The Gazette|jeudi 6 juin 2002
Hartco options draw fire
Firm's policy "completely abusive": fund manager
François Shalom

Hartco president Anthony Molluso, at his firm's CompuSmart store on Phillips Square. He says the firm will not issue options unless it meets its budget targets.

The fortunes of computer-franchisor and phone-store chain Hartco Corp. are on the rise these days, and appear solid.

But the discussion at yesterday's annual meeting of shareholders centred not on the jump in first-quarter profits or on company president Anthony Molluso's forecast of even better earnings this year.

It revolved around stock options for company executives.

At the microphone in the small hotel room, Guy Leblanc wanted to know why the company - in the midst of a turnaround at its franchised computer stores like Compucentre, CompuSmart and at La Cabine Téléphonique after some rough years - was issuing so many options to executives, and at such low prices.

Calmly, the manager of mutual-fund firm Cote 100 told top management that the generous issuing of options to insiders was "completely abusive" - especially in view of the hardships suffered by ordinary Hartco shareholders.

Since Hartco split itself into two separate companies two years ago, breaking out its junior discount department-store division from its computer and telephone chain group, its shares have not fared well.

Issued in July 2000 at $4.25 a share, they promptly lost nearly 90 per cent of their value over the next five months, slumping to 55 cents.

They've since regained some lustre, closing at a post-IPO high of $3.35 yesterday in Toronto, up 15 cents on the day.

"Management holds 2 million options, out of a total of 13 million shares", noted Leblanc, causing a strong diluting effect for as-yet unrewarded common stockholders.

He urged the assembled executives to follow the lead of Domtar Inc., where president Raymond Royer a few years ago set very stringent guidelines for how many, and under what conditions, insiders could buy and sell options.

"There's no downside for insiders, only an upside, which is true only for them," Leblanc said.

He also criticized the practice of "repricing" options - canceling a set price when the shares trade too low, replaced by a far lower, and even more artificial, price.

He stressed he had no problem with options Molluso received - they're a commonly used incentive to attract talented executives from other firms.

Molluso was hired from the top post at hardware firm Sodisco-Howden Group Inc. by Hartco chairman Harry Hart last August - coincidentally, months after Molluso hired Hartco CFO Robert Harritt to become executive vice-president and CFO at Sodisco-Howden.

HART'S SON TARGETED

But Leblanc took aim at options given to others, particularly Hart's son, Jeffrey, under whose stewardship the computer and phone division lost sales and a ton of cash - $4.3 million in fiscal 2000 and $1.1 million in 2001.
"There should be very strict, precise targets on returns that are tied to the number and price of options issued", said Leblanc. By this time, he was holding an amicable post-meeting conversation at the back of the room with Molluso and two reporters, joined intermittently by Harry Hart.

"Fifteen per cent of the float (constituted of options) in a company like yours is abusive," Leblanc repeated.

Molluso responded: "that's your opinion."

After making inquiries, Molluso later told The Gazette that options total 13 per cent of the company's stock, not 15 per cent, "on the low side" of the high of 12 per cent to 18 per cent allowed by Quebec regulators.

Hart assured Leblanc he respected his opinion, and vowed not to distribute options indiscriminately, nor at too-low prices.

But he did not give precise figures, except to say that "you can only exercise 20 per cent of options per year."

Molluso pointed out that "Jeffrey Hart is no longer on the board," adding that "I can guarantee you that if the company does not meet its budget numbers, there's not going to be any options."

But budget numbers are confidential, and are not known by investors.

Molluso countered that "we'll make it transparent."

All of which will have to pass muster with Harry Hart, who owns about 50 per cent of the stock - a figure Molluso said will "drop to 40, and then 30, and then lower - eventually."

Hart also told Leblanc: "Remember, the biggest effect of the dilution is on me."

The issue, debated vigorously but with great civility and even humour, also overshadowed the turnaround market performance of the revamped company - like its first-quarter earnings, which soared 50 per cent from last year to $3.1 million.

Hartco is mainly a distributor, supplying its 146 franchised and five corporate stores under various banners like Compucentre, CompuSmart, MicroAge and operates 37 corporately owned La Cabine Téléphoniques.

But Molluso is also on the prowl for a large acquisition in a sector it isn't currently in: consumer electronics. He said he's targeting a company in eastern Canada with annual revenue of between $150 million and $300 million.

PC PRICE DEFLATION

The main reason wholesale revenues to its franchised retailers and corporate stores have dropped from $744 million two years ago to $623 million last year, he added, was 20-per-cent price deflation in computers and related products over that period.

"We do about $200 million a year just in computers, so that's about $40 million lost," Molluso said.

He also emphasized that profitability will also take precedence over revenue growth.

The company cut more than $1 million in expenses in the last year, including laying off about 30. Hartco now employs about 250 people.