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LEVERAGED CAPITAL NEWSLETTER     
Vol. 2, Issue 15 August 16, 2002

Leveraged Capital, is a free monthly newsletter that presents growth and strategy issues effecting entrepreneurs and owners of small to medium size enterprises (SME's).

Leveraged Capital is published and delivered electronically to subscribers. Your privacy is strictly respected and we do not share or sell subscriber email addresses to anyone outside of Graham Financial Corporation.

If you enjoy what we present, please forward a copy of Leveraged Capital to clients and associates. They can subscribe to Leveraged Capital, by clicking on this link: http://www.GrahamFinancial.com/newsLetter.htm and filling out the quick form.

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Do you feel as relieved as I do? Are you now convinced that our markets are once again in solid hands of management that can be entrusted with public money?  Me thinks not.  However, the SEC requirement on Wednesday of this week is a step forward at a time when the markets need at least the perception that changes will take place;   the move to hold top managers personally liable for any misrepresentations made to investors — which the new corporate oversight legislation also does — is a turning point worth celebrating.  

Stay tuned.

Much (long-term) success to you,  DPG.

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14 Years of Exceptional Service

Contact Nikki Barnett (416) 367 - 1055
Email:   info@kingcentre.com  Web: www.kingcentre.com

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In This Months Issue: (Click on the Article Title To Go To The Full Story.)

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Quote Of The Month:
"Do any of us doubt that Skilling would have signed, that Rigas would have signed, that Ebbers and Sullivan would have signed?  Of course they would have signed."  
William S. Lerach, a plaintiffs' lawyer at Milberg Weiss Bershad Hynes & Lerach. On the reality of S.E.C. requiring the 947 largest US companies to forward a sworn, notarized document confirming "the reported numbers" are accurate.

Investment Hindsight:
“Executives at Dynegy and Adelphia Communications said they would not certify the companies' results, joining those at WorldCom, CMS Energy and Qwest, who had all previously made similar announcements. The companies said they were reviewing their accounting and expected to restate earnings.” 
Jonathan D. Glater in the  New York Times 15-Aug-02.

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Porter's Five Competitive Forces.  
Adopted By:  D. Paul Graham, President Graham Financial Corporation

Michael Porter’s 1980 book “Competitive Strategy:  Techniques for Analyzing Industries and Competitors” quickly became a significant tool to analyze an  industry in the context of a company’s corporate strategy and relative competitiveness.  After almost 60 printings and translated into 19 languages, the book is as significant today as it was 22 years ago.

In his book, Porter identified five competitive forces that shape every industry and market. By recognizing these forces, you can analyze many elements of your business ranging from the intensity of competition, identified market signals, defined strategies for industry evolution or devolution, as well as assess the profitability and attractiveness of an industry. Just think about the number of factors affecting your business and you will see just how far reaching Porter’s model can be.  The following graphic illustrates the relationship between the different competitive forces.

As you develop strategies for your company, consider how Porter’s five competitive forces can highlight elements of your strategy.

Force One:            The Threat of New Entrants.  
The easier it is for new companies to enter the industry, the more significant the  competition will be. Many an industry has changed seemingly overnight as a result of low barriers to entry.  Venture capitalists rank high barriers to entry as a positive factor when considering investing in companies because the threat of new entrants is mitigated to a degree.  Factors that create high barriers to entry can include:

Force Two:            Supplier Bargaining Power.
This force reflects how much pressure suppliers can place on a purchaser.  If one supplier has substantial enough impact to affect a purchaser's margins and volumes, then that supplier holds power in the marketplace and industry.   A few reasons that suppliers realize such bargaining power could include:

Force 3:            Buyers Bargaining Power.
This force reflects the degree of pressure customers can place on a supplier. If one buyer has substantial enough to affect a suppliers margins and volumes, then that buyer holds substantial power. Buyers can realize this type of power for some of these reasons:

Force Four:            Threat Of Substitutes.
The threat of substitutes occurs if the purchasers cost of  switching  to a competitive product or service is low.  Here are a few factors that can affect the threat of substitutes:

Force Five:            Competition Within An Industry.
High competition within an industry generally equates to earn low margins and low returns directly due to the high cost of competition. A highly competitive market exits when:

Michael Porter is considered one of the world's foremost authorities on competitive strategy and international competitiveness and is the author of 14 books concerning competition and strategy.
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D. Paul Graham is President of Graham Financial Corporation.  For many small to medium sized companies, there may be limitations on the resources of time or key employees needed to develop growth strategies, let alone the time to execute and measure the success of strategic plans.   Graham Financial Corporation provides outsourced corporate development, M&A, financial advisory, and restructuring services for our clients. 
 Paul can be reached at dpgraham@grahamfinancial.com  or visit www.grahamfinancial.com .

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Legal Alert:  Protecting Officers and Directors from Personal Liability for Corporate Acts.
By:  James G. McPherson, Aylesworth Thompson Phelan O'Brien LLP.

This bulletin is to remind all senior executives and business managers of a key element of daily business conduct that is crucial for protection of the personal assets of the owners, managers and signing officers of limited liability corporations. The outcome of a recent British Columbia Supreme Court case serves as a reminder of what happens if one forgets the basics.

The Case:
The facts of the case are common and every day (Mitchell v. Consolidated Technologies Inc. December 1, 2000). A company was incorporated under the laws of British  Columbia as "430862 BC Ltd.", but as is commonly the case, the business was carried on under a properly registered "business name", Pacific Data Net Canada. Two contracts providing for delivery of bulk long distance telephone services were signed in the name of "Pacific Data Net Canada" followed by the signature of the president with the title "President" shown. At trial (later confirmed by the British Columbia Court of Appeal) the Court found Mr. Mitchell, the president, to be personally liable for failure to deliver on these contracts.

Why? At no point had the contract shown that "Pacific Data Net Canada" was a limited liability company. The Court pointed out that unincorporated businesses have presidents and at no time was the other party put on notice that they were dealing with a limited liability company.

The Lessons:
The lessons are three-fold: (i) an officer or director must ensure that any contract signed in his or her corporate capacity shows on its face that he or she is signing on behalf of a limited liability company; (ii) signing as an officer or director is not sufficient to limit one's personal liability; (iii) the use of a company's operating name without reference to the fact of that business being a limited company is problematic.

The Law:
Ontario's legislation is nearly identical to that in B.C. A business corporation company here must have the words "Limited", "Incorporated" or "Corporation" (or their short form or French equivalents) as part of its legal name (Section 10(1) of the Ontario Business Corporations Act (the "OBCA")). Section 10(5) of the OBCA further provides that the full legal name must be used on all "contracts, invoices, negotiable instruments and orders for goods or services issued or made on behalf of the corporation".

In modern business it is often the case that businesses dealing with the public operate under names (and in many cases, several names), other than their legal name. Such names may be registered as "Business Names" under the Ontario Business Names Act or as full registered trade names under federal Trade Mark legislation.

Conclusion:
In short, the name of the corporation as it appears in its current Articles of Incorporation must appear on key business documents. While it is not legally necessary to have it appear on purely promotional material (cards, brochures, advertisements), we believe it is prudent to do so.  In most cases, full corporate names can be displayed without diminishing the branding and marketing objectives of the business. The fundamental rules however, are clear. When one considers the overreaching objectives of legislatures to protect the public, they are also necessary. From that perspective the reasoning of the BC court is valid. As in business generally, the explosion of the use of names and the value of the goodwill and intellectual property associated with names has produced a fast-changing (and at times confusing) landscape for the busy executive.
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James G. McPherson  is a business lawyer dealing with closely held companies in communications, marketing,  media and logistics both in Canada and  internationally.  James can be contacted at jmcpherson@aylaw.com or (416) 777-0101 

Aylesworth Thompson Phelan O'Brien LLP "since l861" provides  business advice with a  fresh perspective  to service industries, manufacturers, franchisors and financial institutions from its offices at  200 Bay Street Toronto and through Lawyer's Associated Worldwide,  a net- work of similar firms located in 40 countries.  Visit their website at www.aylesworth.com .

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Overview of Stats Canada's Survey Of Innovation
By:  Statistics Canada, Originally in Small Business Quarterly June 2002.  

Statistics Canada’s Survey of Innovation 1999 examined the characteristics of close to 6000 Canadian firms in the manufacturing sector¹ that employed at least 20 people and grossed more than $250 000 annually. The survey is the latest in a series of innovation surveys conducted by Statistics Canada since 1993. Data by size of firm were tabulated specifically for Industry Canada. 

The survey found that small, medium-sized and large firms that were considered successful innovators — firms that “offered a new or significantly improved product or a production/manufacturing process during the past three years (1997–1999)” — shared similar characteristics. However, both the proportion of successful innovators and the number of innovative activities among small firms lag somewhat behind those among larger firms.² Small firms were defined as those with fewer than 50 employees, medium-sized firms as those with more than 49 but fewer than 250, and large firms as those with more than 249 employees.

The table below shows that 75 percent of small firms in manufacturing were successful innovators. However, a larger proportion of medium-sized firms (82 percent) and large firms (88 percent) innovated successfully. Innovative small firms also trailed medium-sized and large firms in terms of the number of innovation activities performed. On average, small firms performed 3.42 innovation activities, whereas medium-sized and large firms performed 3.9 and 4.29 innovation activities respectively.

Firms innovate to improve product quality and production capacity as well as to extend product range. The most common sources of information for innovation are management and production staff, trade fairs and exhibitions, and clients and suppliers. Federal/provincial agencies and research laboratories, and universities and colleges, are among the sources used least often.

The survey cites the following four major barriers to innovation: 

1. the inability to devote staff to projects on an ongoing basis; 

2. the high cost of development; 

3. lack of skilled personnel; 

4. and lack of financing. 

Government regulation is relatively low on the list of impediments to innovation.

The Innovation Policy Branch of Industry Canada is currently preparing a research paper, slated for publication in fall 2002, in which the survey data will be analyzed in greater detail.

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¹ Selected natural resources industries were also surveyed but the results are not presented here. More details on the survey can be found in Schaan and Anderson (2001), Innovation in Canadian Manufacturing: National Estimates, Cat. No. 88F0006XIE01010, Statistics Canada.

² Innovation activities are R&D; acquisition of machinery, equipment or other technology; industrial engineering and industrial design; tooling up and production start-up; and training. 

Article Source:  Industry Canada (this reproduction is not represented as an official version of the materials reproduced, nor as having been made in affiliation with or with the endorsement of Industry Canada)  Readers can read the entire edition of Small Business Quarterly at  http://strategis.ic.gc.ca/SSG/rd00654e.html .

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Quick Stuff:  Who Signed Off?

The Securities Exchange Commission (S.E.C.) required the 947 largest US companies to forward a sworn, notarized document confirming "the reported numbers" are accurate.  Both CEO’s and CFO had to sign separate statements. Here's the Web address to view the updated list and to see which companies have signed the documents: 

http://www.sec.gov/rules/extra/ceocfo.htm

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