Creo joins Billion Dollar
Club, CDNX Survivability, Corporate Governance Report, Good Buys,
CPC Comments and Update, and Coming Events
Creo joins Billion Dollar
Club
We have a billion dollar
winner! Burnaby's Creo Products Inc (TSE:CRE) is the first B.C.
technology company to hit $1 billion (Cdn) in sales. It is the first member of
this exclusive club. When Dave Brown of Creo made mention of this in his
talk earlier this week at the Vancouver Enterprise Forum, he received a
spontaneous round of applause. And well deserved. When I first came to B.C. a
dozen years ago, there were no $100 million tech companies. Now there are more
than 10 that have this distinction. In the 2000 survey, Creo ranked second at
$675 million and PMC Sierra Inc (NASDAQ:PMCS) placed third at $637.8
million.
For the fiscal year ending
Sept. 30, Creo achieved revenues of US$656.5-million, an increase of 45 per cent
on the US$453.3-million reported a year ago. This increase was primarily the
result of the company's April, 2000, acquisition of the prepress division of Scitex
Corporation Ltd. Adjusted earnings for Creo were $27.1-million or 54 cents
per share (diluted) for the fiscal year ending Sept. 30, 2001, compared with
adjusted earnings of $41.9-million or 97 cents per share
(diluted) for the same period a year ago. Adjusted results exclude the effects
of costs associated with the acquisition - something that always results in
certain writedowns of good will and other intangibles. However, as I see
it, this acquisition positions Creo for market dominance.
In addition to the reduced
earnings, some pressure on the stock price is due to Scitex Corporation's
announcement that it intends to sell 7 million shares of Creo Products Inc.
valued at approximately $78-million. Scitex continues to hold 6.25 million of
the original 13.25 million Creo shares acquired in April, 2000, in exchange for
its digital preprint and print-on-demand assets.
As demand in the printing
sector, currently depressed by weakness in the advertising market (Creo's 4th
quarter revenue slipped to US$143.2-million from US$173.3-million a year
earlier), picks up again next year, Creo should perform well for its investors
in the long run. Trading in the C$18 range, Creo stands a good chance of getting
back to its recent highs at twice that price as selling pressure abates and
demand rises.
CDNX Survivability
Nearly half of the Canadian
Venture Exchange's staff, which numbered about 260, has been cut from
Vancouver and Calgary since the Toronto Stock Exchange acquired the junior
exchange in July. Just this morning, I learned that David Hess, the
CDNX's chief, is stepping down, too.
I'm a little confused, though, about a story in
this morning's Globe which states that Hess's departure is a normal occurance
when two organizations merge, stating that you can't have two presidents. The
article then says that Gerald Romanzin, Exec VP, is
filling Hess's shoes for the time being - until a replacement is found. Figure
that out.
About 47% of CDNX employees are
leaving, or have left, the organization, according to TSE spokesman Steve Kee.
I worry that soon nothing will
be left of the CDNX. Suspicions and worries about its acquisition by the TSE may
well turn out to be the proverbial self-fulfilling prophecy. As we see more
consolidation in the investment industry with all the major dealers getting
absorbed by the big banks (e.g. CIBC's recent deal to takeover Merrill
Lynch), the junior companies and bit players are the ones that'll be dealt
out of the market.
This is not good. Emerging tech
companies need all the help they can get. The junior market (in spite of all the
VCs and well-heeled investors proclaiming that it's not a good idea to "go
public early") is needed to create another avenue for assimilating capital
and flowing it into those deals were VCs fear to tread.
The logic is obvious. VCs and
institutions must think of reasons why they should not invest. After all,
they are investing other people's money and they must do so diligently and
prudently. They must think of all the things that can go wrong and have answers
- from management - as to why they should still invest. Small investors - such
as angels and junior speculators on the other hand, think of reasons why they should
invest. Their little company might just make it into the big leagues.
Another key reason why
something like the CDNX is needed is that investors can invest much smaller
amounts - i.e. many investors with modest amounts rather than just a few
investors with huge amounts. A VC invests millions - and of course will not, and
should not, take big risks. But a thousand investors can easily afford to invest
one or two thousand dollars each and not lose any sleep if they lose it.
I chuckingly (is that a word)
remember a comment that was once made about the former VSE in comparison to
lotteries (because flamboyant stock promoter Murray Pezim once said the
VSE was like a lottery - giving speculative investors a chance to strike it
rich). I think it was a former commissioner who retorted by saying that
"comparing the VSE to a lottery is unfair to the lottery".
Even now, I keep running into
people who shun the CDNX. I would love to have so much dough that I could take
this aloof position, too. But the reality remains: young companies need access
to all types of capital - from adventure to venture capital.
If it keeps going on its present course, the
CDNX will fail. For the first nine months of this year, CDNX financings totaled
only $882 million, down from almost $2 billion in the same period last year.
Daily trading on the CDNX is a paltry $10 million. In comparison, VC investments
for the same period this year are $3.8 billion, down only a wee bit from $4.4
billion for the first 9 months of 2000.
I repeat from before: a
vibrant, active, junior exchange can't be run and managed by an institution.
Without entrepreneurs in the picture, it'll surely fade away.
Corporate Governance Report
A must-read is the final report
of the Joint Committee on Corporate Governance (available at www.jointcomgov.com).
The study makes fifteen
suggestions (down from its originally proposed 27 in the interim report last
March) for improving the governance culture in corporate Canada.
Stock Exchanges such as the TSE
and CDNX, which along with the CICA (Canadian Institute of
Chartered Accountants) commissioned the study, are deciding on how far they
should go in requiring that their listed companies comply with same.
The head of the Centre for
Corporate and Public Governance, Richard Finlay in Toronto thought
that the report was weak. His point is that we shouldn't have to remind boards
what their job is and that there should have been some hooks to eliminate the
"cozy CEO clubs" where CEOs appoint each other to their respective
boards.
One of the recommendations was
that there should be an independent director who acts as board leader - the
report stopped short of saying that this should be the Chairman. This could be
unworkable and lead to a power struggle especially if the CEO is also the
official board chair. The report did not insist on having different people in
the roles of chairman and chief executive.
I sit on a lot of boards -
ranging from the tiniest little startup company which hardly knows how to spell
"governance" all the way to a senior Nasdaq company. And I observe
many others in action. I can tell you this: all companies can improve on
their so-called governance practices. I'm always astonished at how little
directors (including yours truly) really understand about this. So, even though
Findlay may be a little disappointed, I think the report is a good first step at
getting the un-informed just a little more enlightened on how to govern a
company.
Since the size of an
organization will, at least from a practical perspective, dictate the degree to
which a board should be obsessed with governance matters, what I particularly
like about the report is that all companies can adopt the notion of a
"board charter". This is a document which spells out the modus
operandus of that company's board at the time in its life, i.e. what are the
expectations of board members and precisely what are their roles and duties?
Good Buys
As mentioned in my previous
column, in the spirit of getting back into the market, I'm allocating a few
column inches to draw attention to some of our emerging publicly traded B.C.
tech companies.
Among the morass of negative
cash flow emerging technology public companies gasping for breath is a little
gem that has just turned the breakeven corner and is now making a profit. Jenosys
Enterprises (CDNX: JET) in Richmond, BC, makes electronic bingo systems and
just posted its second consecutive quarterly profit with 6 month sales of just
over $2.5 Million and net income of just over $200,000. For the recent quarter,
gross margins increased to 52.4% versus 39.5% and an expense reduction of 28%
was achieved over the same period last year. Those gross margins are pretty
decent for a company producing both hardware and software products, e.g. gaming
terminals.
With some 20 million shares
issued and at a current price of $.10, the company's market cap is only $2
million - the kind of valuation that very early stage private investors usually
enjoy. Speaking of investors, the company is raising additional capital now but
plans to do so without diluting shareholders at current levels. It'll do this
via a convertible debenture offering which is convertible at higher prices, e.g.
$.30. This will avoid having a lot of cheap stock on the street.
The company is moving from a
single local customer (BC Lottery Corp) to a few in the US. Bingo is played all
over the world and with such a low market cap, this is surely a company to
watch. Who knows, maybe you'll find yourself shouting "bingo", too!
Infowave Software
(TSE:IW) is a local company which I like because of their ambitious plans and
the space that they're in. It is establishing itself as a leading wireless
technology provider. I heard CEO Thomas Koll, ex-Microsoft, speak at the
recent Softworld 2001 Conference held in Vancouver earlier this month. I was
quite impressed by the company's plans, but more so by the fact the Koll
personally put at risk $5 million of his own money. That spells commitment and
confidence!
Earlier this week, Infowave
closed a first tranche of its previously announced private placement. The
company issued 30,062,576 special warrants for gross proceeds of US$13,112,757.
It might close up to an additional $1,887,243 on similar terms prior to the
close of business today.
Revenue for the nine months ended Sept. 30,
2001, was $2,654,386 - 256% higher than the $745,013 reported in the first nine
months of last year. Still modest for a TSE company - but moving in the right
direction.
Infowave was named one of the 50 fastest
growing companies in Canada by Deloitte & Touche, LLP.
Capital
Pool Corporation (CPC) Comments and Update
In this column, I
keep track of Capital Pool Corporation ("CPC") companies as
defined by the CDNX because they may provide funding and management to, and in
the process acquire, technology companies. They provide companies with an
alternative to traditional venture capital financing. CPCs are the continuation
of the former VCP (Venture Capital Pool) and JCP (Junior Capital Pool) programs
on the Vancouver (VSE) and Alberta Stock Exchanges.
If you add up all
the CPC, VCP, and JCP companies that were formed since Alberta invented the idea
back in 1987, you'll find more than 1200 such companies. In total, these have
raised more than $3 billion (yes, that's a "b") for growing companies.
Of all the CDNX
companies which have graduated to the TSE in 2000, 24% started off as CPCs. Two
notable B.C. companies that started this way and are now TSE listed are Burntsand
Inc (TSE:BRT) and Westport Innovations (TSE:WPT). Another one, RDM
Corporation (CDNX:RC) was one of the first JCP's which I launched back in
1987 on the ASE. In the early 90's I headquartered it in Vancouver but 5 years
ago it moved to Waterloo, Ontario where its main business is based. I couldn't
resist mentioning this one because there's a thumbs-up buy recommendation in
today's Globe and Mail calling for this stock, now just shy of $1, to hit $2 in
the near future.
Since the CPC
program was launched in B.C. a few years ago, some 300 CPCs have been formed but
only a small number, i.e. less than 50, have completed their so-called
Qualifying Transactions (QT). Right now, there are dozens just sitting there
with modest amount of cash - usually around $500K - not knowing what to do with
it. Under a relaxation of rules by the CDNX, CPCs are permitted to merge with
one another, coincident with acquiring a qualifying company, thereby eliminating
the need to raise additional funds.
When the VSE decided to
introduce its version of the program in 1999, a capital limit of $700,000 was
imposed. The reasoning behind this was that, until a real business was
identified, there shouldn't be too much public money at risk. The concept was to
use this initial sum to seed the company and then do a concurrent placement of
shares when an acquisition was nailed down. Most CPCs have only a few hundred
thousand dollars in the till - especially after paying all the legal and
regulatory fees and bills.
Of course nowadays getting
investors to pony up with the extra dough is proving to be a little tough in
light of the lack of public market euphoria. It's also tough for a CPC with only
$500K or so to attract an acquisition with such a sum and only a promise for
more. Early on, I suggested a larger limit - say $2m - and still believe that
this should be done. This amount is in the ballpark of a small IPO and given a
burn rate of $50K to $100k per month, it would give a speculative startup 3
years or so to hit some milestones and legitimize its existence.
Check our Capital
Pool Corporation chart (in .pdf format) for a complete list of the CDNX's
CPC and VCP companies, thanks to David Ing of Pacific International
Securities. This list is updated on a regular, e.g. monthly basis. Since
today is Nov. 30th, the last trading day of the month, we'll be updating the
afore-mentioned chart after the markets close so you might wish to check back
early next week for a fresh update.
An introductory
article explaining CPCs may be found at http://www.bctechnology.com
Coming Up
The next Vancouver
Enterprise Forum event will be held on January 22, 2002 and the topic is
"Finance: Venture Capital, the Banks, and the Market". This is always
a popular one and tends to sell out in advance. Details will be available at: www.vef.org.
The VEF's new tag line is: "VEF - Advancing Technology
Entrepreneurship."
There's usually no VEF event
scheduled in December. Instead, the VEF and other local groups join together to
host a festive Christmas Tech Lunch next Thursday, December 6th,
11:30am - 2:00pm, at The Park Ballroom - Four Seasons Hotel in Vancouver. In the
spirit of the giving season, this year's Christmas Tech Lunch features a silent
auction with MC Jill Krop, from BCTV. The BC-TIA is hosting
this in cooperation with BC Biotech, Applied Science Technologists
& Technicians of BC (ASTT-BC), Science Council of BC (SCBC), Geekrave,
Wired Woman Society, Vancouver Enterprise Forum (VEF), Fraser
Valley Technology Network (FVTN), New Media BC (NMBC). Check www.bctia.org
to book a seat or a table.
The silent auction is your
chance to get involved and help a great cause. All donations of goods or
services are warmly encouraged and appreciated. Donations of $250 or greater
value will be part of the silent auction and will receive table top signage.
Proceeds raised from this year's charitable activities will go to Covenant
House. If you are interested in making a donations of goods or services please
contact Leanne Janzen at 604.683.6159.
A complete calendar of
technology events can be found on T-Net's
Events page.
Footnotes
Since I mentioned the nuisance
of email change notices in the previous column, I've received dozens and
dozens of them - mostly due to the change from @home to @shaw or
something else. What a pain! Job mobility and ISP changes will only add to that
pain. Although this is no big deal for the home user, anyone in business with a
half decent contact list is going to go nuts trying to keep up with this. For
the small cost of getting your own domain, now around $20/yr, why not end
the pain? The investment is well worth it. Take control now. Be email
savvy! (Hint: a personal domain name registration for a 1-10 years would make a
good family Christmas present.)
If you're an entrepreneur
looking for a place to get your company started, there's some great space
available at Harbour Centre downtown. The New Media Innovation Centre (NewMIC)
and SFU's TIME Centre have teemed up to provide not only office space but
also access to various resources, e.g. tech advisors, access to capital,
mentors, etc. Worried about the high cost of being downtown? Well, not to worry
- they'll even reduce the fees and take some payment in the form of equity.
Check www.sfu.ca/time for contact info.
A reminder: SFU's TIME Centre
is open for business - business folks, that is. TIME is an acronym for
Technology, Innovation, Management, and Entrepreneurship. TIME supports the
growth and development of the tech industry in B.C. TIME features a
"Business Centre" (looks like an airport business lounge) which is
open to technology entrepreneurs and business people to use as a drop-in
downtown office facility. Need to plug-in? Make some calls? Do some work? Hold a
meeting? There are some great facilities for holding your company's AGM. Why
hang out at MacDonald's when you can work productively at the TIME Centre? Drop
by and check it out! It is located at SFU's downtown campus at 515 West Hastings
St.
For a convenient printable, pdf version of this
column, click
here.
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