The cost of expansion through acquisitions and slow growth in its income streams outside of its lottery business has eaten significantly into Supreme Ventures Limited's cash resources, resulting in failure to meet a liquidity requirement of its lottery and gaming licence.

First in April, and then again in July, SVL said it failed to meet the condition of its licence to operate lottery type games, under which its liquid assets must be at least 75 per cent of current liabilities.

As at July 31, SVL's current assets were only 60 per cent of current liabilities.

'NO PENALTIES'
Chief executive officer Brian George told the Financial Gleaner on Tuesday that his firm was not facing any penalties from the regulator as a result, nor has the company failed to meet any of its cash obligations.

"It has been dealt with through almost daily dialogue with BGLC," George said. "But we have never missed a prize payout or statutory tax payment."

Supreme Ventures Limted had raised $1.85 billion through its private placement in July last year to facilitate, among other things, the company's expansion thrust over the next three years.

Last year, SVL forked out $536 million on acquisitions of subsidiaries, which included the purchase of Coral Cliff Hotel in Montego Bay, and had taken up $421 million in long-term receivables that helped draw down cash through investing activities during the year to October 31, 2005 as a result.

George said "the liquidity ratio (used by the BGLC) takes into account payables and receivables," hence the acquisitions of Coral Cliff and Prime Sports would have pushed up the entity's liabilities significantly.

SVL spent another $980 million repaying loans, which combined with investing activities, lead to a net increase in cash of $111 million after the $1.85 billion from the private placement was take into account, leaving a cash balance of $393 million.

Included in the repayments is $281 million to directors who had financed a $277 million loan the year before to inject in the cash-strapped company.

Without that injection, the company would only have had $6 million in cash. But George said it was not uncommon for a young company, only three years old in 2004, to get additional funding from stakeholders.

However, since achieving a $393 million cash cushion last October, the company spent another $377 million on investing activities over the nine months to July 31, 2006, which included the US$2.25 million ($148 million) cash payment for the acquisition of Prime Sports and "land acquired beside Coral Cliff to facilitate expansion," according to George.

Put against operating profit of $202 million, it left the company with a $185 million cash balance at balance sheet date.

The reduction in cash and the conversion of $284 million that was due from Prime Sports up to the end of October last year, dragged down current assets of the lottery and gaming company from $870 million to $416 million in the nine months from last October to July.

As a result, the company's current liabilities which totalled $675 million at the end of July was higher than the amount required to bring SVL in line with BGLC rules.

CASHPOT
Another major drain on the company's cashflows has been SVL's flagship lottery game, CashPot, which makes up 77 per cent of total sales, and which has been making higher payouts than previous quarters.

"Average payout was 78 per cent in the second quarter (three months to April 30) and 75 per cent in third quarter (three months to July 31)," said George. The average is usually 72 per cent.

"It cost us $180 million of additional expenditure over the period, negatively affecting profit and cash position."

The volatility in the instant cash game was responsible, in part, for the company spending hundreds of millions on expansion.

"We are very focused on diversifying business to insulate us from the volatility of CashPot," said George added.

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