Confidence Shaken, What's Up,
Technology Financings, Capital Pool Corps Update, and Coming
Events
Confidence Shaken
Confidence - not optimism - is what it's going
to take to get us out of this slump. That message struck home with me this week
as I was chatting with various brokers and investors. Although we should heed
NYC Mayor Rudolph Giuliani's call for optimism in the wake of last week's
terrorist attacks, it's going to take a while to regain confidence in the
markets.
The lack of confidence brought about by the war
cry and what it all means is putting us all in a down mood. And when you're not
in a good mood, you don't feel much like buying a new car or investing in a
company with an uncertain future.
George Bush's speech last night said
nothing about the economy. Obviously, his first priority is to deal with basic
freedoms and the fight against terrorism. Even the usually steady and
re-assuring Alan Greenspan said that "nobody has the capacity to
fathom fully how the tragedy of Sept 11 will play out."
As I watched the market's opening early today,
the DOW immediately plunged by over 300 points only to reverse that by
350 points in the other direction just an hour later. Of course, in addition to
the general doom and gloom, this Friday also happens to mark one of those
quarterly Wall Street phenomena - the so-called triple witching hour during
which index futures contracts and options on index futures and stock options all
expire at the same time. This always creates some confusion as investors and
speculators settle hedged (or unhedged in the case of speculators) open
positions.
This week alone, more than a trillion dollars
(US) in North American market cap was wiped out. The Nasdaq is trading where it
was back in mid-'97 and locally, even my most revered barometer for the B.C.
tech sector, the T-Net20 index, fell below its inaugural value of 1000
set in January, 1998. It is now trading in the low 800 range. Why, early last
year it passed the 10,000 mark! What a ride that's been!
Confidence won't materialize as long as the
uncertainty prevails. How will we know when this war has ended? Will it be
over when the U.S. captures bin Laden or when it kills him? Or, when it
eradicates all terrorists? Or, will the war against terrorism end up like the
war against drugs - a never ending fight?
So what can we do? Anything's better than
nothing.
I read about a Canadian teacher who sent $100 to
a stockbroker asking him to buy American stocks as a show of confidence. (I
guess the Nasdaq QQQ's would be the best home for this $100). Although
this investment struck me more as a charitable donation, it's still a positive.
At least her heart's in the right place.
Back to the economic question. Perhaps the U.S.
President will gradually turn his attention to the economy once the emotional
need for revenge has been satisfied. In the meantime, though, there are some
tangible things that we, in Canada and here in B.C., could do.
This might just be the right time to announce
some major economic stimulation packages. We need to be a little more dramatic
on the economic front. What have we got to lose?
Let's just look at one "little" idea:
There's an investment incentive in place for B.C. Mining Investors. You may have
heard of the term, "flow-through shares". This fairly new incentive is
called "super flow-through shares". Here's what it means and why it is
super. Jumping right to the bottom line: if a B.C. investor buys $1000 worth of
shares in an eligible mining company, he gets a 100% write-off on the investment
PLUS an additional tax credit such that the true cost of the $1000 investment is
only $367 (your at-risk capital). That's pretty good leverage if you ask me!
So why is this limited to the mining industry?
Why not offer such an investment stimulus to ALL companies? Certainly, the high
tech sector, could use this kind of encouragement. We need to pry loose those
pent-up dollars and get them flowing again.
In the days after September 11th I, like many
others, felt very glum and discouraged. There wasn't much get up and go. But, as
the days went by, it became clear to me that tragedies - no matter how great -
can't weigh us down forever. The human spirit to create and be productive, I
believe, will be stronger than ever. We will not just rebuild - we will grow,
expand, and prosper. History has shown that following events such as this,
people turn their attention to productivity. It makes us feel good to achieve
and accomplish.
I can't help but wonder how things would be
different today if New York and Washington were hit by an earthquake instead of
terrorists. Surely, we'd accept such a devastation as a natural disaster - not
something we can strike back at. We'd start the rebuilding process while still
grieving. Yet, we know that earthquakes can re-occur. That threat is always
present. And, it doesn't stop us. I suppose we believe that because humans (if
you can call them that) caused this, we have a greater chance of eliminating or
controlling the problem. Yeah, right. I guess we need to get some closure on
this before we can regain our shaken confidence and move on.
What's Up?
There are some stocks
which have made dramatic gains this week. One of these, which has a B.C.
connection, is Milpitas, CA-based Polycom Inc (NASDAQ:PLCM). Polycom shot
up by 30% earlier this week to U$25+ and has held that gain all week. It was one
of the biggest and most active gainers on Nasdaq when it opened on Monday.
Polycom is a maker of audio and video conferencing systems. Why fly when you can
travel in cyberspace? You'll recognize its conference phone products by their
distinctive black 3-pointed star shape which can be found on many boardroom
tables. In April of this year, Polycom completed its acquisition of Circa
Communications - a young, North Vancouver manufacturer of VoIP
(Voice-over-Internet Protocol) telephony products. When the deal was announced
in September 2000, it was valued at U$90 million but due to market declines it
actually closed closer to $20 million.
Another B.C. company to
benefit from the chaos is Imagis Technologies Inc (CDNX:NAB). Imagis
traded up to $1.75 this week, presently settling to $1.35. That's still more
than double its $0.63 price the day before the attack on NYC.
The substantial increase in
Imagis Technologies' stock price is due mostly to Imagis biometric facial
recognition technology. This technology assists in airport security, customs and
immigration, law enforcement and criminal justice. Imagis says that over the
past week, many of these organizations have contacted them to assist in the
development of identification, airport and security system installations. Imagis
already has installations of its biometric facial technology at Toronto's
Pearson Airport, in specific Royal Canadian Mounted Police detachments in
Western Canada, and in numerous counties in California. I just love Imagis'
ticker symbol, "NAB", as in "let's NAB those guys!"
You can bet that any company
with a security bent to it, for example Silent Witness Enterprises Ltd (TSE:SWE),
is worth watching. Silent Witness, which just announced unaudited year end (to
July 31,2001) results of $40m in revenue and $5.3m in profits (i.e. $0.86 per
share), is trading in the low teens. It traded up to $14 earlier this week,
though.
Founded in 1986 and
headquartered in Surrey, B.C., Silent Witness is a global provider of
high-performance closed circuit television (CCTV) cameras, digital and analog
storage solutions, network-based remote video surveillance and multiplexers.
Other popular investments are
bound to be companies involved with disaster recovery, backup systems, storage,
communications and anything relating to defense electronics, systems and
software.
Video-game companies might get
a cool response from investors if they're promoting violent games. I noticed
that Electronic Arts has already redesigned one of its game covers which
showed the World Trade Centre in the background. An exception to unpopular games
might be a "get binLaden" game. Just wait, I'm sure we'll see one.
Some T-shirts already show him in the sight of a rifle's cross-hairs.
Technology Financings
Many CFOs will tell you that financing their
businesses continues to be a struggle. Yet, deals are getting done.
Millions of dollars have recently been been
raised by the likes of companies such as Nxtphase Corp ($30m), Datawest
Solutions Inc ($20m), Sideware Systems ($6.3m), Kinetek
Pharmaceuticals ($16.5m), Xantrex Technology Inc ($58m), TIR
Systems Ltd ($1.5m), Xenon Genetics Inc, ,f,($4.1m), Protiva
Biotherapeutics Inc.,($14.5m), and Marine Bioproducts International Corp
($1.2m).
In gleaning this information from the B.C.
Securities Commission's exempt financing notices, a word of caution is in order.
If you look in the current issue of Business in Vancouver, which produces
a nice weekly summary of financings, you'll see that Meteor Technologies Inc
(CDNX:MMI) completed a $9.7 million financing. In fact, what this notice - and
many others - really tells us is that share issuances of said amounts took place
which is not necessarily synonymous with a capital infusion. For example,
in Meteor's case, various investors in Meteor's Thoughtshare Communications
subsidiary converted their equity in Thoughtshare into shares of Meteor at a
deemed valuation equal to the recorded transaction valuation. No new
cash flowed into Meteor's treasury.
In spite of the apparent lack of capital, there
are also new investment funds getting established. A very recent example of this
is Chrysalix Energy, a Limited Partnership formed in July 2001 by three
founding partners: Ballard
Power Systems Inc., Shell
Hydrogen and Westcoast
Energy Inc. This private capital joint venture unites key industry players
to create and support valuable new fuel cell technology companies. At its head
is Wal van Lierop who is moving over from Westcoast Energy. Wal is also
active with NewVenturesBC (see below). Check www.chrysalix.com.
In the last column, I commented that a couple of
junior, CDNX-style, companies were in this enviable position of making some
stock buy-back offers. For example, Triant Technologies Inc, (CDNX:TNT)
has made an offer to buy up to 2 million of its own shares up until Aug 31,
2002. Ignition Point Tech (CDNX:IPN), a developer of broadband
communications technologies, plans to re-purchase up to 730K of its own shares
up until Aug 16, 2002.
ACD Systems International (TSE: ASA) is
another B.C. tech company that just announced a share buy-back bid. ACD intends
to acquire up until September 23, 2002 for cash up to 640,000 common shares.
This represents less than 3 percent of its 22,019,465 shares, close to the
maximum number permitted under securities rules.
I really like this company. Although I haven't
bought any stock yet (too broke), I've been using their software for a number of
years. It's one of the best programs I've seen for viewing and organizing image
files (e.g. photos, etc). Headquartered in British Columbia since 1993, ACD is
one of the world’s leading developers and marketers of digital imaging
software. The Company has a history of 100% annual revenue growth and consistent
profitability. ACD has an estimated user base of 24 million including over
33,000 corporate customers and many Fortune 500 companies.
This week there was news that a number of big
cap firms announced plans to buy back some of their shares in the open market.
Although this includes the likes of PepsiCo, United Parcel Service,
and Starbucks the ones that I found noteworthy are those in the tech
sector. For example, Cisco said it would buy back up to U$3 billion and Compaq
said it would continue re-purchasing another U$550 million remaining under a U$1
billion buy-back. Intel, too, continued with its repurchase plans as its
board added an additional 300 million shares to the plan.
Other tech companies which are buying back their
own shares include Siebel Sysytems Inc., and Solectron Corp. Microsoft
is expected to follow suit. A spokeswoman for Microsoft stated that this was a
reasonable expectation to "participate in buyback efforts to support the
economy and the financial markets". Hah! I don't quite follow that logic.
If they really wanted to support the economy they ought to use that capital to
invest rather than giving some of their stakeholders an easy exit.
(Interestingly, and I'm surprised that no one
has commented on it, is the fact that the U$40 billion appropriated by the U.S.
Congress is in the order of magntitude of Bill Gate's wealth. I thought that
Bill could patriotically chip in a a few "bill", but wouldn't it be
better if there were some compelling programs in place to get angels and other
investors back in the game?)
So what's good about these buybacks? Well, other
than the anti-dilutive benefits to remaining stockholders, these purchases are
clear evidence that these firms have plenty of cash on hand to weather a storm.
Whether or not they can weather a war, is unclear. Retaining a strong cash horde
might prove to be a better boardroom strategy at this juncture.
In any event, when we see the likes of Cisco and
Intel using their cash to buy back their own shares, the situation cannot be that
bad. The war effort may well fuel their sales. Technology companies often fare
well during periods of heavy military spending.
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. They provide
companies with an alternative to traditional venture capital financing. CPCs are
the continuation of the former VCP and JCP programs on the Vancouver (VSE) and
Alberta Stock Exchanges.
Since the program
was launched in B.C., more than 250 CPCs have been formed and more than 30 have
completed their so-called Qualifying Transactions (QT). It takes at least a year
- usually longer - for a CPC to find a suitable takeover candidate and another
six months to a year for a deal to be finalized. One way to expedite the
process is to eliminate the need for a special shareholders meeting to approve
the deals - leave it up to the CPC boards.
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 monthly basis. The Chart is now
current to August 31, 2001.
An introductory
article explaining CPCs may be found at http://www.bctechnology.com
Coming Up
Keep your eyes peeled next week for the
announcement of the winners in the NewVenturesBC
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