Avoiding the costly mistake made last year when the company had to reschedule its Annual General Meeting (AGM) because of inadequate notice, the notice for the company's 2003 AGM is dated January 16, some forty-nine clear days before the meeting on March 6, almost erring on the side of caution since a notice of more than fifty days would have also been invalid. Banks must however be congratulated on its compliance with the Securities Industry Act which requires that the company's annual report be filed with the Council and sent to each security holder within four months of the company's financial year end.

Once again, the annual report is presented on high quality paper but could be improved by a more economic use of the space and fewer photographs. Some six (6) pages are dedicated to the company's flagship product Banks Beer which won the Mode Selection Gold Medal award in 2003 which given its performance on the domestic market is somewhat ironic.

The publication of this review in this supplement rather than in Sunday's Business Page is timed for the benefit of members as they assess the performance of the company and the Directors' Report prior to the company's AGM this Saturday. The Editor in Chief of the Sunday Stabroek had written the Chairman and Chief Executive Officer of the company on 18th February, 2004, asking for a response to eighteen questions prepared by the Business Page columnist. On the 26th February, 2004 Mr Reis advised Mr. de Caires that he would not be responding since he would have to put the questions to the Board and enough time was not available. Many of the questions require information available to management not normally requiring Board involvement or approval. Mr Reis had earlier criticized Business Page as not affording the company an opportunity to have its view reflected in advance of any publication.

Quite unusually, the meeting on Saturday will begin with presentation of long serving awards a distraction from the serious issues members need to address. They will have a fairly packed agenda and will be asked, among other things, to approve the financial statements, vote en bloc on the re-election of three directors retiring by rotation, the service contracts of the non-executive directors, amending the company's Articles of Incorporation to increase the company's share capital and to issue one bonus share for every four now held, to declare a dividend and to appoint the auditors and to fix their remuneration.

The company has no doubt taken advice from its two legal counsel on the agenda but are they comfortable with en bloc voting, the structure of agenda items 8 and 9 and whether the company is in compliance with section 104 of the Companies' Act regarding the approval of directors' remuneration? (We are not talking here about IFRS's but the Companies' Act).

The Annual Report includes the financial statements of the company as well as the group which is made up of the company as the holding company, Citizens Bank Guyana Inc., a 51% subsidiary, Caribanks Shipping Co. Ltd. (100%) and an associated company B.B Farms Inc. (40%). The Chairman reported without elaboration that Caribanks did no trading during the year leaving readers to speculate about the reasons for non-trading and the future of the company even as shipping is listed as an activity of the group. The group accounts include mainly a manufacturing entity and a financial services institution while the company's separate financial statements do not include the very important statement of cash flows which allows the thousands of ordinary members to understand how monies come into and are deployed by the company. The company has chosen to ignore the plea by Business Page for such a statement which many would argue is a requirement under accounting rules.

Citizens Bank Limited

Before we turn our attention to the company it might be helpful if we commented briefly on the performance of Citizens Bank which has received a very positive report in the media and indeed a cartoon in the Stabroek News of 27th February showed the company soaring into the air. The reality is slightly different. Pre-tax profit increased by $77Mn. from $166Mn. to $243Mn.but this is after a (non-recurring) foreign gain of $100.Mn. and reduced interest payment of $107.7Mn. Indeed all the key indicators went the wrong way - interest income fell ($20Mn.), fees and commission income fell ($54Mn), gains on foreign exchange trading fell ($30Mn.). On the other hand staff costs, administrative, operating and loan loss expenses increased by a total of $26Mn. This contradicts the assertion by Chairman of the Bank Mr. Reis that 'An important element of our overall business plan is expense control. In 2003 we managed our non-interest expenses to a lower level.' Clearly he is taking credit for a fortuitous movement in the exchange rate giving rise to the $100Mn. gain referred to above while ignoring the realities.

The cartoon is also interesting for its irony - rising above the Guyana economy. The fact is that the Bank, like some of its competitors, is showing a marked preference to invest its depositors' funds abroad rather than in exploring ways to expand its loan base in Guyana to support the ailing local economy. In fact the foreign currency denominated assets of Citizens Bank, the bulk of which would be in investments, now stands at $2.8Bn., up from $1.8Bn. one year ago. This strategy may be good for the Bank and its shareholders but does little for depositors, the business community or the country when they need it most. It also weakens the regular calls by Chairman Reis for the Guyanese consumer to support Banks DIH's products even as the company continues to print its Annual Report overseas rather than locally as Citizens Bank does.

Citizens is the only financial house in Guyana that pays interest on demand deposits yet its related parties do not seem to do that well as depositors, having earned a meagre 1.1% average interest on their deposit while they paid an average of 14% on their loans and advances. Average interest paid on all deposits and average interest earned on all loans during the year were 3.62% and 12.57% respectively.

Notwithstanding the challenges facing the economy Citizens has announced plans for the construction of new headquarters which was not mentioned in its Annual Report.

Shareholder value

Business Page had previously commented adversely on the absence in successive annual reports to references to shareholder value which is what equity investment is all about. One would surely have expected that with the advent of the Stock Exchange directors would discuss shareholder value by reference to the performance of the shares on the Stock Exchange, whatever limitations they may claim the Exchange has.

Instead of doing this, the Chairman confidently tells members that the bonus issue will increase shareholder value! Mr. Reis must surely know that the issue of bonus shares is an accounting entry that creates no value. In fact all things being equal the share price will fall by approximately 20% from their current level of $6 to $4.80 even without a reaction to the poor results reported by the company. This is because there will be after the issue five shares for every four now held, and the dividend per share, a key determinant of share price, will most likely fall. Since the bonus issue in 2001 dividends have fallen by 37% during which time a bonus issue was made.

We recall when in the 1999 Annual Report the Chairman had asked rather optimistically "What better guarantee could there be of success in the new millennium?" Business Page referred to Michael Hammer, the originator of the concept of re-engineering and business process centering who said "If you think you're good you're dead! The formulas for yesterday's success are almost guaranteed to be formulas for failure tomorrow." Since that upbeat statement, the company's performance has continued to decline even as the company invests massive sums that from an outsider's view are increasingly difficult to justify.

This columnist strongly believes that the investment strategy pursued by the directors has done serious harm to shareholder value and the signs are of a further deterioration without fundamental changes in the company's strategy and processes. Unfortunately, there is nothing to indicate that the directors are even prepared to admit that the strategies of the past are doomed to failure and the necessary changes are unlikely to come from this current Board.

Governance

For the first time the company actually addresses the question of governance in any descriptive way in its annual report. Unlike last year when the Chairpersons only of Board Committees were identified, the membership of the Committees has been disclosed and positively, the Human Resources and Emoluments Committee has been re-designated Corporate Governance and Human Resources Committee.

There are however several continuing concerns about the company's corporate governance practices. The Annual Report does not even acknowledge the Guidelines on Corporate Governance issued by the Securities Council for consultation let alone the steps it will take to comply. Indeed, a review of the Guidelines indicates several areas of non-compliance including the absence of a nomination committee, no biographical data of directors, shareholder involvement in determining remuneration, statement on internal control, the right of the directors to obtain independent professional advice at the company's expense, etc.

It is also hard to understand how the Board conceives of its function and authority which, as a general rule, it derives from the law and the members. Last year I wrote in my capacity as a shareholder the Company Secretary as Secretary to the Board setting out a series of questions but to my surprise the response came from the Executive Chairman and avoided many of the questions posed. One answer which shows a fundamental misconception of the authority of the directors is that the directors 'decided that it was in the best interest of the Company that the Chairman of the Company should always be the Executive Chairman and that the Vice Chairman should be a Non-executive Vice Chairman'.

Directors as well as shareholders might find it very interesting to note that one of the reasons why the once unassailable Michael Eisner of Disney was relieved of the Chairmanship of the Board while barely retaining the post of CEO is his and the Board's failure to recognize that there has been a revolution in corporate governance. The shareholders recognized and held Eisner responsible for the company's failures and emphasized the link between good governance and good performance.

The key Committees seem unable to function without the presence of the Chairman who is a member of three of the four Committees set up by the Board including Corporate Governance and Human Resources as well as the Audit and Finance Committee which also includes the Finance Director. This is itself not good corporate governance as these Committees need to be insulated from the dominant influence of the executive.

Banks DIH does not meet the standards of independence regarding directors only two of whom can be described as truly independent. Five of them report to the Chairman/CEO who therefore has a big influence on their assessment for promotion and remuneration. Of the six non-executive directors, one was involved in a major land transaction with the company details of which have never been shared with shareholders, one is connected to a supplier which does business with the company which has not been disclosed, another is connected with a Banks DIH subsidiary while a fourth is the widow of the late founder of the company. Given these conditions can shareholders be confident that the directors properly carry out their fiduciary responsibility to the company and its shareholders?

In my letter last year I had questioned the appropriateness of shareholders having to direct their questions to the Chairman. He gave the classic answer that that 'has always been the custom'. That this 'custom' is again reflected in the 2003 Annual Report shows unfortunate inertia and a lack of appreciation of developments in corporate governance including the recent pronouncements by the Stock Exchange. Some truly independent director should have responsibility at least for shareholder relations.

Accounting deficiencies

In addition to the non-presentation of a statement of cash flows for the company and inadequate disclosure of transactions with related parties, the financial statements provide no geographical segmental information as required by both accounting standards and the Securities Industry Act, while as Business Page has commented in the past, its business segmentation is far too narrow to assist comprehensibility.

Despite this auditors Jack A. Alli, Sons & Co. assert that the financial statements are in compliance with International Financial Reporting Standards. Unlike their report on the accounts of Citizens Bank, the auditors do not indicate their international affiliation in the case of Banks DIH.

Related Parties

A number of questions were transmitted by the Editor in Chief to Mr. Reis relating to the completeness of the note on related parties transactions and a request was made for the statements of B.B Farms Inc., an associated company. This column is convinced that all the transactions with related parties have not been disclosed as required by International Financial Reporting Standards, notwithstanding the opinion by the auditors to the contrary. B.B Farms Inc. is part of the John Fernandes Group headed by Mr. Christopher Fernandes who as a member of the Banks board approved the financial statements on January 15, 2004. Nor are the transactions with the Demerara Life Group of companies despite having common directors at the highest levels of both boards.

One question asked Mr. Reis to state whether the company does business with any company in which the CEO, the Finance Director or any other director has an interest. The Chairman was also asked about the ownership of the hotel facilities situated in d'Aguiar Park and whether those facilities are used by visitors to the company. Our information is that the facilities - Barrington Apartments - are owned by C.F. & C. Investments Inc., a company controlled by Mr. Clifford Barrington Reis - meeting the test of a related party for disclosure purposes. Since the Park is essentially a company-owned facility it would be useful if shareholders could be told whether the same rules of occupation and termination apply to the directors as they do to the other employees including Mr. Ramsey Ally who had to resign following the investigation in the misuse of promotional supplies. Incidentally, Mr. Reis has also not responded to our question about that investigation and the role which the Audit Committee played therein.

Financial performance

The company's performance has been on the decline for the last five years as shown by the following major indicators:

Profit and loss account

The changes in the major profit and loss items for the company and the group are as follows:

While turnover for the company went up in nominal terms by 2.85% operating profits fell by a dramatic $196Mn or 19.83%. For the group, performance was depressed by that of the company with the result that group turnover increased by a modest 1.28% while operating profits fell by 139Mn or 11.79%. The financial statements show that most of the major performance indicators of the company have been on the decline since 1999 - 22.62% in operating margin, 21.86% in net profit margin, 32.39% in return on assets and 38.28.% in return on equity.

Under normal circumstances, any such sustained performance decline would be a cause for great concern but this is heightened when one considers that capital expenditure of $4.1Bln.was incurred over the past five years resulting in the growth of total assets by $2.55Bln or 36%, from $7.05Bln in 1999 to $9.60Bln in 2003. The result as shown by the following graph is a dramatic decline in the return on assets, an important measure of management.

One of the investments made by the company is an increase in its stake in B.B Farms Limited (the Fernandes Group Company) which has been reporting losses since the acquisition. This certainly needs an explanation to avoid any suggestion that the decision was made on other than purely financial considerations in the company's interest.

The following graph shows the movement in assets and operating profits of the company since 1999:

According to the Chairman's report, the Beer Plant now operates 'two to three days per week' which he attributes to the removal of the 10% remission of Consumption Tax on Banks Beer and Related Products which in turn led to higher prices and increased smuggling. Knowledgeable persons in the sector consider these explanations extremely inadequate and incomplete and that they fail to consider the loss of market to Guinness marketed by Banks DIH and to strong competition from Carib Beer imported by Ansa McAl. According to a company source the sale of Banks Beer has fallen from 1.7Mn.cases in 2000 to 1.1 Mn. cases in 2003.

With regard to the Foods Division Business Page had always questioned the wisdom of the expansion of the several food outlets, a concern that has finally dawned on the company with considerable impact. Mr. Reis notes that the division which comprises restaurants, biscuits and bread 'did not perform to expectations' but did not respond to an enquiry as to precisely how they performed. My source tells me that bread sales have fallen by more than sixty percent since the launching of the bakery and that some of the food outlets struggle to cover their operating costs.

Even if we ignore the absence of any logic of having the restaurants operate under six different names, the company has neither the product nor the service to compete against the better known, better quality restaurants. Yet, even as the Chairman laments the performance of the food division the company is incurring substantial expenditure on its Main Street food outlet called Arapaima Restaurant.

Balance sheet

The following summary is extracted from the audited financial statements:

Included in non current assets are raw materials valued at $1.69Bln which represents 235 days of raw materials using the consumption for 2003 of $2.62Bln. This is high even if there is a long re-order period.

The major increase in non current liabilities are employee benefits which is up by $307Mn or 59%, representing the current deficit on the pension scheme calculated in accordance with IAS 19 - Employee benefits. There is no disclosure in the financial statements of how this deficit will be funded or the recommendation of the Actuaries.

Six months comparison

As required under the Securities Industry Act the company was required to issue half year financial statements as at March 31, 2003. An analysis of the performance for the first and second six month period of the group is as follows. It was not possible to do such an analysis for the company since separate half year financial statements were not presented.

Gross turnover for the second half of the year decreased by $270Mn or 5% yet there was an increase in profits before taxation of $124Mn or 21%, a development which surely warrants an explanation. Sales may be cyclical but it is hard to suggest that other than direct costs expenses are similarly cyclical. Profit before taxation as a percentage of gross sales was 8.33% for the first six months compared to 11.33% for the second six months.

Share price, valuation and market capitalisation

The following graph shows the actual average price of the company shares between 1998 and 2003 with the projected price for 2004(after the bonus issue):

The shares of Bank DIH over the last month were trading at between $5.90 and $6 per share. With a stock exchange now in operation and a better informed public, the price per share will fall even further following the one for one bonus issue.

An analysis of the market capitalisation and net assets of the company, net assets per share, share price and price earning ratio for the last five years is as follows:

The market capitalisation is the value the market places on the entity having regard principally to future expectations. Even in capital intensive companies, the market capitalisation is higher than asset value. In the case of Banks DIH however the deficit is widening indicating that the market does not believe that the company is worth its book value. Earnings and dividends are inadequate while the investment strategy borders on irresponsibility. Bonus shares that do nothing but reduce the share price can no longer be considered a substitute for cash dividends. Indeed the money spent on this issue in terms of stationery, legal fees and administrative costs would have been better utilised in paying dividends which have been reduced.

Conclusion

The directors have obviously failed to recognise the decline in the company's fortune over the past five years which have become clear and widely commented on by several observers. Meanwhile because of inadequate information or the obvious limitations under which they function, directors have continued to make massive investment decisions proving extremely costly to shareholders.

The reversal of the company's fortunes will require a radical rethinking of the company's strategy and processes. It needs to make major decisions about the businesses it will divest and those it regards as core to its being.

The Board which must take full responsibility for the situation needs a radical overhaul, with new personalities fresh with new ideas and imbued with modern concepts of governance. The structures within the company are likely to stifle and resist these absolutely necessary changes. At a minimum however they have a duty to respond to the submitted questions in the public interest and in the context of their commitment to high standards.

Among both executive as well as non-executive directors there are far too many conflicts of interest and the company's corporate practices, which I believe are largely responsible for the company's continuing failures, need to be radically overhauled.