Are IT Capital holders exchanging treasure for trash?

Friday 19th July 2002

Grant Samuel's report on ITC's proposed rescue by its two top managers does little to help shareholders to make up their minds how to vote at next Tuesday's annual meeting.

This is not - heaven forbid - a comment about GS' appraisal skills but rather a reflection on how little useful information there is on the prospects for ITC's existing and proposed investments.

Shareholders will have to decide whether to issue a swag of shares and options to Maurice Bryham and David McKee Wright, the company's chief operating officer and its chief executive, respectively.

If shareholders agree, the duo will get a three-year management contract worth $300,000 a year and 50 million options, exercisable at 4c each in five tranches, at six-monthly intervals and at escalating strike prices starting at 8c and finishing at 18c.

They will each buy 15 million ITC shares for 4c each, raising $1.2 million in cash for the company.

In return for their stakes in three technology startups they will be issued with 137.5 million shares at 4c, valuing the stakes at $5.5 million.

And they propose to raise a further $2.5 million in cash from selling 62.5 million ITC shares to institutional and habitual investors.

The net effect for ITC shareholders is that the company, which at its present cash burn rate will be insolvent early next year, gets enough cash to plough on for a year or two longer.

The downside is that their stakes will be diluted massively. Messrs Bryham and McKee Wright will hold 41.4% of the company if no options are exercised and 47.6% if they all are. The new investors will have 15.4%.

On the face of it the decision is Hobson's choice. After all, no matter how promising or otherwise ITC's portfolio of investments might be, Bryham and McKee Wright's offer is the only one on the table. To state the obvious, 1% of something is worth more than 100% of nothing.

Should the deal go ahead, investors will be watching with interest the fortunes of ITC's expanded portfolio.

GS notes none of the three companies the dynamic duo propose to sell to ITC has the cash resources to see their technologies through to commercialisation. Nor does it offer any opinion about their chances of commercial success, noting simply that its valuations rely almost entirely on management's projections, a situation it deems "less than desirable."

Shoeshine isn't enthusiastic about any of them.

Conceptual Solutionz is developing a "radical" electric motor, which claims to be a significantly more efficient converter of electrical energy to mechanical energy than competitors.

In common with every motor invention, including the one Wellington Drive Technologies is still trying to commercialise after 12 years, the blurb points to multibillion-dollar worldwide markets.

Datasquirt "has developed a revolutionary product called Textcode, which allows mobile phone users to use the text messaging capability of their phones to place an order for products and services."

It aims to make its money from charging commission from the merchant and a percentage of message revenue from the mobile carrier. But as GS notes, management projections are reliant almost entirely on guesstimates of the uptake of Textcode.

Lastly there is Sealegs, the developer of a boat with retractable wheels which will do away with the need for manhandling cumbersome trailers down the beach and getting wet launching your boat. You never know, but Shoeshine would feel a tad self-conscious driving one down Narrow Neck Beach on a summer's afternoon.

Although GS won't comment on these companies' potential, one existing ITC investment, Deep Video Imaging, seems to get its pulse rate up a bit - if "DVI appears to have the potential to be commercially successful" can be considered an unqualified endorsement.

DVI, the brainchild of Hamilton inventor Peter Witehira, has developed and patented 3D display technology for computer monitors and fixed video kiosks of the type used in games arcades.

ITC paid $3.9 million for a 42% stake. The other major shareholder is The Warehouse's Stephen Tindall with about 40%.

While still burning cash, DVI has attracted some serious attention.

Last week Korean computer monitor maker GTT contracted to manufacture and market screens incorporating DVI's multi-layer display (MLD) technology.

And this week California's Applied Display Technology bought a licence from DVI to make MLD monitors for Nasa and other US government clients.

Although no techie, Shoeshine agrees with GS that all this sounds promising - or at least, a great deal more promising than any of ITC's three proposed investments.

The question for equity investors is this: is the Bryham-McKee Wright rescue plan the best, or only, way ITC shareholders can benefit from their indirect DVI holding?

It would be interesting to know what options ITC's board explored and why they were rejected.

As things stand, an investment in ITC is an investment in DVI. Its other holdings, Golden Orb and Terabyte, have been written down to zero and negotiations to sell Terabyte are close to completion.

ITC appears confident of raising $2.5 million from outside investors under a plan that will see existing shareholders' exposure to the promising DVI diluted in the dynamic duo's favour. In return the duo contribute a modest amount of cash and dilute their exposure to some far earlier-stage and less promising technology.

Was Tindall approached to inject funds and lift his DVI exposure?

Given the obvious interest of substantial manufacturing interests, would they not have lobbed a few million ITC's way to keep DVI's development rolling?

For shareholders facing next week's take-it-or-leave-it resolutions, it's probably too late to ask these questions. They might like to ask them nonetheless.

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