Right up front, Pierpont admits he has a prejudice about Philip Michod. When Philip floated Citadel Securix in 2000, Mrs Pierpont took a few of the shares at $1 each and has never forgiven Pierpont for advising her to do so.
Mrs Pierpont invested $5000 in Citadel Securix and saw the value of the shares reduced to $200 in less than two years. As Pierpont has written previously (August 30, 2002, if any reader wishes further background), eternity will pass before your correspondent is forgiven by Mrs Pierpont.
In turn, it will take more than a zillion eternities before Pierpont forgives the promoters of Citadel who brought this blight upon his life. Top of his list is Philip, who was the main vendor of security systems to Citadel and was chief executive of the company after it went public.
Subscribers stumped up $10 million for Citadel, of which Philip collected $3 million. In the prospectus, Citadel's chairman, Paul Cooper, said it had been established since 1993 and had more than 400 clients, including many top 100 listed companies and government departments. The prospectus said Citadel had been profitable since inception and forecast a 2.5¢-per-share dividend for the year to June 2001.
In brief, the prospectus painted a picture of an established growth company, in contrast with many of the patently over-optimistic dotcoms of the day, which is why Pierpont encouraged his bride to invest (together with the fact that the float was underwritten by BNP Paribas). Within two years, the company was tottering towards chancery on the grounds (according to its own documentation) that it had failed to achieve a large enough customer base. So much for the 400 clients, top 100 companies and government departments.
In August 2002, Philip, who still held 67 per cent, bought out the minorities (including Mrs Pierpont) for 5¢. So she lost 95¢ of her $1 less than two years after investing it. On Pierpont's reckoning, the takeover cost Philip about $650,000, leaving him holding a net gain of $2.3 million cash plus the company plus the $270,000-a-year salary shareholders had been paying him during its short life.
In January 2003, Philip sold Citadel to eGlobal International, an integrator of business applications, smartcards, data centres and (after it acquired Citadel) security systems. eGlobal bought Citadel for $2.7million, of which $1.7 million was cash and $1 million was in convertible notes. If Pierpont's numbers are correct, Philip had now collected a total of $4million cash for Citadel and still held eGlobal convertible notes with a face value of $1 million. Not bad for a company that had been a turkey from day one on the ASX.
Pierpont did not rejoice at Philip's good fortune. Nor, to judge by Pierpont's email bag, did several other former shareholders of Citadel, some of whom provided your correspondent with helpful biographical material.
Pierpont hopes some student of dotcom finances will write his or her PhD on the rapid turnaround of Citadel's affairs during the five months between Philip's takeover and resale of Citadel.
In August 2002, the directors of Citadel urged shareholders to accept Philip's offer. They said: "Notwithstanding the extensive efforts to reduce the company's cost base to meet its operating costs, the board expects the business, as currently constituted, to continue to face a difficult trading environment, which is likely to lead to trading losses for the foreseeable future."
On January 29, 2003, the directors of eGlobal said: "It is anticipated that Citadel Securix will make a positive contribution to the consolidated result for eGlobal in the current year. Citadel Securix's unaudited revenues for the half-year ended December 31, 2002, were approximately $4million. Citadel Securix has traded profitably since its inception in 1993 other than the two-year period whilst listed on the ASX ..."
So Citadel was profitable before and after its existence on the ASX, but not during. And it must have staged a remarkable turnaround as soon as Philip privatised it.
Nevertheless, eGlobal is starting to look like a rerun of Citadel. When Philip moved into eGlobal in early 2003, the share price was about 6¢. The shares struggled up to a giddy height of 9.7¢ in October, but have now collapsed to around 3¢.
On the way up, eGlobal managed to rake in $5 million through a capital raising at 7.5¢ in September 2003. A million dollars of that raising was then spent on a capital return of 3.3¢ a share, so shareholders at least got something back. The remaining $4 million from the capital raising was going to be spent on expansions into Hong Kong and the United States.
But Citadel doesn't seem to have done much for eGlobal's bottom line. In the year to June 2002, eGlobal had revenue of $18.9 million.
After acquiring Citadel halfway through, eGlobal's revenue for 2003 actually fell to $15.8million. eGlobal made losses of $3.7million in 2002 and $2.4million in 2003 - lower, but still a loss. Operating cash flow was negative by $1million in 2002 and even worse at $2.7 million in 2003.
The latest December half showed no discernible improvement, with eGlobal registering a loss of $2.6million. In the March quarter, there was a further operating cash drain of $690,000.
Nor is the immediate outlook bright. The latest update, issued by eGlobal's new chief executive officer, Chris Teoh, on June 22, said eGlobal had burned its fingers in Hong Kong and the US and was focusing back on Australia instead. And in Australia, forecast revenue was down from $12 million to $8.5million for 2004. But, Chris added, on a rosier note, that the order book for next financial year was at a record high.
From the behaviour of the shares, the market was expecting the downside and isn't putting much faith in the 2005 upside. The share-price graph looks like a profile of Thredbo and the stock has traded as low as 2.8¢.
If eGlobal is really going to boom next year, then the time is ripe for another Philip-style takeover. The only problem will be to work out exactly who controls the stock.
This time around Philip holds a mere 4.8per cent, which he got by exercising part of his convertible note. The chairman, Gordon Chalmers, holds 6.5per cent and Jim Goldburg of Flight Centre, who recently quit the board, holds 19.9 per cent.
The most recent substantial shareholder to emerge is a Jersey company called Arbitrage Research & Trading, which holds 9.1 per cent. Arbitrage is said to be linked to Andrew Fox, whose Info Investments Pty Ltd took a $400,000 convertible note in eGlobal last March.
That note would convert into a further 8million shares, but at 5¢, which is out of the money at present. On top of that, Andrew has rights to three-year options over a further 8million shares, but at 10¢, which would be a very expensive way of buying into eGlobal.
The whisper around the Croesus Club is that if Andrew exercised all his convertibles and options he would hold more than 20 per cent of eGlobal.
Maybe it's time for another elcheapo bid. Meanwhile, MrsPierpont wants to know if Philip can send her a photo of himself, a small fragment of his clothing and a lock of his hair. She already has the doll and the pins.
EGI Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
