Jenny Ruth: Beware the hype: Go straight to the sums

It is clear what Christchurch-based IndraNet Technologies says it's selling: its latest prospectus says it will offer true broadband internet access starting at speeds of 2 megabytes, aiming for up to 20 megabytes and charged at a flat rate rather than according to how much you download.

IndraNet also promises it can provide this service for about a 20th of current prices for broadband services. Elsewhere in the prospectus, it says its prices will be 10 to 30 times lower than market prices.

Before you take that at face value though, the promise is heavily qualified. The company estimates most broadband offers are below speeds of half a megabyte and it promises its prices will be "normalised to comparable levels of services".

Exactly what that means in hard cash isn't spelled out in terms of monthly rentals.

The prospectus talks of existing providers charging between $190 and $1000 a month on an equivalent basis for a 2 megabyte service and up to $3074 a month for downloading 10 gigabytes a month.

It has a nice bar graph showing Telecom New Zealand's charges are astronomical compared with 11 other international providers, and that IndraNet's would be at the other end of the scale.

The nature of Indranet's technology is far from clear. The prospectus says the company's technology focuses on "mesh networks applied to broadband communications, energy and transport infrastructure technology".

The company's first mass-market broadband wireless commercial product is called "FraMe as in Fractal Mesh", it says. It talks about levering "existing and under-utilised backbone infrastructures" but doesn't explain what these are.

It does assure us that New Zealand and Australia "are already well endowed with the efficient low-cost backbone required by FraMe Networks". So we can be happy we've got lots of whatever they are.

The prospectus does contain pages and pages of description, but to me most of it is gobbledegook. Try this: "IndraNet FraMe Networks will offer a fresh, coherent approach over the entire last 10 miles space, and its integration to the backbone, to leverage existing backbone and substantially expand broadband markets."

It says its FraMe "is built almost entirely of customer premises equipment (CPE) called 'minders' which communicate wirelessly thoughout the entire network". It also involved "metaminders" and "hyerminders".

A similar vagueness pervades the descriptions of its directors' careers. Chairman and treasurer Russell Fitts has a string of initials after his name and we're told he has "extensive experience in the selection, valuation and management of investments, in commercial negotiations and in business development".

We aren't told where, when or what.

Co-founder and managing director Louis Arnoux has "over 30 years' experience in industrial development, R&D, technology development, transfer and marketing". The prospectus goes on about his experience at length but again doesn't say where this experience was gained except in vague terms as in: "He has worked closely with Australian, New Zealand and Asian private-sector and government bodies."

Another director, John Collis, "has a multidisciplinary background" while yet another, Mick Kain, "has a robust entrepreneurial and professional investment background".

One of the few names in the prospectus well known in New Zealand business circles is former Sky Network Television chief financial officer Paul Smart who is listed as an adviser.

You could say reputable firms are involved: PricewaterhouseCoopers is the auditor and Westpac is its banker.

A similar vagueness surrounds exactly what the company has up and running so far. It has been going since 1998 and the prospectus tells us that, in 2003, it "entered its global commercialisation phase through a series of projects begun in New Zealand, Australia and in Fiji".

It says these projects "have successfully demonstrated the benefits, costs and competitive advantages" of its technology but, again, details are lacking.

It also says that its development team "has managed to reduce the manufactured cost of the IndraNet network equipment by a factor of five". Sounds great, but what did it cost to start with?

The prospectus says the company will expand through a series of agencies which may be subsidiaries, joint ventures, franchisees or licensees. It estimates its global market over 20 years at more than 3000 agencies.

"IndraNet believes that, based on the telecommunications industry alone, there will be 10 agencies in progress by 2006 and 33 agencies in progress by 2008."

The trouble is, how do you measure what an agency will be worth? The lack of clarity as to the nature of the company's product and the people behind it is interesting because the marketing of its equity issue seems to be aimed entirely at Joe Blow Public. No broker is involved and the issue isn't underwritten.

I can't help thinking promoters are operating on the "blind them with science" principle.

The company effectively refused to answer my questions, so that avenue of enlightenment was denied me.

The one thing about the prospectus that you can get to grips with is its financial track record. The balance sheet at June 30, 2004, shows the company had already gone through almost $15.5 million of shareholders' funds and that it had a deficit of $181,915 in shareholders' funds at that date.

Since balance date, the company tried to raise up to $5 million from its existing shareholders at 50c a share and succeeded in raising nearly $1.3 million by the end of September.

That doesn't bode particularly well for the current issue: it is again trying to raise $5 million from investors in general but this time at $1 a share.

As far as I can tell, this is the fifth time the company has issued a prospectus and it has also raised money from placements.

What the present 207.2 million shares on issue are worth is anyone's guess: they aren't listed anywhere as far as I know.

As for those vaguely described operations, the company did achieve $50,000 in sales in calendar 2002 and $80,000 in 2003 but nothing in the six months ended June 30.

Its bottom line loss in the six months was nearly $1.3 million following a nearly $3 million loss in 2003 and a $2.6 million loss in 2002. The company has never made a profit.

Perhaps a more important measure is the rate at which it is bleeding cash: $858,583 in the six months after $2.3 million in 2003 and $1.4 million in 2002.

The company has other financial worries: the notes to the accounts show it secured a line of funding and received A$200,000 but that the remaining A$300,000 wasn't forthcoming. "The repayment date and any interest liabilities are uncertain as a result of the lender's failure to comply with the original agreement."

Elsewhere, it says the interest rate is 10 per cent a month but that it hasn't been accrued because of the breach of agreement.

The statutory information also shows that two shareholders are taking legal action in California over a June 2002 share issue. The company says it believes the claim is without merit and that it is in the process of hiring US counsel to defend the proceedings.

IndraNet Technologies

* Headquarters: Unit 2, 242 Ferry Rd, Christchurch.

* Profile: The company says it is preparing commercial roll-outs in New Zealand and Australia of its first mass-market broadband wireless commercial product, FraMe. It also talks of applying its technology to other industries including the electricity and transport industries. In the past, it has talked about developing a car that runs on compressed air.

* Key financial statistics: The company had negative shareholders' funds of $181,915 at June 30 after posting an almost $1.3 million bottom-line loss for the six months ended that date. Since then, it has raised almost $1.3 million from existing shareholders at 50c a share.

* Market capitalisation: unknown.

* This issue: The company is aiming to raise up to $5 million at $1 a share.

* Major shareholders: Managing director Louis Arnoux with 21.76 per cent (assuming the $5 million is raised), a trust associated with director Dan Hilgendorf with 11.47 per cent, a company associated with alternate director Peter Mcaulay with 11.47 per cent, a trust associated with director Andrew McGregor with 11.18 per cent and a trust associated with chairman Russell Fitts with 9.17 per cent.

* Key executives: Managing director Louis Arnoux, chief executive John King and commercial development manager Richard Punter.

* * *

A number of readers have read into my column last week on 42 Below that I was endorsing where the company's shares are trading and the implied valuation. I was not and have made no attempt at valuing the company. I have changed my view from thinking it nothing but hype to believing a viable business is emerging.