Spills and thrills for financial surfers

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Two markets expected to grow explosively between now and the end of the century are multimedia and the Internet. One projection suggests worldwide spending on multimedia software will rise from $4bn (pounds 2.67bn) in 1995 to $30bn by 2000. Internet growth may be even greater.

Not surprisingly, many small companies with experience in marketing, entertainment and publishing are jumping on the bandwagon. Some of these early birds may generate spectacular rewards for investors, but they are exchanging a quiet life for the thrills and spills of a white-knuckle ride. The three companies considered below have loads of potential but be warned: investors may lose all their money or be faced with throwing good money after bad.

Recently floated Firecrest illustrates the pitfalls. Shares in the former marketing services company soared from 40p to more than 200p when the group announced initiatives involving the Internet. But in the early stages the new ventures cost money. The results for 1995 showed pre-tax profits up from pounds 415,000 to pounds 603,000 on turnover of pounds 6.6m, but that included a one-off pounds 200,000 for the sale of European rights.

More importantly, pounds 1.74m of costs incurred in developing products for the group's new ventures were carried forward and not charged against profits. The company was consuming cash at an unsustainable rate and had to go to shareholders for more. A fund-raising was announced at 50p and the shares collapsed from 130p to 55p before recovering to 72p.

The company was trying to do too much too quickly. In response, it has been re-financed, initially with pounds 750,000 from a private placing, followed by pounds 1.5m to be raised from the current open offer to shareholders. There has also been a management shake-up, with 42-year-old Malcolm Evans, formerly operations director for Sega Amusements Europe, coming in as managing director under chief executive Roy Capper, who founded the company. A new finance director is to be appointed.

The appeal of Firecrest is its broad range of Internet products. These include: GOD (Global Online Directory), which helps people find their way around the Internet; Nethead, a web site design service for corporate customers; and Transphone, a patented handset for making calls on the Internet.

Mr Evans, who has been personally buying shares, is excited about the prospects, with some very big names in the industry talking to the group about licensing Transphone. The odds are that the darkest hour is past.

Epic Multimedia Group (EMG) is a new flotation on the AIM, where dealings are expected to commence in mid-May with a market valuation around pounds 25m, after raising pounds 5m of new money. Stockbrokers to the issue are Henry Cooke Lumsden.

The solid part of EMG is its corporate video business with a host of blue chip clients. The exciting part is developing CD-Rom and CD-i titles (for specially equipped PCs and televisions, respectively) through its publishing division. The group has spent more than pounds 3m developing state- of-the-art production facilities and games (part funded by customers) with all costs written off against profits. It should have a portfolio of nine titles by the autumn, when, if all goes according to plan, royalties and profits should start to roll in.

The group budgets to make useful profits on titles selling 150,000, but the real bonanza comes with Top 10 hits selling maybe 500,000 copies. The group picks up a royalty on each sale of $5.40 so a hit could bring in $2m of which a sizeable chunk would be profit. Given the buoyant state of the multimedia market, these shares could easily fly in early dealings.

Last but not least is AIM-listed, Freepages, which floated by reversing into the near-defunct Blagg Group. The shares have already doubled to 241/2p from the 12p placing price. This was on reports that the company became cash-positive in March after earlier projections that this would not happen until September.

Freepages offers a free telephone business directory service. It is more focused than Talking Pages, with the country divided into 1,000 rather than 70 areas and three businesses per category listed for each area. Callers therefore have three potential suppliers within close range rather than dozens often many miles away. Revenue comes from companies paying to be listed. Numbers have been growing fast with additional income expected as the group adds an Internet service. Prospects for further progress look excellent.