Mumbai: The net worth of Reliance MediaWorks Ltd, Reliance ADAG‘s film and entertainment services company, has completely eroded as the company struggles to cope up with indebtedness and with losses over consecutive quarters.

"Considering the continuing substantial losses incurred by the company, its net worth has eroded," the company said in notes to the accounts while releasing the financial results for the quarter ended June 30, 2012.

Reliance MediaWorks‘ net worth had eroded to Rs 378.11 million as on March 31, 2012 from Rs 6.66 billion as on March 31, 2008. The company‘s net worth further eroded as it reported a loss of Rs 910.08 million in the quarter ended June 30, 2012.

The company had on May 15, 2012 extended its financial ended March 31, 2012 by six months up to September 30, 2012.

For the fifteen months ended June 30, 2012, the company‘s loss amounted to Rs 5.25 billion. The company also suffered a loss of Rs 243.52 million on cancellation of a derivatives contract pertaining to interest rate swaps, due to adverse foreign exchange fluctuations and interest rates. The loss was accounted for in the quarter ended June 30, 2012.

In the quarter ended June 30, 2012, the interest cost for the company on a consolidated basis was Rs 768.32 million and on a standalone basis Rs 757.43 million. The company has nearly Rs 12 billion of long-term and short-term loans.

Reliance MediaWorks said it has reported the results as a going concern, despite erosion of its net worth, based on the improved operational performance on account of stabilization of new businesses in films and media services and financial support from its promoters.

The company has filed with the Securities and Exchange Board of India (SEBI) for a rights issue to raise Rs 6 billion.

It has also signed an indicative non-binding term sheet with a private equity fund to acquire a substantial minority stake in Reliance MediaWorks‘ film and media services division for an investment of Rs 6.05 crore. The proposed investment is subject to completion of customary detailed due-diligence, definitive documentation and forming a separate subsidiary for the film and media services business.

The company‘s total income from operations and net loss in the quarter ended June 30, 2012 is at the same levels as that of a year earlier. However, its total income from operations at Rs 1.22 billion in the quarter ended June 30, 2012 was 27 per cent higher compared to the previous quarter ended March 31, 2012.

Similarly, its revenues from exhibition business at Rs 987.66 million were up 38 per cent compared to the previous quarter.

According to the draft prospectus filed by the Reliance Mediaworks, the company‘s auditors have qualified their audit report in respect of our standalone and consolidated financial statements for the 12 months ended March 31, 2012.

In the audit report on standalone financial results for the 12 months ended March 31, 2012, the auditors have noted that the company has not accounted for loss on cancellation of the derivative contract, post period end, aggregating Rs 243.52 million. The auditors noted that the company did not account for this loss as required by the principles of prudence as enunciated in accounting standard-1 (AS-1).

Further, the auditors have drawn attention to the recognition of deferred revenue expenditure aggregating Rs 138.72 million pertaining to start up and stabilisation costs of the business of Reliance MediaWorks Entertainment Services Limited, one of our subsidiaries.

If the company had recognised these losses in the 12 months ended March 31, 2012, the loss for the period would have been higher by Rs 382.24 million.

The auditors have, in their report on restated standalone financial information, have drawn attention to the fact that the net worth of our Company has eroded on account of loss of Rs 4.58 billion (as restated) for the 12 months ended March 31, 2012. In addition, the auditors have in the report on restated consolidated financial information drawn attention to the fact that the net worth of the company has fully eroded on account of loss of Rs 5.72 billion (as restated) for the 12 months ended March 31, 2012.

Reliance MediaWorks, in the draft prospectus, has stated that it cannot assure investors that the company‘s net worth will not decrease further. The auditors have warned that the erosion of net worth indicates an uncertainty that may cast a doubt about the company‘s ability to continue as a going concern.