Tech Futures:
October 20, 2000
By Michael
Volker
Good Tax News, High Tech ETIFs, Stock
Commentary, IPO Watch, Capital Pool Corps Update
Well, I'm pleased to report that Paul Martin
has taken my advice and reduced the capital gains tax inclusion rate to 50% -
meaning a net tax of just under 25% on capital gains at the top marginal rate.
He's also reducing personal income taxes slightly.
In high tech circles there has always been a
plea for the reduction of both cap gains as well as personal income tax cuts.
Not all company CEOs agree as to what the priorities are - i.e. investment vs
income related taxation, given a choice. Small companies which aren't paying
huge salaries need investment capital and hence they prefer investment
incentives whereas the more mature companies need the personal tax breaks to
make it easier for them to recruit. In this regard stock options also benefit
from the lower cap gains tax.
The American tax advantage gap over Canada's is
narrowing. The tax cuts announced this week create a more level playing
field. In some cases, Canadian taxes are lower.
With regard to the human resource question, the
budget had two features supporting post-secondary education. For full-time
students it doubled the education credit to $400 per month. It also
provided a further $600 million to the Canadian Foundation for Innovation
to invest in university research facilities. $100 million will also be
provided over 5 years to the Social Sciences and Humanities Research Council for
research in management skills and education in the New Economy.
The new lower capital gains tax will
certainly benefit the high tech industry and the Canadian economy. Not only
will it make stock options, a critical element of compensation, more
attractive, but it will also reduce Canadian capital gains tax rates to
U.S. levels. The only headache is going to be felt next spring as people try to
figure out their taxes for 2000 - a year in which three different inclusion
rates (75%, 66% and 50%) apply for different time periods.
A further investment incentive has been created
by the increase in the tax-free rollover of capital gains on small business
investments to $2 million (from $500K). This allows investors to transfer
their gains from one company to a new company without "cashing out"
thereby deferring any tax.
The general corporate income rate cuts have
also been accelerated, to stimulate investment and growth in the economy and
jobs. This is good news for investors in that corporate earnings and hence
earnings per share, will increase due to a 2%/year reduction in the general
federal corporate income tax rate from 27% in 2001 down to 21% by 2004.
Since most tech employees and investors find
themselves in the upper tax brackets (which has been increased to $100K+),
here's a little summary for you top income earners in British Columbia (btw - a
good summary of the mini-budget can be found on the Canadian page of www.pricewaterhousecoopers.com.
| |
Capital Gains |
Dividends |
Income |
| B.C. |
24.35% |
35.96% |
48.70% |
| Ontario |
23.21% |
31.34% |
46.41% |
| Alberta |
19.75% |
24.71% |
39.50% |
| Federal |
14.50% |
19.58% |
29.00% |
| US Fed |
20% |
|
39.60% |
The provincial rates are combined provincial
and federal taxes. The Canadian federal rate has been shown for reference. For
comparison, the US rate is the federal rate only. The tax brackets are
much broader in the USA, but at the $100K income level, they are still around
31%. State taxes are additional. In California, count on tacking on up to 9.3%
applied to your net income. So who said the U.S. is such a good deal?
Although the BC Tech Industry has not yet
commented publicly (at least not via their website), the Canadian Advanced
Technology Alliance notes that the mini-budget has come very close to
addressing its requests and proposals. Those items that were not acted on
involved stock options. CATA's proposal that tax should be calculated only when
optioned shares are sold was ignored as was the suggestion to provide a $1
million capital gains tax exemption on employee stock options. More B.C. input
at national levels and more cooperation with national industry orgs wouldn't
hurt.
Whoa! Take a look at B.C. compared to Alberta!
And, don't forget when you buy goods in Alberta, there's no PST! I wonder why we
couldn't just annex B.C. with Alberta and get rid of some overhead to boot! Come
to think of it, have you noticed a lot of Alberta license plates in the streets
these days?
Already a number of Canadians live south of the
border and commute in to B.C. to benefit from lower U.S. taxes. It seems to me
that living in Alberta and working in B.C. is akin to a tax haven. Maybe we
could convert Bowen Island into a Leichtenstein of sorts, eh?
But before you join the stampede to take up
residency in Alberta, I'll repeat some remarks I made in the last column about a
recent speech by Gordon Campbell, leader of the B.C. Government's Opposition
Party. His promise: "there will be dramatic cuts in the first 90 days in
office...and....BC will have the lowest base rate of taxation in Canada within
the first term of office".
If you don't believe me, ask him yourself. His
email is gordon.campbell.mla@leg.bc.ca.
Two years ago, B.C. marginal rates were at 52%. Although the cuts at the federal
level are welcomed, a 48%+ rate is still simply too high. Now it's the
Province's turn. In the meantime, if you like being abused, consider
moving to Quebec. Taxes there are just slightly worse than in B.C.
However nice these cuts are, let's not be too
myopic. There's still a $500B+ mountain of debt that our kids have to deal with
someday. Now that times are good, there are surpluses but what happens when the
current up-wave (expected to last 20 years or so) abates? We've got to reduce
that debt so that if the going gets tough, we don't have to once again increase
tax rates.
It's nice to see that some of Canada's high
tech entrepreneurs that left Canada for the greener grass south of us are taking
initiatives to provide assistance to new startup entrepreneurs. Case in point, Jeff
Skoll, the Canuck who got eBay rolling, has put some seed money into the
Leaf (www.the-leaf.com) to achieve such a purpose.
High Tech ETIFs
Exchange Traded Index Funds - ETIFs - have been
in the papers quite a bit lately. These ETIFs are becoming popular because they
allow investors to effectively buy baskets of stocks, like mutual funds. Unlike
a mutual fund, though, the composition of an ETIF is defined by its underlying
index. Hence, there are no investment management decisions involved. Such funds
simply mirror an index like the Nasdaq, TSE, DOW, etc. The main advantages are
huge liquidity, highly visible, bought and sold just like stocks, and very low
fees.
For high tech investors, here are some
suggestions. Although I mentioned some of these earlier this year, in light of
current interest in the subject, please forgive any repetition.
A very innovative way in which to play the
technology sector is by investing in the Nasdaq market, through the CIBC
Nasdaq Index RRSP Fund. Even though the underlying securities are U.S.
based, the shares are actually eligible for your RRSP. How can that work? Very
clever - the CIBC is not actually investing in the securities per se. It places
the funds in secure, interest-bearing notes and uses the interest to invest in
highly leveraged derivatives products (e.g. options and futures) in such a way
as to mirror the performance of the Nasdaq 100 shares. Very cute!
Of course, you can also buy the Nasdaq 100
directly by purchasing a fairly new product created by the Nasdaq itself. This
is the "QQQ" or Nasdaq100 share which trades on the Nasdaq
under the QQQ symbol. The only advantage of this over the CIBC play, is that
investors may have better liquidity but would lose out on the RRSP eligibility.
Notwithstanding my afore-mentioned comment
about liquidity and visibility, a quasi-ETIF for internet (not dot-coms!) is the
Business Development Bank's (TSE:BDB.N) Special Notes. The BDC has
produced a very interesting low risk vehicle for investing in the internet.
Here's how it works: By buying so-called
special notes traded on the TSE under the symbol, "BDB.N", you are
investing in a basket of stocks of U.S. internet companies. When the BDC issued
these notes in Aug'99, the price per note was US$10. This price is guaranteed
by the BDC such that, upon their expiry in August 2009, the holder of a Note
will at least be reimbursed the US$10 face value. And, this guarantee is from
Her Majesty, herself!
The Notes trade on a daily basis and are
presently in the US$7.50 area. So, if you buy at US$7.50 today and hold until
maturity in Aug'09, you will get back at least the US$10 guaranteed amount. On
the other hand if, in 10 years, internet stocks continue to perform, the Notes
could appreciate substantially. That's a low-risk way to play a high risk
volatile industry. If you buy today at US$7.50, you not only is your capital
guaranteed, but so is a profit of US$2.50.
The basket of stocks which the BDC tracks
consists of the top 20 internet companies. It includes these companies:
Yahoo, Etrade, Ebay, Sun, Microsys, VerisSign,
CNET, Amazon.com, Doubleclick, Microsoft, Inktomi,
AmericaOnline, CMGI, At Home, Cisco, Entrust Tech,
Infoseek, Qwest, Psinet, Macromedia, and Qualcomm.
These are not your typical dot-coms.
The way in which the Note value is determined
is interesting. The top 5 and the bottom 5 of this top 20 list are removed,
leaving the middle 10. It is the price appreciation of this group of 10 on which
the Notes' value is based. The actual trading price of the BDC may not exactly
track this valuation since that is based more on daily supply and demand of the
BDC Notes versus the underlying value of the Notes. In fact, the BDC says that
as of Sep 30th, the basket level (i.e. the theoretical performance index) was at
US$12.10 but the Notes were trading at only US$8.25 on that date. These values
are updated monthly at the BDC website. Could it be that no one knows about
these? Likely. The volumes are very thin - sometimes only 100's trade in any
given day.
More details can be found in the original
prospectus, which you can find on the BDC website at http://www.bdc.ca/
(you need to search for it by using "internet notes" under investor
relations). The BDC sold these Notes to get revenue for general operating
purposes. But doesn't this expose them to a huge risk? Why would the BDC do
this? Since this answer cannot be found in the prospectus, I called them up to
find out that they have hedged their position via en equity-swap, giving them
extra working capital at minimal risk.
Finally, it should be noted that there are a
mere 1.5 million of these notes in existence. The BDC sold only $15 million
dollars' worth. The lack of publicity about this vehicle, the apparent
under-market pricing, Her Majesty's guarantee and the hot internet arena would
all seem to be good arguments for using these to invest in the internet.
A good way to check up on the performance of
internet stocks is the Internet-100 stock index, as reported by USA Today. This
Index consists of 50 e-Business and 50 e-Commerce companies.
What we really need is an ETIF for BC's tech
stocks. Then local investors can invest in BC's high tech sector without having
to create their own portfolio.
Stock Commentary
In previous columns, I mentioned the matter of
Insider Trading. Insider trading is, of course, quite legal provided that
trading is not being done when an insider possesses privileged information.
Recently, Air Canada has been under fire
for giving analysts some inside tips. In the U.S., the Securities and Exchange
Commission (SEC) has an answer for this: Regulation FD, also known as
"Regulation Fair Disclosure" or "Reg. FD" is a new SEC rule
that requires companies to make all "material" information available
to all investors at precisely the same time. This landmark ruling challenges
public companies' longstanding practice of giving the news earlier to analysts,
institutional investors and selected news services. This fair disclosure rule
will take effect on Oct. 23. I wonder if Canada will follow suit?
QLT PhotoTherapeutics (TSE:QLT), B.C.'s
best known biotech firm, has reported a quarterly profit. It has now joined the
elite group of about 20 biotech firms out of around 500 which are actually
generating a real profit. QLT first started trading over a decade ago when it
listed on one of the CDNX's progenitors, the Vancouver Stock Exchange. At the
time the stock was trading in the $1.00 area. Yesterday it closed at $82.
QLT posted its first-ever profit in the third
quarter ($4.3-million, or six cents a share) from the sales of Visudyne, a new
treatment for blindness in seniors. Quarterly revenue was $15.4-million with
Visudyne sales contributing $11.6-million.
Last week, the federal and provincial
governments announced a new initiative under WEPA, a joint federal-provincial
agreement to encourage economic development and job creation in B.C. Under the
agreement, $13 million will be invested in the fuel cell industry. This includes
roughly $1 million to establish Fuel Cells Canada as a non-profit
organization to manage funding for new projects.
Some of the companies which stand to benefit
from this initiative are Ballard Power (TSE:BLD), Methanex Corp (TSE:MX
), QuestAir Technologies (Private, Ballard recently invested $16.7 for
10% of QuestAir), and Cellex Power Products (Private).
Dynetek Industries Ltd (TSE:DNK) is an
Alberta-based alternate fuel play. Last month, Dynetek closed its IPO of 5.3
million shares, offered to the public at $7.50 per share to raise some $40
million. Dynetek makes fuel storage systems for compressed natural gas and
hydrogen for fuel cell vehicles.
Another recent market debutant in the Energy
sector is Stuart Energy Systems Corp (TSE:HHO), a Toronto-based firm
which is developing products to separate hydrogen from water so it can be used
as an energy supply in fuel cells. Stuart priced 5.8 million shares in its
initial public offering at $26 each, the top end of a range of $24 to $26, in a
deal which was typically "oversubscribed". (I've never heard of an
under subscribed IPO - in fact, the price is always adjusted to ensure an over
subscription). Love that ticker, though - HHO!
Don't forget to get rid of all those OTC-BB
stocks cluttering up your RRSP account. Canada Customs and Revenue Agency
("CCRA"), is disallowing OTCBB stocks in RRSPs and RRIFs.
Even though it is quite acceptable to have some
"foreign content" in one's RRSP, OTC-BB stocks - even Canadian issuers
- have got to go. Shareholders have until December 31, 2001 to get rid of
them. You can sell them for cash or transfer them to a non-RRSP account in
exchange for cash. And if you don't, you will be taxed on your holdings of
such stock.
If you don't believe me, CCRA has set up a page
on their website at (its short enough to easily remember): http://www.ccra-adrc.gc.ca
Sideware Systems (CDNX:SYD.U) has seen
better days. Sideware has collapsed from a US$25/share high last January down to
the US$1 range. Quarterly sales are only $267,000 with a net loss of $6.5M.
However, the company has signed over 20 deals to market Internet based dispatch
systems. In Q3, it contracted $900K revenue for delivery over subsequent
quarters. Also, Rahul Bardhan, a veteran of Oracle Corporation, has
joined Sideware as Chief Technology Officer. With 58M shares outstanding and
stock trading around US$1.50, the market cap is US$89 million.
One of BC's long-standing tech companies and
one of my personal favorites, Epic Data International (TSE:EKD), is also
undergoing some rough times. I renewed my interest in the stock when well-known
tech entrepreneur Barclay Isherwood (of Mobile Data Systems International fame)
took control of the company in a proxy fight. However, today Epic announced that
it is reducing its work force by one-third or approximately 100 employees in
response to declining revenues. Revenue will be below expectations and
sequentially down from the third quarter due to lower than expected demand in
enterprise resource planning (ERP) markets in both Europe and North America. At
the same time, the company announced the departure of senior vice-president,
software marketing, Normand Pigeon. Alas, the stock is hovering at $1.15, near
its low of $.90. C'mon fellows- pitch in and make it hum.
IPO Watch
There are no recent IPO announcements. Here are
some upcoming previously mentioned BC offerings.
Sourcesmith Industries Inc. is a
software technology company that is proposing to raise $1,000,000 through an IPO
on the CDNX. The company designs "business process management
software". It also provides custom development and consulting services - a
good way to get cash flow going while being attuned to market needs and
opportunities. Barry Swanson, 46, is President and CEO of the company. He was
formerly a consultant with Microsoft and has 20 years experience in the computer
industry. Haywood Securities is acting as the agent for the offering. It looks
like this offering is limited to BC and Alberta. The company, based in North
Vancouver, is 6 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. Its products address some of the
"last mile" needs allowing cable operators to connect their systems to
end users. Two powerful endorsements of the company's products come from Cisco
and Harris Corp. Cisco has agreed to buy US$24 million of WaveCom's upconverter
equipment - annually- and Harris has placed an initial order to purchase up to
US$34.5 million of WaveCom's 3.5 GHz broadband wireless equipment commencing in
early 2001. 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! Gross margins are 44% - good for a hardware
manufacturer. Furthermore, the Company's order backlog at the end of August was
$45.6 million. In reading the preliminary prospectus, I note that he credentials
of the management team look pretty good. The founder is Dr Surinder Kumar,
President and CEO with a track record in R&D in the telecommunications
field. I haven't seen any pricing information yet, but if you're keen, contact
one of their underwriting agents - Goepel McDermid, Yorkton Securities, TD
Securities, or CIBC World Markets.
Yet another Victoria firm, 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. This is a very young
company, being less than one year old. Its business is to provide secure on-line
credit card transaction processing for internet commerce transactions. It
provides a proprietary Application Service Provider (ASP) solution for merchants
requiring financial transaction processing in a secure environment. Craig
Thomson, 36, is CEO and President. Check the prospectus for more details.
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.
New additions to the list are Aqua
Capital Corp., Buckeye Energy Corporation, Hawkeye Ventures Inc.,
Outside Ventures Inc., Rainmaker Capital Corp., and Smart Api
Venture Capital Corporation. All of the new entries are CPCs.
All of the new entries are from
B.C. except for Hawkeye Ventures and Outside Ventures, which are from Alberta,
and Smart Api Venture Capital, which is from Quebec.
Of particular interest is Aqua
Capital. It is the second CPC from the Discovery Capital Corp.(CDNX:DVY)
group of John McEwen, Harry Jaako and Randy Garg.
Since the previous update, the
following companies have come to trade: Balsam Ventures, CCPC Biotech,
Clarity Telecom Networking, Hollingfield Capital, Intercedent
Ventures, Larkfield Capital, Millennium Ventures, Red Oak
Trail, SNL Enterprises, and Yes Capital (they're going to have
a tough time saying "no" to entrepreneurs).
Because they have completed their
Qualifying Transactions, the following companies have been removed from the
list: Darwin Capital Corp., Detec Resources Ltd., Fountainhead
Projects Corp., and Patfind Inc.
One CPC worth mentioning is Vast
Capital Pool (CDNX:VST). I mention it for two reasons: 1. Because it
has acquired User Friendly Media Inc, and 2. because of its creative use
of special warrants to not only raise capital but also advance a good chunk of
it to the company prior to closing. Vast Capital has received regulatory
approval for, and closed the first tranche of, its private placement of 4.2
million special warrants. Advances up to $604,500 in total will be made to User
Friendly under a loan agreement as additional closings occur.
Vast is paying approximately $4
million in stock to acquire the "geeky" company. User Friendly is an
Internet media company which has attracted a large following of IT professionals
to their entertaining and informational website. It is best known for the comic
strip userfriendly.org, which is based on the daily lives of Internet workers at
a fictional ISP, Columbia Internet. It features the Dust Puppy as its central
character. With over a million monthly visitors, User Friendly is one of the
largest independent geek destinations on the Web.
One big complaint about CPCs is
the fact that it does take anywhere from four to six (or more) months to
complete an acquisition. Not much can be done about this due to the regulatory
and legal processes required in the public arena. However, deals such as Vast's
are innovative ways to allow companies to access capital in the meantime.
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
Footnotes
The Vancouver Enterprise Forum
started up again this Fall with its 2000-2001 season. The first event was held
on September 26th and the topic was early stage financing for new ventures. This
was a popular event and was sold out. There were a number of presentations
dealing with seed investors, incubators and high tech business angels. Some of
the presentations are available on-line. Details are at http://www.vef.org
as is information on various upcoming local tech events.
The October 24th event will
feature 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. He will lead us through his company’s
decision process over the last two years, as NxtPhase formed several
high-profile strategic partnerships (for technology, in the market, and with
investors) to fuel early-stage growth.
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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