dividends for several years were also m arrear, owing to poor trading re- i suits. | To cope with^this situation, 17/- m the £ was written off the ordinaries, bringing them down to 3/- shares, and arrears of preference dividend to April. 30, 1929, amounting to £34,027, were also cancelled. As a result, capital dropped from £374,689 m 1929 to £204,529 m 1930, £170.160 of water being thus squeezed out. Properties were written down by £41,480, plant, etc., by £12,522, debtors by £65,739, goodwill was eliminated, and an item of £1025 for "shares and investments" also' disappeared. Tlie directors consider that these "values are on a very much sounder basis than ever before." After such a clean-up they naturally would be.

Not much has been effected, however, as regards the amounts owing to the King estate, m spite of various hints m the reports. This item of liability, which stood at £91,011 m 1927, had fallen to £78,763 on the eve of the reorganisation, and stood m last accounts at £ 69,830, so that any concessions obtained must be of a minor character. We have had occasion before to point out to investors the vulnerable position of the preference shareholder m a company, and this is a further instance. Theoretically, the preference holder has ample protection; but if the con- | cern falls upon evil days he is. In j reality, m a. very poor position, since he will inevitably, m such circumI stances, be faced with the option of i accepting a reduction m his claims or other curtailment of privileges, or In

IMPROVEMENT

the alternative an unsatisfactory liquidation. The rights_ of the preference shareholder, m other words, are valuable only when they are finan- > cially unnecessary; and when the time comes to enforce them they are usually found to be practically ineffective, though legally watertight. Such was the case with this concern. The company does not publish a trading account, but the figures show a net profit, after payment of tax, of £11,502 m 1926, £3521 m 1927, a loss of £24 m 1928, a profit of £23,429 m 1929, and of £20,544 m 1930, this last sum being presumably subject to income tax. . This profit was 3 per cent, of capital m 1926. 0.9 m 1927, nil m 1928, 6 per cent, m 1929, and 10 per cent, m 1930, showing the marked improvement m the last two years. Since the reorganisation the concern has earned 9 per cent, on total shareholders' funds, not a bad record m existing circumstances. N With the, carry forward, this enabled a preference dividend for 1925 to be paid m 1926. at the rate of 6% per cent., absorbing £11,342, and £379 was carried forward. In 1927 net profit amounted to £3521, and with the carry forward of £379 and £7500 brought m from reserve, this placed £31,400 m the appropriation account. Tlie transaction waa really a trans-

fer of capital to income, because at the time that £7500 stood m the books as reserve the company was carrying on the other side an item of £30,000 for goodwill, which it must then have known, and has since recognised, to be fictitious; so that there was no true reserve at all, but only an accountancy fiction. However, this enabled a further preference dividend m respect of the previous year to be paia at the rate of 6% per cent., absorbing £11,342, and leaving a carry over of £58, which, owing to the net loss of £24 m 1928, was reduced to £34, no dividend being paid. * This loss was incurred through £20,542 being written off profit and loss for bad debts, a reflection of the growing financial tightness m the dairy-farming world. In 1929, net profit of £23,429 was made, £23,012 was written off debtors' accounts, this time, presumably by way of variety, through the appropriation account, m 'anticipation of reorganisation, no dividend again being paid, so that preference shareholders were standing out of dividend for 1927, 1928 and 1929, and these arrears were written off under the reorganisation scheme. ' In 1930 profits amounting to £20,544 were declared, and this, amounting with the carry forward of £451 to £20,995, was applied m paying a dividend of 6% per cent, on both preference and ordinary shares, absorbing £13,294, and leaving a carry forward of £7700, which is the only reserve, but which is a real reserve. . This, it is hoped, concludes thia chapter of frenzied Taranaki finance, and the company is now on a sounder basis, though hampered with £69*830 still owing to the King Estate, the only apparent beneficiary from these remarkable transactions. With the squeezing out of the water, the excess of circulating credits over debits, which stood at £302,403 m 1929, now stands at £227,898, an apparent drop of £74,505 m working capital, omitting the debt to the King Estate, but it can 'be assumed that the debtor position is Viow on a basis. Overdraft at £191,721 is only £12,808 short of paid-up capital at £204,529, and with the existing outlook m the dairy world it may be that the company is not yet out of the wood. It is not recommended as an investment, more particularly at the present time. '