Tax
Freedom Day,
R&D Pipeline, Corporate Performance, Capital Pool Corps
Update
Tax
Freedom Day
School's out and Bill
Gates must be a happy camper in view of yesterday's court ruling in Microsoft's
favour. This, along with the recent Fed rate cuts, may give the tech market a
little boost.
Today is "Tax Freedom
Day" - the day of the year when we start working for ourselves, according
to Vancouver's Fraser Institute, instead of for federal, provincial and
municipal governments. Thanks to last year's tax cuts, we get to enjoy this
freedom five days earlier this year.
Our American friends,
though, have been working for themselves since May 3rd. The reason we're farther
behind is because the taxes used in the Institute's computation include income
taxes, provincial sales taxes, the federal Goods and Services Tax, property
taxes, capital gains taxes, health, social security and payroll taxes, import
duties, license fees, taxes on cigarettes and alcohol, fuel taxes and hospital
taxes. I mention this because in my previous column I made mention of the fact
that the income tax gap had pretty well closed between Canada and the USA.
Once upon a time, in 1961,
the date for Canadians was May 30th. I wonder when it'll be next year?
The
R&D Pipeline
In the previous column, I
wrote about university
spin-off companies noting that the
University of B.C. (UBC) and Simon Fraser University (SFU) have
created over 150 spin-off companies. The July issue of Financial
Post Magazine notes that more than 773 spin-off companies have been created
(as of last September) by Canadian universities.
Some readers pointed out
that I shouldn't forget the other research institutions. For example, spin-off
companies from the BC Cancer Research Centre have pumped many tens (if
not hundreds) of millions of dollars into the BC economy and been responsible
for creating a growing pool of technological entrepreneurs. Point taken.
What drives this, and
indeed is the foundation for technology ventures, is Research and Development
(R&D). Canada's Natural Sciences and Engineering Research Council (NSERC)
provides much of the university R&D funding (around $500 million) that's
behind the technology being commercialized by these spin-offs.
In its recent annual survey
on Corporate Canada's R&D spending, Research Infosource Inc. reports
that total R&D expenses for the top 100 Canadian companies (i.e. top 100
ranked by R&D expenditures) accounted for $11.1 billion in 2000. This
represents an increase of 28.5% over 1999. Sounds good, right? Actually, they
should have spent even more if you compare expenditures to revenue (which you
should). Because revenues were up substantially for this group, R&D as a
percentage of sales was only 4.4% (compared to 4.5% in 1999).
These 100 companies account
for 85% of R&D performed by all companies in Canada (i.e. $13Bn). Nortel,
the top-ranked company, invested nearly $6Bn in R&D. That's almost 20 times
as much as the #2 firm - Pratt & Whitney Canada Corp.
Nortel shareholders may be
thinking that some of that "expenditure" could have been put on the
bottom line. But, if you take a longer term view of these expenditures as an
investment, it will benefit shareholders in future quarters. I've seen many
companies compromising on R&D in favour of bottom line results. That can be
a mistake. Info-tech companies can take a lesson from their biotech colleagues
which appear to have a better appreciation of this.
A recent column in the Globe
and Mail questioned Research in Motion's (TSE:RIM) plans for follow-on
products to its successful Blackberry email device. Another story in the same
paper noted that one way of valuing companies - using the example of biotech
companies involved with Cancer therapies - was to look at their "R&D
pipeline", i.e. what are they working on that may lead to new commercial
opportunities?
Most tech startups have a
technological advantage because it is some leading edge technology which gets
them going in the first instance. But what happens after they've been in
business for a few years busily reaping the benefits of their first technology?
What will they do for an encore? How are they nurturing their R&D
connections. For smaller companies, who cannot afford to do their own R&D,
links to universities and other institutions are of critical importance.
Here in B.C. we're lucky to
have organizations such as the B.C. Advanced Systems Institute which
address this very concern, i.e. building bridges between companies and
university researchers. It assists companies (large and small) by giving them
access to intellectual capital.
Corporate Performance
The Globe's Report on
Business Magazine (July issue) features the Top 1000 - measured in terms of
PROFIT. Now, that's a new one! Most rankings are by revenue or by market cap,
but this one is actually concerned about the bottom line.
To be fair, Business Week
(June 18) used an interesting approach in producing its Info-Tech 100 report.
Its ranking was based on four equally weighted criteria: shareholder return,
return on equity, revenue growth, and total revenues. As mentioned in the
previous column, Canada's Celestica Inc.(NYSE:CLS), a contract
manufacturer, was the #1 pick. Celestica was an IBM spin-off (IBM is #6
on the list) aiming for U$20 billion in revenue by 2003.
With respect to corporate
performance, I can't resist mentioning another company even though it isn't in
B.C. (but which now has a B.C. connection - see below). The company is EMJ Data
Systems Ltd (TSE:EMJ). Although not exactly a tech company, it is certainly
in the tech industry, being a specialty distributor of hardware and software
products. It ranked 465th on the Profit 1000 list. EMJ will take-on innovative
products of young companies - long before traditional distributors will even
consider them.
Why do I mention it? Well,
have you ever heard of a company in the tech industry, especially a re-seller,
that actually pays a dividend to its shareholders? Take a look at this:
Yesterday Jim Estill, EMJ's
president and founder, reported that EMJ Data Systems will be paying a special
dividend in the amount of 80 cents per share (no, this is not a typo!) on its
7.7 million outstanding common shares to shareholders of record at the close of
business July 11, 2001. (If you've never received a dividend on a stock - you
still have time). EMJ has paid a regular eight-cent-per-share dividend every six
months (16 cents per year). This special dividend will be replacing the next
three regularly scheduled dividends. According to Jim, "One of our goals is
to offer a fair return for our shareholders. This dividend is one way of
offering this return." In addition to the 16-cent-per-year dividends, in
July, 1998, EMJ issued a special dividend of $1.50 per share.
The company recently released its third quarter
results for the period ending April 30, 2001. Sales for the nine months ended
April 30, 2001, increased $31.7-million or 26 per cent to $153.8-million
compared with the same period the previous year. Income from operations was
$5.1-million for the nine months ended April 30, an increase of 37 per cent or
$1.4-million from the previous year. The company's 12-month trailing earnings
per share are 75 cents.
Now, get this: this is EMJ's 87th
(again, not a typo) consecutive quarter of operating profit!!
Based on the current per-share price of only
$5, EMJ's market cap is less than $40 million, i.e. a microcap stock with annual
sales approaching $200 million.
Jim's a little old-fashioned.
He read Warren Buffet's book (he lent me his copy a few years ago and I still
haven't returned it) and has obviously bought into Buffet's basic values. Now, I
just hope that Buffet knows about EMJ because it would fit his criteria to a
tee. Jim is value-oriented.
His style is interesting.
He's very hands-on and most unpretentious. Although he can well afford the
trappings and accoutrements of an executive's lifestyle, Jim likes to fly on
discount fares and stay in inexpensive hotels.
Jim, a University of Waterloo grad, sits
on a number of boards including Research and Motion as well as an emerging BC
company, IP Applications Corp (CDNX:IAP), a local internet startup.
Fortunately, he also recently agreed to serve
on the Board of the B.C. Advanced Systems Institute (mentioned above).
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, 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 (NB the update will get
posted after the long weekend).
An introductory
article explaining CPCs may be found at http://www.bctechnology.com
Footnotes
FP's July magazine has a piece on the
wealthiest 40 Canadians under 40. It makes for some interesting reading
(aspiring entrepreneurs take note). I'm just glad I'm over 40 so I don't have to
try to get on this list.
Last week, the Vancouver
Enterprise Forum held its end-of season Annual Celebration Dinner
wrap-up event. The subject was: Wireless Data in BC: Twenty Five Years to
Overnight Success. The Keynote speaker, David Sutcliffe, President,
Chief Executive Officer and Director of Sierra Wireless (TSE:SW) gave a
riveting and enlightened talk on the evolution of the wireless industry in B.C.
Although the summer is usually
a quiet time for the Tech industry, a complete calendar of technology events can
be found on T-Net's
Events page.
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? 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 Harbour Centre campus at 515 West
Hastings St. More information can be found at www.sfu.ca/time.
PS - there are some great facilities for holding your company's AGM.
For a convenient printable, pdf version of this
column, click
here.
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