Presentation to UBC Commerce Faculty

Current Funding Issues for Technology Companies

March 9, 2001

Presentation by

Jeremy SouthVice President, Investment Banking

Jaysen SmalleyAssociate, Investment Banking

Agenda• A commercial from Thomson Kernaghan & Co.• How the markets fared in 2000• Some recent technology deals in BC• The key investment themes for 2001• Valuation considerations• Impact on funding technology companies• What it means for our business

Company Overview• Established in Toronto in 1949, Thomson Kernaghan

(“TK”) is one of Canada’s oldest investment banks.

• The capital of Thomson Kernaghan is owned by 74 shareholders, including 6 senior partners, which allows us to remain independent of any other organization.

• Thomson Kernaghan is an entrepreneurial firm and as a result we relate well to fast growing companies and management teams that are also shareholders.

• Staffed by over 200 employees, the firm has offices in Toronto, Montreal, Vancouver and Calgary.

Company Overview Continued• Thomson Kernaghan is a boutique investment

bank offering clients:– Investment Banking Services (Corporate

Finance and M&A Advisory);– Research;– Institutional Sales and Trading;– Retail Sales and Trading; and– Fund Management.

Investment Banking Services• Director, Alex. Brown Technology Investment Banking

for Europe• VP for TK’s Technology Investment Banking Group -

BC Region• 12 professionals across Canada, based in Toronto,

regional offices in Calgary and Vancouver• Focus on small to mid-cap public companies and early

stage private companies, primarily in the following industries:– Technology (hardware/software);– Internet (ASP, service providers, applications);– eCommerce (B-to-B, B-to-C);– Media & Entertainment;– Communications;– Special Situations.

EQUITY FINANCINGS

Seed Capital

Private Placements

Special Warrants

Initial Public Offerings

Marketed Underwritings

FINANCIAL ADVISORY

Acquisitions & Divestitures

Related Party Transactions

Fairness Opinions / Valuations

Listing Sponsorship (CDNX, TSE, ME)

Corporate Re-structuring

Strategic Advice re:

•Business Plans

•Key Executives

•Board of Directors

U.S. CAPITAL MARKETS

Regulation D Financing

Interim or Bridge Financing (prior to a U.S. listing)

Private Placement Financing (with U.S. investors)

Introductions to U.S. Investment Dealers and Legal Counsel for:

•Public Offerings

•Registrations

•Listings

OTHER

Mezzanine Financing Private and Public Preferred Share Financing

Private Placement Debt Financing

Investment Banking Services

Selected Clients

How the Markets Fared in 2000

• In 2000 the tech laden NASDAQ got hammered – down 40%• DJI down 6% and S&P 500 down 10%• Europe’s main indices were down • The main tech indices also suffered - TechMark down 40%

and Neuer Market suffered major casualties along with a 40% decline

• IPOs mirrored the market performance• Q1 2000 saw 141 issues at $24bn while in Q4 only 63 IPOs

at $8.8bn while aftermarket performance was anaemic• Still a banner year for money raised - $81bn vs $69bn in

1999• A wobbly start to 2001 – over 100 IPOs withdrawn in Q4

2000 – and investors remain wary

Deal Activity Year 2000 Small to Mid-cap BC Tech Co.’s(Deal size: $5m - $100m) (Canadian Issues Only)

Close Date Company Description # of Shares Price SizeCAD

5-Sep-00 Westport Innovations Common Shares (bought) 2,484,900 $15.50 $38,515,95029-Aug-00 Spectrum Signal Processing Special Warrants (1 com1 wt) (bought) 1,764,705 $4.25 $7,499,99625-Aug-00 Intrinsyc Software Special Warrants (1 com 1/2 wt) 3,000,000 $4.50 $13,500,00026-Jul-00 MacDonald Dettwiler and Associates IPO 6,000,000 $14.00 $84,000,00014-Jun-00 Triant Technologies Inc. Special Warrants (1 com) 9,375,000 $1.60 $15,000,0005-Jun-00 International Sales Information Systems Inc.Special Warrants (1 com 1/2 wt) 7,300,000 $1.25 $9,125,0003-May-00 PhotoChannel Networks Special Warrants (1 com 1/2 wt) 15,000,000 $1.00 $15,000,00013-Apr-00 Infowave Software Special Warrants (1 com) 924,000 $32.50 $30,030,00030-Mar-00 bridges.com Special Warrants (1 com 1/2 wt) 3,250,000 $5.55 $18,037,50028-Mar-00 Absolute Software IPO (Venture Exchange) 4,400,000 $5.00 $22,000,00027-Mar-00 AimGlobal Technologies Equity 1,750,000 $20.00 $35,000,00016-Mar-00 Multiactive Software Special Warrants 1,904,762 $5.25 $10,000,0017-Mar-00 Burntsand Inc. Special Warrants 4,714,285 $10.50 $49,499,993

29-Feb-00 Westport Innovations Special Warrants 3,430,000 $9.35 $32,070,50023-Feb-00 ACD Systems International Special Warrants (1 com 1/2 wt) 1,875,000 $12.00 $22,500,00022-Feb-00 Axia NetMedia Special Warrants 3,000,000 $12.25 $36,750,00026-Jan-00 eDispatch.com Wireless Data Special Warrrants (1 com) 3,000,000 $10.50 $31,500,0004-Jan-00 Lions Gate Entertainment Preferred Shares (w/warrants) 13,000,000 $2.55 $48,067,500

• $18 million special warrants trade

• Online career management solutions for highschool students

• Provitable internet company (Rare!)

• Market timing was key. Very important to have solid financing strategy

• Able to make strategic acquisition to build their business and execute their business plan

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The Key Themes for 2001• Value will be a constant theme• Institutional liquidity remains high notwithstanding a shift in

the risk profile• Tech earnings growth is still in excess of the overall market

and alternative investments• Fed intervention will provide some comfort for investors but

the economic slowdown has taken hold• Companies solving major problems will continue to be funded• Semiconductors• Software/infrastructure• Networking• Bandwidth brokers, optical components may see selective

gains• B2B enablers, wireless, security remain interesting areas

Criteria for all Investors• Management, management and management• Addressable market• Time and route to market is key• Differentiating factors - technology, people etc• Are we in a “hot space”?• Projections are largely irrelevant for early stage

companies• Sponsors - VC, investment banks, corporate venturers• Prospects for exit• Think outside the box - traditional rules for capital

providers do not apply

Some Current Funding Themes• The traditional seed and venture capital route remains

the best route to follow for technology companies• VCs gorged themselves on new money throughout 2000

- $100bn raised in 2000 - but many investments are now in trouble

• “At best we are only 40% through the carnage”• US incubators have been particularly hard-hit• Current theme is smaller number of investments, bigger

dollar amounts• Optical networking, some software still sought after but

many areas are essentially unfinanceable – B2C, services, B2B, non-optical hardware

• IPOs will resume in most markets in 2001 given liquidity position but selectivity once again is paramount

The Canadian Scene• Run rate of $1bn a quarter inflow to private equity in

Canada• Owes much to a small number of optical deals, largely

financed by US venture funds• Historical conservatism meant many Canadian funds do

not have same portfolio problem as the US players• Recent shakeout seen by many as proof of their position –

valuations now more attractive• Steady increase in number and size of funds dedicated to

technology• While we will feel impact of US situation, expect the

momentum in Canadian tech financings to continue• M&A seen as equally likely exit as IPO

Valuation Considerations• Top line growth at any cost is over for now• Valuation measures have moved down the income

statement• PE to growth rate and PE multiple are back in vogue• Core valuation validation will come from publicly traded

comparables• Poses a dilemma for pre IPO companies which have

done high valuation private rounds• For private companies, valuations have been savaged

and the rules are much fuzzier• Good valuations for great ideas; lower valuations for

good ideas; no money for anything else

What it means for our business

• We need to keep reinventing our skill sets to stay in touch with the market

• In particular we need to know what is hot and what is not• Deal/client selection will become critical• M&A in BC will be a major exit strategy for many small

companies• Cash rich idea poor is better than vice versa at present• There are a number of bargains appearing on the horizon• Technology is here to stay…we are pausing for breath• BC can assume a mantle as a technology destination over

the coming years