Where has all the cash gone?!

Yorkshire Business Insider, May 2001

Despite a string of probes by private investigators, accountants, directors and market regulators, the truth about exactly how EuroTelecom burnt through £17 million in ten months remains murky. Tim Chapman examines the evidence

The beginning of April 2000 was a good time for technology companies. Doubts were beginning to intrude into the more airy extremes of the dotcom world, but infrastructure companies seemed a dead cert. It was a good time for EuroTelecom, which would provide equipment and services to a new generation of intelligent buildings, to raise over £15 million to fund its ambitious growth plans. When it sponsored the Yorkshire International Business Convention in June, the Dearne Valley firm looked like one of the heroes of the new hi-tech economy that was going to lead the economic regeneration of South Yorkshire.

But barely 12 months after its debut on AIM, EuroTelecom's directors, investors and advisers are asking just how it all went so wrong. This isn't a case of a tech firm hitting the rocks because investors lost confidence in the hi-tech dream. This was a firm that somehow pissed away £17 million in ten months amid some very shady dealings by its top executives.

Things seemed bright as stockbrokers Beeson Gregory brought EuroTelecom to AIM. The firm promised to provide future-proof network infrastructures to large building or campus sites such as retail malls, science parks, sports stadia and urban live/work centres. Analysts predicted a loss of up to £400,000 in the year to June 2000, but profits of £3-5 million on a turnover of £20 million the following year.

The company also had the considerable asset of Chris Akers as chairman. From city analyst to chief executive of Leeds United, Akers was a colourful, popular and well-trusted character on the small investment scene. Around £12 million of the funds raised on flotation came from "friends of Chris" - a network of investors, many based in offshore centres, who have backed Akers in a string of deals. The biggest investor was Mark Sieff, great grandson of the Marks & Spencer co-founder, who took a 13 per cent stake. Akers himself invested £500,000.

Flagship projects for EuroTelecom's pioneering technologies began to stack up. The first was Q.ton, a wired conference centre at Cambridge Science Park. Its founder, Amanda Staveley, sold 49 per cent of the venture to EuroTelecom for £750,000 cash plus £1.2 million worth of EuroTelecom shares. The two businesses agreed a revenue-sharing contract, and Staveley took a non-executive seat on the board.

And in late June, the group announced a long-awaited contract at the £100 million Printworks leisure complex in Manchester. The first phase of work would earn EuroTelecom £300,000 plus £60,000 a year for facilities management. A further £300,000 of work was planned for the second phase. Chief executive Phil Derry acknowledged that the initial contract values were modest, but was confident they would generate increasing revenues as the tenants moved in.

Confident of future revenues, the group poured around £200,000 a week into its own technical infrastructure. Staff increased from 130 to over 300, and the group acquired or took stakes in a string of subsidiary businesses, from software to air conditioning.

The group and its workers were bullish. In the background, however, were a few seemingly minor failures of management that, with hindsight, might be seen as symptoms of a deeper malaise. A special shareholders meeting to approve an amendment allowing conversion of shares was adjourned when it was discovered that shareholders had not been sent proxy materials. More worryingly, price sensitive information was appearing on internet bulletin boards in advance of Stock Exchange announcements, most posted by one "John D Tornado".

Reality hit home on 12 October. EuroTelecom revealed a operating loss of £3.7 million on turnover of £6.5 million.

Derry - a charismatic figure trusted by his employees - claimed a "solid start" to the new financial year. The company was negotiating contracts worth over £100 million, he claimed, and close to winning contracts which would generate £25 million in the next year.

But the chairman's statement from Akers - "I have every confidence that our management team will deliver a marked improvement in sales and profitability in the current financial year" - must have been presented with tight lips. Shocked by the scale of the losses, Akers commissioned a forensic report from BDO Stoy Hayward.

Relations between Akers and Derry worsened, reaching loggerheads over the proposed acquisition of the fibre optics business of Intelect, Derry's former employer. The two communicated increasingly by email - one message from Akers carried the subject line destined to be carved on EuroTelecom's tombstone: "Where has all the cash gone!!!"

Trouble was also brewing between Staveley and the executives. In September, EuroTelecom pressed for a change to the revenue-sharing arrangement with Q.ton. Staveley is believed to have agreed to the change, and Q.ton was invoiced for £835,000. A VAT rebate was claimed on the invoice, but it was never paid.

In a later statement, Staveley claimed: "The work performed by EuroTelecom was vastly over-specified yet seriously defectiveÉ there could be no question of our agreeing their claim." Staveley commissioned corporate investigators Kroll Associates to look into the executive directors.

The BDO findings, when they came, were damning. In documents lodged with the high court in Leeds, the accountants painted a picture of feckless management: £50,000 bonuses paid to Derry, finance director David Linell and marketing director Andy Kwrawchuk when the company was struggling; another £50,000 worth of company credit card bills paid with no supporting invoices; a final warning from the Inland Revenue over unpaid PAYE and NI contributions totalling £218,000; and a web of payments to companies relating to Derry, Linell and Krawchuk totalling some £164,000.

The report, completed at the turn of the year, concluded: "In the absence of new external funding lines being obtained by the business, it is considered unlikely that the EuroTelecom Group will be able to meet its debts as and when they fall."

The Kroll investigation commissioned by Staveley was equally worrying, uncovering the fact that Derry had been probed by the fraud squad in 1986. A company he established in 1980, Marlborough Communications, was accused of defrauding the Ministry of Defence of £1 million. The investigation was dropped after four months.

Kroll found that both Derry and Linell had been less than open about their pasts. The two had been directors of a company called Secure Networks, which had acquired its assets from the ruins of OSPL UK. When Secure Networks collapsed in March 1999, EuroTelecom bought its assets.

Derry has a string of failed companies to his name, going back to his yacht brokerage Wherry Quay Marine, which went bust in 1991. Derry and Linell were also involved in Intelect Europe, which called in the liquidators in 1997.

Kroll is also understood to have uncovered share dealings by friends and relatives of Derry and Linell, which are now under investigation by City regulators.

As the boardroom tensions became more obvious, Beeson Gregory corporate finance director Chris Calloway brokered a meeting between Akers, Staveley and Derry in December. Accounts of what transpired vary: according to one, Akers threatened to resign; according to another, Derry demanded that he do so. As it transpired, Linell was the first to go, resigning "due to pressures of his other interests" on 26 January, less than a month before the administrators were called in.

While EuroTelecom's employees were aware of some of the problems, even senior members of staff were shocked when the PricewaterhouseCoopers administrators were called in on 23 February. Akers was away in Cannes at the GSM World Congress when the news came. He immediately headed up the coast to Monaco, where many of his wealthy, investment-hungry "friends" are based - most notably Nigel Robertson, believed to have been the real driving force behind Scoot.com and Sports Internet. After a grilling by those who had put their faith in him, Akers vowed to discover what had gone wrong.

On 27 February, the entire board of EuroTelecom and representatives of Beeson Gregory were quizzed by the powers at the Stock Exchange. Akers met the Exchange separately the next day at his own request. The group's advisers were later summoned for further grilling.

Derry has kept a low profile since February. In occasional statements, he has maintained the company's biggest problem was the delays at the Printworks in Manchester, which incurred £4 million costs for EuroTelecom, and the failure of other promised contracts to materialise. In March, he was revealed as attempting to put together a consortium to buy back EuroTelecom. Despite insisting that he wouldn't let go of his company, Derry finally resigned, along with Krawchuk, on 26 April.

As Insider went to press, the PwC administrators led by Roger Marsh were still working to untangle the group's complex structure and find buyers for as many parts as possible. A handful of subsidiaries have been sold on, but a buyer for the core business has failed to materialise, despite repeated promises from the administrators.

Akers and commercial director Graham Ford have meanwhile launched an internal probe to investigate the collapse of the company and the activities of its officers, directors and advisers. A suit against Beeson Gregory, who arranged the float, and BDO Stoy Hayward, who signed off the company's accounts, has been mooted. Addleshaw Booth in Leeds have confirmed that they are acting for a number of EuroTelecom shareholders and that the company is "currently considering all options".

In the end, however, the scandal-worthy misdeeds of some of the executives were not the sole cause of the collapse of EuroTelecom. The alleged insider dealing and siphoning of funds among Derry, Linell and their circle undoubtedly hastened the company's demise, but are just the sleazy icing on a cake of mismanagement.

In the weeks before the axe fell, it was no secret within the company that money was desperately short. There was thought to be enough funds to keep going for another two months, but there was widely believed to be someone lined up to put more money in.

The main problem was that the company had simply spent too much too quickly. Thanks to the general slowdown of the tech markets, the big contracts simply failed to arrive. Had EuroTelecom not rushed to buy every company that it thought could broaden its offering, it would have lasted considerably longer on its own merits.

The irony is that the apparent misdeeds of Derry and Linell might never have come to light if it hadn't been for the broader management failings. And that inevitably raises questions about the lighter regulatory policing of the Alternative Investment Market. Shareholders will also be wondering about the role of non-executive directors - especially ones as busy as Akers - and their ability to act as a brake on executives who are inexperienced, incompetent or just plain bent.