Follow the money - Einstein Group

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At the beginning of the year, the chess world learned that 'Einstein
is Game On'. A press release announced that, 'Einstein Group plc, the
international multi media group is now on course for an exciting
future in game and education based media, having today, 25 January
2002, purchased Intellectual Leisure Ltd which owns some of the
assets previously held by BGN plc.'

The announcement continued, 'The deal gives Einstein Group a five-
year contract with World Chess Champion, Vladimir Kramnik; all
contracts/arrangements relating to the proposed "Brains in Bahrain"
(Man v Machine) tournament; all contracts relating to the Dortmund
qualifying rounds of the Chess World Championships and all
contracts/arrangements relating to the proposed Chess World
Championships in 2003. Intellectual Leisure Ltd will now be a
subsidiary of Einstein Group plc.'

Who or what is the Einstein Group? The release answered, 'Einstein
Group plc, founded in 1999, is an international multi-media group. It
floated on the Alternative Investment Market (AIM), of the London
Stock Exchange in March 2000.'

Remembering the advice that Deep Throat gave investigative reporters
during the Watergate scandal of the 1970s, I decided to 'follow the
money' and find out what is on the Web about Einstein Group. Because
it's publicly traded, there is a lot about the company and its
history. At...

London Stock Exchange (LSE)
http://www.londonstockexchange.com/landmark/southwest/company_southwes
t.asp?sedol=0127426

...it's identified as symbol EIC, along with historical data like
share price performance, price movement, number of trades, value
traded, and recent company announcements. The British newspaper
Financial Times maintains another page on the company...

FT.com : Investing data & tools
http://mwprices.ft.com/custom/ft-com/quotechartnews.asp?symb=UK:EIC

...with information similar to the LSE page. Another source is...

Yahoo! UK and Ireland Finance - Quote Search
http://uk.finance.yahoo.com/q?s=EIC.L

...where the profile places EIC in the 'media & photography' sector
and the business summary describes the company's main activity as 'a
holding company to its subsidiaries'.

The stock is not a penny stock, it's a half-penny stock. It opened on
29 July 2002 with a trade of 20100 shares at 0.56p (that's pence, not
pounds) for a trade value of £113 (that '£' is for British pounds, in
case the symbol displays incorrectly on your computer screen).
Recently, the stock has traded by appointment; there were only five
trades between 18 and 29 July, although activity has increased
recently for reasons that I'll explain later.

Financial reports are available on the company's website...

Einstein Group plc
http://www.einstein-group.tv

...One interesting document is the 'Listing Particulars', which
provided information to potential investors about the company's IPO
(Initial Public Offering) in March 2000 on the LSE's AIM. The
document states, 'Einstein Channel PLC is a newly formed company
created to develop a new multimedia brand -- The Einstein Channel.
The Directors intend that this will start with the launch of a
digital TV channel in the major European territories and that The
Einstein Channel will transmit a programme schedule of live and
recorded, cutting edge science and technology launches, entertainment
and education programmes across Europe.' Note that the company later
changed its name from 'Einstein Channel' to 'Einstein Group' at its
Annual General Meeting early in 2001.

The offering met its objectives -- 21.250.000 shares were sold at 40p
each, providing net proceeds to the company of £7.9m. Company
insiders retained another 15.000.000 shares, giving an initial market
capitalization of £14.5m.

March 2000 was the month the NASDAQ index peaked, and it's been
downhill ever since for the dot.com equity markets. The Einstein
Group has not been spared; the company has traded above its IPO price
for brief periods only. The FTSE AIM Index, available by following...

AIM stocks
http://uk.finance.yahoo.com/q?s=+^FTAI+@aim_ah.l&f=snlcvi

...shows the overall AIM market dropping from its peak of 2925 on 3
March 2000 to its current level of about 680, a drop of more than 75%.

The Listing Particulars document also provides background information
on the original senior management team. The most senior executives
were Derek Wyatt, Martin Powell, and Stephen Timmins.

Wyatt, Non-executive Chairman and Member of Parliament since 1997,
had 15 years experience in the media industry, including Director
of 'The Computer Channel' at BSkyB and Main board Director at
publisher William Heinemann. At the time of the IPO, he was also
involved with the World Internet Forum, to be modeled loosely after
the World Economic Forum. A victim of the imploding Internet mania,
the Internet Forum was cancelled a few days before it was scheduled
to begin in November 2000; only 63 delegates had registered, fewer
than the number scheduled to speak.

Powell, Executive Deputy Chairman, had founded another media company,
Sleepy Kids Plc, which later became Entertainment Rights Plc. He left
Einstein 'by mutual agreement' in August 2000.

Timmins, Group Chief Executive Officer, had 'over 25 years experience
in broadcasting and the media', including a stint as executive
producer for the BBC. In 1987, he had co-founded CST Productions Ltd,
later involved in a number of cutting edge media projects in cable
and satellite programming.

Under the heading 'Group Structure', the Listing Particulars
explains, 'The Company was incorporated in September 1999, and is the
holding company for the three other companies in the Group, namely;
Einstein Productions, Einstein Channel GmbH and the European Science
Channel.

'Einstein Productions commenced trading in January 2000 and its
principal activity is the production of high volume/low cost TV
programmes. One series is currently in development for Carlton
Television.

'Einstein Channel GmbH commenced trading in February 2000 [...] Its
principal activity will be the transmission of The Einstein Channel.

'The European Science Channel commenced trading in January 1999 when
it entered into a consultancy agreement with European Space Agency
(ESA) [...] It is expected that the trading activities of the
European Science Channel and the consultancy agreement will be
transferred to Einstein Channel GmbH and that, therefore, the
European Science Channel will become a dormant company.

'All the trading subsidiaries have separate management who will
report to the Board through the Group's central finance and
administration function. Financial reporting will be supervised by
the Finance Director.'

In its first year of operation, ended 31 December 2000, the group
reported a turnover (revenues) of £830k with a loss on ordinary
activities (before taxation) of £3430k. The year saw a successful
launch of its science and technology multimedia channel in Germany; a
contract for UK distribution on Astra, Europe's largest digital
satellite; and the appointment of Granada Channels as the sales agent
for its digital TV channel and Internet portal in the UK.

Its second year of operation, ended 31 December 2001, was more
turbulent. The company failed to publish its report & accounts in the
six months required by AIM regulations and was temporarily suspended
by AIM on 1 July 2002. The suspension was lifted a week later after
the reports were published. Turnover was reported to be £3107k, with
a loss of £4491k.

You don't need to be a crack financial analyst to calculate that the
loss in 2000 of £3430k plus the loss in 2001 of £4491k is almost
equal to the £7.9m raised in the IPO. Indeed, the balance sheet for
end-2001 indicated net current liabilities of £664k for the group. To
add to the financial uncertainty, the first half of 2002 saw the
replacement of the Group Financial Director, the Nominated Adviser,
and the Broker.

The independent auditors' report included a highly unusual disclaimer
that said, 'Because of the possible limitation in evidence available
to us, we are unable to form an opinion as to whether the financial
statements give a true and fair view of the state of the company's
affairs at 31 December 2001 or of its loss for the year then ended.
In all other respects, in our opinion the financial statements have
been properly prepared in accordance with the Companies Act 1985. In
respect alone of the limitation on our work relating to the
preparation of the financial statements on the going concern basis we
have not obtained all the information and explanations that we
considered necessary for the purpose of our audit.'

On the technology front, the company had at least one solid
achievement in 2001. In January it announced the successful launch of
its UK TV service on BSkyB's digital platform. If you're interested
in Einstein's technology, two pages by IBM...

IBM & Einstein Reduce Cost and Time-to-Air for Broadcasting Companies
http://www-
1.ibm.com/industries/media/pressrelease/PRESSRELEASES_72377.html
http://www-1.ibm.com/industries/media/casestudy/CASESTUDY_58592.html

...describe a breakthrough 'system that allows broadcasters to begin
transmission within weeks rather than months - at a fraction of the
normal cost'.

In November 2001, EIC split its stock from a nominal value of 10p per
share to one new ordinary share of 0.5p each plus nineteen deferred
shares of 0.5p each. This allowed the issuance of new shares, which
is prohibited by company law at less than nominal value. The split
was apparently in preparation for important soon-to-be-made-public
deals.

On 19 November, the company announced that Derek Wyatt MP had
resigned as chairman; a few days later it announced 'advanced
discussions with Brain Games Network plc ("Brain Games"), the London-
based events company which owns the global rights to the World Chess
Championships, with respect to the merger of the two companies. The
proposed merger is dependent on a refinancing of Einstein, currently
under negotiation, and would be effected through the share for share
acquisition of Brain Games by Einstein.' The timing of the
announcements was interpreted as a disagreement between Wyatt and
Timmins over the new direction of the company. On the day the deal
was announced the stock rose from 2.75p to 3.50p.

Early in January, the company specified that 'negotiations are now
focused on the potential acquisition of certain assets held by Brain
Games, rather than its entire issued share capital'. Timmins, in his
monthly investor relations update, explained that this was done
because 'you will have seen, and are likely to continue seeing, a
variety of statements casting doubt on the propriety and legality of
various of Brain Games' historic activities. Notwithstanding that, as
far as we and our legal advisers and associated parties are aware,
these allegations have yet to be substantiated. However, your company
took the precaution of acquiring assets of the company through a
subsidiary rather than the company itself in order to protect
Einstein and its shareholders from any action or claim if any of
these allegations are ever proven.'

The press release of 25 January was accompanied by a news
announcement detailing the terms of the deal. Einstein's obligations
were:-

- an allotment to Brain Games (BGN) 'of an initial 5,964,285 Einstein
shares (equivalent to £164,000 at 2.75 pence per share)';

- an 'unsecured interest free convertible loan stock of Einstein with
a nominal value of £1,060,000, convertible at 3.5p per share into a
further 30,285,715 Einstein shares';

- assumption of £800,000 in debt owed to BGN by [Intellectual
Leisure], where 'it is intended that £350,000 of this debt will be
satisfied by the placing of a further 10,000,000 Einstein at 3.5p per
share' (this was done in July); 'the balance of this debt will be
satisfied within six months of completion either in cash or, at
Einstein's election, by the issue of further Einstein shares at 3p
per share'.

On the day of the announcement the stock closed at 2.56p, unchanged
from the previous day. The end-2001 report mentioned the transaction
as a note under 'Subsequent events', and assigned it a value
of '£1.269m to be paid in Einstein shares.' As I write these lines,
the stock has just traded at 0.50p, making considerably less value
for the deal, especially considering that the 'interest free
convertible loan stock' is a busted convert and currently worthless.

What did the Einstein Group receive in return for the shares it
issued? 'The assets being purchased by Einstein include BGN's
contracts with the Brain Games world chess champion, Vladimir
Kramnik, a 10% shareholding in Brain Games Asia ("BGA") together with
the right to receive a one-off $500,000 license fee and an annual
$250,000 management payment from BGA. Vladimir Kramnik will be
participating in a Man v Machine Tournament later this year in
Bahrain which has attracted funding and sponsorship of $2m and the
next Brain Games world championship is expected to take place in
early 2003.'

Ignoring the license fee and management payment from Brain Games
Asia, which are probably valued just as speculatively as the £1.269m
calculated for the deal, it brought Einstein Group two intangibles :
(1) a lot of publicity, and (2) the inside track on potentially
valuable programming content. Since the end of January, EIC has been
associated with the Kramnik - Howell blitz match, the Prague
Reunification agreement, and the Dortmund Sparkassen Chess Meeting,
won by Leko. The group can also look forward to the Brains in Bahrain
match between Kramnik and Deep Fritz in October, the Kramnik - Leko
match in the first half of 2003, and the match between the winners of
Kramnik - Leko and Kasparov - Ponomariov.

The Brains in Bahrain event might even turn the company around.
A 'Sponsor Fact Sheet' on the brainsinbahrain.com site ('temporarily
unavailable due to maintenance work') informs us that:-

- '40 million people play chess regularly', and

- 'Chess is played by over 500 million people (second only to Soccer
in terms of popularity)'.

For the Kasparov - Deep Blue match:-

- 'The Deep Blue internet site achieved over 75 million page
impressions over two weeks',

- 'The event was covered by over 200 journalists from over 60
countries', and

- 'IBM valued their exposure in excess of $105 million', where
exposure means publicity.

Looks like a winner, doesn't it? Unfortunately, it is not certain
that the Einstein Group will be able to benefit from this attention.
An announcement dated 29 July stated that, 'The directors are
currently in negotiations with the Company's supplier regarding
transmission of Einstein TV in the UK. As a result, the Company has
agreed to a temporary suspension of the service. Says Chairman Steve
Timmins: "Our UK TV operation is facing a difficult time and is
losing money because of the advertising downturn. It is my immediate
aim to re-structure the UK TV channel to mitigate these losses. I
hope to have some more news for you on this in the near future." The
Company's second annual general meeting which was originally
scheduled for 30 July is to be postponed and a notice will shortly be
sent to shareholders advising them of the new date.'

Cancelling a shareholders meeting a day before it is scheduled is not
a healthy sign for a going concern, although trading in the stock
perked up immediately. This is not a stock for widows and orphans; it
might, however, be appropriate for a risk-taking chessplayer. I can't
think of another opportunity where John Q. Public could take a flyer
on the future of chess.

Bye for now,
Mark Weeks (not an EIC stockholder!)