Tech Futures:
November 3, 2000
By Michael
Volker
Stock Contributions, Stock Commentary,
Warrants or Options?, IPO Watch, Capital Pool Corps Update
Stock Contributions - Favourable Tax Treatment
I'm delighted to see so many reports of altruistic tech
entrepreneurs who have cashed in a few of their chips for the benefit of
society. Back East, RIM founder, Mike Lazaridis, recently donated $100 million
for Physics research and Matrox co-founder Lorne Trottier donated $10 million to
McGill.
There's a very strong tax temporary tax incentive in
place which makes donation of company stock very attractive - more so than a
mere contribution of cash. Here's an example of how it works.
Suppose
you're a co-founder of a successful technology firm. For your efforts, you are
rewarded with a $2 million cash bonus - one of many such bonuses. Taken as
salary, you'd be left with about half that amount, after paying taxes. Of
course, it is unlikely that you would earn such a bonus in cash. Earning it
through capital appreciation on your zero cost founders shares is a more likely
scenario.
Because
of the more favorable tax treatment on capital gains coupled with the tax credit
(of 50%) on charitable contributions, let's take a look at what you can do with
a $2 million windfall on stock. (Feel free, of course, to apply the same logic
to lesser amounts!)
Instead
of selling your founders shares, you contribute $1 million worth of stock to
your alma mater (or your favorite foundation) as a charitable donation. You also
sell another $1 million for yourself. On your donation, you are deemed to have
disposed of the shares but instead of being taxed on one-half of the gain (as
per the recent mini-budget reductions in cap gains taxes), you are taxed on only
one-quarter of this at your full marginal rate of, say 50%, implying a tax
liability of approximately $125K.
On
the $ 1 million which you sold for yourself, you will have a net tax liability
of $250K. However, on the other $1 million in stock donations, you get a tax
credit of 50%, i.e. $500K, which more than wipes out your entire tax bill of
$375K arising from these two transactions (with an unused credit of $125K). You
are effectively left with $1.125 million.
Sure,
if you had not been quite so generous, making no donations, you would have
netted $1.5 million on a $2 million sale (assuming, as above, a zero cost base
on founders stock). But look at it this way: by donating $1 million in gains
your real cost of making a $1 million donation is therefore only $375K - i.e.
the after-tax difference between the $1.5 million you would pocket without
making any donations and the $1.125 million you're left with after a donation -
which is still more than if you had earned the same amount in the form of a
salary bonus. Regardless of how you might rationalize it, it really isn't all
that painful.
High
technology entrepreneurs know that research and higher education are the
lifeblood of their enterprises. Sustaining this valuable resource through
generous stock donations makes good business sense.
Business
in Vancouver recently reported on the good fortunes enjoyed by various B.C. tech
execs. What we don't know is if some of their reported stock sales were
dispositions for charity. Being an optimist, I'll bet some were!
Stock Commentary
Fickle or what? It was hard for even the most
seasoned investor to understand the Nortel (TSE:NT) meltdown and its
impact on other tech stocks. Last week, on the day that Nortel was to report its
quarterly results, it reported earnings slightly better than expected. The
company's earnings from operations (before taking into account any amortization
of acquisition costs) of US$0.18 per share was just ahead of the US$0.17 per
share which analysts were looking for, according to First Call/Thomson
Financial.
Revenue rose 42% over last year to $7.3
billion, only $200 million shy of the average analyst estimate compiled by First
Call. However, even though Nortel's revenue from its optical business grew
90% in the third quarter from the same period a year ago, it was slower than the
150% growth reported in the second-quarter.
Nortel also said that it sees percentage growth
in its share earnings in the low 40s - higher than it had previously expected -
and that it expects to grow faster than the market in 2001.
In spite of this no-surprise news, Nortel's
stock plunged to US$48.75 in after-market trading on the day of the
announcement setting the stage for a tumble the next morning - exacerbated by
margin calls, program trading, and nervous investors and day traders. It is
still hovering in the low US$40's range. Nortel, being Canada's most valuable
company, accounts for 30% of the TSE 300 composite index. Hence "the
market" felt the impact.
It's almost as if the markets were looking for
a reason - any reason - to dump some stock. Sure, some of it was profit-taking
(why not?). Other telecom stocks like Cisco and Lucent were also being attacked
because of the over-heating in this sector and less-than-stellar results being
reported.
Even so, Nortel's P/E is still over 60. The P/E
(Price/Earnings ratio) should be considered along with the PEG (Price/Earnings
ratio divided by growth rate). A PEG of 1.0 means that the P/E is comparable to
the growth rate. A higher figure could indicate (when compared to other
companies) an overvalued situation whereas a figure less than 1.0 could be
interpreted as a relatively undervalued situation. Presently, Nortel's PEG is at
2.1, about the same as Cisco's. Given that, it would appear to be fairly priced
- at least for the moment.
Recent economic data shows that the rise in
U.S. GDP dropped to 2.7% in Q3 from 5.6% in Q2. Inflation climbed to only 2.2%,
up slightly from 2.1%. The U.S. economy seems to be moderating to a sustainable
level meaning that inflation is likely to remain in check and hence the U.S. Fed
is unlikely to raise interest rates in the near term. Some say a decrease may
even be forthcoming. On the positive side, such news is good news for stocks
which always retreat on any signs of interest hikes.
And then there's Intel, a company highly
regarded as a barometer for tech stocks. Yesterday, Intel predicted its sales
growth over the next year to be in the high teens - news to which there was a
strong positive market reaction.
Corporate forecasts such as this, along with
the economic data mentioned above, lead to the conclusion that growth is still
high, just not quite as high as predicted earlier this year. This should mean
that further market corrections are unlikely, at least not substantial ones, and
stocks should start gaining some momentum again. (Hope, Hope!)
Indeed, this may be a good time to get into
those companies that you were keen on back in the Spring but which seemed pricey
at the time, e.g. Burntsand Inc.
Burntsand Inc (TSE:BRT) was added to the TSE 300
Index after the close of trading on November 1st. Being a part of the country's
leading stock index is good for a company in that it gives it a higher profile
and can attract more investors. Burntsand replaces Teleglobe in the TSE 300
Index. Burntsand also reported positive quarterly operating results.
NORSAT International (TSE:NII) of
Burnaby gained $1.15 to $10.00 after the company said it will begin trading on
the Nasdaq National Market on Monday. The company has previously traded on the
Nasdaq SmallCap Market.
Explanation: the "Nasdaq National
Market" is the Nasdaq - the one which everyone aspires to be listed
on. The Nasdaq SmallCap is a junior Nasdaq for companies with smaller market
capitalizations - a very respectable market at that. Why care about this subtle
distinction? I recently discussed this with the CEO of a Nasdaq SmallCapper. He
explained that many institutional investors only invest in Nasdaq Nationals -
hence the desire to be in that market place. It opens the doors to many new
(large and well-heeled) investment funds.
It should be noted that the Nasdaq SmallCap is
sometimes confused with the so-called NASD OTC-BB market - which is not an
official exchange. Many OTC companies call themselves junior Nasdaq's because it
makes them feel more important. But, that's a real stretch.
How can you tell which is listed where? If you
look up quotes on a service like quote.yahoo.com, you'll clearly see suffixes to
identify the specific market. For example, Nasdaq Nationals are listed as
NasdaqNM whereas OTC stocks have a ".OB" appended to the ticker symbol
(e.g. PCSP.OB).
Forbes Medi-Tech Inc. (TSE:FMI,
NasdaqNM:FMTI) started its trading days on the VSE, then progressed to the TSE.
It, too, is now interlisted on both the TSE and Nasdaq.
Here's something for you net savvy
investors. To listen to an audio interview with Mr. Tazdin Esmail, President
& CEO of Forbes Medi-Tech Inc. (TSE:FMI), please follow the instructions
below using the supplied link: www.ceocast.com/company.cfm?cid=3508.
You will be asked for an email address &
password. There is no cost for this.
1. Click on link
2. Click on "First time users, please click here"
3. complete form and click on register.
To locate interview please follow down the page on the right hand side to
10/26/2000 Forbes Medi-Tech Inc. - Tazdin Esmail.
Warrants or Options?
This week's stock tutorial: What's the
difference between warrants and options? Both warrants and options give the
holder thereof the right to buy shares in a company at a certain price (the
exercise price) for a specified period of time.
We often hear about employee incentive stock
options - the kind every high tech employee likes to get as part of her
compensation package. We also hear about warrants which a company issues to
investors, usually as part of a financing package, giving investors the right to
buy more stock from the company (just like employee options).
But then there are also tradable stock options
- the kind you see listed in the newspaper. These are created (i.e. written) by
owners of stock and do not obligate the company in any way. E.g. If I hold
Nortel stock, I can sell options on my stock. Technically, employee incentive
options are really warrants. Warrants represent dilution as the issuing company
"prints" more stock to fulfill the obligation whereas tradable options
deliver already available stock, so there is no dilution. Employee stock options
can not be traded whereas warrants often are. Confused yet?
IPO Watch
Local biotech company (and UBC spinoff) Kinetek
Pharamaceuticals Inc is planning an IPO on the TSE to raise $25 million for
drug research. Kinetek is a UBC spin-off formed in 1992 by Professor Steven
Pelech to develop new drugs to treat cancer, inflammation and metabolic diseases
and anti-diabetic compounds. Goepel McDermid in
Vancouver is the lead underwriter for the offering which is expected to be
completed
in December. The shares will be offered in the $6.50 range. QLT's cofounder
Julia Levy sits on the board. Investors WOF, Royal Bank Ventures Inc., and
Ventures West hold a combined 35% interest in the company.
Previously mentioned pending IPOs include the
following:
Sourcesmith Industries Inc. is a North
Vancouver software technology company that is proposing to raise $1,000,000
through an IPO on the CDNX. This offering is limited to BC and Alberta. The
company, based in North Vancouver, is six years old and has some revenues -
about $500K (annual).
WaveCom Electronics Inc. is a Victoria,
BC company which designs broadband transmission equipment for data over cable
and fixed broadband wireless networks. It seeks to raise approximately $75
million at $13-$15 per common share. Pricing will be finalized in the week of
Nov. 13th with a closing expected in the last week of November. The company has
a 12-year history of sales and profits. In its most recent fiscal period (June
2000), sales were almost $22 million with a $4.5 million net income - after tax!
If you're keen on this one, contact one of their underwriting agents - Goepel
McDermid, Yorkton Securities, TD Securities, or CIBC World Markets.
Beanstream Internet Commerce Inc's filed
a preliminary prospectus on September 11th to raise $1.575 million by selling
$1.75 million shares at $0.90 per share to BC investors only. Haywood Securities
is acting as the agent.
You can get a full prospectus on
any Canadian IPO offering (or any Canadian public issuer for that matter) on the
Sedar website at http://www.sedar.com.
Capital Pool Corporation (CPC)
Update
In this column, I keep track of
Capital Pool Corporation ("CPC") companies (see chart below) as
defined by the CDNX because they may provide funding and management to, and in
the process acquire, technology companies. CPC's are the continuation of the
former VCP and JCP programs on the Vancouver and Alberta Stock Exchanges.
I like CPCs from an investment
perspective. Although one may regard them as speculative (indeed, they are),
they are also an inexpensive way of getting in early and inexpensively. You can
pick up 10,000 shares of a typical CPC for pennies.
There are nine new additions to the
list. These are: ABI Capital Corp., Avic Technologies Inc., E-amigos.com
Inc., Environmental Management Solutions Inc., Killam Properties
Inc., MaxTech Ventures Inc., Mountainview Energy Ltd., My
Venture Inc., and One Click Ventures Inc.
All of the new entries are from B.C. except for
ABI Capital and Avic Technologies, which are from Alberta; E-amigos.com
and Environmental
Management
Solutions, which are from Ontario; and Killam Properties, which is
from Nova Scotia (welcome! Nova Scotia!)
Since the previous update, the following two
companies have come to trade: Celest Medichem Inc., and Navan Capital
Corporation.
Because they have completed their Qualifying
Transactions, the following three companies have been removed from the list: Duke
Capital Corp., Techgroup Ventures Inc., and Yes I.C. Technologies
Inc.
Check
our Capital
Pool Corporation chart (in .pdf format) for a complete updated list of the
CDNX's CPC and VCP companies, thanks to David Ing of Pacific
International Securities.
An introductory article explaining
CPCs may be found at: www.bctechnology.com/statics/mvolker-jun02
Footnotes
The Vancouver
Enterprise Forum's October 24th event featured a company presentation by NxtPhase.
Richard MacKellar, took this small start-up with innovative fibre-optic
technology and attracted the interest of the established power industry.
Unfortunately for many of us investors, the company is still private, but hey -
there was a hint of an IPO somewhere down the road.
The upcoming November 28th event
is titled "Mobile Commerce: Emerging Wireless Technologies
and Companies". The moderator will be Norman Toms of Sierra Wireless
(TSE:SW). Mr.Toms will make a general presentation on the state of wireless
technology and pervasive computing,
where the technology is going and which companies are taking us there. Panelists
for this session include Barry Jinks, President & CEO, SynchroPoint
Wireless, Inc., Juliana Cafik, President & CEO, Soft Tracks
Enterprises,
Karim Khoja, Chairman & CEO, EXI Wireless, and MC'd by Pyarali Jamal,
VP Corporate Finance, Ernst & Young.
For a convenient printable, pdf
version of this column, click
here.
Michael Volker is the
Director of the University/Industry Liaison Office at Simon Fraser University,
Chairman of the Vancouver Enterprise Forum, and a technology entrepreneur. He
owns shares in many of the companies he writes about. Contact: mike@risktaker.com.
Copyright,
2000.
What Do
You Think? Talk Back To Mike Volker
Tech Futures is a bi-weekly column that
focuses attention on new and emerging BC publicly listed technology companies.
Mike Volker is the Director of the University/Industry Liaison Office at Simon
Fraser University, Chairman of the Vancouver Enterprise Forum, and a technology
entrepreneur. He owns shares in many of the companies he writes about.
Contact: mike@risktaker.com
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