April 9 2002

At One.Tel you never had to dig far to find trouble. The new mobile network, the call centres and the fixed-wire business were all unravelling. Paul Barry finds woefully controlled finances finally blew the business.

Most companies with sales of $10 million have budgets and profit centres, so the management can keep costs under control, and know which bits are making money. One.Tel had nothing of the sort, even though it was 100 times the size.

Most companies also have accounting systems that can tell them whether or not they are heading for the rocks. But One.Tel was sadly short of these as well. And in the second half of 2000, it was crippled by a breakdown in the billing system. From August to November, in the words of one of the company's senior accountants: "We were travelling blind, totally blind."

One.Tel's top managers relied on two key measures of where the company was headed. The first was the monthly "flash report", which came out two or three days after the end of each month. The second, and far more reliable, was the management accounts, which normally arrived a couple of weeks later.

The flash reports were intended to be a very rough, back-of-the-envelope assessment of sales and profit for the previous 30 days.

The management accounts, on the other hand, were designed to give an accurate picture of what was happening. But in the second half of 2000, with bills going out six weeks to eight weeks late and often going out wrong, they were relying on figures that were two months out of date. This meant the accounts for October were being prepared in November with figures for August.

In these circumstances, the rough and ready flash reports were the only instrument that the management and board had to steer by, so the accountants made sure they talked to people in each business unit to get a picture of how each was travelling. Disturbingly, these inquiries told them that One.Tel was making less money, or losing more, than forecast. However, this was something that Rich and his acolytes simply refused to believe.

In the last quarter of 2000 there were running battles every month between the group financial controller, David Barnes, and his immediate boss, Steve Hodgson. Every month, it was Hodgson who won: Barnes presented his careful and cautious estimates of how much profit the business was making, and Hodgson revised them upwards to show that One.Tel was on budget and going well. There was no evidence to support this, and plenty of indications to the contrary. But Rich and Keeling and One.Tel's finance director Mark Silbermann desperately wanted to believe that everything was fine, because they had staked their future on hitting the forecasts for 2000-01. If the company missed them it would be a disaster.

For three months, no-one knew for sure whether the optimists or the pessimists were right. But by November 2000, the billing system was back on track, the systems were working again and it was possible to prepare proper figures. These confirmed that One.Tel's Australian operations (it also operated in Europe) were way off budget, and making big losses, just as the accountants had thought. This meant it would be extremely hard to keep the promises made to the market.

Publicly, the results for the six months to December showed that One.Tel had lost only $5 million more than it had expected. But according to senior members of One.Tel's finance team, the accounts had been heavily massaged to achieve this result. Between $10 million and $15 million of "adjustments" had been made to bring the figures in on target.

According to the finance team, this fiddling had been necessary because One.Tel had run some $20 million behind budget in the first half of the year, just as Barnes and his number crunchers had been arguing.

The board was not informed of this $20 million shortfall, and it must be said that Silbermann denies there was one. Instead, the board was told that everything was fine.

On January 25 last year, at the regular bi-monthly board meeting, the non-executive directors - Lachlan Murdoch, James Packer, Rodney Adler and its chairman, John Greaves - were told that One.Tel would finish the year in better shape than the market had been promised, with "a significant cash buffer". They were also given a copy of the company's PR strategy for its first-half results, due for release seven days later, which listed One.Tel's "Key Messages" as:

Do not need cash

Businesses turning EBITDA (earnings before interest, taxes, depreciation, and amortisation) positive.

Company continues to deliver on forecasts.

A week later, One.Tel hired a suite at the swish new Radisson Hotel near Circular Quay to tell analysts and the press how well things were going. Marshalling his bar charts, which showed subscriber numbers and revenues leaping ahead, Rich was at his persuasive best. The business was fantastic, the future was rosy, everything was on track. There would be $75 million in the bank at the end of June, as promised, and One.Tel would be minting money thereafter.

It did not take the greatest sceptic to wonder whether these predictions could really come true, because One.Tel had already consumed more than $235 million of its $336 million cash reserve in the six months to December - on the new mobile network and expansion in Europe - and had then gobbled up another $27 million in January.

One.Tel would have to spin on a sixpence if Rich's promise was to be kept. The $101 million loss in the first half would have to turn into a $10 million profit in the second. Mr Positive was adamant this would happen.

Some of One.Tel's second-line managers had already been fed this line. Gathered in the meeting room on the 28th floor on One.Tel's Castlereagh Street offices, they had been shown graphs of the company's operations in Europe and Australia, which plunged deep into the red before suddenly flipping up and roaring skywards. In business, they call these hockey-stick companies, where a brilliant future is just around the corner. One of the more cynical members of the audience could not hide his disdain, and coughed the word "bullshit" into his hand, so that those around him could hear.

There was no doubt the forecasts looked great. There was no doubt One.Tel's directors had swallowed them. But in the opinion of several senior finance people, there was no chance they would come true: the numbers they were based on were a crock of shit.

By the end of February, the management accounts for January showed that the figures given to the board at the January 25 board meeting were wrong. Far from being on target, as the directors had been promised, the Australian operations had fallen another $5 million short of their profit forecast. When combined with the admitted $5 million shortfall for the six months to December, this meant One.Tel was running $10 million behind budget. By the end of March, the management accounts for February would show this gap opening up to $20 million. By the end of April it would be clear the company had fallen even further behind.

Given how little margin there was for error, if One.Tel was to keep the promises Rich, Keeling and the chairman, Greaves, had made to the market, these management accounts spelt Danger with a capital D. So you might think it was vital for One.Tel's directors to be kept fully informed about the figures.

In December, six months after One.Tel's collapse, I asked Rich whether they were ever shown to the board, and whether One.Tel's directors were told in clear and unequivocal terms that the company was running $20 million or more behind budget. During a heated 10-minute exchange, Rich repeatedly refused to answer the question.

The management accounts for January, February and March were never shown to One.Tel's directors. Nor was news of any shortfall relayed to analysts, journalists or the Australian Stock Exchange, who had all been told by Rich in the official February briefing that everything was tickety boo.

Stranger still, the management accounts were not shown to Geoff Kleemann, finance director of the Packers' public company, PBL, who had been deputed to keep an eye on One.Tel for the company's two biggest shareholders.

In early February last year, a new staff member joined the One.Tel finance team to manage the company's cash resources. A no-nonsense girl, she saw straight away that money was flowing out of the company faster than it was coming in. Before long, she could also see it might well run out altogether. She claims One.Tel hid this problem by deferring payments to creditors.

At the end of every month, the new cash manager had to prepare a forecast for the next 30 days. To estimate payments, she took a schedule of all the creditors, with the dates they needed to be paid. To estimate receipts, she added up all the bills that One.Tel was sending out and assessed what percentage of the money was likely to be collected. The combination produced daily cash totals for the month ahead.

At the beginning of March, the forecast showed that cash would run dangerously low before the month was out. She claims that when she showed the figures to Silbermann, he told her to change them, saying he had given cash numbers to the board, which her figures needed to match.

There were two basic ways to manipulate the forecast, the first being to assume that One.Tel would collect more money from its customers. She claims that Silbermann insisted she do this, even though it was likely that receipts would be lower than usual, because the company had stopped doing credit checks on Next Gen customers, and there was a growing bad debt problem with local calls.

The second was to defer payment to creditors, and she claims Silbermann told her to do this, too.

She recalls that the combined effect of these changes was to add between $10 million and $20 million to the forecast cash totals. Silbermann denies these allegations and disputes the nature of the woman's job.

"She was just a record keeper," he says, "she was not involved in cash forecasting. All she did was the treasury function, managing payments." He adds that One.Tel paid all its major creditors on time - which is certainly not true.

The woman's other main task was to manage the cash flow on a daily basis, and to update the forecast to reflect the amount of money that had been received. It soon transpired that One.Tel was not collecting nearly as much as Silbermann had told her to assume. She claims she was now instructed to put more bills on the spike, and to sit with Silbermann each day while he told her who to pay and who to put off.

By the end of March, she had prepared a new cash forecast for April - on an Excel spreadsheet - which showed things going from bad to worse. Soon after, she came into work to find a new version on her computer. She claims that when she asked what it was, Silbermann told her he had sat down with One.Tel's joint general manager, Steve Hodgson, the previous evening, and made some changes to her forecast, which she had spent the previous two weeks preparing.

There was one change in particular that caught her eye: a new "balancing item", which added $20 million to the forecast total. She asked Silbermann what this $20 million was. He told her to talk to Hodgson. She claims she asked Hodgson what it was, and he said, "Don't worry about it." She did worry. She was appalled.

On Wednesday, April 4, Rich was a keynote speaker at the Merrill Lynch telecommunications conference in Sydney. Reading from a now familiar script, he told his audience that One.Tel's finances were "on track as promised". He repeated the pledge that the company would have $75 million in the bank at the end of June. The very next day, the company's bank balance was $34 million below that target. Two weeks later, it was $50 million short.

http://www.smh.com.au/articles/2002/04/08/1017206312436.html

-- Anonymous, April 09, 2002