Prime Time for Corporate Scams, Bootstrapping's the
way to go, BBX Debuts, Capital Pool Corps Update, and Local Events
Prime Time for Corporate Scams
I recently played an old video clip for a Simon
Fraser University engineering class learning about the world of business. It was
NBC's Prime Time exposé of the Vancouver Stock Exchange (VSE) in
October of 1990. It, along with Forbes magazine, labeled Vancouver as the
"Scam Capital of the World." Prime Time did a great job of showing how
scams were perpetrated (I hope the students didn't get any "bad"
ideas!).
It would appear that many CEOs in corporate America not
only adopted these "bad" ideas, they took the art of accounting
reporting to a new level. It's ironic that the recent, and frequent, reports of
fraudulent and suspect behavior in the in corporate suites now make Vancouver's
scams look like petty theft. Look no further than Worldcom, ImClone, Enron,
Tyco, Adelphia, and even the auditor, Arthur Andersen for evidence of
this.
Junior stocks on the VSE suffered from the bad press.
Investors fled from these stocks and prices plummeted. Exactly the same thing is
happening now - only at a much larger scale. Even George Bush is worried.
Last Fall, investors expected that by this time,
executive actions (e.g. cost cutting and restructuring) would start to show
improvements in corporate financial performance. This, coupled with rosy
economic reports, would turn the markets around. Instead, we're seeing major
indexes drop below their post-September 11th lows.
It goes to show how important it is for companies to
foster investor confidence. Every morning as I open the Report on Business, I
wonder who's it going to be today? When good clean living icons like Martha
Stewart start little fires in their kitchens, one can only wait and hope
that a new recipe will fix the indigestion.
Already there are reports that regulators need to
tighten up the (e.g. accounting and reporting) standards. Put new rules into
place. Put an end to creative accounting - speaking of which, there's a very
amusing satirical piece on satirewire.com in which it's reported that the U.S.
Supreme Court has exonerated the wrong-doers on the grounds that their financial
reports should be considered as "art-forms" - i.e. creating something
out of nothing;>) and indeed, they certainly were creative.
Do you remember what happened after the revelations of
penny-stock fraud on the VSE? The NDP government commissioned James
Matkin to launch a review which resulted in many recommendations. The bottom
line was more regulation. But it backfired. It kept the good companies away from
the junior market because they couldn't tolerate the additional costs and red
tape. They were able to get their startup capital elsewhere. On the other hand,
the marginal companies, those that could not attract venture capital as easily,
had to put up with the extra burden. As a result, there were fewer scams (they
all went to the American OTC-BB market and the "pink-sheets") but
there were also fewer "quality" companies leaving the good old VSE
with a bunch of mediocre companies.
Now, the Liberal Government is attempting to
dramatically cut the red tape and strike a better balance between investor
protection and corporate access to capital. It is trying to adopt more of a
caveat-emptor, investor-beware, American style of doing business. It'll be
interesting to see how far the American regulators go in providing parental
guidance to their companies. The theory has always been that better disclosure
will allow investors to make their own, hopefully better, decisions.
Practically, though, we all know how tough it is to glean information from the
legalese in corporate disclosure documents. How many people do you know that
read balance sheets looking for lots of fluff and questionable goodwill on the
asset side of the ledger?
Moving back to increased regulation and controls will
not help. It will only increase the cost to companies of doing business - and
reduce the bottom line return to shareholders. Estimates vary on what it costs
to maintain a public company listing. A small cap Nasdaq issuer will likely
spend in the neighborhood of $50K/month (minimum) for the privilege of being a
public company. This includes all the compliance costs, filing fees, legal
expenses, audit and reporting costs, management time and attention, etc. A
junior TSX-Venture Exchange issuer should budget at least $15K per month just to
tread water.
The reason why more rules won't help is simple. Some
years ago, I read a report put out by one of the top accounting firms (e.g. KPMG
or Ernst & Young - if any readers recall who it was, let me know and
I'll send you a free copy of "Accounting for Dummies") which commented
on the state of honesty in our society. The report stated that 20% of the
population is inherently honest all of the time; 20% is inherently dishonest all
of the time; and the remaining 60% of the population is neither totally honest
or dishonest - swinging marginally depending on the circumstances. If you
believe these numbers (or adopt them anyway), it may help you in your business
dealings with others. It's an insight into human nature. Just yesterday, I read Bruce
Little's "Dismal Science" column in the Globe and Mail in
which he noted that in a new survey of American executives, 80% admitted that
they cheat in golf - AND in business! That jives with the 20% dishonest and 60%
somewhat dishonest grouping in the affore-mentioned study.
I do not believe that any amount of regulation and
control will change these statistics. But knowing what they are may make you,
the investor, a little but more cautious. That, rather than blind investing
predicated on hot tips and chat-line gossip, may be the take-home lesson from
all of this.
The fact is, that company executives - be it in large or
emerging companies, want to look good. Whenever there's any latitude in how
numbers are reported, they can be stretched a bit. I have not seen a single
company - ever - that has been totally, conservatively, ultra-honest 100% of the
time.
Bootstrapping's the way to go
Unfortunately, the negative investment climate has a
substantial impact on our emerging technology sector which is suffering a
set-back, especially in terms of access to capital for those companies that are
seeking money and a weak market for those investors seeking good opportunities.
It's disheartening to see how low many of our very
promising stars have fallen (stock price-wise, that is). You need look no
further than our top tech companies. Many of these are trading at less than 5%
of their highs of two years ago. If you believe that they will survive, can you
make 20 times your money?
Just take a look at companies like Burntsand Inc.
(TSX:BRT) and Infowave Software (TSX:IW) which are trading in the pennies
now at $.50 and $.20 respectively when they were up in the teens before. Whereas
Infowave still has to prove that it can get customers and generate revenue,
Burntsand has to demonstrate that it can retain customers and make a buck.
Others such as PMC Sierra (NASDAQ:PMCS) have to weather the
communications storm (i.e. slowness in this specific sector) while companies
such as Sierra Wireless (TSX:SW) have to show that they can get their
products out the door on time. These firms could take a lesson or two from MacDonald
Dettwiler (TSX:MDA) - it's one of few that are producing bottom-line results
and it's share price is holding up nicely at $23. It looks like investors are
still keen. I was amazed that Waterloo's Research in Motion (TSX:RIM)
increased in price by 21% yesterday when it reported a loss - but a lesser loss
than everyone expected.
When the public markets are bearish, IPOs are rare and
investors are less keen to invest in private companies when they don't see a
clear path to liquidity. Deals still get done but at very low valuations.
It'll be some time (if ever) before investors flock to
startups with fat wallets ready to inject millions of dollars into unproven
concepts and ideas. Although I've not seen much of an abatement in the start-up
arena, the deals that are moving forward are those with good solid business
plans, teams and most importantly - customers.
I figure that over the next two years, both private and
public companies will have to focus on results - getting customers, keeping
them, and producing bottom line results instead of wheeling and dealing with new
acquisitions. It'll certainly show us who the real entrepreneurs are - those
that know what it's like not to depend on new capital but rather to work with
what they have and bootstrap their businesses to positive cash flow. Rather than
"buying" cash, they'll take pay cuts, cut deals with suppliers, lease
rather than buy, settle for Chevies over Porsches and most importantly, take the
fastest route to generating sales income.
BBX Debuts
In
mid-June, some 250 company owners, investors and advisors attended the first
forum in North America (held in Vancouver, interestingly enough) by the
newly-created Bulletin
Board Exchange,
the "BBX".
In
a news release on the event, Jack
Martin, founder of Martin & Associates law firm, commented that
“In the mind of many of our clients, the Canadian option of the newly-formed TSX
Venture Exchange is not attractive. Right now in Canada there is a monopoly
on small cap financing – it’s the TSX Venture Exchange or nothing. Our
clients vote with their wallets and their feet.
They are attracted to the US, and they are looking forward to the
creation of the BBX, which will do away with the negative drag of the OTC-BB and
the scams which happened.” I wonder why Forbes or Prime Time have never done
an exposé on some of the scams.
More recently, they've got enough juicy news on big-cap companies to fill our
plates.
The
BBX Forum featured representatives of the BBX Team from Washington, D.C. that
saw the value in coming to the Canadian home of 300
Over-The-Counter-Bulletin-Board (OTC-BB) companies. Canadian
companies comprise approximately 10% of the OTC-BB’s listings with more than
half those coming from B.C., many in the tech sector.
The
OTC-BB will be phased out in the first quarter of 2003 and a new market, the
Bulletin Board Exchange (BBX), will be launched.
The BBX is managed by the Nasdaq Stock Market, which expects that most
OTC-BB companies will apply to list on the BBX market.
The BBX will appeal to many of the same companies that are currently
traded on the OTC-BB, but will purportedly be a higher quality market.
The
BBX is expected to offer a significant improvement over the OTC-BB for
qualifying small companies by increasing liquidity for their securities,
augmenting the opportunity to raise equity capital, and conferring the
recognition of trading on a listed market.
The
BBX will be a listed marketplace, with qualitative listing standards similar to
those of Nasdaq's Small Cap market but with no minimum share price, income, or
asset requirements, therefore allowing entrance to a wide array of listings. The
doors are open to virtually anyone!
According
to the news release, brokers in Vancouver and Calgary are figuring out ways to
cater to companies looking at financing to head south, and clients in B.C. who
want to invest in US companies. (TSX-V take note!)
The BBX is accepting applications now. Interested
companies are required to submit a listing application detailing certain
information about the company and its people.
The BBX listing qualifications will include:
a) Public Interest Standards - the BBX will have the
discretion to deny listing to a company in order to protect investors and the
integrity of the BBX market. The procedures will include a review of all
directors, officers and major shareholders for past regulatory or legal issues.
b) Public Float/Shareholder Requirement - minimum of 100
round-lot shareholders and 200,000 shares in the public float.
c) Annual Shareholder Meetings, Proxy Solicitations and
Quorum - annual shareholders' meeting must be held with the first one held
within 12 months of the end of the first fiscal year after the company becomes
listed. It is also proposed that a quorum requirement be adopted of at least
one-third of all shareholders represented for voting at shareholder meetings.
That'll be interesting. I have not been to many junior company meetings which
are attended by at least one third of shareholders. In fact, many are down
around 10%. What'll happen is a quorum is never reached?
d) Independent Director - BBX will require appointment
of at least one independent director, with companies given a grace period of 12
months after launch of the BBX to appoint the independent director. That's a
good move. They must have read Canada's Saucier report on Corporate Governance
(see www.jointcomgov.com)
which I've previously commented on.
e) Audit Committees/Conflicts of Interest - BBX will
require creation of an audit committee, with the majority of members comprised
of independent directors, and adoption of an audit committee charter. Companies
will have 12 months after launch of BBX to create the audit committee. I wonder
how this will be accomplished if there's only one independent director as
suggested in d) above?
f) Auditor Peer Review - all issuers must engage
auditors that are subject to peer review consistent with the American Institute
of Certified Public Accountants procedures.
g.. Shareholder Approval - BBX will adopt the current
NASDAQ rules requiring shareholder approval of transactions that involve
the grant of stock options to officers or
directors; certain below-market issuances of stock;
acquisitions; or changes of control.
h) Distribution of Annual Reports, Availability of
Quarterly Reports - BBX will require distribution of annual reports to
shareholders and require companies to make available quarterly reports upon
request.
What'll it cost to list? The proposed fees (not
unreasonable) for listing on the BBX market include:
a) Initial Listing Fee - $5000 for the first class of
securities listed. Half of the Initial
Listing Fee will be waived for all applicants who
apply within six months after the launch of the BBX. The sale is on!
There is also a fee for each additional class of
securities listed based on greater of $1000 or $0.001/share, not to exceed
$5000. The maximum initial listing fee is $10,000.
b) Annual Fee - $4000 for the first class of securities
and $1000 for each additional class of securities.
c) Listing of Additional Shares Fees - $0.005 per share,
up to a maximum of $8,750 per quarter and $17,500
annually.
It looks like the TSX-V is in for some competition. I really think that it
missed the boat over the past two years with all of its navel gazing,
name-changing, and mergering activities. It's been too busy to get out there and
become the junior exchange for North American companies (a concept I've
been espousing for the past several years).
The BBX website can be found at www.bbxchange.com.
Capital Pool Corporation (CPC) Comments and
Update
In this column, I keep track of Capital
Pool Corporation ("CPC") companies as defined by the TSX Venture
Exchange (the former 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. It lets the public
investor get into the game.
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. It is now
current to the end of June, 2002. (previous update was April, 2002). An
update of the CPC list as of May 31, 2001 was not produced.
The new additions to the list (since April) are Affirm
Capital Inc., CJHC Capital Ltd., Desco Exploration Ltd., ESS Capital Inc., K45
Capital Corporation, LeChamp Capital Corp., Matador Capital Inc., Supernova
Capital Corporation and Tulane Capital Corp.
Of these new additions, Affirm, CJHC, Desco, ESS,
LeChamp and Matador are from Alberta. Supernova and Tulane are from B.C. and K45
is from Quebec.
Since the previous update, the following companies have
come to trade: Bio 1 Inc., Gyzer Capital Inc., Innoventures International
Inc., Performance Property Capital Inc., Piper Capital Inc., Red Chip Inc.,
Sonus Venture Capital Corporation, Tango Energy Inc., Thrust Capital Corp. and
Yardley Capital Inc.
Finally, since the April update, the following companies
have been removed from the list because they have completed their Qualifying
Transactions and are now regular listed companies: Access West Capital Corp.,
Aitchison Capital Inc., Aqua Capital Corp., Castle Bay Enterprises Ltd., CSW
Ventures Corp., Driver Energy Services Inc., Environmental Management Solutions
Inc., EquiTech Corporation, Newlook Capital Corp., Planex Ventures Ltd., Pure
Lean Inc., Transcend Capital Corporation, Western Prospector Group Ltd., Wise
Wood Energy Ltd. and Yes Capital Corp. Obviously, deals are getting
done!
An introductory
article explaining CPCs may be found at http://www.bctechnology.com
Local Events
Summertime is not usually a busy time for
networking and tech events. The BC TIA will hold its third annual BC
TIA Fall Golf Classic to be held on September 10, 2002. This is turning into
a key charity event for BC’s technology community.
Organized by the Technology Committee for
Children’s Hospital (TECCH) and the BC TIA, this year’s event has
already secured sponsorship from Telus, Nortel Networks, Cisco
and Digital Pioneer. The net proceeds will go towards much-needed
equipment, research and programs at BC’s Children’s Hospital. More info on
this can be found at www.tecch.com.
Another very worthwhile golf-fundraiser to
support Alzheimer's research takes place on August 16th at Pitt Meadows
Golf and Country Club. This is organized by the Aasen family (Greg Aasen
is a founder of PMC-Sierra). Check www.acegolfpro.com
for more information on how you can participate in this event.
(For you golfers, don't forget that 80%
statistic mentioned in the first part of this column!)
A complete calendar of technology events can be
found on T-Net's
Events page.
Footnotes
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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