SMARTHOMES INVESTORS:PRESIDENTIAL HOPEFUL Seán Gallagher promised investors in his company Smarthomes two years ago that revenues would grow to €10 million this year and €13 million in 2012, according to documents seen by The Irish Times.
In fact, turnover stands at a fraction of this level; in the latest figures, for 2009, it is €1.01 million, while employment has dropped to 20 from a peak of 60.
In a letter to BES (Business Expansion Scheme) investors in October 2009, Mr Gallagher and fellow director Derek Roddy said they were confident profit margins could be increased to 20 per cent by entering a distribution agreement with a US multinational.
In April 2010, Mr Gallagher stepped down as a director of the company, which installs television and broadband cabling systems for houses and apartments under construction, and no longer has a shareholding.
The claims were made in the context of a proposal to bring a new investor into the firm to ensure its survival. As part of the proposal, the €750,000 invested by BES participants was to be converted into a minority share of the company.
The correspondence reveals disagreements between the directors and BES investors over the ownership of intellectual property rights in the company.
Some investors were also critical of the amounts of cash the directors took out of the company when it was losing money. In 2008, when Smarthomes lost €650,000, more than €540,000 went to the benefit of the two directors – €195,000 in directors’ remuneration, €55,000 in directors’ pension costs, €196,000 on rent payable to the premises they owned and €96,000 in royalties. The first three figures rose over the previous year, despite the overall losses incurred by company.
Mr Gallagher’s press advisers referred all inquiries about the letters to Smarthomes. Its spokesman said the charge for directors’ remuneration was in line with the level of business, while the charge for rents was in line with rents in Co Louth. He said Mr Gallagher received an average €10,000 a year pension over the past decade and €167,000 in royalties over the same period.
The investors claimed, in a series of questions posed to the directors of Smarthomes in 2009, that “the directors stated, when BES funds were being looked for, that all IP rights would be the property of the company!”
Mr Gallagher and Mr Roddy said they regretted any confusion that may have been caused. “If this was mistakenly included in the BES prospectus, then it may have occurred by way of an administrative error.”
The directors said the advice from financial and tax advisers had always been that from the outset, patents would be held outside the firm. “I can only presume that the point was being made in the prospectus that we were not using patents held by another party in another jurisdiction.”
There was “no potential” that royalties they received could be repaid because they reflected considerable investment by Mr Gallagher and Mr Roddy in materials and time since the firm started.
They also claimed they could have taken larger salaries under the terms of their share agreements but instead decided on “salary levels in the interests of the survival and sustainability of the company”. At the time, Mr Gallagher was being paid €30,000 per annum as chief executive, according to the document.
Last week, Mr Gallagher published his P60 showing that he earned €12,133, equivalent to €233 a week. However, the form was for 2010, long after the company’s fortunes nosedived; a P60 would not a give a comprehensive indication of the wealth of a self-employed businessman.
According to Enterprise Ireland, the agency has provided €693,000 in supports to the firm since 2004. Smarthomes also got €41,970 from InterTrade Ireland, to whose board Mr Gallagher was appointed three years later.
In the letter to investors, Mr Gallagher and Mr Roddy warned that the collapse of the construction sector posed a risk to the company’s survival. The firm was facing huge losses – estimated at up to €1 million – from the bad debts of existing customers, they said.
Smarthomes grew rapidly during the boom with initial turnover of €300,000 a year, growing to €1 million in 2004, €1.5 million in 2005, €5 million in 2006 and €7 million in 2007. In December 2006, a €10 million expansion to create 100 jobs was announced. However, turnover fell to under €4 million in 2008. The most recent accounts, for 2009, show a loss of about €500,000.
On the presidential campaign trail, Mr Gallagher has claimed to have created 100 jobs, but under questioning, he said this figure included sub-contractors.
Under the proposal, marked confidential, Mr Gallagher was to stay on as chairman until the end of 2010 “as a minimum”, for which he was to receive expenses of €1,000 a month.
In the event, the 2009 proposal did not go ahead, but a subsequent proposal to bring in an investor was approved and in March 2010 Smarthomes converted the BES investment into a 15 per cent stake in the business. Smarthomes says it has no creditors outstanding and the accounts for this year will show a return to profit.