Gaynor: Heads roll in tale of two companies

By BRIAN GAYNOR

Totally different atmospheres prevailed at the first two company meetings of the year.

Feverpitch's directors were extremely confident as they explained their new internet betting facility.

By contrast, all but one of Strathmore's directors announced their resignations as the company admitted its information technology venture capital model had failed.

The two meetings also indicated that last year's contentious issues - option schemes, directors' retirement allowances and other forms of payment to management and directors - will still be hot topics this year.

Feverpitch International is a New Capital Market company listed at the end of last year, and last week's meeting was called to approve the key transaction, the purchase of its betting operation.

This internet-based gambling activity allows individuals to bet against one another, whereas in traditional gambling operations individuals bet against a professional bookmaker.

Thus, Feverpitch is similar to a stock exchange or the successful United States company e-Bay rather than a more traditional gambling operation such as the TAB.

The operation, which will be launched commercially in mid-year, is the brainchild of 23-year-old Derek Handley and has been valued between $7 million and $8 million by Grant Thornton.

This valuation is based on revenue forecasts of $14.5 million and operating earnings (earnings before interest, depreciation and tax) of $9.7 million in year four.

Feverpitch's directors have agreed to pay $4.5 million for these assets through the issue of nine million shares at 50c each to Mr Handley and the other shareholders. Four million of these nine million shares will be issued on the basis of the company's revenue.

As these shares will be issued at a rate of one share for every $3.71 of revenue over a four-year period, the vendor shareholders will receive their full allotment of nine million shares only if the company achieves gross revenue of $14.85 million over this period.

The operation will be based in London (www. feverpitchexchange.com) and will target several sports, including Australian and Hong Kong horse racing, rugby, cricket and major United States sport.

It will not have the market to itself. There are several online betting exchanges - Betfair (www.betfair.com) in Britain is one of the more successful. Betfair specialises in English racing and soccer, whereas Feverpitch will focus on other sports.

Mr Handley is an intelligent and focused young entrepreneur and the energy and enthusiasm at last week's meeting was infectious.

Feverpitch is well worth watching, but it has a long way to go before it cracks the lucrative international betting market.

Strathmore's annual general meeting displayed little energy or enthusiasm as executive chairman Phil Norman and fellow directors Don Cowie and Chris Due announced they were stepping down.

The company will abandon its venture capital strategy and sell its remaining assets, with the exception of a 25 per cent stake in Global Online.

Simon Clatworthy, who represents Eric Watson's interests, is the only director who is not resigning.

Two years ago, Strathmore was full of hype and optimism after Mr Watson bought a 10.6 per cent interest at 6.2c a share (adjusted for a subsequent rights issue) and Mr Norman and Mr Cowie were appointed to the board.

At the December 1999 annual general meeting, Mr Watson asked Mr Norman whether there was any similarity between CommSoft, which was 21.6 per cent owned by Strathmore, and the high-flying Australian company Telemedia.

The chairman replied with a broad smile that CommSoft was "at least equal" to the Australian company.

The loaded question and positive reply created a buzz of excitement among shareholders, and Strathmore's share price leaped from 37c to 51c immediately after the meeting.

Mr Norman was spot on, but not in the way he intended. Telemedia has collapsed and CommSoft has struggled to keep its head above water.

Strathmore's performance has almost mirrored that of those two companies.

Shareholder funds rose from $3.5 million in 1999 to $33.2 million in 2000 and its share price peaked at 62c in the same year.

But at July 31 last year shareholder funds had been reduced to $7.1 million and the share price has been as low 2.5c.

Mr Watson and Auckland businessman John Sorenson have effective control of Strathmore and will appoint new directors.

The company's only asset will be a 25 per cent stake in Global Online, which operates the customer loyalty programme called Kachingo!

Mr Norman told Wednesday's meeting that Global Online had a recent valuation of $70 million.

This represents $17.5 million or nearly 10c a share as far as Strathmore is concerned.

But shareholders were given no specific financial information on Global Online and are unlikely to receive any because Strathmore's holding is less than 50 per cent.

Strathmore has almost run out of money and its future depends on its ability to sell non-core assets, Global Online's performance and, perhaps, a touch of the Eric Watson magic.

The stock will remains highly speculative until Global Online starts producing positive financial returns or Mr Watson pulls a winner from his bag of tricks.

The company's employee share option plan was also discussed at length on Wednesday.

At the 1999 annual general meeting, shareholders approved the issue of 27,480,000 options under this scheme.

No more than 50 per cent of the options could be offered to directors, and 80 per cent were exercisable at 20c an ordinary share and the remainder at 40c. This compared with the ordinary share price of 37c just before the 1999 meeting.

Shortly afterwards, 20,905,000 options were issued with 13,740,000 going to directors.

The options allocated to directors represented the maximum number that could be issued to them under the plan.

At the 2000 meeting, shareholders renewed the directors' authority to allocate the remaining 6,575,000 options.

The explanatory notes said that the terms of the plan had not changed, yet the exercise price of the unissued options was now based on the price of the ordinary shares on the NZSE at the time the options were issued instead of the 20c/40c mix.

At this week's meeting, there were two resolutions on the employees' share option plan.

The first was to renew the directors' authority to allocate the remaining 6,575,000 options.

The second, believe it or not, was to allow directors to change the terms or rules of the plan without shareholder approval.

The explanatory notes for the meeting said that the requirement to seek shareholder approval was "cumbersome".

Mr Norman was not concerned than this was an employee scheme, yet 66 per cent of the option already issued had gone to directors and shareholders were now being asked to renew the plan when the company would no longer have any executives.

He was also unconcerned that three of the four directors were retiring and the resolution would give the new board carte blanche to change the employee share plan. The resolution was passed by poll after a show of hands was inconclusive.

Finally a shareholder asked if the retiring directors would be given a golden handshake. He was told that this issue was unresolved, but the payments would not be "extravagant".

But it raises the question of how these retirement allowances are determined when three out of four directors are retiring. Mr Norman was paid $275,000 last year and Mr Cowie $205,000.

These were extravagant payments for a company that was running out of cash and has made a number of unsuccessful investments under the stewardship of the two men.

The retiring directors should be paid nothing, but shareholders cannot be confident of this outcome in light of the board's self-interested attitude towards the company's employee share option plan.

* Disclosure of interest: Brian Gaynor is a Strathmore shareholder.

* bgaynor@xtra.co.nz