Letter to Shareholders
27 August 2001
27 August 01
Letter to Shareholders
Dear Shareholders, colleagues and friends,
As your company enters the next stage of its development I wanted to set out for you our strategy and direction.
IT Capital, like other venture capital funds focussed on investing in technology companies, has suffered through the global downturn and fall in investor confidence over the past 18 months. However we are doing better than most with our share price down by approximately 66% from its 12 month high, while as a group the median share price fall for these companies is 82.9%.
Your Board has taken decisive actions that will help us move successfully through this difficult period, and emerge stronger in the months to come. Our existing portfolio is performing strongly, we have cut operating costs to around 50% of last year’s result, and we are actively looking for ways to increase our assets under management.
To date we have made eight investments totalling $25 million of capital and have realised cash proceeds of NZ$10.53 million from the sale of two investments, and total profits on our investments to date of $7 million.
We are confident that our position will continue to strengthen in the coming year, and we will emerge safely from the tech-wreck of 2000-2001.
Resolutions at the AGM
Over the past few months there has been speculation about your company in the media, on share chat groups, and in emails and letters that may have been sent to you personally. Some of that reporting and speculation is inaccurate, and possibly intentionally mischievous.
As we prepare for the Annual General Meeting on 31 August I wanted to present you with the facts about ITC, and to ask you to support the resolutions we are putting to that meeting by returning your proxy forms before 5pm Auckland time on Wednesday 29 August.
Your Board is focussed on increasing shareholder value
In a recent statement to the New Zealand and Australian stock exchanges [copy enclosed] your Board made a commitment to increasing shareholder value by cutting operating costs and increasing assets under management. We are also evaluating ways to generate management fees on a consistent basis. By attacking these three issues at the same time, our goal is to reduce our costs so that our operating expenses approach 3% of capital under management. This will take some time, but this is our goal in the long run.
We are now actively looking for merger or partnership opportunities that will increase our assets under management. We believe the global venture capital industry is ready for consolidation and we are taking steps to be a leader in this process.
We are working with Gresham Partners in Sydney to identify closely those venture capital companies that we believe would be a good fit with our business, with the intention of making acquisitions or seeking a strategic partnership that will add value for our shareholders. ITC has built an international venture capital platform over the past 2 years which is unique to Australia and New Zealand. Our goal is to leverage this infrastructure by finding other venture capital companies that can benefit from these relationships.
Reducing costs
We first began tackling the increasing costs several months ago. In our business the majority of our operating costs are in salaries and overheads to support our offices. Staff numbers, particularly in New Zealand, had risen beyond what the Board felt was necessary, given that our portfolio companies are now looking for much of their support from us in Asia and the United States. We have reduced staff numbers in the United States and New Zealand and cut office costs in New Zealand by locating our office in the Terabyte premises. We have also looked – and are continuing to look - closely at our salary and office costs in other locations. The severance costs involved in these changes will be reported in the six-month results to the end of September. However the outcome will be a reduction in overall operating cost from NZ$4.8 million in the year to 31 March 2001, to NZ$2.4 million from 30 September 2001.
Some of you may ask why it costs NZ$2.4 million to run an investment business of this size, while others will wonder how can we operate internationally on such a slim budget. I am happy to explain the budget breakdown in greater detail in my report to the AGM, and a copy of this report will be sent to you in September.
Executive salaries and bonuses
Clearly a significant element in managing costs is salaries and bonuses, and your Board has taken steps to reduce these across our operations. The Board will continue to look for ways of reducing costs provided this does not affect our ability to support our portfolio businesses and raise additional capital.
IT Capital has a flat management structure, and the base salary for the managers of each of our offices, including myself, is approximately the same dollar amount expressed in their respective local currencies. However, when translated back to NZ dollars, the amounts differ based on the particular cross rates. This is part of being a multi-national company. By the standards of the industry in which we work, these are not excessive salaries. The incentive for our people comes from making profits on our investments, and when they do, they receive a share of those profits through the bonus scheme. Your company also has a stock option plan as an incentive for your management to increase the share price.
The bonus scheme, approved by a meeting of shareholders in January 2000, sets out clearly the rules and entitlements of staff. Your Board and its remuneration committee have adhered to these rules at all times. The plan is cumulative, meaning it will be negatively affected by recent investment losses, and not just paid out when there are gains.
Last financial year, on your behalf, we took decisions that realised a significant profit for the company on two of our investments (exo-net and BMC Media), which more than offset our one write down (Tunes.com). As a consequence of making those profits, and in accordance with the rules of the bonus scheme, 15% of the profit above our costs, writedowns, and a return of 32.5% on invested capital, was set aside in the bonus pool and later distributed to employees. As you know, the Managing Director of our New Zealand operation at the time, Keith Phillips, and myself, received the larger amounts paid out of that pool.
When the decision to pay the bonus was approved by your board, your company had reported a profit for the first half of the year of NZ$4.9 million. At that time the values of all of our investments were reviewed. As for other technology companies, the market changed rapidly and we too were taken by surprise at the severity of the downturn.
If we had not made the decision at that time to realise the company’s gains on our investments then we would have deserved criticism, your company would not have made an operating profit for the financial year ending 31 March, 2001, we would not have had the additional funds to help accelerate the growth of our portfolio companies, and no employees would have received any bonus.
Investment Performance
IT Capital has performed at the top of the range in comparison with many of its listed peers over the past 18 months. Our cash on cash, internal rate of return [IRR] to date is just over 40%, and we reported operating EBITDA of NZ$1 million to 31 March. By any measures this is a solid performance from a fund that made its first investment just over two years ago.
The failure of Streamlink was a great disappointment to us, as is any investment that does not add value for you. However put in the perspective of the performance of our entire portfolio, it is a minor setback.
Streamlink did not meet its agreed targets, and we then had to make the decision of whether to continue to support it, or to use those funds for other companies in our portfolio such as Virtual Spectator and Deep Video Imaging. Once the decision was made that we would not contribute the second part of our funding to Streamlink, the Directors of Streamlink worked actively to find other partners or buyers for that business. This was continuing right up until the Streamlink Directors decided to call in an Administrator for the company. In those circumstances, as a minority investor, we were not able to advise our shareholders of this outcome until Streamlink had made its announcement.
By contrast Virtual Spectator and Deep Video Imaging are going from strength to strength, developing their products and attracting interest and contracts from well recognised international businesses. You can read more about these successes on their respective web sites. We have confidence that these companies will continue to secure the international investment and contracts they need to capitalise on their unique strengths and technologies.
Confidence for the year ahead
Your Directors have confidence in their strategies for the year ahead, and in the underlying capabilities of our portfolio companies to achieve their objectives.
Your management asks that you support the resolutions being put forward at our upcoming AGM. Of specific importance is the re-appointment of Don Caldwell and Jay Snider to the board of ITC. Mr. Caldwell’s venture capital fund, Cross Atlantic, and Mr. Snider are two of ITC’s largest shareholders, and they most experienced venture capitalists on your board of directors. As large investors in ITC, they too are disappointed in the performance of ITC’s share price. They have important international contacts in the United States and Europe that will aid in increasing the value of our investee companies at this important stage of their development. They also bring an established track record of successful investment and credibility to our organization as we raise additional capital.
We have also asked for the authority to issue 100 million new shares. These shares will be used to raise more cash to support our portfolio companies or acquire new assets. Without this authority, your company will lose flexibility to increase the strength of its balance sheet and provide liquidity to our businesses in the event that our portfolio companies are delayed in raising third party financing.
We look forward to your continuing involvement with IT Capital, and to your support for your Directors at our Annual General Meeting.
