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Special Report: Strathmore Untangled

By Phil Boeyen, ShareChat Business News Editor

Thursday 22nd February 2001

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Tech venture capitalist Strathmore (NZSE: SMR) sang its own praises last October when it reported a profitable result, mainly on the back of the successful listing of its Commsoft investment.

"At this stage our venture capital business is still predominantly in an investment phase which would typically be profit-neutral or loss making. We are therefore especially pleased to be reporting a $2.7million profit in our first report to shareholders," chairman and CEO Phil Norman told the company's shareholders.

Despite that result, Strathmore's shares have been finding it tough going in a market which has put an abrupt end to its love affair with technology.

From a high of 60 cents before last year's tech meltdown SMR has been trading lately at around 13 cents, giving it a market cap of $22 million.

Even one of the company's biggest investors, fellow techie Advantage Group (NZSE: ADV), exited the company earlier this year, selling its 16% holding for just over $3 million.

But given Strathmore still owns 16% of telecommunications software company Commsoft - an investment currently worth in the region of $12 million alone - isn't the market being a bit tough on this stock?

Probably the answer lies in whether or not there is another Commsoft among the company's myriad investments. Just don't ask CEO, Phil Norman, to do the picking for you.

Like a mother hen with her chicks, Mr Norman isn't going to reveal if he favours one over another.

"As you can appreciate, it's not appropriate to comment on which of our investments is looking the best."

Nor he is prepared to reveal which ones are making money and which ones aren't.

"We have some companies that are making profits, others that have yet to come to profitability," he says enigmatically.

What Phil Norman will say is that times have got harder for the tech sector.

"This year is looking to be a tough year for the tech sector and we are seeing indications from the US that that is the case. Companies are finding it hard to prosper in difficult trading conditions."

What then are the possibilities for Strathmore to make further investments?

As Mr Norman points out, the company's annual report shows it is "fully invested". The report shows that at the end of July 2000 Strathmore had total assets of $35 million, with $1.7 million in cash and $31 million in investments.

The company could, of course, sell-down more of its Commsoft shares to finance further investments, but there's possibly more potential upside in holding onto the stake. It could also borrow if an investment was worthwhile.

The priority at the moment, though, is to concentrate on what the company already owns.

"Although we are always interested in new options, like most other venture capital companies, we plan to focus more of our energy on helping our existing investee companies to ensure they succeed," says Mr Norman.

Investors taking a look at SMR need to take a deep breath before plunging into its pool of investments.

The company itself has recognized that investors face difficulty understanding all of its businesses, and says it is committed to providing substantially more information on its investment portfolio in the future.

Aside from its Commsoft stake, Strathmore's share in debt collection and credit information company, CreditNet, probably ranks as the next most straightforward.

The company owns 43% of CreditNet, which it bought for $900,000. The company was sold in June last year to credit and receivables group RMG (NZSE: RMG) for around 6.2 million RMG shares.

The shares are still held by CreditNet and can't be sold till June this year. At a current price of 27 cents for RMG shares, that makes Strathmore's stake worth about $720,000.

US-based Genie Systems has been Strathmore's biggest investment. It spent $3.4 million to grab a 16% share of the software company whose flagship product, OrderWare, "offers a single system for managing all buying, selling, content management and marketplace commerce processes", according to its website.

Genie has offices in San Francisco, Sydney and Auckland, and last year boasted a sale of its OrderWare electronic procurement system to Babies 'R' Us, a division of giant US retailer Toys 'R' Us.

Next up is Soft Tech, another US-based company with offices in England, France, Australia and New Zealand, where its development team is based.

Soft Tech provides vertical market design software for the window and door fabrication industry, and while there was talk a year ago that the company might list offshore, that hasn't happened.

Strathmore owns 16.7% of Soft Tech and can take its stake to 30%. It has so far invested $2 million in the company.

Another $2 million investment has been in Silicon Valley-based 'venture catalyst' Double Impact. Strathmore owns 11% of Double Impact, which provides services such as strategy development, capital raising advice and strategic market positioning to young internet, media and IT companies.

The reason for the Double Impact investment has been not just financial, but also to provide its other investment companies with international contacts and industry advice.

Close behind in value is the $1.9 million put into North Carolina-based Haht Software. Strathmore has a 0.8% of Haht Commerce and 7.5% of Haht Asia.

Haht provides software so companies can use the internet for sales, marketing, ordering and customer service functions and has some of the biggest names in US industry as clients. Two of its biggest investors are Bank of America and CIBC.

In terms of company share, one of Strathmore's biggest stakes is the 30% it owns in video email software company Inspar. Inspar is San Francisco-based and provides advanced solutions and services for internet streaming and multimedia.

Its flagship product, MediaPoster, is designed for use by web companies such as portals, online auction sites, dating services, and online greeting card companies, making is easy for users to post video and audio to a web site.

When Strathmore first announced its Inspar investment it claimed the company was projecting revenues in its first year of operations of $4 million, doubling that to $8.2 million in its second year.

A 33% investment in Global Online Promotions rounds out the Strathmore stable. Eric Watson's Cullen Investments owns 52% and the rest is owned by Global's management. Cullen is also a major Strathmore shareholder.

SMR has put $2 million into New Zealand-based Global Online, a company that develops real time point-of-sale and customer relationship programmes.

Its first product, called Kachingo!, was three years in the making and cost $5 million in development, but is forecast to bring in first year revenues of US$25 million.

Although the product has been launched in New Zealand in conjunction with liquor retailer Super Liquor, the company has its eye on the US market, where sales promotions and rewards schemes are a multi-billion dollar business.

That wraps up where Strathmore has put its money, but just what kind of value the investments truly offer is harder to judge.

Certainly Strathmore can't be accused of not spreading its risk, but tech company valuations around the world have been on a dizzying downward ride for some time and that leaves the company exposed.

As most of the investee companies are privately held, getting to grips with their financial states isn't easy. And even though Strathmore says it plans to offer additional information in future, that isn't going to stretch to individual company breakdowns.

For investors, it will pay to keep a close eye on Strathmore's half-year result to the end of January, due to be announced in early March.

That may give a better idea of whether the market has made a harsh ruling on the company's stock, or if the jury is still out on its future.

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