Annual General Meeting: A meeting of shareholders that must be held every calendar year to enable them to view the records of the company, elect directors, and vote on matters integral to the running of the company.
There are two basic types of financial instruments that can be structured: an "equity" offering where the company is selling partial ownership in the company (via the sale of shares or a membership unit) to raise capital, or a "debt" offering where the company raises debt financing by selling a note instrument to investors with a set annual rate of return and a maturity date that dictates when the funds will be paid back to investors in full.
An equity offering is where the subject company sells an ownership stake in the company to investors. In an equity situation, investors profit as the company profits since they are partial owners. This provides the advantage of not having debt service payments draining revenue from the company in its early stages of growth. Most companies sell 10-30% of their company for a first round funding - obviously there are exceptions but this is the average.
Investors typically profit in two ways from an equity deal: via their proportionate "per share" percentage of company profit (called a dividend) and via the final sale of the security through an exit strategy such as the company buying the securities back from the investors, the company and its issued and outstanding securities being bought out by another company, listing on a stock exchange or selling on the open market.
Assets: Everything that a person or company owns or has due to it. Cash, investments, money due, stocks and materials are "current assets"; buildings and machinery are "fixed assets"; patents and goodwill are "intangible assets". Assets surplus to liabilities are "net assets".
Asset backing: Useful check for investors; net assets of a company (in $) are divided by the number of issued shares. Relate this to the firms earning capacity.
Associated Company: A company that is owned between 20% and 50% by another company.
Authorised capital: This used to be the total amount of capital that could be offered to the public for subscription and was the amount named in the Memorandum of Association. It was usually fixed at some round figure sufficient for the company's foreseeable needs. (see Subscribed or Issued Capital) Note: As of July 1, 1998 no longer allowed, now merely called common stock or issued shares.
Board of Directors: Persons elected by shareholders to control the planning and implementation of corporate objectives.
Bonus Issues: Distribution of funds to shareholders in the form of shares issued free.
Business Angel: Informal private investor making direct equity investments in high growth potential SME's (and frequently contributing management and other expertise) in return for a share of the company, its income or capital growth.
Call: Often Limited Liability companies have shares that are not fully paid. A call can be made for the payment of part or all of this outstanding capital. Holders of shares in Limited Liability companies cannot avoid a call and are Liable for monies so called. (See Limited Liability)
Capital: Money invested in a business by its owners in order to earn income.
Capitalised Value: Is the total amount of money invested in a company in return for shares (the equity held in the company), or its revised value calculated by the most recent share sale price times the number of issued shares.
Company: A company is a corporation. A corporation has been defined as a succession or collection of persons having in the estimation of the law an existence, as well as rights and duties, distinct from those of the individual persons who from time to time comprise it. The company continues in existence irrespective of the death or bankruptcy of a member.
Company limited by shares: Is a company in which the liability of the members is limited to the amount of capital they have subscribed or agreed to subscribe. (See Public Company)
Debentures: A debenture is a fixed interest loan secured by specific fixed assets or through a "floating charge" on the business as a whole. Such loan stock is often issued with a convertible option attached to it; at the end of a stated period, the lender may convert it into ordinary shares.
Delisted: Removed shares or securities that were once quoted on a stock market.
Development Capital: Larger volumes of equity finance provided by a professionally managed fund to established firms with a track record of successful enterprise.
Discount: The amount by which a security is quoted below its issue value. The opposite to "premiums".
Dividend: Distribution of profits among shareholders usually expressed as a percentage of paid up capital or as an amount per share.
Dividend yield per share (DPS): The dividend yield is the theoretical return on investment from dividends per share, based upon the price paid per share. It is shown as a percentage of the last sale price.
Calculated as follows: Dividend per share x 100
Last sale price per share in cents
Earnings per share (EPS): Is the portion of profit earned by the company for every ordinary share on issue. It is calculated by taking the consolidated net operating profit (prior to extraordinary items) and dividing by the number of issued ordinary shares.
Calculated as follows: Net Operating Profit
Number of issued ordinary shares
EBIT: Earnings before Interest and Tax.
Equity: The capital invested in a company by its owners, together with retained profits from previous years that have not been distributed as dividends.
Equity Funding: Through the issuing of new shares. The opposite to debt funding, equity funding is contributed in return for a share of ownership. It is not repayable, demands no provision of security (other than issued shares) and bears no interest.
Exempt Proprietary (Pty Ltd) Company: In filing an annual return, it is not necessary to include a copy of the balance sheet of the company, if it is an 'exempt' proprietary company, that is to say one in which no share is owned or deemed to be owned by a public company. This privilege enables an exempt proprietary company to keep its affairs confidential.
Float: The initial raising of capital by public subscription and subsequent listing of the issued shares on a stock exchange.
Gross Revenue: All receipts from the sale of a products and/or services.
Growth SME: A small or medium sized enterprise either aspiring to, or achieving high or significant growth.
Initial public offering (IPO): A new share issue (allotment) from a company (the Issuer). The floating of a company by offering a proportion of its shares to public investors, sometimes called the 'Primary issue'. The basic concept of an underwritten IPO is that part of a corporation is sold to an underwriter, who then resells it in much smaller pieces. An underwritten IPO is traditionally handled by securities firms (stockbrokers) that have formed an "underwriting syndicate," with one of the firms acting as "lead" or "managing" underwriter.
The company's primary responsibility is to contact and negotiate with the managing underwriter, who will then direct the sales of the securities. The most important ingredient of an IPO is that the underwriter has responsibility for selling the securities.
A more cost-effective way to achieve "unrestricted seller offers and buyer bids" on a company's issued shares may be through a "compliance listing" on the Newcastle Stock Exchange. (See Newcastle Stock Exchange.)
Investment ready: The state of a firm being considered to meet the requirements of external equity investors. These requirements include a high quality management team, and appropriate governance and delegation arrangements.
Joint Venture: An agreement for two or more parties to jointly explore, finance or direct a particular development. May be in various forms such as, 50/50, 75/25, with a right to increase to 60/40 etc.
Limited Liability: The liability of shareholders is limited to the fully paid value of the shares held. If partly paid shares are held in a limited company and a call is made, the holder is liable to pay the call. A person taking up shares in a company knows from the beginning the extent of his individual liability.
Memorandum & Articles of Association: The Memorandum was used to set out the objects of the company, whereas the Articles of Association were to formally state the rules governing the management of a company. Note: now replaced by a Constitution July 1, 1998.
Net Tangible Assets Per Share (NTA): Is the asset backing per share. Calculated as follows:
Ordinary Shareholders' Funds – Intangible Assets
Number of issued ordinary shares
Newcastle Stock Exchange: (www.newsx.com.au)
The Newcastle Stock Exchange provides SME's with share price quotation. It facilitates unrestricted seller offers and buyer bids on the issued capital of companies with more than 50 shareholders and a minimum capitalised value of $500,000.
Offer Information Statement (OIS): Is a short form of prospectus that is less onerous than a full prospectus.
Option: The right to take up certain shares on specified terms within or at a specified time. One may negotiate to convert part or all of an account owing, into an Option to take up shares in a company by conversion of any, or all, of the account total. Options are frequently transferable and are themselves bought and sold.
Paid up capital: This is the amount of money that has been paid or deemed to have been paid on shares actually allotted.
Par: The nominal value once given to shares by the Articles of a company. It often had no relation to the asset value or worth of shares. Note: the concept of par value is now obsolete.
Parent company: Company that owns a majority of shares in another company.
Pooled Development Fund (PDF): The object of the PDF program is to encourage investors to provide patient equity capital to Australian SME's. The Federal Government has revised its PDF program to make it more tax effective and investor attractive. From 1 July 1994 the concessional tax rate for PDF's has been lowered from 25 per cent to 15 per cent on the profits derived from investments in small and medium enterprises.
Placement: An allotment of shares made directly from the company to investors, rather than through the medium of a cash issue.
Pre-emptive Rights: The existing shareholders reserve the right of first refusal should any shareholder wish to sell (usually embodied in the company's Constitution).
Prescribed Interests: Shares, stocks, bonds, debentures etc.
Premium: Was an extra amount above par value, payable upon issues of shares. No longer allowed.
Price Earnings Ratio (PER): The relationship that a company's profits bear to the current sale price/value of its shares, usually expressed as: Market value of share
Earnings per Share
Example: 1999 2000
Last sale price $2.24 $3.00
Earnings per share 20c 25c
PER 11.2 times 12 times
Primary Share Sale: This is the term used to describe the initial issuing or allotment of shares from a company to its shareholders.
Promissory Note:
A promissory note is a written promise, legally enforceable, to pay on demand, or on one or more specified dates, a specified sum. The note sets forth the terms and conditions of the loan arrangement between the company and the investor. Thus a note would provide a certain interest rate paid monthly, quarterly or annually to investors with a maturity date that dictates when the principal is paid back in full to investors.
Notes can be sold in fractional amounts providing flexibility for accommodating investors - thus a typical debt offering for $200,000 would be the sale of 20 notes at $10,000 per note. An investor investing $10,000 would get one note. If the interest rate were 12%, then he/she would get $1,200 paid to him/her annually based on the $10,000 investment. If the maturity date were 36 months, then at the end of the 36 months, the company would pay back the $10,000 to the investor.
Many early stage companies that lack the required equity or operating history for conventional bank financing will use private debt from investors for a short period of time (12-36 months) to establish a credit and operating history. They then have the capability to pay out the private debt loan funded by investors with a standard bank business loan at a potentially lower interest rate.
Promissory Note - Definitions
The Maker: is the Borrower or Debtor (the Maker of the Promise).
The Lender: is the Creditor and Payee.
The Seller: is the Creditor who offers to sell, or sells, a Promissory Note.
The Buyer: is an Investor who buys the Note from the Seller and becomes the new Creditor.
Prospectus: Document issued by a company setting out the terms of its public issue of shares subject to the Corporations Law.
Prospectus costs: The tough prospectus provisions of the Corporations Act 2001 mean that anyone involved in the promotion of the sale of shares to the public - be they the owners, the underwriters, the accountants or the lawyers - can be held legally liable if the prospectus contains misleading information or there is an omission of material information.
The long reach of the law behoves anyone involved in a float to know the business being sold in very fine detail. Thus everybody tends to employ a consultant to tell them what they probably already know.
Proxy: Written authorisation given by a shareholder to another person to vote on his behalf at a company meeting.
Public Company (Limited): A public company has no limitation on membership, must have a minimum of three directors, has broadly no restriction on the transfer of shares, and can, subject to the Corporations Act 2001, raise money by appealing directly to the public.
Research and development (R & D): The search for improvements and innovations in a company's products/ services and the solving of allied technical problems, with a view to creating new products/services.
Scrip: Short for subscription. These are the Share certificates representing the ownership (equity) in a company. Keep your scrip in a safe place.
Secondary sale: The sale (transfer) of shares from a shareholder (the Seller) to another buyer.
Securities: Usually refers to the form of investment, i.e. shares, debentures, bonds, etc.
Shares: Shares are the parts into which the capital of the company is divided. The ownership of a share entitles the holder to receive a proportionate part of the profits distributed by the company, and to take part in the management, usually on the basis of one share one vote.
Share Capital: The amount of money invested in a company by its risk-taking shareholders.
Share Premium: Money received by a company for a share issue which is in excess of its nominal (or par) value. No longer allowed as of July 1, 1998.
Small to Medium sized enterprise (SME): Means a business which employs up to 250 employees (counting any part-time employee as an appropriate fraction of a full-time equivalent).
Subscribed or issued capital: This is the total nominal or face value of the shares of the company which have actually been issued or allocated to shareholders. These shares are generally issued in consideration for cash but can also be issued in consideration for the company acquiring non-cash items such as: intellectual property, real property, machinery, investments, etc.
Subscription: The application by the public for shares being offered for issue/allotment.
Subsidiary: A company that is owned or controlled by another company. Ownership or control need not be complete but must be through a majority, e.g. 51%. (See Parent Company)
Tenants in common (TIC): Also known as "small scale property syndication". A mutual ownership of a property by two or more persons whose interests in the property, in the event of any tenant in common's death, passes to legal heirs rather than the other tenants in common. Two or more persons may hold property as tenants in common in any shares they choose.
The Mathematics of Investing: see, Earnings per share (EPS), Dividend yield per share (DPS), Price Earnings Ratio (PER) & Net Tangible Assets per share (NTA).
Turnover: The gross revenue earned from providing goods or services to customers.
Underwriter: One who arranges an issue of new securities by guaranteeing full subscription.
Valuation:
Capitalised Value - By Valuation
If the Company has been valued in the current financial year, what is the current capitalised value? Who undertook the valuation?
Capitalised Value - By Secondary Sale
Has there been a recent share sale/transfer representing at least 2% or more of the Company's total issued capital?
Other Material Change or event
Has there been any extraordinary event that might have had a material impact on t he Company's valuation?
Vendors Shares: The shares received by the seller of a property, from the company to which he sells the property. Sometimes the seller receives both Vendors Shares and cash.
Venture Capital: Accepted OECD (Organisation for Economic Co-operation and Development) usage defines venture capital as primarily equity investments in enterprises, including property and mining, not covered by collateral or other security (that is, they are justified solely on the earning potential of the project).
Venture/development capital: Risk finance (equity) provided by a professionally managed fund to an enterprise (investee) in return for a share of the firm's ownership and voting control for the ultimate purpose of capital gain.
Working Capital: The amount of short term funds available to a business to perform its normal trading operations. This is usually defined as the difference between current assets and liabilities.
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