April 17, 2012
The British High Court witness statement from Kia Silverbrook reveals troubling details on the financial future of Memjet.
The statement, given to the British High Court, purports to reveal how the Memjet Companies failed to reach its sales target by 90 percent, and details the strained relationship between Silverbrook Research (SBR) and the George Kaiser Family Foundation (GKFF), leading to on-going court proceedings.
Speaking on the costs of development, Kia Silverbrook notes in his witness statement that the “overall development to production of the Memjet technology has taken longer and cost much more than initially anticipated […] this is partly because the technology is extremely difficult, and requires advanced science and engineering in a large variety of disciplines”.
Additionally, “another major reason that the Memjet project has taken longer and cost more than expected was that, at every stage, potential customers demanded a more complete solution, stating that there was too much technical uncertainty or risk for them to take on the development themselves, that they did not believe that it would work or that they did not have the in-house expertise”.
Silverbrook continues: “While the technology works, and is scalable to very high volumes and across many markets, the Memjet management have not met their own sales targets, recently missing these targets by more than 90 percent”. This has led to “the relationship between SBR and the GKFF Entities [becoming] increasingly strained due to the failure of the commercialisation of the Memjet technologies, and the resultant need for significant further funding”.
Silverbrook contests a number of claims put forward by GKFF, remarking on one such statement from GKFF referring to “Ms [Janette Faye]Lee and I [as] ‘cunningly smart’” and having “outwitted the GKFF Entities into investing more than they should have”. Silverbrook insists that all investments were “personally directed” from Mr. Kaiser.
The witness statement contains a number of events purporting to demonstrate the inadequacy in Memjet management to financial issues, with one such example detailing how Chief Financial Officer Mark Legg “delivered a presentation showing that the Memjet companies would require approximately an additional $120 million (€91 million) to reach break-even than had been believed before”.
Silverbrook’s statement continues: “This extra $120 million requirement was not mentioned until 20 minutes before the end of a six hour board meeting. I was visibly shocked by the news”.
In response to GKFF’s value of the claim, detailed as “invested in excess of $610 million (€494 million) in the Memjet companies”, Silverbrook claims that the GKFF entities actually invested “less than 60 percent of this amount, being $350 million in total”.
Silverbrook asserts that the GKFF Entites “appear to conflate the sums invested […] with those invested by Mr Kaiser himself, despite the fact he is not a party to the Oklahoma proceedings […] indeed, it is notable that Mr Kaiser avoids any personal involvement in the proceedings, despite being the key investor in the Memjet Companies and having made greater investments than any of the GKFF entities.
“Either Mr Kaiser is unconcerned regarding his significant personal investment or he is concerned, but not to the extend that he is prepared to be party to any action”.
The relationship between SBR and GKFF is described as having broken down through a number of differences, including a revised budget that Silverbrook insisted would “increase the risk of schedule blow-outs substantially as it removed buffers and the ability to deal with unanticipated problems efficiently”, and the appointment of Len Leuer as the new CEO of Memjet entities.
The witness statement also includes a letter from Janette Faye Lee, discussing her lack of faith of the Memjet management, described as “the key risk factor”:
“My confidence in the Memjet management is shattered. I know that this may sound simplistic, but the “rocket science” was supposed to be the challenge. Memjet is now a proven and highly scaleable technology.
“Shockingly, the management professionals employed, at significant cost, actually now seem to be revealed as the key risk factor. Sales and marketing should be able to be readily costed and evaluated for risk […] the shock was not just that an extra $120 million (€91 million) shareholder support was required, but that management did not have in place the basic means to detect this shortfall […] In my view, business ‘as usual’ is not a credible or financially sensible option.”
By mid-2011, SBR was keen to sell Memjet “to a company which did have the capability to successfully commercialise and profit from the technology”, a view shared by chartered accountants KordaMentha. However, “within six months, our predictions of the continued failure of Memjet management to achieve sales were proven correct, and Mr Kaiser decided to sell Memjet”.
However, despite the agreement, Silverbrook remarks that “the dispute arises from the way of progressing to a sale. The Kaiser parties want to eliminate all minority shareholder rights and have complete discretion over how the proceeds of sale are distributed among shareholders.
“The Kaiser parties have proposed that the Memjet companies will acquire all assets used by SBR in providing services to Memjet without paying for them to leave SBR carrying the liabilities, and without paying SBR more than $22 million (€16 million) in currently overdue invoices. The Kaiser parties are using the current lawsuit, and its concomitant destruction of the reputations of Ms Lee and myself, as a commercial tool to make us and SBR comply with these demands”.
KordaMentha would go on to issue a report “highly critical of the management of Memjet companies, especially in regards to the financial reporting”.
On the accusation of “gouging Memjet and lining the defendants own purses”, Silverbrook refers to his action against a 2012 operations budget for Memjet proposed by Len Leuer in December 2011: “This budget totalled $279,720,000 (€213,136,290) for the year. I thought that this budget was excessive and poorly focused, and included various items which would actually reduce the value of Memjet.
“I proposed an alternative budget totalling $135,825,600 (€103,494,081) for 2012, less than half of Mr Leuer’s budget”.
The witness statement includes a number of details regarding the technological background of Memjet, including its origins under the codenames “Manta” and “Koi”, as well as meetings with OEMs Dell and HP regarding demonstrations.
However, most pertinently, Silverbrook makes several assertions regarding the attempts from other printer manufacturers to emulate the device: “Many companies have attempted to develop what the Memjet technology achieves.
“Canon has spent at least $1 billion (€700 million) in several attempts to achieve it. Philips made three unsuccessful attempts over a period of around six years, each costing over $200 million (€152 million). HP has spent several billion dollars in several attempts, and has come the closest to succeeding, although its solution is inferior to the Memjet technology.
“Many other companies, including Xerox, Sony, Fuji-Xerox, and Samsung, have also tried and failed. It is a technology which is deceptively simple in concept, but enormously difficult to implement in practise”.
Neither the George Kaiser Family Foundation and Silverbrook Research were available for comment at the time of publication.
Categories : World Focus