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Class action threat against ABC Learning Centres as ABC prepares to write-off A$213m

publication date: Aug 2, 2008
 | 
author/source: Ed Tranham
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IMF, an Australian listed company that specialises in providing funding to support legal claims by disgruntled shareholders has signalled an interest in funding a possible claim against ABC Learning Centres if enough claimants come forward. This follows the dramatic slump in ABC’s share price, which has plummeted from A$3.74 a share on 25 February 2008 when half-year results were announced to the current price of 72.5 cents.


IMF argues that ABC has misrepresented the real performance of the core nursery business by failing to disclose separately licence-fee income from property developers of ABC’s nurseries – licence fees that ensured ABC achieved its revenue targets on each centre or as ABC put it ‘to support centres during occupancy growth’. IMF believes that profits were therefore overstated and that investors invested in the business on incorrect information.


The existence of these licence fees from developers came to light following the appointment of Ernst & Young as company auditor this year. When ABC announced half-year profits of A$37m to 31 December 2007, licence fees from developers contributed A$73m when there had been zero disclosure before.

A further look at the half-year accounts also reveals that ABC’s other income included a A$51.1m ‘profit’ from the A$71.8 (£31.2m at the time) acquisition of Leapfrog Nurseries from Nord Anglia in September 2007. This is the result of ‘an excess of the acquirers’ interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of the investment’. A further A$26.2m of income in the first half year came from damages paid by childcare developers for non-performance under developer agreements.
Ernst and Young’s review has led to a reassessment of ABC’s accounting treatments and carrying values for the 30 June 2008 year end accounts. As a result, A$213m will be written-off leading to an expected pre tax loss of A$437m after last year’s pre tax profit of A$197!


ABC’s response to the Australian stock exchange is to state that no claim has been received from IMF and that there are many factors that influence the share price. Of course it’s possible that no claim may materialise if IMF doesn’t obtain enough participants, but, as the Sydney Morning Herald said last month, ‘Eddy Groves's annus horribilis just got uglier.’ And the latest accounting adjustments won’t help.


www.childcare.com.au


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