Intangible Finance Standards: Advances in Fundamental Analysis and Technical Analysis

Intangible Finance Standards ADVANCES IN FUNDAMENTAL ANALYSIS & TECHNICAL ANALYSIS

Intangible Finance Standards ADVANCES IN FUNDAMENTAL ANALYSIS & TECHNICAL ANALYSIS

Ken Standfield The International Intangible Management Standards Institute San Diego, California

AMSTERDAM • BOSTON • HEIDELBERG • LONDON NEW YORK • OXFORD • PARIS • SAN DIEGO SAN FRANCISCO • SINGAPORE • SYDNEY • TOKYO

Elsevier Academic Press 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA 525 B Street, Suite 1900, San Diego, California 92101-4495, USA 84 Theobald’s Road, London WC1X 8RR, UK This book is printed on acid-free paper. Copyright © 2005, Elsevier Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without permission in writing from the publisher. Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone: (+44) 1865 843830, fax: (+44) 1865 853333, e-mail: [email protected]. You may also complete your request on-line via the Elsevier homepage (http://elsevier.com), by selecting “Customer Support” and then “Obtaining Permissions.” Library of Congress Cataloging-in-Publication Data Application submitted British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 0-12-663553-6 For all information on all Elsevier Academic Press publications visit our Web site at www.books.elsevier.com Printed in the United States of America 05 06 07 08 09 10 9 8 7 6 5 4 3 2 1

Working together to grow libraries in developing countries www.elsevier.com | www.bookaid.org | www.sabre.org

TABLE OF CONTENTS

Dedication Acknowledgments Terms & Disclaimers Preface

1 Advances in Fundamental Analysis

xiii xv xvii xix 1

2 Competitive Advantage Valuation Stock Prices Measure Competitive Advantage Understanding Price Fluctuations Competitive Advantage Costs Other Competitive Costs Competitive Costs: Not Wage Costs Benefiting from Flawed Valuation Approaches Exploiting Flawed Management Thinking Hard vs. Soft Intangibles Robust Intangible Valuation Systems Brand as an Intangible Robust Intangible Management Systems 15 Key Issues Ignored 17 Problematic Valuation Issues Issue #1: Strategy Based (intMgtOS®6001.I05) Issue #2: Incorrect formation (intMgtOS®6001.I1) Issue #3: Comparability (intMgtOS®6001.I2) Issue #4: Underlying Component Changes (intMgtOS®6001.I3)

7 8 8 9 10 10 14 14 17 18 19 20 21 21 21 22 22 v

vi

Table of Contents

Issue #5: Strategy Linked (intMgtOS®6001.I4) Issue #6: Limited Scope (intMgtOS®6001.I5) Issue #7: Ownership Based (intMgtOS®6001.I6) Issue #8: Wage Costs as a Proxy (intMgtOS®6001.I7) Issue #9: Productivity not Linked to Brand (intMgtOS®6001.I8) Issue #10: Expense Productivity Ignored (intMgtOS®6001.I9) Issue #11: Revenue Potential Ignored (intMgtOS®6001.I10) Issue #12: Employee Motivation Ignored (intMgtOS®6001.I11) Issue #13: Daily Brand Value (intMgtOS®6001.I12) Issue #14: Competitive Advantage Ignored (intMgtOS®6001.I13) Issue #15: Daily Competitive Advantage Valuation (intMgtOS®6001.I14) Issue #16: Confusion Regarding the Term Intangible (intMgtOS®6001.I15) Issue #17: Linking Intangibles to Financial Performance (intMgtOS®6001.I16) 18 New Valuation Laws Intangible Laws Financial Performance and Intangibles Profit and Intangible Asset Capitalization Intangible Economics and Profit Intangible Demand and Conventional Demand Expenses and Intangible Demand The intMgtOS Profit Equation Intangible Financial Statements The Intangible Classification System Intangible Assets Intangible Liabilities Intangible Capital Other Intangible Transactions intMgtOS Statements Conclusion and Summary

22 23 23 23 24 24 24 25 26 26 28 29 30 30 33 35 35 36 37 38 39 41 41 42 42 42 42 43 44

3 Foundations of Intangible Financial Statements Level 1 Time Analysis Level 2 Time Analysis

45 46

Table of Contents

Level 3 Time Analysis Nanotime Manufacturing An Example Nanotime Value Transactions Nanotime and Value

vii 47 48 49 50 55

4 Benchmarking Intangible Performance Intangible Finance Statements Proposition 1 Optimal Employment Levels Linking Revenue and Employees Proposition 2 Intangible Transactions What Makes Intangible Value a Leading Sentiment Indicator Proposition 3: How an Expenses—Only Focus Destroys Value Intangible Financial Statements

57 58 58 59 61 61 63 65 65

5 Intangible Management Economy Fundamental Analysis The Accounting Crisis The Role of Intangible Standards (intMgtOS®) Accounting Problems Why Accounting Problems Exist Solving Fundamental Problems Accounting or Intangible Management? Applying Intangible Standards (intMgtOS®) Intangible Finance Asset Classes Four Approaches to Intangible Valuation True & Fair Value Certification Case Study: Microsoft (Nasdaq: MSFT) Step 1: intMgtOS® Physical Availability Report Step 2: intMgtOS® Daily Time Report Step 3: intMgtOS® Real Revenue Report Notes to the Revenue Statement Step 4: intMgtOS® Apportionment Statement Artificial Employment intMgtOS®5001.iR4 and the Apportionment Statement Notes to the Apportionment Statement Interpreting intMgtOS®5001.iR4

67 68 71 72 74 76 77 79 81 82 83 83 87 88 88 88 91 95 95 97

viii

Table of Contents

Step 5: intMgtOS® Intangible Balance Sheet Step 6: intMgtOS® Nanotime Productivity Determining Nanotime Productivity Step 7: intMgtOS® Income Statement Organizational Potential Notes on the Size of Potential Productivity Savings Step 8: intMgtOS® Sustainability Statement (intMgtOS®5003.iR8) Step 9: intMgtOS® Artificial Employment Statement (intMgtOS®5003.iR9) Step 10: intMgtOS® ROI Statement (intMgtOS®5003.iR10) Step 11: intMgtOS® Daily Value Statement (intMgtOS®5003.iR11) Step 12: intMgtOS® Market Value Statement (intMgtOS®5003.iR12)

98 101 102 105 109 111 114 115 116 117 118

6 intMgtOS® and Other Standards intMgtOS® Standards Intangible Standards ISO® Standards ISO9000 (QMS) and ISO14000 (EMS) ISO Certification and Registration ISO Accreditation Comparing ISO® and intMgtOS® ISO® Costs intMgtOS® Enterprise Certification intMgtOS® Real Time Reporting intMgtOS® eLearning Certification intMgtOS® Membership ANSI® Standards ANSI® Costs ANSI® Benefits

122 122 124 124 126 126 127 128 128 130 133 136 138 139 139

7 Advances in Technical Analysis Value Types Positive Intangible Value Negative Intangible Value Returns & Risk

142 142 142 149

Table of Contents

ix

8 Intangible Analysis of Sectors and Industries Sector Analysis Analyzing Large Caps Highest Absolute Return Highest Relative Return Lowest Relative Return Analyzing Medium Caps Highest Relative Return Lowest Relative Return Comparison with Strongest Large Cap Results Comparison with Weakest Large Cap Results Analyzing Small Caps Highest Relative Return Lowest Relative Return Comparison with Strongest Large Cap Results Comparison with Weakest Large Cap Results Analyzing Micro Caps Strongest Relative Returns Weakest Relative Returns Intangible Analysis of the Market The Role of -IV The Role of +IV +IV and -IV for Large Caps intMgtOS® Value Factors By Sector: ±IV for Large Caps By Industry: ±IV% for Large Caps By Industry: ±IV% for Medium Caps By Industry: ±IV% for Small Caps By Industry: ±IV% for Micro Caps Conclusion Calculations

151 151 155 155 155 155 157 157 157 158 158 159 160 160 160 161 162 162 163 163 163 164 164 165 165 171 186 189 197 205

9 The intMgtOS® Economy Statement What the Statement Measures intMgtOS®6001.D110: Gross Time Capital (GTC) intMgtOS®6001.D120: Rev:MV Gearing intMgtOS®6001.D130: BV:MV Gearing intMgtOS®6001.D140—MV:Emp intMgtOS®6001.D160—opInc%

207 207 208 210 211 213

x

Table of Contents

intMgtOS®6001.D170—IAT% Standfield Factor intMgtOS®6001.D180—SSP intMgtOS®6001.D185—SBV/S intMgtOS®6001.D190—SIV/S intMgtOS®6001.D190—Standfield Factor

213 213 214 215 215 215

10 The intMgtOS® Standfield Statement The intMgtOS® Standfield Statement Analysis Stage 1 Analysis Stage 2 Analysis Stage 3 Analysis Stage 4 Analysis Stage 5 Analysis Standfield Exchange Analysis NASDAQ Analysis AMEX Analysis OTC Analysis NYSE Analysis Conclusion

217 223 223 224 224 224 224 225 225 225 230 230

11 The intMgtOS® Smart Money Statement Why Smart Money? Specific Exchange Smart Money Statements NYSE Analysis NASDAQ Analysis AMEX Analysis Conclusions

247 249 249 249 264 264

12 Pattern Return Analysis L1 Pattern-Based Analysis Capital Creation (CC) Analysis Negative Share Price Movements Positive Share Price Movements Large Cap Analysis Large Cap +IV Pattern Return Analysis Conclusions Medium Cap Analysis Relative Pattern Return (±IV) Analysis

270 270 270 271 271 273 290 292 292

Table of Contents

Average Return on Investment (±IV) Analysis Relative Return on Sector Investment (±IV) Analysis Absolute Return on Sector Investment (±IV) Analysis Conclusions Small Cap Analysis +IV & -IV Ratios Sector Return on Investment Analysis Micro Cap Analysis +IV & -IV Ratios Sector Return on Investment Analysis Return by Sector Analysis Summary +IV Summary -IV Summary Cross-Sectional IV Analysis IV Market Composition Indicators IV Relative Performance Indicators IV Return Composition Indicators

xi 293 299 299 304 304 306 307 314 314 318 318 325 326 329 330 330 334 336

13 Conclusion

341

Index

345

DEDICATION

While I was writing this book, my five-year-old daughter, Samantha, was diagnosed with high risk leukemia. My wife, Wendy, and I would like to dedicate this book to Samantha and would like to let others know what a precious and beautiful child Samantha is. Significantly beyond her years in emotional intelligence and intellectual intelligence, her love will be with us always. To Wendy, you are the love of my life. Thank you for your love, encouragement, and tireless support. I feel truly blessed to be loved by two such wonderful and kindhearted people. To me, you are both true successes. I wish you the very best in your journey through intangible finance, and trust that you find it helpful, useful, and practical. I welcome you contacting me personally to discuss this book, intangible management, or anything to do with intangibles. My email is [email protected]. Dr. Ken Standfield Chairman, International Intangible Management Standards Institute http://www.StandardsInstitute.org

xiii

ACKNOWLEDGMENTS

This book could not have been possible without the assistance and support of Reuters Inc. I would especially like to thank Stan Levine for his generous assistance in rendering the data for this book.

xv

TERMS & DISCLAIMERS

Nothing in this book should be taken as, or constitutes under Financial Service Laws, investment advice, tax advice, or legal advice. This book does not provide specific buy sell recommendations, or stock picking advice. No content should be regarded or used as an offer or solicitation of an offer to buy or sell securities. If expert assistance is required, the services of a competent professional person should be sought. All source data in this book is © Reuters Inc. All rights reserved. Copying and redistribution prohibited. Reuters Inc. obtains information from sources deemed reliable, but does not warrant its accuracy and disclaims for itself and its information providers all liability arising from its use. No information provided shall constitute tax, legal, or investment advice, or an offer to buy or sell securities. Quotations are unsolicited and do not represent endorsements from the individuals or companies those individuals represent or are affiliated with. All trademarks, registered or otherwise, are the property of their respective owners. You agree that all intellectual property rights in this book, including trademarks, are and shall remain the property of the relevant owners, and you shall not acquire any rights in them.

xvii

PREFACE

Intangible finance has been designed to improve fundamental analysis and technical analysis, by providing a wide range of new intangible management reports developed in accordance with intangible management operating standards (intMgtOS®) (www.StandardsInstitute.org). Like those of all standards institutes, intangible management operating standards are recognized by a distinctive trademark. To identify intangible management operating standards, the registered trademark intMgtOS® is used. This trademark ensures a level of investor protection, as it can only be legally used by certified intMgtOS® Intangible Analysts qualified directly from www.StandardsInstitute.org. The information contained within this text is comprehensive and designed to give you the skills you need to start constructing your own intangible finance statements to assist with fundamental analysis and technical analysis. The book is divided into two parts: Part 1 deals with new methods and techniques to upgrade fundamental analysis. New techniques of analyzing organizational performance are given, and a completely new management reporting system is introduced. Part 2 deals with new methods and techniques to upgrade technical analysis. A wide range of new stock analysis methods are given, as are a wide range of new stock performance statements. The breakthroughs presented within this book build on the concepts and methods presented in the book Intangible Management: Tools for Solving the Accounting and Management Crisis, Ken Standfield (Academic Press, 2002). I have deliberately not repeated key sections of that text but made references (where relevant) to the 2002 book throughout this book. You will find the book Intangible Management invaluable to your understanding of intangible finance, and I would recommend obtaining a copy for your personal library. xix

CHAPTER

1

Advances in Fundamental Analysis

Accounting data is the basis of fundamental analysis. The following chapters will show that traditional accounting measures need to be complemented by new value measures—those deployed through intangible management operating standards (intMgtOS®). As Table 1.1 illustrates, non-accounting value (or intangible value) can be significant for many firms. For the 50 firms mentioned below, average accounting value (book value) is less than 25% of total market value. This means, for these firms, accounting value ignores an average of 75% of what investors are prepared to pay for. More than 50% of these firms (27 out of 50 firms) have non-accounting value in excess of 80% of their market value. Oracle Corporation’s (Ticker: ORCL) accounting value represents approximately 10% of its market value. For SAP (Ticker: SAP), accounting value represents approximately 2% of market value. For Mitsubishi Tokyo Financial Group (Ticker: MTF), accounting value is less than 1% of the market value of the company. 1

2

Intangible Finance Standards

TABLE 1.1 Intangible Value of 50 Well-Known Firms

Name

Ticker

Market Cap ($M)

Tot. BV ($M)

Tot. IV ($M)

Int%

General Electric Company

GE

333,156

72,488

260,668

Pfizer Inc.

PFE

296,485

68,299

228,186

78.24% 76.96%

Microsoft Corporation

MSFT

291,017

69,076

221,941

76.26%

Wal-Mart Stores, Inc.

WMT

249,194

42,172

207,022

83.08%

Exxon Mobil Corporation

XOM

266,904

83,486

183,418

68.72%

Intel Corporation

INTC

201,708

37,965

163,743

81.18%

Citigroup Inc.

C

254,287

96,871

157,416

61.90%

Cisco Systems, Inc.

CSCO

170,789

27,752

143,036

83.75%

Int’l Business Machines Corp.

IBM

170,219

28,056

142,162

83.52%

Johnson & Johnson

JNJ

160,725

25,741

134,984

83.98%

America Movil S.A. de C.V.

AMX

209,955

86,401

123,554

58.85%

American Int’l Group, Inc

AIG

188,242

68,179

120,063

63.78%

The Procter & Gamble Co.

PG

132,290

17,017

115,273

87.14%

The Coca-Cola Company

KO

125,003

13,525

111,477

89.18%

GlaxoSmithKline plc

GSK

134,823

30,111

104,712

77.67%

Merck & Co., Inc.

MRK

108,446

15,259

93,187

85.93%

TOTAL S.A.

TOT

110,886

19,000

91,886

82.86%

Altria Group, Inc.

MO

111,268

22,838

88,429

79.47%

Novartis AG

NVS

116,571

32,202

84,369

72.38%

Nokia Corporation

NOK

99,975

19,259

80,715

80.74%

Dell Inc.

DELL

84,366

5,865

78,501

93.05%

PepsiCo, Inc.

PEP

86,198

11,792

74,406

86.32%

Bank of America Corporation

BAC

119,269

47,918

71,351

59.82%

AstraZeneca PLC

AZN

84,463

13,222

71,241

84.35%

Eli Lilly & Co.

LLY

80,232

9,985

70,246

87.55%

Roche Holding AG

RHHBY

86,891

16,895

69,996

80.56%

Verizon Communications

VZ

102,592

33,428

69,163

67.42%

Berkshire Hathaway Inc.

BRK.A

138,540

71,782

66,757

48.19%

United Parcel Service

UPS

79,596

13,627

65,969

82.88%

Amgen, Inc.

AMGN

83,261

19,390

63,871

76.71%

Oracle Corporation

ORCL

70,782

7,266

63,516

89.74%

Wells Fargo & Company

WFC

96,894

33,950

62,944

64.96%

The Home Depot, Inc.

HD

82,659

22,280

60,379

73.05%

Abbott Laboratories

ABT

69,366

11,866

57,500

82.89% (continues)

3

Advances in Fundamental Analysis TABLE 1.1

(continues)

Name

Ticker

Market Cap ($M)

Tot. BV ($M)

Tot. IV ($M)

Int%

France Telecom

FTE

62,327

5,786

56,541

90.72%

ChevronTexaco Corporation

CVX

91,310

35,241

56,069

61.40%

3M Company

MMM

61,945

7,786

54,159

87.43%

Royal Dutch Petroleum

RD

98,050

44,067

53,982

55.06%

American Express Company

AXP

68,250

15,110

53,141

77.86%

SAP AG

SAP

52,896

1,182

51,714

97.76%

UBS AG (NYSE)

UBS

79,846

28,972

50,874

63.72%

Aventis

AVE

62,903

13,375

49,528

78.74%

Medtronic, Inc.

MDT

57,270

8,172

49,098

85.73%

Mitsubishi Tokyo Fin. Group

MTF

48,107

29

48,079

99.94%

SBC Communications Inc.

SBC

86,144

38,286

47,858

55.56%

Sanofi-Synthelabo

SNY

50,872

3,471

47,401

93.18%

Wyeth

WYE

55,829

8,673

47,156

84.46%

PetroChina Company Limited

PTR

88,281

41,447

46,835

53.05%

Telefonica Moviles, S.A.

TEM

50,884

4,634

46,250

90.89%

Bristol-Myers Squibb Co.

BMY

Totals

55,948

10,064

45,884

82.01%

6,067,908

1,461,261

4,606,647

75.92%

Source: Market Value data from Copyright © Reuters, 2004. Date: Friday, February 6, 2004.

4

Intangible Finance Standards “The GAAP system has, for all its faults, served business and the public well, like an octogenarian butler. At the same time there’s increasing evidence that the faithful servant isn’t just misplacing a spoon here or there but has lost track of some valuable jewels, paid no attention to the furnace and the water heater, and put the place at risk. Investors simply don’t value what accountants count.”—Thomas Stewart, Fortune

Due to this often significant gap between investor value and accounting value, it is essential for investors to know and understand the role intangible value plays in the firms they invest in, and the sectors and industries those firms operate in, as well as the economy as a whole. “It has been 500 years since Pacioli published his seminal work on accounting and we have seen virtually no innovation in the practice of accounting—just more rules—none of which has changed the framework of measurement.”—Wired Magazine

Intangible finance changes the framework for measuring value. It seeks not to replace accounting but to complement it.

Accounting measures changes in money. Intangible finance measures changes in time, and links those changes in time to changes in money. With both accounting statements and intangible management statements, it becomes possible to show how “time is money” using a series of new financial statements. As time and money are the two scarcest resources in today’s Intangible Management Economy, detailing the performance of an organization by either time or money is not sufficient to safeguard investors—both time (intangible management reports) and money (accounting reports) need to be used. “The income statement, balance sheet, and statement of cash flow are about as useful as an 80-year-old road map.”—Robert A. Howell, Professor at the Tuck School at Dartmouth

The power of intangible management reports is derived from their strong linkage to existing financial (accounting) statements. It is these linkages that assist investors in understanding how the firm generated its revenue, earnings, and cash flows from leveraging its knowledge assets and relationship assets. “There are going to be a lot of problems in the future as accounting is not tracking investments in knowledge assets.”—Alan Greenspan, Federal Reserve Board Chairman, United States

Intangible management is the solution that Alan Greenspan was seeking when he made the comments regarding inherent problems within accounting

Advances in Fundamental Analysis

5

reports. The chapters that follow introduce you to a completely new system of measuring, monitoring, and financially reporting corporate value in an objective manner. This book leads on from the 2002 book Intangible Management: Tools for Solving the Accounting and Management Crisis (Academic Press, 2002). There is a substantial amount of information contained within the earlier book that is not replicated in this book on intangible finance. For a complete understanding of intangible management, readers should obtain a copy of Intangible Management for reference. Please note that international intangible standards (IIS) have been renamed to “intangible management operating standards” (intMgtOS®) to better capture their applicability to organizations. Intangible financial reports are required to objectively assess the performance of 21st century organizations. Securities exchange commissions, responsible for safeguarding investors, are starting to look seriously at what needs to be done to safeguard the stability of the financial system as we move from an economy based on manufacturing (tangibles) to one based on services (intangibles).

Intangible financial reports, formed in accordance with intangible management operating standards and certified by qualified intMgtOS® intangible analysts, will become a requirement of corporate annual reporting in the not-too-distant future.

In this day and age, nothing is more important than safeguarding investor security, and intMgtOS® reports offer a powerful way of reporting an organization’s true financial performance.

One aim of this book is to provide the information to government policy makers so that intangible financial reports can start being incorporated into the quarterly and annual reporting requirements of companies.

The breakthroughs of intangible management and intangible finance rival the development of accounting and finance itself and will forever change how investors invest, how managers manage, how bankers allocate loans, and how employees work. The ramifications of intangible management, intangible management operating standards, and intangible financial reports are significant. This book explains how.

CHAPTER

2

Competitive Advantage Valuation

STOCK PRICES MEASURE COMPETITIVE ADVANTAGE When a firm increases its competitive advantage it increases its market value, share price, earnings, and revenue in the process. Companies with greater competitive advantage than their competitors can withstand competitive attacks and harsh economic conditions far more easily than their competitors can. When a company grows its revenue base, it is actually capturing competitive advantage from competitors. When a firm loses competitive advantage it loses brand value, market share, market value, share price, earnings, and revenue in the process— its revenue base shrinks while the revenue base of its competitor grows.

Stock prices, therefore, represent competitive advantage.

7

8

Intangible Finance Standards

UNDERSTANDING PRICE FLUCTUATIONS Competitive advantage changes over time. When a firm’s competitive advantage increases—its share price increases. When competitive advantage decreases—share price falls. If a share price grows over the span of months or years, it is because the firm has sustainable competitive advantage. If a share price falls over months or years (and, perhaps, falls to zero) it is because the firm did not have sustainable competitive advantage. Sustainable competitive advantage is defined by intangible management operating standards (intMgtOS®) as follows: Sustainable competitive advantage is the prolonged economic benefit and superior competitive position that results from the implementation of a unique nanotime strategy that combines competitive intangibles in an optimally effective way which competitors cannot duplicate, imitate or create substitutes for (competitive effectiveness) due to the maintenance of an ever increasing capability gap that competitors cannot close. (intMgtOS® 11001.D12)

Nanotime is a different type of time than people are typically used to. In the past we tended to aggregate time into chargeable blocks of time, such as the 6 minute block of an accountant’s time. Nanotime is very different according to the standards: Nanotime allocates time according to time allocation activity. There are two fundamental time allocation activities: knowledge asset time allocation and relationship asset time allocation. Allocation occurs by reference to the inverse of relationship time allocation. This means that all time not spent communicating with others is a knowledge asset time allocation (IIS1001.D26.1) Put simply, if you are allocating time to anything other than another person, you are allocating time to knowledge assets.

Stock prices decrease due to competitive advantage costs. Stock prices increase due to competitive advantage benefits.

COMPETITIVE ADVANTAGE COSTS Competitive advantage costs are the greatest cost within any organization; they can (and do) steal millions, or even billions, from the revenue stream and market value of large businesses.

Competitive Advantage Valuation

9

Competitive advantage costs are most directly measured by assessing the productivity costs created when competitive intangibles are ineffectively managed. “Competitive intangibles are defined as the knowledge assets (the operational quality and effectiveness of knowledge) and relationship assets (the operational quality and effectiveness of human interactions) that when combined during nanotime, and leveraged through an organization’s infrastructure, create a perception of value in the customer’s mind which are fulfilled (positive competitive advantage and increased brand value) or violated (negative competitive advantage and decreased brand value).” (intMgtOS® 2001.D3)

It is the purpose of intangible financial statements to measure competitive advantage costs and place a financial value on them. Consider a few competitive advantage costs: 1. 2. 3. 4. 5. 6. 7.

Poor customer service (low quality relationship assets) Low satisfaction (low quality relationship assets) Poor morale (low quality relationship assets) Unhealthy stress (low quality relationship assets) Excessive conflict (low quality relationship assets) Unknowledgeable staff (low quality knowledge assets) Emotionally unintelligent staff (low quality relationship assets)

All of these factors create competitive advantage costs that result in decreased productivity, lost revenue, decreased market growth, lowered earnings, and a falling share price.

OTHER COMPETITIVE COSTS Competitive advantage costs are intangible costs as they cost an organization money, but that money relates primarily to increased risk due to lost business, decreased productivity, destroyed brand value, lost revenue, and lost sustainability—not expenses in the traditional financial accounting sense. Competitive advantage costs are therefore competitive costs, but not accounting costs in the traditional sense of the word.

In the Intangible Management Economy, the most important issue for executives and managers is to decrease competitive advantage costs wherever, and whenever, possible.

10

Intangible Finance Standards

Competitive Costs: Not Wage Costs Organizations throughout the world use wage costs as an attempt to measure competitive advantage costs (more correctly known as intangible costs). Wage costs do not, and cannot, serve as a meaningful basis for measuring intangible costs.

Wage costs tend to significantly understate the impact of intangible costs and should never be used as the foundation of estimating intangible costs (or intangible benefits).

In the intMgtOS® statement shown in Table 2.1, the “wage cost multiple” gives an arm’s-length proxy for how $1 of wage value is associated with $x of productivity across different sectors. In the Energy Sector, large cap firms had a wage cost multiple of 28.33. This meant for every $1 of wages that was used to attempt to estimate the impact of intangible costs (or intangible benefits), the true value of the activity was being understated by $28.33. Benefiting from Flawed Valuation Approaches Investors need an edge to make money in the stock market. Whenever a firm’s competitive advantage changes, its share price will also change over time to reflect that change. Analysts attempt to estimate this change to create a fair value for the share price. However, when it comes to estimating competitive advantage costs and benefits, analysts, accountants, executives, and other financial professionals often use wage costs as a basis to estimate potential competitive advantage impacts (especially for operational issues). As observed in the Energy Sector, wage costs are a flawed method of assessing competitive advantage impacts, due to a high leveraging factor between wages and revenue. As a result, analysts, executives, and others can seriously understate the benefits or costs associated with changes in competitive advantage. For a savvy intangible analyst, this creates a window of opportunity in which the application of flawed valuation approaches can be exploited to make money by having a better understanding of how competitive advantage should change.

Consumer/ Cyclical

Conglomerates

Capital Goods

Basic Materials

Sector

Gross Revenue ($m) Wage Cost ($m) Wage Cost% Wage Cost Multiple

Gross Revenue ($m) Wage Cost ($m) Wage Cost% Wage Cost Multiple

Gross Revenue ($m) Wage Cost ($m) Wage Cost% Wage Cost Multiple

Gross Revenue ($m) Wage Cost ($m) Wage Cost% Wage Cost Multiple

Data

1,420,697.15 135,784.32 9.56% 10.46

507,640.66 72,072.63 14.20% 7.04

405,853.15 53,368.72 13.15% 7.60

448,167.08 58,738.04 13.11% 7.63

Large

TABLE 2.1 intMgtOS® Wage Cost Multiple Statement

204,520.03 35,180.40 17.20% 5.81

31,813.15 5,283.44 16.61% 6.02

151,376.45 19,803.35 13.08% 7.64

241,010.04 31,369.16 13.02% 7.68

Medium

59,848.11 11,006.77 18.39% 5.44

33,893.39 4,675.10 13.79% 7.25

75,192.31 13,794.01 18.34% 5.45

98,355.85 14,310.98 14.55% 6.87

Small

40,542.81 11,138.22 27.47% 3.64

291.60 61.60 21.12% 4.73

39,832.54 7,501.77 18.83% 5.31

52,319.18 10,074.87 19.26% 5.19

Micro

(continues)

1,725,608.10 193,109.71 11.19% 8.94

573,638.80 82,092.77 14.31% 6.99

672,254.45 94,467.85 14.05% 7.12

839,852.15 114,493.05 13.63% 7.34

Total

Healthcare

Financial

Energy

Data

Gross Revenue ($m) Wage Cost ($m) Wage Cost% Wage Cost Multiple

Gross Revenue ($m) Wage Cost ($m) Wage Cost% Wage Cost Multiple

Gross Revenue ($m) Wage Cost ($m) Wage Cost% Wage Cost Multiple

Gross Revenue ($m) Wage Cost ($m) Wage Cost% Wage Cost Multiple

(continues)

Consumer/NonCyclical

Sector

TABLE 2.1

626,571.37 62,448.97 9.97% 10.03

1,829,987.95 145,784.03 7.97% 12.55

1,421,475.65 50,168.83 3.53% 28.33

801,093.34 84,959.57 10.61% 9.43

Large

101,584.13 19,409.36 19.11% 5.23

198,263.95 15,551.20 7.84% 12.75

115,009.38 10,788.11 9.38% 10.66

122,634.34 15,242.67 12.43% 8.05

Medium

39,304.97 12,374.69 31.48% 3.18

69,778.28 9,629.71 13.80% 7.25

51,132.33 4,264.14 8.34% 11.99

38,730.21 8,959.01 23.13% 4.32

Small

26,531.97 10,996.12 41.44% 2.41

34,073.16 4,807.36 14.11% 7.09

20,122.40 965.61 4.80% 20.84

22,309.26 3,930.96 17.62% 5.68

Micro

793,992.44 105,229.14 13.25% 7.55

2,132,103.34 175,772.30 8.24% 12.13

1,607,739.76 66,186.69 4.12% 24.29

984,767.15 113,092.21 11.48% 8.71

Total

Gross Revenue ($m) Wage Cost ($m) Wage Cost% Wage Cost Multiple

Gross Revenue ($m) Wage Cost ($m) Wage Cost% Wage Cost Multiple

Gross Revenue ($m) Wage Cost ($m) Wage Cost% Wage Cost Multiple

Gross Revenue ($m) Wage Cost ($m) Wage Cost% Wage Cost Multiple

Total Wage Cost Multiple

Total Wage Cost%

Total Wage Cost ($m)

Total Gross Revenue ($m)

Utilities

Transportation

Technology

Services

9.44

10.60%

1,219,018.13

11,504,738.16

543,227.62 39,684.64 7.31% 13.69

159,473.09 36,471.78 22.87% 4.37

919,879.78 112,413.23 12.22% 8.18

2,420,671.32 367,123.37 15.17% 6.59

6.77

14.77%

329,149.99

2,229,206.10

138,675.89 7,164.19 5.17% 19.36

80,843.34 15,667.86 19.38% 5.16

260,570.36 39,372.31 15.11% 6.62

582,905.04 114,317.94 19.61% 5.10

5.42

18.46%

158,637.83

859,498.74

17,421.12 1,056.02 6.06% 16.50

55,440.36 10,712.95 19.32% 5.18

97,452.58 17,893.99 18.36% 5.45

222,949.23 49,960.46 22.41% 4.46

6.39

15.65%

120,233.42

768,453.04

194,477.27 1,629.27 0.84% 119.36

47,479.91 9,773.30 20.58% 4.86

76,221.45 13,539.74 17.76% 5.63

214,251.49 45,814.60 21.38% 4.68

8.41

11.89%

1,827,039.37

15,361,896.04

893,801.90 49,534.12 5.54% 18.04

343,236.70 72,625.89 21.16% 4.73

1,354,124.17 183,219.27 13.53% 7.39

3,440,777.08 577,216.37 16.78% 5.96

14

Intangible Finance Standards

TABLE 2.1a All exchanges as of Friday, February 6th, 2004 (intMgtOS® 5003.iR30) Notes

Values

intMgtOS Report

intMgtOS® 5003.iR30

Created By

Dr Ken Standfield, Certified intMgtOS® Analyst (111291AKS01)

Data Date

June 30, 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS® 5003 (International Intangible Reporting Standard) Certified.

intMgtOS® Certification No.

intMgtOS®-874561

Exploiting Flawed Management Thinking Financial analysts and executives not certified in intangible management operating standards (intMgtOS®) have little to no understanding of intangibles. For investors this can be transformed into a substantial advantage. In a 2003 study conducted by Accenture (“Intangible assets and future value: An Accenture survey conducted by the Economist intelligence unit”), 85% of executives stated that intangibles related to R&D, brand, intellectual property, and goodwill, as defined by relevant accounting standards boards, as well as items of uncertain value placed on the balance sheet. According to intangible management operating standards (intMgtOS®), 85% of managers are incorrect in their understanding of the term intangible. Managers do not understand that intangibles are far broader and more encompassing than intellectual property. Intangibles also include: competitive advantage, service, satisfaction, quality, response time, levels of knowledge, and many other factors that create or destroy competitive advantage. Hard vs. Soft Intangibles Intangibles initially exist in non-financial (or soft) form. A person’s ideas, their skills, emotional intelligence, knowledge, and how they interact with others will incrementally increase or decrease competitive advantage within an organization on a day-to-day basis. Consider Mozart. When he composed his music, the notes came from his mind, imagination, and skill. Was the value of Mozart just in the musical scores he wrote, or in his ability to actually embed competitive advantage (a point of strategic difference) into his music?

Competitive Advantage Valuation

15

According to conventional management, intangibles become tangible (or hard) by being written down (intellectual property and so on) or by someone paying for them (purchase or sale: goodwill, and so on). Executives in the Accenture survey only understood hard intangibles. The main problem is that soft intangibles create hard intangibles, not the other way around. When soft intangibles are managed correctly (service, quality, speed, reliability, satisfaction, expectations, and so on), hard intangibles look after themselves, as do financial transactions. Different Resource Types According to intangible management operational standards (intMgtOS®), there are three levels of resources that every firm must manage in order to create and maintain competitive advantage (intangible value): 1. Competitive (soft) intangibles—knowledge and relationships in their non-financial form. These resources cannot be owned but they can be influenced and leveraged. They are the source of competitive advantage. 2. Legal (hard) intangibles—the representation of competitive intangibles in information or other form that is capable of legal protection (copyright, trademark, and so on). These resources can be owned by the firm, and sold separately from the people that create them (licensing, outright sale, and so on). 3. Financial transactions—actual exchanges of money that are created from leveraging competitive intangibles or legal intangibles.

It is the management of competitive intangibles that creates or destroys competitive advantage (and hence share price).

The three resource levels are diagrammatically represented1 in Figure 2.1. The key to understanding this diagram is to note two things: 1. Level 3 resources create level 2 resources, which create level 1 resources. That is, intangibles create tangibles. 1

This framework was first introduced in my earlier book, Intangible Management: Tools for Solving the Accounting and Management Crisis (Academic Press, 2002).

16

Intangible Finance Standards

FIGURE 2.1 Understanding L1, L2, and L3 Resources.

2. Current management, accounting, and finance techniques specialize in level 1 resources and in only one of the six parts of level 2 resources (intangible assets), completely ignoring all level 3 resources. Explaining Resource Levels 1. No ownership (Level 3: Competitive (soft) intangibles). Firms cannot own the knowledge that they do not know about inside the heads of employees, nor the relationships that employees have but the firm does not know about. 2. Legislated ownership (Level 2: Legal (hard) intangibles). A firm can own the representation of an employee’s knowledge (intellectual property). However, without the expert, this intellectual property can quickly lose value in today’s competitive environment. It is often the inventor, or subject matter expert, that the IP represents that is truly valuable to the firm, as these people can continually update the firm’s knowledge base to gain advantage over competitors. 3. Financial ownership (Level 1: Legal property rights). Traditional accounting dominates this area. Something only has value if you can produce a historical financial receipt to substantiate the transaction. Hence, when a firm pays $1b for a company with balance sheet value of $800 m, $200 m is termed goodwill. Goodwill is the embodiment of level 3 competitive intangibles, decreasing in value in the face of competitive pressures.

Competitive Advantage Valuation

17

In the Intangible Management Economy, this focus on ownership (financial transactions only) is destroying competitive advantage and share price.

The Understood Importance of Intangibles Even though executives from the Accenture survey misunderstood the nature of intangibles and how they create competitive advantage and therefore share price, they did understand the importance of intangibles. Of those surveyed, 49% of executives stated that intangible assets are the primary source of shareholder wealth generation, and 26% stated that intangibles have equal importance to tangibles in wealth generation—making a total of 75%. However, only 5% of companies surveyed stated that they had a robust system that measured and tracked all aspects of performance of intangible assets and intellectual capital. Given the misconception regarding intangibles, such measurement systems would likely be intellectual property registers with few, if any, financial metrics that investors would be able to use to make investment decisions.

ROBUST INTANGIBLE VALUATION SYSTEMS In this chapter, intangible management operating standards (intMgtOS®) will detail: 1. 17 key reasons competitive intangibles have been misunderstood and ignored, even though they are the source of competitive advantage. 2. 12 problematic valuation approaches that render practically any traditional intangible valuation meaningless. 3. 18 new valuation laws required to objectively value intangible performance—without them competitive advantage cannot be objectively financially valued. 4. 12 new management laws that executives need to understand if they are to manage their organizations according to the new rules of the Intangible Management Economy. 5. Why the traditional profit equation leads executives and investors to make wrong decisions due to an ignorance of intangible costs and intangible benefits. 6. Why placing intangible assets on a balance sheet is dangerous and inevitably destroys corporate performance.

18

Intangible Finance Standards

7. How an understanding of intangible demand and intangible supply assists executives and investors make better decisions by better understanding how revenue and expenses are dependent on each other. 8. The 6 core tasks that intangible accounting statements perform. 9. The intangible classification system—a requirement for all investors to know and understand so that they can assess the quality of management and competitive advantage. The end result of this process is that as an investor and/or executive you will acquire an edge in understanding how value is created within organizations. This edge can be transformed into financial gain when applied.

BRAND

AS AN INTANGIBLE

Intangibles have always been acknowledged by senior management as being extremely important to manage, despite common misgivings about the difficulty of identifying, classifying, measuring, valuing, reporting, and managing source intangibles (such as knowledge, emotions, quality, service, and expectations).

Executives and investors need to know how a business is truly performing over time if they are to make sensible investment decisions. One simple and quick way of understanding the true performance of a business is to assess its productivity and its productivity potential.

In the past, productivity has been exceptionally difficult to measure. Intangible management operating standards provide the world’s best practice on how to measure the productivity of knowledge assets and relationship assets—the two dominant competitive intangibles that create or destroy the underlying competitive advantage of the business.

Productivity is a proxy for competitive advantage and brand value on a daily basis.

Without doubt, managing organizational productivity is critical to the success of any organization. If an organization does not manage the effectiveness of its

Competitive Advantage Valuation

19

productivity, it is not managing its competitive advantage. Competitive advantage is acquired and lost on a day-to-day basis at the operational level. Intangible management operating standards (intMgtOS®) view productivity as a proxy for competitive advantage, brand effectiveness, brand power, and management effectiveness.

If productivity increases, it is due to enhanced intangible effectiveness (acquired competitive advantage, higher amounts of brand power, and so on). If productivity decreases, it is due to decreased intangible effectiveness (lost competitive advantage, diluted brand value, and so on).

Before intMgtOS® 22001 (the Operational Brand Management Standard), neither the identification of brand value nor its financial measurement was well regarded. As Scott Davis, author of Brand Asset Management: Driving Profitable Growth Through Your Brands (Jossey Bass, 2002), notes on page 215: “Our recent study, Brand Asset Management for the 21st Century, confirmed that there is a massive dissatisfaction with how companies are measuring their brand’s progress. In fact, only 40 percent of companies currently measure brand value. Of those 40 percent, only half are satisfied with the methods they use. Therefore more than 80 percent of companies are unhappy with their brand measures.”

According to conventional management thinking, brand value is regarded as one of the most visible and important of all intangibles. However, brand valuation has been plagued with problems. Across the world, companies are hampered by a fundamental inability to measure and manage the key components of their competitive advantage—competitive intangibles.

ROBUST INTANGIBLE MANAGEMENT SYSTEMS Intangibles obey a number of laws that conventional (financial) assets disobey. It is for this reason that intangibles have eluded capture and detection for so long—intangibles are simply “invisible” if normal management methods are used to try and detect their presence. In fact, most of the laws governing the behavior of intangibles are the direct opposite of how executives, valuers, and financial professionals have been taught to identify, classify, value, report, and manage in the past.

20

Intangible Finance Standards

15 KEY ISSUES IGNORED The following is a summary2 of some of the specific behaviors of intangibles (known as intangible characteristics): 1. Intangibles typically cannot be directly touched. (intMgtOS® 1001.C1) 2. Intangibles cannot be directly measured. (intMgtOS® 1001.C2) 3. Intangibles are not evidenced by financial transactions. (intMgtOS® 1001.C3) 4. Intangibles create future value. (intMgtOS® 1001.C4) 5. Intangibles cannot be owned. (intMgtOS® 1001.C5) 6. Intangibles cannot be voluntarily extinguished. (intMgtOS® 1001.C6) 7. Intangible value does not diminish with use; it is enhanced. (intMgtOS® 1001.C7) 8. Intangibles are typically felt when they are removed, not when they are present. (intMgtOS® 1001.C8) 9. All source intangibles exist in a neutral state until influenced by an interaction. (intMgtOS® 1001.C9) 10. Intangible transactions are actually uses and sources of time capital. (intMgtOS® 1001.C10) 11. Financial transactions and financial performance are the end result (or accumulation) of numerous intangible transactions. (intMgtOS® 1001.C10) 12. Intangibles can be either source intangibles or destination intangibles. (intMgtOS® 1001.C12) 13. The true impact of intangibles is typically not understood or recognized due to the impact of derived demand. (intMgtOS® 1001.C13) 14. Intangibles create flow-on and aggregation effects (meaning that it can be extremely difficult to separate them in determining how different intangibles have created value). (intMgtOS® 1001.C15) 15. Intangibles can be simultaneously deployed without loss of use or value. (intMgtOS® 1001.C16) The characteristics of knowledge assets and relationship assets (competitive intangibles) run contrary to those of financial transactions. In most cases, the behavior of competitive intangibles is the opposite of what current (financial) systems can detect, and this is why intangible value is ignored. It is the contrarian nature of intangibles that has caused so many problems for the valuation profession. Considering these points, it is little wonder that current management systems and valuation systems cannot measure the value of intangibles, or manage them, correctly. 2

See Chapter 3, “What Knowledge Managers Need to Know” (particularly pp. 45–47), of my earlier book.

Competitive Advantage Valuation

21

17 PROBLEMATIC VALUATION ISSUES The fact that 80% of companies surveyed in the Accenture study were unhappy with their brand valuation, whereas only 5% stated that they had robust measurement systems to measure and track all aspects of performance of intangible assets and intellectual capital, is due primarily to more than a dozen problematic valuation issues not being addressed by conventional management, finance, and accounting practices. Issue #1: Strategy Based (intMgtOS® 6001.I05) Conventional management relies on two principal types of metrics when attempting to monitor intangible value: (1) point measures and (2) indices. Both of these metrics produce significant problems. Neither type of metric, although widely used, is reliable or could be objectively used by investors to make meaningful investment decisions. Point measures identify key performance indicators (KPIs) within a business that are assumed to drive business performance. For example, point measures may include time to establish a new office (time), percentage of employees under a certain age (%), the average training expenditure per employee ($), and so on. Such metrics do not measure the source of value creation, just a specific type of manifestation of that source. Indices aggregate point measures into index values that can be tracked over time. Much like the consumer price index (CPI), a bundle of representative KPIs are chosen and tracked over time. The purpose of the index is to allow managers to track aggregate changes (especially graphically). Subjective measures, while powerful management tools, are “subjective” because they are chosen in respect to the company’s strategy. Strategy, by its very nature, involves a constant choice between alternatives and requires judgment calls to be made. From a statistical point of view, strategy measures are “sample measures.” To create objectivity, population-based measures are required. Issue #2: Incorrect Formation (intMgtOS® 6001.I1) Subjective valuation measures disobey a fundamental mathematical law—the law of mathematical consistency. This law states that to maintain mathematical validity, only units of the same base measure can be compared—“apples to apples” and not “apples to oranges.” For example, if there are three point measures—time (200 hours), money ($250,000), and a percentage (45%)—and you seek to aggregate them into an index, you are really making “fruit salad”; 200 hours, $250,000 and 45% cannot be meaningfully mathematically compared, as they do not use the same units of measurement.

22

Intangible Finance Standards

Hence, the law of mathematical consistency ensures that only units of measurements can be compared. Subjective measurements are subjective because they create an apparently objective number (an index) that is formed from subjective quantities of dissimilar units. As such, it is impossible for an investor to rely on them to make an objective investment decision (as they are incorrectly formed in the first place). Issue #3: Comparability (intMgtOS® 6001.I2) Investors make investment decisions by comparing data. To illustrate, consider firms A, B, C, and D. As each firm has a different strategy, different point measures have been derived and different indices have been formed. If Index A for Firm A rises by 12% and Index A for Firm D rises by 5%, it is impossible for investors to know what this actually means, as the KPIs underlying Index A (apparently the same index for both firms) could be substantially different from each other. When subjective measures are used it is practically impossible to compare data in a meaningful way. Issue #4: Underlying Component Changes (intMgtOS® 6001.I3) As the KPIs that form an index are unknown, there is nothing stopping executives from manipulating the underlying KPIs to make an index appear better than it really is. For example, assume that an “original index” was composed of 20 KPIs, picked from 100 KPIs, where 11 KPIs were high performing, and the remaining 9 were low performing. By discarding the 9 low-performing KPIs and selecting 9 better-performing KPIs from the 80 non-included KPIs, the average could be artificially distorted. Another method would be to change the weightings of the 11 high-performing factors and significantly decrease the weightings of the low-performing 9 factors. Both results are the same, an artificial increase in performance that is not substantiated by changes in real performance. Issue #5: Strategy Linked (intMgtOS® 6001.I4) In dynamic markets, strategy must change consistently in order for a firm to continually compete with rivals. When there is a shift in the strategy of the organization, then there must also be a shift in the KPIs that need to be tracked. This will lead to some KPIs being “thrown out” with the old strategy, and new KPIs brought in to measure the new strategy. This exercise is expensive and creates results that are not comparable over time. Hence, as soon as a KPI is selected it becomes “linked” to the strategy that formed it. If the strategy

Competitive Advantage Valuation

23

changes (even minimally), the link is broken and the KPI measure loses its meaning, as it is no longer comparable over time. Issue #6: Limited Scope (intMgtOS® 6001.I5) Performance KPIs will differ for different divisions, markets, and departments. For example, accounting departments will have different KPIs than will the marketing, sales, IT, or manufacturing areas. Finance is unlikely to be able to compare its results to those of the other divisions. This results in the problem of metrics with limited scope and applicability. Issue #7: Ownership Based (intMgtOS® 6001.I6) The accounting model of management assumes ownership. It assumes that you can own and control whatever is done in business. In the manufacturing age, this concept made sense. In today’s Intangible Age this principle no longer holds. In the Intangible Management Economy, organizations exert more economic power by influencing the quality and performance of competitive intangibles than they can by managing “hard assets” that are subject to financial ownership. The shift to the service-based economy has placed the methods of manufacturing, and often the majority of the production process, inside the heads of employees. Today, the role of management is to influence employee behavior through emotional leadership so as to reduce turnover, and to increase output and quality. Issue #8: Wage Costs as a Proxy (intMgtOS® 6001.I7) Organizations do not exist to pay expenses; they exist to generate profits. As a result of this fundamental issue, focusing solely on wage costs as a valuation proxy for intangibles is seriously flawed. It is the impact of intangibles on productivity, revenue, earnings, market value, and share price that is most important to quantify. Looked at another way, if $1 of revenue only paid $1 of wages, the organization would need to borrow to pay for its other expenses (rent, advertising, manufacturing, and so on). Even if $1 of revenue paid for all expenses (with wages as a percentage of those), the purpose of business would remain to generate a profit. The intMgtOS® Wage Cost Multiple Statement illustrates the difference between wages and revenue on a sector-by-sector basis for large caps, medium caps, small caps, and micro caps across all US exchanges. This previously introduced statement (see Table 2.1) shows that if wages were used as the sole basis of cost justification, then they would understate true cost by $9.44 for each $1 of wages across all large cap firms. For medium cap firms

24

Intangible Finance Standards

the wage cost multiple was 6.77; for small caps, the ratio was 5.42, and for micro caps, the ratio was 6.39. Across all exchanges the ratio was 8.41. Issue #9: Productivity Not Linked to Brand (intMgtOS® 6001.I8) Productivity is the lifeblood of all organizations. Brand value can be seen as a proxy for the effectiveness of productivity over time. If productivity increases, it is due to increases in operational brand value. If productivity decreases, it is due to decreases in operational brand value. One of the most essential issues for any firm is to link brand value to productivity, so that short-term decision impacts can be meaningfully measured and financially valued. Issue #10: Expense Productivity Ignored (intMgtOS® 6001.I9) Revenue and expenses are dependent on each other—a change in expenses will result in a change in revenue. Expenses are the seeds of revenue. Hence a reduction in expenses typically leads to a reduction in revenue. There are exceptions to this rule. Where a reduction in expenses does not lead to a reduction in revenue, what is being eliminated is a non-productive expense. Where a reduction in expenses leads to a reduction in revenue, what is being eliminated is a productive expense. It is essential to make the connection between productive and non-productive expenses so that the quality of their strategic management can be better understood. Current financial statements do not separate productive and non-productive expenses. By ignoring cost quality and labeling all expenses as non-productive, organizations focus on cost reduction before value creation. Issue #11: Revenue Potential Ignored (intMgtOS® 6001.I10) If a growing organization has revenue potential it is possible for that organization to increase productivity, revenue, and earnings without the requirement to hire additional staff to meet increased client demand. This translates to a direct improvement in revenue from an existing employment base. Revenue potential is primarily derived by converting intangible (competitive advantage) costs into productivity in a sustainable manner. Intangible analysts define revenue potential as follows: Revenue potential is defined as the amount of accessible latent productivity that an organization can leverage to increase its revenues and earnings without the need to hire additional employees. (intMgtOS® 6001.D11) Accessible latent productivity is the total amount of non-effective time that can be transformed into effective time after a continuity margin has been deducted to ensure sustainability. (intMgtOS® 6001.D12)

Competitive Advantage Valuation

25

Other related definitions include: Opportunity cost is defined as the amount of non-effective time, and the financial value of that time, associated with a specific intangible transaction. (intMgtOS® 1001.D18) Intangible transactions create changes in competitive rights and are therefore non-financial transactions and are evidenced by changes in nanotime at the precontractual, contractual, and post-contractual level. Changes in competitive rights are classified into four key categories: intangible assets, intangible liabilities, intangible expenses, and intangible revenue. Intangible transactions result from the use of knowledge assets, relationship assets, emotional assets, and cycle-time assets (intMgtOS® 1001.D22) Non-financial transactions involve expenditures and receipts of time. (intMgt OS® 1001.D23)

Issue #12: Employee Motivation Ignored (intMgtOS® 6001.I11) Employee motivation directly influences: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Competitive advantage costs Competitive advantage benefits The quality of a customer’s brand experience Brand perception—how the customer comprehends the brand’s promises Brand equity—the financial value of the brand Brand displeasure—the dissatisfaction customers feel about the brand Brand pleasure—the satisfaction customers relate to the brand experience Brand definition—the character of the brand Brand power—the level of influence the brand commands in the market Brand weight—the market share or dominance of the brand The quality of intellectual property The effectiveness of research and development expenditures

Managing employee motivation and the quality of interactions between employees—and between employees and staff—are vital to a brand’s health and competitive sustainability.

According to intangible management operating standards, employee motivation in the Intangible Management Economy is most effectively attained through the implementation of emotional leadership techniques.

26

Intangible Finance Standards Emotional leadership is the psychological ability of an employee to create and leverage emotional intelligence to positively affect effectiveness, productivity, quality, continuity, and sustainability regardless of adverse conditions. Emotional leaders therefore indirectly manage the emotional capital (service, satisfaction, attractiveness, loyalty, quality, and so on) of the organization. (intMgtOS® 1001.D14)

Emotional leaders are emotionally intelligent, but they also understand intangibles, how intangibles influence performance, and intangible management operating standards (intMgtOS®). Emotional leaders understand how the world works (they are practical and realistic people), they know how they feel (self-awareness), they can articulate those feelings in an assertive manner, they understand that the world can be unfair and do not take it personally, they can take criticism, and they redesign themselves to meet new challenges. Emotional leaders are gold collared workers. Such people can calm angry customers and co-workers, and restore a sense of purpose and connection to troubled workplaces. Such people can positively manipulate clients to see the unique benefits of the company’s brand and competitive advantage in order to increase organizational performance. Issue #13: Daily Brand Value (intMgtOS® 6001.I12) To successfully manage organizations in the Intangible Management Economy, it is essential to understand the daily brand value of an organization. Intangible analysts understand that how well an organization leverages its brand value dictates (1) its current revenue stream and (2) the revenue to market value multiple it can achieve in the stock market. Intangible analysts use the intMgtOS® Revenue Multiples Statement (see Table 2.2 and 2.2a) to gain a quick understanding of how revenue increases could be translated into market value movements. This method of predicting stock market performance should be used as a guide only, as more sophisticated models are required to more accurately predict share price performance. From a very basic level, if a large cap Technology sector firm predicted that it could increase its revenue by $100 m, then with a sector-based Rev: MV factor of 2.69, market value would be estimated to increase by $269 m. Having the ability to understand and monitor such connections allows investors and executives to value firms far more effectively and profitably. Issue #14: Competitive Advantage Ignored (intMgtOS® 6001.I13) Competitive advantage is an understood, yet non-financially reported, concept. Stating that competitive advantage is essential to manage, but not being able

27

Competitive Advantage Valuation TABLE 2.2 intMgtOS® Revenue Multiples Statement Sector

Data

Large

Medium

Small

Micro

Total

Basic Materials Gross Revenue Market Cap Rev: MV

448,167 650,973 1.45

241,010 206,743 0.86

98,356 50,582 0.51

52,319 11,872 0.23

839,852 920,169 1.10

Gross Revenue Market Cap Rev: MV

405,853 347,483 0.86

151,376 116,964 0.77

75,192 46,300 0.62

39,833 11,598 0.29

672,254 522,344 0.78

Gross Revenue Market Cap Rev: MV

507,641 732,632 1.44

31,813 20,797 0.65

33,893 2,740 0.08

292 134 0.46

573,639 756,304 1.32

Consumer Cyclical Gross Revenue Market Cap Rev: MV

1,420,697 594,608 0.42

204,520 133,330 0.65

59,848 34,994 0.58

40,543 12,775 0.32

1,725,608 775,706 0.45

Gross Revenue Market Cap Rev: MV

801,093 1,107,893 1.38

122,634 77,288 0.63

38,730 23,949 0.62

22,309 6,492 0.29

984,767 1,215,623 1.23

Gross Revenue Market Cap Rev: MV

1,421,476 1,325,068 0.93

115,009 127,319 1.11

51,132 36,168 0.71

20,122 7,781 0.39

1,607,740 1,496,335 0.93

Gross Revenue Market Cap Rev: MV

1,829,988 3,298,902 1.80

198,264 332,687 1.68

69,778 122,175 1.75

34,073 48,284 1.42

2,132,103 3,802,048 1.78

Gross Revenue Market Cap Rev: MV

626,571 2,065,616 3.30

101,584 206,020 2.03

39,305 87,083 2.22

26,532 33,590 1.27

793,992 2,392,310 3.01

Gross Revenue Market Cap Rev: MV

2,420,671 3,581,207 1.48

582,905 646,235 1.11

222,949 180,411 0.81

214,251 44,687 0.21

3,440,777 4,452,540 1.29

Gross Revenue Market Cap Rev: MV

919,880 2,473,820 2.69

260,570 461,606 1.77

97,453 185,206 1.90

76,221 61,170 0.80

1,354,124 3,181,802 2.35

Gross Revenue Market Cap Rev: MV

159,473 206,868 1.30

80,843 55,855 0.69

55,440 23,643 0.43

47,480 4,688 0.10

343,237 291,054 0.85

Capital Goods

Conglomerates

Consumer/NonCyclical

Energy

Financial

Healthcare

Services

Technology

Transportation

(continues)

28

Intangible Finance Standards

TABLE 2.2

(continues)

Sector

Data

Large

Medium

Small

Micro

Total

893,802 643,451 0.72

Utilities Gross Revenue Market Cap Rev: MV Total Sum of 11,504,738 Gross Revenue Total Sum of Market Cap Total Sum of Rev: MV

543,228 524,752 0.97

138,676 101,445 0.73

17,421 14,192 0.81

194,477 3,061 0.02

2,229,206

859,499

768,453

15,361,896

16,909,822

2,486,291

807,442

246,131

20,449,686

1.47

1.12

0.94

0.32

1.33

TABLE 2.2a All exchanges as of Friday, February 6th, 2004 (intMgtOS® 5003.iR31) Notes

Values

intMgtOS® Report

intMgtOS® 5003.iR31

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

June 30, 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS® 5003 (intMgtOS® Reporting Standard) Certified.

intMgtOS® Certification No.

intMgtOS®-874575

to value it in financial terms, means that it is effectively mismanaged. This mismanagement occurs as it is impossible to manage something when it is not measured. It is the process of measurement that allows investors and executives to determine exactly what parts of competitive advantage are most important and make more informed choices on how that value is best increased. Due to its mission-critical importance to every business, competitive advantage needs a financial value in order to be correctly managed. Issue #15: Daily Competitive Advantage Valuation (intMgtOS® 6001.I14) Competitive advantage and brand value are linked concepts. Enhanced competitive advantage increases short-term revenue and long-term revenue.

Competitive Advantage Valuation

29

Decreased competitive advantage decreases short-term revenue and long-term revenue. Hence, understanding how revenue is changing over time is an essential part of any intangible valuation method. Issue #16: Confusion Regarding the Term Intangible (intMgtOS® 6001.I15) Ask the average person what “intangible” means, and they will respond with words such as “intellectual property,” “immeasurable,” “brand names,” “lacking physical substance,” “goodwill,” and so on. Princeton University3 (1997) defined intangible as follows: “Especially business assets—not having physical substance, or intrinsic productive value, intangible assets such as goodwill, incapable of being perceived by the senses, especially the sense of touch, hard to pin down or identify, lacking substance or reality, incapable of being touched or seen.”

In short, the world believes that intangibles cannot be seen, touched, owned, defined, or valued. This notion is upheld in the Accenture study. There is also a perception by some executives that intangibles are not valuable (“business assets—not having physical substance, or intrinsic productive value”). Accountants know that intangibles such as intellectual property, goodwill, and brand names are extremely valuable. They are also extremely hard to value, report, and manage. In fact, conventional accounting has great difficulty in dealing with intangibles in a way that is objective, consistent, structured, and scientific. This is because intangibles often have the opposite characteristics of financial transactions.

With the introduction of intangible management operating standards (intMgtOS®), intangibles can now be identified, classified, measured, managed, and reported as easily as traditional financial transactions are.

However, to do this a new language—that of intangible management operating standards—is required. The Intangible Foundation Standard (intMgtOS® 1001) defines the term intangible far more broadly than common perception allows: “An intangible is defined as any event that creates or modifies perceptions or expectations of the future behavior, value, or relevance of an individual, group, or 3

WordNet® 1.6, 1997, Princeton University.

30

Intangible Finance Standards otherwise constituted organization. Intangibles exist initially as level 3 resources (competitive intangibles), which cannot be owned, only influenced. L3 resources can be transformed directly into financial transactions (L1 resource), or into L2 resources (legal intangibles) and then into L1 resources. Competitive intangibles are the source of competitive advantage, value creation, and performance.” (intMgtOS® 1001.D2)4

Issue #17: Linking Intangibles to Financial Performance (intMgtOS® 6001.I16) Whenever an interaction occurs, as evidenced by an exchange of time (not necessarily an exchange of money), perceptions and expectations alter. Most, if not all, people have experienced a situation where they were prepared to buy from an organization, but due to poor customer service, they went to a competitor. On a very simplistic level, poor customer service is an example of an intangible liability that becomes an intangible expense. Good customer service is an example of intangible capital (a different meaning under intangible management operating standards than conventional terminology) that becomes intangible revenue when customers engage in referred business and repeat business. Astute readers will have already surmised that there is actually a strong correlation and linkage between intangible transactions and financial transactions.

Intangible transactions either facilitate or prevent financial transactions from occurring.

18 NEW VALUATION LAWS The Intangible Finance Standard (intMgtOS® 6001) details 18 laws that must be obeyed in order to generate a certified intangible financial statement. These 18 laws allow robust investor and executive valuations to be created. Robust valuations are simple to use, constantly accessible, and repeatable; are significantly less subjective than other comparative metrics because they explain financial performance; help executives take action; are less prone to creative accounting; and facilitate better business decisions. In short, they safeguard internal and external interests through the objectivity of their formation. These 18 laws are as follows: 4

Intangible Management, op. cit. at p. 49.

Competitive Advantage Valuation

31

1. Law of Universal Comparability This law of intangible finance theory states that if a financial measure is to be robust, it must be capable of being realistically compared to any other organization, irrespective of that organization’s strategy, mission, vision, or industry. (intMgtOS® 6001.L1) 2. Law of Universal Consistency This law of intangible finance theory states that if a financial measure is to be robust, it must be formed from the same factors from one year to the next, with no artificial shifting of the basis of the measure (reweighting of indices, or omission/addition of measures) being possible without full disclosure. (intMgtOS® 6001.L2) 3. Law of Universal Solidity This law of intangible finance theory states that if a financial measure is to be robust, it must be formed in accordance with the laws of mathematical consistency (that is, apples to apples, no fruit salad). (intMgtOS® 6001.L3) 4. Law of Strategy Independence This law of intangible finance theory states that if a financial measure is to be robust, it must not be formed from the strategy of the organization (as strategies are subject to continual change and readjustment). This alleviates any problems with choosing one metric over another, or weighting one metric higher than another. (intMgtOS® 6001.L4) 5. Law of Financial Presentation This law of intangible finance theory states that if a financial measure is to be robust, it must be ultimately expressed in objective financial terms, as financial figures are universally comparable, between firms, industries, departments, divisions, etc. (intMgtOS® 6001.L5) 6. Law of Organizational Sustainability This law of intangible finance theory states that if a financial measure is to be robust, it must be calculated in such a way as to separate shortterm changes in value from long-term (or sustainable) changes in value. (intMgtOS® 6001.L6) 7. Law of Metric Balance This law of intangible finance theory states that if a financial measure is to be robust, it must be calculated in such a way that it takes into account tangible and intangible factors. (intMgtOS® 6001.L7) 8. Law of Holistic Management This law of intangible finance theory states that if a financial measure is to be robust, it must be sustainable in its implementation and not give rise to behaviors that destroy sustainable performance for the sake of short-term gain. (intMgtOS® 6001.L8)

32

Intangible Finance Standards

9. Law of Organization Type Independence This law of intangible finance theory states that if a financial measure is to be robust, it must be applicable to and comparable to any type of organization (public, private, government, listed, unlisted, and so on). (intMgtOS® 6001.L9) 10. Law of Size Independence This law of intangible finance theory states that if a financial measure is to be robust, it must be applicable to and comparable to any size of organization, from a sole proprietor to a multi-billion dollar global multinational corporation. (intMgtOS® 6001.L10) 11. Law of Strategic Security This law of intangible finance theory states that if a financial measure is to be robust, the methods, techniques, and processes that organizations use to create premium value cannot be readily disclosed, as the communication of premium strategy leads to increased competition and replication by competitors. (intMgtOS® 6001.L11) 12. Law of Intangible Conservatism This law of intangible finance theory states that if a financial measure is to be robust, it must be derived from the actual operational performance of the business, based on current operational trends. (intMgtOS® 6001.L12) 13. Law of Supplemental Reporting This law of intangible finance theory states that if a financial measure is to be robust, it must be capable of being presented in financial terms in reports that can be easily understood by executives, managers, shareholders, and investors. (intMgtOS® 6001.L14) 14. Law of Holistic Value Reporting This law of intangible finance theory states that if a financial measure is to be robust, it must be capable of reporting the value of operational activities throughout all phases of the value creation process. (intMgtOS® 6001.L15) 15. Law of External Benchmarking This law of intangible finance theory states that if a financial measure is to be robust, it must be capable of being estimated for an organization where only publicly available information has been provided. (intMgtOS® 6001.L16) 16. Law of Internal Reporting This law of intangible finance theory states that if a financial measure is to be robust, it must be capable of assignment to any level within the business and be readily compiled into divisional reports, project reports, section reports, country reports, or conglomerate reports. Reports also need to be capable of being generated for functional units (HR, IT, Marketing, and so on). (intMgtOS® 6001.L17)

Competitive Advantage Valuation

33

17. Law of Intangible FOP Measurement This law of intangible finance theory states that if a financial measure is to be robust, it needs to specialize in the measurement of intangible factors of production (FOP), such as knowledge assets, relationship assets, motivation assets, and cycle-time assets. Such factors need to account for level 1 (L1), level 2 (L2), and level 3 (L3) intangible resources. (intMgtOS® 6001.L18) 18. Law of Performance Organizations exhibit two types of performance: (1) Financial (accounting) performance, and (2) Intangible (business) Performance. (intMgtOS® 6001.L20) Intangible Laws In addition to the 18 new valuation laws listed above, there are several intangible laws that must also be factored. There are numerous intangible laws,5 an understanding of which is critical to your understanding of Intangible Financial Statements. A summary of these laws is provided here for your reference. First Law of Intangibles (intMgtOS® 2002.L1) Intangible performance causes financial performance. Second Law of Intangibles (intMgtOS® 2002.L2) Conventional management records do not reflect negative intangible transactions or negative intangible performance. Third Law of Intangibles (intMgtOS® 2002.L3) Immediate and future financial transactions occur in accordance with the aggregated quality of perceptions and expectations from all intangible transactions relevant to those transactions. Fourth Law of Intangibles (intMgtOS® 2002.L4) Immediate financial transactions only occur if the perceived return on intangible investment is greater than the perceived cost of intangible investment. Fifth Law of Intangibles (intMgtOS® 2002.L5) As individual intangible transactions are not directly evidenced by financial transactions, financial transactions are the result of the aggregation of numerous intangible transactions. Sixth Law of Intangibles (intMgtOS® 2002.L6) The financial value of level 3 intangibles cannot be measured directly. Level 3 intangibles can only be financially valued by assessing the effectiveness, potential, continuity, and sustainability of intangible capital. Seventh Law of Intangibles (intMgtOS® 2002.L7) Any usage of intangibles in a non-effective manner leads to a loss of organizational productivity, efficiency, and effectiveness. When such losses create the poten-

5

See Chapter 4, “Intangible Operating Structures” (particularly pp. 76–80), of my earlier book for essential information and expansion on intangible laws.

34

Intangible Finance Standards tial for increased risk, an intangible liability is incurred. When such losses create actual lost business, an intangible expense is incurred. Eighth Law of Intangibles (intMgtOS® 2002.L8) The accumulation of financial expenses, financial liabilities, financial revenue, and financial assets results from leveraging L3 (competitive) intangibles. Ninth Law of Intangibles (intMgtOS® 2002.L9) A sustainable increase in productivity, value, and profit can only come from the effective management of knowledge assets, relationship assets, motivation assets, and cycle-time assets. It cannot come from a simple reduction in expenses. This is because expenses and revenue are interdependent. As a result, a reduction in expenses cannot equal an increase in profit. Depending on the quality of the expense being altered, a decrease in expenses could cause a decrease in profit, an increase in revenue, or no change in revenue. It is therefore essential to determine cost quality before committing to cost reductions. Tenth Law of Intangibles (intMgtOS® 2002.L10) Expenses are the necessary requirement to generate revenue. When productive expenses are reduced, the ability of a firm to generate revenue decreases in accordance with the values calculated by intMgtOS® 5001 (the Intangible Valuation Standard). Eleventh Law of Intangibles (intMgtOS® 2002.L11) “Brand effectiveness is determined from the quality of competitive intangibles on an operational, day-to-day, basis.” (intMgtOS® 2001.L11)

Low-quality knowledge assets (low levels of knowledge) and low-quality relationship assets (lack of emotional intelligence, leading to higher conflict) directly reduce the value of an organization’s brand. When customers’ assessment is that the experience is not sufficient to warrant a purchase, they will take their business to a competitor (direct or substitute). Hence, the day-to-day management of value expectations and value fulfillment of customers and employees is critical to the effective functioning, sustainability, and profitability of any organization. To an intangible analyst, a brand represents an embodiment of a specific strategy of the organization, and managing that brand on a day-to-day basis means that strategy is also being managed on a day-to-day basis. Twelfth Law of Intangibles (intMgtOS® 2002.L12) “Retention rates, satisfaction rates, repurchasing rates, and referral rates; and therefore productivity, revenue, earnings, and free cash flow; are all directly affected by the operational effectiveness and operational quality of competitive intangibles. The management of competitive intangibles therefore creates competitive advantage or destroys it.” (intMgtOS® 2001.L12)

The key word in this law is “operational.” If an organization does not manage the operational effectiveness and operational quality of its knowledge assets and relationship assets, it will be penalized by customers (lost business, reduced share price, decreased market share, slower growth rates, and so on).

35

Competitive Advantage Valuation

FINANCIAL PERFORMANCE AND INTANGIBLES One of the greatest breakthroughs brought about by intMgtOS® Statements is the reformulation of the profit equation. Historically, this has been: Profit (earnings) = Revenue less Expenses [1] FIGURE 2.1 The Conventional Profit Equation.

As the stock market rewards organizations that consistently grow their earnings (profits) above expectation, it is common for organizations to attempt to artificially inflate earnings by reducing mission-critical expenditures (human capital, research and development, marketing, training, and so on). In the short term, earnings increase as revenue takes time to be influenced by changes in the financial structure of an organization. However, in the medium to long term, earnings may be seriously affected due to the impact of negative network effects.6

PROFIT

AND INTANGIBLE

ASSET CAPITALIZATION

One way to artificially decrease expenses is through the use of intangible asset amortization. Consider a firm with revenues of $100 million and expenses of $60 million. If executives are allowed to convert expenses associated with hard (destination) intangibles into financial assets that belong on the balance sheet, two things happen: (1) earnings increase as expenses decrease, and (2) assets in the balance sheet increase. Let us assume that $30 m of expenses can be moved onto the balance sheet in this way. Being simplistic, the company’s profit equation originally looked like this: Profit (earnings) = Revenue less Expenses [1] Profit (earnings) = $100 m - $60 m Profit (earnings) = $40 m After adjustments for hard (destination) intangibles, it now looks like this: Profit Profit Profit Profit

= = = =

Revenue less Expenses plus Capitalized Assets [2] $100 m - $60 m + $30 m [2] $40 m + $30 m [2] $70 m [2]

The company has moved from $40 m profit (40% of revenue), to $70 m profit (70% of revenue) simply by moving expenses and capitalizing them. This is an increase in profit (earnings) of nearly 100%. 6

For more information see Chapter 5, “The Asset versus Expense Debate,” of my earlier book.

36

Intangible Finance Standards

Due to the distorting effects of intangible asset capitalization, and because capitalization violates the laws of Intangible Finance, it is not used in intMgtOS® Statements. (Note that economic destabilization can readily follow intangible capitalization.7) If the balance sheet of the firm originally totaled $30 m (before the intangible capitalization), it would be $60 m after it, which would yield a perceived increase in value of 100%. As nothing more than an accounting conversion (expenses to assets) has occurred, intangible management operating standards would not permit such an activity to occur in intMgtOS® Statements practice.

INTANGIBLE ECONOMICS

AND

PROFIT

Knowledge, relationships, service, quality, emotional intelligence, and speed are all examples of soft (source) intangibles. In saturated markets where numerous firms effectively offer the same product or service, it is the quality of soft intangibles that ultimately determines the quantity, quality, and continuity of financial performance. Intangible Economics was developed8 to reshape the supply and demand framework away from the supply and demand of a quantity of physical goods over a specified price range (and therefore specified financial transactions) to the supply and demand of expectations and perceptions (intangible demand and intangible supply). Instead of using the price and quantity of physical products, the price and quantity of intangibles are used to analyze intangible production. At the heart of Intangible Economics is the concept that an organization is a unique collection of knowledge assets, relationship assets, motivation assets, and cycle-time assets. Each organization will have an intangible demand function through which it will demand soft (source) intangibles (knowledge, relationships, and so on) in order to congeal its knowledge assets and relationship assets into a form that creates value to its customers. Employees, alliance partners, consulting firms, and other organizations supply soft intangibles in exchange for financial transactions. It is the interaction of intangible demand and intangible supply that generates supply-side intangible transactions. intMgtOS® 7001, the International Intangible Standard dealing with Intangible Economics, defines it thus: “Supply-side intangible transactions occur when an organization demands soft (source) intangibles (such as knowledge, expectations, relationships, quality, etc.)

7

For information on the causal connection, again see Chapter 5 of my earlier book. Dr Ken Standfield (www.StandardsInstitute.org)

8

Competitive Advantage Valuation

37

from suppliers of soft intangibles, in order to facilitate the organization in the creation, enhancement, marketing, and distribution of perceptions of value and customer relevance.” (intMgtOS® 7001.D25)

Once the organization has completed its research, development, and production of knowledge products and knowledge services, it will supply this potential value to a specific target market in a marketable form. In this case the market has an intangible demand function and the firm has an intangible supply function. Customers demand relevance, interactions, expectations, and perceptions. It is the interaction of intangible demand and intangible supply that generates demand-side intangible transactions. intMgtOS® 7001, the Intangible Economics Standard, defines this as follows: “Demand-side intangible transactions occur when an organization supplies soft (source) intangibles (such as knowledge, expectations, relationships, quality, etc) and hard (destination) intangibles (such as intellectual property), combined with tangible products to consumers in exchange for the potential of financial transactions.” (intMgtOS® 7001.D26)

Intangible Demand and Conventional Demand It makes great sense that the higher the quality of intangibles, the greater the potential demand for an organization’s products and services due to increased latent (potential) value. Under a conventional economics framework, an increase in intangible demand can be embodied as a right shift of the demand function (an increase in demand). Assume that an organization sells widgets. It expects to sell 100 widgets at a price of $10. This firm will therefore generate total revenue of $1000 ($10/unit ¥ 100 units = $1000). According to the First Law of Intangibles (intMgtOS® 2002.L1), intangible performance causes financial performance. This means that the $1000 revenue is the end result of numerous intangible transactions. Some of these intangible transactions will be negative. We know from the Second Law of Intangibles (intMgtOS® 2002.L2) that conventional management records do not reflect negative intangible transactions or negative intangible performance. This means that conventional management and accounting systems ignore the potential performance of the organization and record diluted performance. It is diluted financial performance that is embodied in a conventional supply and demand diagram. Conventional (Tangible) Demand Framework If the organization increases the quality of the knowledge assets and relationship assets it uses to form its products and services, it will make the product more desirable and easier for consumers to purchase, thereby increasing tangible demand (D1 to D2). (See Figure 2.2.)

38

Intangible Finance Standards

Price ($)

$10 Revenue: $1,000

Demand Quantity (units)

100

FIGURE 2.2 Conventional (Tangible) Demand Framework.

Price ($) Extra Revenue: $400 $10 Revenue: $1,000

D2 D1 100

140

Quantity (units)

FIGURE 2.3 Demand After Increased Intangible Productivity.

Conventional (Tangible) Demand Framework After Soft Intangibles The Ninth Law of Intangibles (intMgtOS® 2002.L9) states, “A sustainable increase in productivity, value, and profit can only come from the effective management of knowledge assets, relationship assets, motivation assets, and cycle-time assets. It cannot come from a simple reduction in expenses. This is because expenses and revenue are interdependent. As a result, a reduction in expenses cannot equal an increase in profit. Depending on the quality of the expense being altered, a decrease in expenses could cause a decrease in profit, an increase in revenue, or no change in revenue. It is therefore essential to determine cost quality before committing to cost reductions.” This means that the way to increase financial performance is through the correct management and measurement of soft (source) intangibles, not expense reductions. (See Figure 2.3.) Expenses and Intangible Demand When expenses are increased or decreased, intangible demand and conventional demand are both affected. For example, if expenses are reduced to

39

Competitive Advantage Valuation

Price ($) Reduced Revenue $10 Revenue: $800 D2 80

100

D1

Quantity (units)

FIGURE 2.4 Demand After Reduction in Cost Quality.

reduce the workforce below the real-optimal employment level (per intMgtOS® 7001.D34, the real-optimal employment level, or ROEL, is the effective level of real employment—structural and human capital—required to deliver customer value), then customer demand will decrease, as the organization will be unable to satisfy existing demand. The loss of intangible demand will lead to negative network effects. This will have the effect of reducing demand for the organization’s goods and services.9 (See Figure 2.4.) The intMgtOS® Profit Equation Conventional management regards financial revenue and financial expenses as being independent. This means that changes in expenses are not regarded as changing revenue. While this may be mildly correct in the short term, from a sustainability stance independence is completely false. Revenue and expenses are interdependent, meaning that a change in expenses will either increase or decrease revenue. From this understanding the standard revenue equation is missing vital information:

Profit (earnings) = Revenue less Expenses [1] Profit (earnings) = $100 m - $60 m Profit (earnings) = $40 m FIGURE 2.5 The Conventional Profit Equation.

9

For more detailed information on the quality of costs as determined by reference to soft intangibles, see Chapter 16, “Intangible Cost Structures,” of my earlier book.

40

Intangible Finance Standards

Under the principles of conventional accounting, revenue is frequently defined as the price of tangible goods multiplied by the quantity of sales of those goods. In other words:

Revenue = Price times Quantity [3] Revenue = P ¥ Q [3] FIGURE 2.6 The Common Definition of Conventional Revenue.

In the Intangible Economy, the majority of organizations simultaneously combine knowledge assets, relationship assets, motivation assets, and cycletime assets to create value. Such organizations engage in intangible production to create this value. In other words, Intangible Economy organizations create products and services that “embody value” (such as services, eServices, etc.). Intangible products typically have a limited physical presence. To account for this new dynamic, intMgtOS® Statements redefine the underpinning characteristics of revenue and define it as follows:

Revenue = (Total Effective Time) ¥ (Money Value of Time) [4] Revenue = SET ¥ MVT FIGURE 2.7 The New Short-Term Profit Equation.

This adjustment in understanding is required to link financial transactions through time to soft (source) intangibles. For example, a reduction in the workforce has the effect of reducing human capital, which will translate into less effective time within the organization (if it is understaffed). The decreased supply of time due to a decrease in intangible resources (human capital) will reduce the organization’s total effective time. Unless productivity increases, or more effective time is acquired through structural capital (internet systems, automation, mechanization, and so on), long-term revenue will fall as will continuity and sustainability. It is the connection between revenue, expenses, and time that gives Intangible Financial Statements significant application, relevance, and power. This equation illustrates that a change in expenses can have numerous effects on the future flow of financial transactions and intangible transactions within the organization.10 10

Chapter 5 of my earlier book explores these concepts more fully.

41

Competitive Advantage Valuation

Pr ofit Changed = (RevenueOrig - ExpensesOrig ) + (D Re v Est - DExp Est ) Pr ofit Changed =

([Â PT

Orig

]

) ([ÂDPT .x.DMVT ]- (E

.x.MVTOrig - EOrig -

O

)

- EN )

FIGURE 2.8 The intMgtOS® Profit Equation.

INTANGIBLE FINANCIAL STATEMENTS According to the Intangible Accounting Standard (intMgtOS® 4001), Intangible Accounting performs six core tasks: 1. Holistic and objective identification of source (soft) intangibles (intMgt OS® 4001.C1) 2. Consistent classification of source (soft) intangibles (intMgtOS® 4001. C2) 3. Standardized recording of source (soft) intangibles (intMgtOS® 4001. C3) 4. Objective financial measurement of source (soft) intangibles (intMgt OS® 4001.C4) 5. Comprehensive structured financial reporting of changes in cost quality due to changes in source (soft) intangible performance (intMgtOS® 4001.C5) 6. Flexible analysis of source (soft) intangible transactions (intMgtOS® 4001.C6) In the previous section, we looked over the concepts of intangible demand. One of the major advantages of intangible accounting is that it becomes possible to benchmark the intangible health of an organization by how well the organization is using knowledge assets, relationship assets, emotional assets, and time assets. Intangible benchmarking allows firms to uncover the potential worth of their organization, where value restriction is occurring, and where value expansion is possible.

THE INTANGIBLE CLASSIFICATION SYSTEM intMgtOS Statements use the Intangible Classification System to redefine many traditional accounting terms by focusing understanding on intangible transactions rather than financial transactions.

42

Intangible Finance Standards

Intangible Assets “According to the Intangible Accounting Standard (intMgtOS® 4001), an intangible asset is defined as any intangible transaction that has the ability to positively influence, or otherwise enhance, expectations or perceptions, and therefore financial transactions. This is measured by assessing the total amount of time, through the aggregation of effective time, potential time, continuity time, and non-accessible time at a pre-contractual, contractual, and post contractual level. This identifies the intangible asset base of the organization.” (intMgtOS® 4001.D31)

Intangible Liabilities “According to the Intangible Accounting Standard (intMgtOS® 4001), an intangible liability is defined as any intangible transaction that has the ability to negatively influence, or otherwise dilute, expectations or perceptions, and therefore reduce financial transactions. Assessing the total amount of time that would have been effective time identifies the intangible liabilities present within an organization.” (intMgtOS® 4001.D41)

In the same way that financial capital is the difference between financial assets and financial liabilities, intangible capital is the difference between intangible assets and intangible liabilities. This is defined in the Intangible Accounting Equation: iAssets = iLiabilities + iCapital Intangible Capital “According to the Intangible Accounting Standard (intMgtOS® 4001), intangible capital is defined as the difference between intangible assets and intangible liabilities. It represents the time base of the organization that was actually used to generate financial performance.” (intMgtOS® 4001.D51)

Other Intangible Transactions The remaining international intangible standard definitions for intangible revenues, intangible expenses, and intangible profit (or loss) are as follows. Intangible Revenues “According to the Intangible Accounting Standard (intMgtOS® 4001), intangible revenue defines the total potential time performance of the organization accounting for all time components. It is the financial value of intangible assets.” (intMgtOS® 4001.D60)

It is important to be aware that numerous intangible accounting assumptions govern how intangible revenue is quantified in financial terms.

Competitive Advantage Valuation

43

Intangible Expenses “According to the Intangible Accounting Standard (intMgtOS® 4001), intangible expenses occur when intangible transactions from negatively influenced, or otherwise diluted, expectations or perceptions (intangible liabilities) lead to the actual loss of organizational financial transactions (competitive advantage costs) as evidenced by the financial valuation of intangible liabilities.” (intMgtOS® 4001.D70)

In this sense, intangible expenses are similar to opportunity costs as discussed in conventional economics. Intangible Profit or Loss In the same way that conventional (financial) profit or loss is the difference between financial revenues and financial expenses, intangible profit and loss is the difference between intangible revenues and intangible expenses. This equation is defined in the Intangible Profit Equation:11 iProfit/iLoss = iRevenue - iExpenses “According to the Intangible Accounting Standard (intMgtOS® 4001), intangible profit is the positive difference between intangible revenue and intangible expenses.” (intMgtOS® 4001.D80) “According to the Intangible Accounting Standard (intMgtOS® 4001), intangible loss is the negative difference between intangible revenue and intangible expenses.” (intMgtOS® 4001.D81)

INTMGTOS

STATEMENTS

IntMgtOS Statements create intangible financial statements from intangible assets, intangible liabilities, intangible capital, intangible revenue, and intangible expenses in the same way that conventional accounting does from conventional (financial) accounting classifications. As the same structure is used in intangible financial statements as that used in conventional accounting, intangible financial reports are conceptually identical to conventional accounting reports in terms of structure, nature, and form but are different in terms of content and application. All intangible financial reports are formed in accordance with intangible management operating standards.

11

book.

For more information see p. 115 in Chapter 7, “Intangible Bookkeeping,” of my earlier

44

Intangible Finance Standards

CONCLUSION AND SUMMARY At no other time in history has the accounting profession been under so much duress to upgrade and update its methods to reflect the changes the Intangible Economy has brought. The new management principles and new value creation processes that dominate today’s Intangible Economy run contrary to the long-held methods of doing business in the manufacturing age. Intangible accounting provides the long-awaited upgrade to the conventional accounting framework that allows accountants to meet the challenges of the Intangible Economy with confidence and renewed vitality. The next chapter will investigate a range of new intangible financial reports that place hard financial values on competitive intangibles in accordance with intangible management operating standards (which create robust valuations with inbuilt investor confidence).

CHAPTER

3

Foundations of Intangible Financial Statements

There are three (3) levels of time that intangible analysts value and track. 1. Level 1 time analysis: A macro-view of time across the economy, sectors, industries, and markets. 2. Level 2 time analysis: A micro-view of time within a specific organization 3. Level 3 time analysis: A nano-view of time within a specific organization

LEVEL 1 TIME ANALYSIS Level 1 time is the macro-view of time that intangible analysts value and track. It has four (4) parts (see Figure 3.1). Economy time: This is the total estimated effective, potential, continuity, and non-accessible time across all publicly traded corporations, across all exchanges. (intMgtOS®1001.D45) 45

46

Intangible Finance Standards

FIGURE 3.1 Explaining Level 1 Time.

FIGURE 3.2 Explaining Level 2 Time.

Sector time: This is the total estimated effective, potential, continuity, and nonaccessible time across all publicly traded corporations, within each specific sector. (intMgtOS®1001.D46) Industry time: This is the total estimated effective, potential, continuity, and non-accessible time across all publicly traded corporations, within each specific industry. (intMgtOS®1001.D47) Market time: This is the estimated time customers give to all organizations within a specific industry in terms of their contact with organizations of that industry. (intMgtOS®1001.D48)

LEVEL 2 TIME ANALYSIS Level 2 time analysis looks at an organization from a micro-view. In L2 analysis intangible analysts are interested in quantifying, financially valuing, and tracking the trends in components of time within the firm (see Figure 3.2).

Foundations of Intangible Financial Statements

47

Employee time: Employee time is the amount of effective, potential, continuity, and non-accessible time available to an organization directly from the aggregated hours of individual staff members on an annual basis. (intMgtOS®1001.D50) Statutory time: Statutory time is the amount of time that is removed from an organization as the result of holidays, weekends, and other events that are legislated and therefore outside the control of the organization. This amount is represented as aggregated hours of individual staff members on an annualized basis. Strikes and industrial action would fall into a sub-category of statutory time. (intMgtOS®1001.D57) Discretionary time: Employees have numerous leave and overhead entitlements that they can optionally exercise (sick leave, annual leave, and so on). Discretionary time also accounts for issues such as absenteeism, lateness, overtime, and other events at the discretion of the employee. (intMgtOS®1001.D58) Non-productive time: Non-productive time is the amount of time not available for an individual employee to generate effectiveness for the organization they work for. Non-productive time is composed of potential time and continuity time. Non-productive time is referred to as potential time. (intMgtOS®1001.D35). Productive time: Productive time is the amount of time available for an individual employee to generate actual productivity for the organization they work for. Productive time is not composed of any non-productive time. Productive time, when measured through intangible management practices, is referred to as effective time. Effective time creates sustainable productivity and is superior to conventional productivity. (intMgtOS®1001.D34)

LEVEL 3 TIME ANALYSIS Level 3 time analysis looks at an organization from a nano-view. It investigates intangible transactions and classifies them according to specific categories determined by intangible management operating standards. Intangible transactions create changes in competitive rights and are therefore non-financial transactions and are evidenced by changes in nanotime at the precontractual, contractual, and post-contractual level. Changes in competitive rights are classified into four key categories: intangible assets, intangible liabilities, intangible expenses, and intangible revenue. Intangible transactions result from the use

48

Intangible Finance Standards of knowledge assets, relationship assets, emotional assets, responsiveness assets, and organizational assets (intMgtOS®.1001.D22). Non-financial transactions involve uses and sources of time between entities and therefore relate to intangible transactions. (intMgtOS®1001.D23) An entity can represent an individual (customer, employee, supplier, partner, and so on) or an organization (profit, nonprofit, government, and so on) that is capable of exchanging uses and sources of time with another entity. (intMgtOS®1001.D24)

Intangible analysts understand the nano-view of time. Nanotechnology takes its name from the nanometer, which is 1 billionth of a meter (a meter is 39.37 inches, a little longer than one yard). Nanotechnology generally means the manipulation of atoms to create machines or materials that are less than 100 nanometers long. A meter is just over a yard long, and a nanometer is a billion times smaller, just several atoms wide. Nanotechnology involves molecular manufacturing where scientists manipulate atoms into useful products. Nano is a metric prefix meaning 1 billionth of a unit, or 10-9. For example, nanorulers, nanowires, nanotubes, nanoparticles, and other molecular manufacturing devices are already entering the market. With molecular manufacturing, it is possible to build nanotubes that can be made into materials that are thousands of times stronger than steel and are the thickness of a piece of paper. Just as we are manipulating atoms, we can now manipulate time in a way that has not been done previously. Just as atoms are the building block of matter (carbon atoms when rearranged form diamonds, and the silicon atoms in sand when rearranged form computer chips), time is the building block of revenue (time when arranged correctly generates money). That is, time is money and intangible analysts can tell you more precisely what time is worth, how well companies are using it, how well executives are converting time into value, and how time influences share price. Intangible analysts understand the mission-critical role time plays in the earnings, growth, and sustainability of any firm; they create financial statements that assist in recognizing profitable investment opportunities.

NANOTIME MANUFACTURING All publicly traded organizations conduct nanotime manufacturing—although you are unlikely to find a Nanotime Manufacturing Department in any firm. Manufacturing is the process of creating an output (a product) from an input (raw materials). How effectively an organization transforms inputs (raw materials) into outputs (products or services) is termed productivity.

Foundations of Intangible Financial Statements

49

FIGURE 3.3 Nanotime Manufacturing.

Nanotime manufacturing is the transformation of uses and sources of nanotime into effective units of time that directly influence a customer’s willingness and probability of satisfying their requirements through the organization’s products and/or services. (intMgtOS®1001.D75)

An Example (see Figure 3.3) Purchasing a $2.50 cup of coffee from a café is not an intellectual event. But nanotime manufacturing sees it as a cosmos of interactions, transactions, and interrelationships. To a customer, the value of a $2.50 cup of coffee must be more than the $2.50 they pay. To the business, the cost of a $2.50 cup of coffee must be less than the $2.50 in revenue they receive or the business will make a loss. Nanotime manufacturing is aware of the fundamental struggles between customer value, customer price, and business cost. Let us assume there are two customers: Bob and Fred. Both customers are willing and able to pay $2.50 for the cup of coffee. It is the effectiveness of the firm’s nanotime manufacturing processes that will determine the level of: 1. 2. 3. 4. 5. 6. 7. 8.

Current business Repeat business Referred business Revenue growth Expense levels Earnings quality Market value Share price

50

Intangible Finance Standards

Intangible analysts are fully aware of the key role time plays in making money; they go far beyond the concept of “time is money” and tell you how much, where, when, and why. Nanotime manufacturing dictates the quality, service, and business excellence levels of the firm. A firm with ineffective, low-quality processes for nanotime manufacturing management will destroy customer willingness to purchase. A firm with effective, high-quality processes will dramatically increase customer willingness to purchase. Nanotime manufacturing is a powerful way to manage brand value on a day-to-day basis. Nanotime Value Transactions Nanotime manufacturing manages the three phases of the value creation and extraction process: 1. Pre-contractual performance 2. Contractual performance 3. Post-contractual performance The relationship between pre-contractual performance, contractual performance, and post-contractual performance is represented in Figure 3.4. Intangible costs, or brand value costs, occur at the pre-contractual, contractual, and post-contractual stages; revenue only occurs near the end of the contractual stage. Intangible costs result when actual results are prevented from being generated due to ineffective, or inefficient, knowledge assets, relationship assets, emotional assets, responsiveness assets, and organizational assets. Intangible costs are also referred to as brand value costs. (intMgtOS®1001.D31) Continuity levels are the required investments in intangible costs to ensure ongoing sustainability and replication at satisfactory, sustainable, and maintainable levels. Without continuity levels attached to activities, unsustainable levels of time (burst time) will cause effectiveness and productivity to decrease due to

FIGURE 3.4 The Total Value Process.

Foundations of Intangible Financial Statements

51

burnout, absenteeism, excess stress, dissatisfaction, turnover, and other issues. (intMgtOS®1001.D33) Burst time occurs when an organization has deficient nanotime to fulfill its workflow and compensates by increasing productive time through excess discretionary time to unsustainable levels that can be maintained only on a short-term basis. (intMgtOS®1001.D29)

Intangible finance has a specific way of financially estimating the value of intangible costs and represents them in a structured financial format in accordance with the Intangible Management® Reporting Excellence Framework as a means of identifying potentially profitable stocks.

Pre-contractual Performance Pre-contractual performance involves uses and sources of nanotime by the organization and the customer to determine if contractual performance will be explored due to the established promise of excess customer value. At any stage precontractual performance can result in intangible costs associated with lost business. (intMgtOS®1001.D19a)

In the case of Bob and Fred, both customers are interested in purchasing a cup of coffee for $2.50. From Bob and Fred’s perspective, the cost involved in making the cup of coffee is of no interest. These purchasers are only interested in the excess value they can derive from the purchase. The pre-contractual performance of these two buyers could appear as follows: 1. 2. 3. 4. 5. 6. 7.

Select café Enter café Greeted by staff Shown to a seat Look at menu Decision Call waiter

In this case, we will assume Bob and Fred (independently) have entered the same café around the same time and are not known to each other. Graphically, we would represent these nanotime transactions as graphically explored in Figure 3.5. In Figure 3.5, i = intangible transaction, and the different tones are represented by Figure 3.6. The major productivity costs that can occur during pre-contractual performance are switching costs. Switching costs are serious costs, as they erode customer loyalty and brand value. Without nanotime manufacturing, such intangible costs (or brand value costs) are typically never recorded, never quantified, and remain unmanaged.

52

Intangible Finance Standards

FIGURE 3.5 Pre-contractual Competitive Intangible Interactions.

FIGURE 3.6 Analysis Legend.

Contractual Performance Contractual performance involves uses and sources of nanotime by the organization and the customer in the delivering of value established in the precontractual performance stage. During contractual performance the organization needs to overcome numerous intangible barriers in order to receive payment for delivering on its value promise. Although more difficult, and usually requiring a breach in the terms of the condition of a contract, customers can still avoid having to pay for value that is deficient to that promised. If this happens, such issues can be contested as legal disputes within the court system. (intMgtOS®1001.D19b)

Contractual performance, according to nanotime manufacturing, for the purchase of a $2.50 cup of coffee for Bob and Fred: 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

Make coffee order Coffee order received Wait Staff deliver coffee Customer assesses quality Drink coffee Wait Get check Approach cashier Pay for coffee Interpret response

Graphically, these would be described in Figure 3.7. If the nanotime transaction at point 10 was too long, the customers (Bob/Fred) could simply walk out without legal obligation as the (unwritten) contract for the purchase of coffee would not have delivered value that could

Foundations of Intangible Financial Statements

53

FIGURE 3.7 Contractual Competitive Intangible Interactions.

be contested in a court of law. Even if the coffee was delivered in a reasonable time, customers could still negate the contract at point 12 due to an incorrect order or deficient quality. At every customer–employee interaction, intangible value is created, or destroyed. For the set of 11 transactions that constitute the contract, 6 are customer–employee transactions that could directly increase, or decrease, intangible value. It is the purpose of nanotime manufacturing to assess intangible quality and brand quality by assessing such transactions. Brand quality is the level of nanotime brand value enhancement relative to nanotime brand value destruction that occurs due to customer-employee interactions during nanotime. (intMgtOS®1001.D67) Nanotime brand value enhancement occurs when customer–employee interactions create increased customer value, and increased willingness over time to acquire value from the business over time. (intMgtOS®1001.D67a) Nanotime brand value destruction occurs when customer–employee interactions create decreased customer value and decreased willingness over time to acquire value from the business over time. (intMgtOS®1001.D67b)

Returning to Bob and Fred, both were happy with their order and proceeded to the cashier area 10 minutes apart to pay the $2.50. Fred reached the counter first and paid. The first cashier, Susan, was pleasant while taking the money and provided no reason for Fred to question her level of customer service. Ten minutes later, Bob approached another cashier, Julie, to pay. Julie was in a bad mood and treated Bob and other patrons with contempt. Displeased, Bob asked to speak to the manager and informed the manager of Julie’s bad behavior. However, Bob decided not to visit the café again due to the incident. Post-contractual Performance Post-contractual performance involves uses and sources of nanotime by the customer in assessing the true value proposition of the intangible transactions related to the acquisition of customer value. If the intangible transactions were such that value delivered as promised, a competitive barrier will be formed. If the intangible transactions associated with acquiring value are superior to what was reasonably expected, then a competitive attractor will be formed. (intMgtOS®1001.D19c)

54

Intangible Finance Standards A competitive barrier acts as a motivational disincentive and a value blockage in nanotime value chain analysis. This barrier prevents both repeat business and referred business. Competitive barriers occur when violations in expectations, promises, and perceptions translate into a psychological aversion to supplying the entity that has raised them with nanotime. (intMgtOS®1001.D17) A competitive attractor acts as a motivational incentive and a value enhancer in nanotime value chain analysis. This attractor creates both repeat business and referred business. Competitive attractors occur when delivered expectations, promises, and perceptions are higher than anticipated, thereby creating a psychological approval of and fondness for supplying a particular entity with nanotime. (intMgt OS®1001.D17a) Repeat business is defined as the willingness to re-supply nanotime demand to a specific entity. (intMgtOS®1001.D15a) Referred business is defined as the willingness to recommend attention to an entity’s time capital demand to a customer’s contacts within personal and professional relationship networks. (intMgtOS®1001.D15b)

Bob and Fred’s post-contractual transactions would look like this: 19. 20. 21. 22. 23.

Leave café Assess experience Create knowledge Store knowledge Share knowledge

Bob was content with the quality of the coffee, but displeased with the conduct of the business, and he made the decision not to revisit the business again. Fred was happy with the coffee and the service and has made the decision to purchase again from the café. Overall the nanotime value transactions would appear as detailed in Figure 3.8. Nanotime has multiple dimensions. This nanotime value chain details the nanotime transactions as they relate to the customer. In the next chapter, we will investigate the role of nanotime in the determination of effectiveness of actual results (see Figure 3.9).

FIGURE 3.8 Aggregated Nanotime Value Transactions.

Foundations of Intangible Financial Statements

55

FIGURE 3.9 Level 2 Time Within Aggregated Nanotime Value Transactions.

FIGURE 3.10 Exploring How Nanotime Transactions Create or Destroy Revenue Growth.

Figure 3.9 illustrates that within each transaction there is substantially more detail that nanotime manufacturing looks into to determine how results, effectiveness, brand, time, and value interact.

NANOTIME

AND

VALUE

In all areas of valuation, the change in value over time is an important issue. In nanotime analysis, the critical issue relates to how uses and sources of nanotime are used now and how they destroy or create immediate value while also considering continuity issues. In the case of Bob and Fred, Bob will not repurchase (there are numerous coffee shops), but Fred will (Figure 3.10).

56

Intangible Finance Standards

Of particular interest is the concept that revenue is generated at the 17th transaction. This transaction is very late in the value creation process. Accounting tends to measure only this transaction, as though it were the only one of significance in the total value chain. Such a focus is the reason why the accounting profession cannot account for intangible value. This creates a crisis for executives as they are rewarded and assessed on financial performance and not nanotime performance. The deficiencies in accounting can, though, be overcome through the use of the Intangible Management® Reporting Excellence Framework. In the Intangible Management Economy, the management of nanotime is a key strategic weapon to decrease the competitive strength of rivals by creating competitive attractors. Companies that do not manage their nanotime will find themselves creating competitive barriers, thereby decreasing their future cash flows while increasing their expenses and lowering earnings. Nanotime strategy is therefore critical to implement. Nanotime strategy is the strategic management of intangible transactions as the method of strategically managing the firm’s short-term performance, results, brand value, earnings, free cash flows, and share price. Nanotime strategy is equally applicable to public sector organizations. (intMgtOS®1001.D26)

CHAPTER

4

Benchmarking Intangible Performance

Intangible finance is especially concerned with the interrelationships between sectors, industries, and stocks. To uncover these relationships, intangible analysts form a number of intangible financial statements in order to analyze stock market performance in a structured and scientific manner. These statements are formed in accordance with intangible management operating standards so that they are globally applicable. To ensure that rigorous reporting standards are upheld, the trademark IntMgtOS is used to guarantee that the calculations present in the formation of the statement are of the highest possible quality and conform strictly to intangible management operating standards.

INTANGIBLE FINANCE STATEMENTS At the heart of Intangible Finance Statements theory are three (3) basic propositions: 1. There is a strong direct relationship between employees and revenue. 2. Intangible value is a leading indicator of investor sentiment. 57

58

Intangible Finance Standards

3. A pure focus on expense management destroys organizational performance, and ultimately share price.

PROPOSITION 1 A major failing of conventional accounting and management wisdom is that employees are expenses and therefore destroy earnings. This has led many executives into knee-jerk reactions: fire when things go badly and hire when things are booming. Such companies, according to intangible finance principles, are poorly managed and are subject to increasing stock price fluctuations due to mismanagement. Consider the 3M Company (Ticker: MMM, NYSE), a conglomerate in the Conglomerates sector. This firm employs 68,774 people and generates $17,179 m in revenues, with operating income of $3,388 m and income after tax of $2,245 m. With a market value of $54,293 m and book value of $6,955 m (intangible value of $47,338 m), this is a well-performing firm. At the heart of 3M’s success are two forces: knowledge and capabilities. Both of these intangible assets derive directly from people (human capital). To create a basis of comparison, let us assume that a new CEO has been appointed to 3M and this CEO has determined that reducing 3M’s employees by 70% will result in a net reduction in operating expenses from $13,791 m to $7,823 m (an expense reduction of $5,968 m). The CEO expects that 70% of this reduction in expenses will flow through into earnings, thereby boosting income after tax from $2,245 m by $4,178 m to $6,423 m (a 186% increase in earnings). The “logic” of cutting employees to boost earnings makes sense to millions of executives the world over, but it presents serious problems to investors. Optimal Employment Levels Every organization is characterized by a level of employment such that it is neither understaffed nor overstaffed; this level is called an optimal employment level, or OEL (intMgtOS®6001.D107). At this level the firm has precisely the number of staff it needs to be optimally productive. If a firm has a number of employees in excess of its optimal employment level (E > OEL), then it will create productivity costs and expense costs that will reduce earnings, market value, and share price. This means that the firm requires fewer staff to generate additional productivity, revenue, earnings, market value, and share price. If a firm has a number of employees below its optimal employment level (E < OEL), then its productivity will be below optimal levels. This means

Benchmarking Intangible Performance

59

that the firm has latent productivity, earnings, market value, and share price that it can generate by simply increasing its number of employees. Managing the optimal employment level is therefore critical to managing the share price of organizations. Returning to the previous example of 3M, if 3M is currently at its optimal employment level (of 68,774 employees), a reduction of 70% of employees will place it significantly below its optimal employment level. If 3M’s optimal employment level is 70% below its current employment level, then the reduction will release expenses and enhance share price. Determining OEL At the OEL, a firm can meet current customer demands without requiring additional staff resources. Previous to the 1980s most firms were seriously overstaffed (employees numbering significantly more than the OEL). In the first decade of the 21st century, the situation is reversed: the majority of firms are understaffed. Restructuring, reengineering, and severe cost reductions have cut costs to the bone and beyond—especially in relation to employees. Changing Staffing Levels The vast majority of executives still hire when they have excess client demand and retrench employees when they have low client demand. Unless an organization has gained intMgtOS®6001 intangible standard certification it is reasonable to think that senior executives are still hiring on increases and firing on decreases in customer demand.

Linking Revenue and Employees Intangible valuation by benchmarking true productivity is the foundation of intangible finance and a key focus for intangible analysts. Intangible Finance & Intangible Assets When employees apply their skill, knowledge, and expertise during productive time (intMgtOS®1001.D34), they directly and indirectly generate productivity. Productivity is the engine of revenue and the source of earnings. Productive time is the amount of time available for an individual employee to generate productivity for the organization they work for. Productive time is not composed of non-productive, or overhead, time. (intMgtOS®1001.D34)

60

Intangible Finance Standards

Employees use two (2) core intangible assets to generate productivity and revenue1: 1. Knowledge assets (intMgtOS®1001.D9) 2. Relationship assets (intMgtOS®1001.D10) Knowledge assets occur when source intangibles interact with destination intangibles to modify, or otherwise change, source intangibles or destination intangibles. (intMgtOS®1001.D9) Relationship assets occur when source intangibles interact with other source intangibles to modify, or otherwise change, source intangibles or destination intangibles. (intMgtOS®1001.D10)

To understand knowledge assets and relationship assets, it is important to understand the difference between source intangibles and destination intangibles: A source intangible is defined as the source from which soft (competitive) intangibles are generated. (intMgtOS®1001.D3) A destination intangible is the embodiment of a source intangible. Such embodiments typically give rise to the creation of hard (legal) intangibles. (intMgtOS®1001.D4)

A destination intangible is the representation, in independent form, of a person’s knowledge or understanding. Destination intangibles are typically forms of intellectual property protected under relevant copyright laws. Source intangibles relate to know-how, individual knowledge, emotional intelligence, and many other issues that are not typically subject to intellectual property protection. When a soft intangible (knowledge) is transformed into a hard intangible (a document protected by copyright law), a hard, or legal, intangible has been created. Your personal knowledge is a source intangible. What you write down in the office is a destination intangible (as it is formed from your personal knowledge). These definitions give rise to terminology that also requires further elaboration—competitive intangibles and legal intangibles. The Intangible Operating Structures Standard (intMgtOS®2001) defines these two as follows: “Competitive intangibles are defined as the source from which legal intangibles are created, maintained and enhanced over time.” (intMgtOS®2001.D3) “Legal intangibles are defined as ownership rights that are conferred by an Act of Parliament, or by National or International Agreement that create legal ownership in the represented form of an applied intangible competitive right.” (intMgtOS®2001.D2) 1

For a comprehensive discussion of knowledge assets, relationship assets, and the fundamentals of intangible management (critical to an understanding of intangible finance), please refer to my earlier book, Intangible Management: Tools for Solving the Accounting and Management Crisis (Academic Press, 2002).

Benchmarking Intangible Performance

61

PROPOSITION 2 At the heart of Intangible Financial Statements is the understanding that all organizations experience two types of transactions—(1) financial transactions and (2) non-financial transactions. Financial transactions result from non– financial transactions (uses and sources of time).

Intangible Transactions At a very basic level of understanding, financial exchanges are evidenced by exchanges of money and legal property rights, and intangible (non-financial) transactions are evidenced by changes in perceptions and expectations and in sources and uses of time. Intangible transactions are therefore not conceptually the same as financial transactions. In fact, intangible transactions are defined by intangible management operating standards as follows: “Intangible transactions are non-financial transactions that result from the use of knowledge assets, relationship assets, emotional assets, and time assets.” (intMgtOS®1001.D22)

Hence, intangible transactions cannot be accounted for in the same way as financial transactions. According to intangible management operating standards, knowledge assets have little to do with intellectual property: “Knowledge assets occur when source intangibles interact with destination intangibles to modify, or otherwise change, source intangibles or destination intangibles.” (intMgtOS®1001.D9)

In simple terms, any time you deal privately (just you) with extending your own knowledge, you create knowledge assets. In contrast, relationship assets are communal by nature—more than one person is required in order for them to be generated: “Relationship assets occur when source intangibles interact with other source intangibles to modify, or otherwise change, source intangibles or destination intangibles.” (intMgtOS®1001.D10)

Any time you interact with other people, relationship assets are created. Not surprisingly, relationship assets can vary significantly in terms of quality (positive, neutral, or negative). Intangible Asset Quality All soft intangibles (source intangibles) have discretionary value. (intMgtOS®1001.D28)

62

Intangible Finance Standards The value and quality of any soft intangible is completely discretionary and in the sole control of the holder of the source intangible. (intMgtOS®1001.D28)

Intangible finance recognizes the truth of employment in the Intangible Management Economy: the means of production, and the quality of that production, now reside in the heads of employees. Specifically, employees who are dependent on computers to do their work can often appear busy, but be non-productive (through deficient skills, playing games, sending personal emails, checking stocks when they should be working, or other such activities). Even for employees not dependent on technology, employee autonomy has grown substantially over the years. As such, employees can make “bad decisions,” commit serious frauds, or engage in all-out industrial espionage far more easily than they could in the past (due to complicated systems, power silos, complex processes, and so on). Employees who interact with customers can create substantial intangible asset quality problems. Poor customer service, lack of reasonable knowledge levels, emotional illiteracy, conflict, and other human interaction issues directly damage productivity (short term and long term). It is therefore critical to identify and correctly measure the intangible impacts on employee productivity, in order to quickly identify productivity costs (intangible costs) so as to ensure immediate corrective action. Intangible analysts seek to benchmark the true productivity performance of organizations from an arm’s-length perspective (initially) as a means of determining which firms perform better than others. True productivity is calculated through the strict adherence to the intangible finance standard (intMgtOS®6001).

True Productivity Intangible finance acknowledges the key role and the major problems associated with people creating value over productive time using complex systems, in complex environments, where direct supervision is largely impossible. As a result, the true productivity of an employee needs to assess a number of key issues: 1. The time costs (time overheads) associated with current productivity 2. The classification of time overheads in a structured and collectively exhaustive manner 3. The linkage between time and revenue so that time can be valued in a conservatively realistic manner that reflects the actual financial performance of the organization as evidenced by financial statements

Benchmarking Intangible Performance

63

4. The mathematical estimation of employees, revenue, and productivity, to further refine the accuracy of productivity calculations 5. The wage costs and other associated expenses tied in to the application of employee time 6. The impact of changes in the composition of productive and nonproductive time 7. The total financial value of opportunity costs and opportunity benefits associated with time allocations 8. The potential financial impact on revenue 9. The potential financial impact on market value 10. The potential financial impact on share price True productivity, as calculated by the Intangible Finance Standard (intMgtOS®6001), accounts for the above ten (10) factors using a structured methodology and consistent classification system based on the intMgtOS Reporting Excellence Framework. Quality Management Issues As knowledge assets (know-how) and relationship assets (interactions) rely on people, and people are discretionary in their level of organizational commitment and personal commitment to quality, the quality management of intangibles would be highly problematic unless there were a way to quantify and financially value the quality associated with the application of intangible assets. The purpose of the Intangible Finance Standard is to formalize this process and present a globally applicable valuation system so that soft intangibles can be valued in hard (financial) terms. It is through the systematic valuation of soft intangibles that their impacts on bottom line performance (and ultimately share price) become visible to management and “manageable.”

What Makes Intangible Value a Leading Sentiment Indicator Accounting reports are done quarterly; therefore, share price changes not only according to changes in accounting value, but more so in relation to changes in investor expectations regarding the future profitability and future revenueand cash-generating abilities of the firm. It is the effectiveness of knowledge assets and relationship assets that directly impacts the future financial performance (hence cashflow) of the organization. Market value changes on a day-to-day basis can be driven by a great number of factors, but a major issue governing the long-term growth or decline in a stock is its future earnings potential. Many speculative stocks may briefly rally

64

Intangible Finance Standards

then collapse in value, but some stocks continue to grow in share price over time without collapsing. Non-collapsing stocks have strong growth and cash flow opportunities throughout time. Collapsing stocks have weak or negative growth and negative cash flow opportunities throughout the future. At the heart of growth, future financial performance, and share price growth is the quality of management of knowledge assets and relationship assets. According to intangible finance theory, intangible value changes for six (6) main reasons. 1. Investor expectation changes Investors who know or believe that upcoming earnings will exceed expectations often buy stock as they know it will increase after earnings are announced. 2. Competitive reasons Broker upgrades, downgrades, and initiations proceed on the basis that a firm’s stock is closely linked with those of its competitors, so that changes in one flow through to another. 3. Industry-related reasons Often industries are upgraded or downgraded by brokers, or mentioned in articles (like Barron’s, WSJ, and so on) 4. Sector-related reasons Sector rotation strategies often result in the movement of funds between different sectors to generate maximum return strategies. 5. Economic reasons Sometimes industries are affected by new technologies that seriously reduce the ability to generate future earnings. Currency fluctuations, wars, policy decisions, and other events can disturb markets. 6. Shocks Unexpected events, such as terrorist attacks, currency debt crises, unexpected interest rate changes, freezing temperatures, and medical outbreaks (such as SARS, chicken flu, and so on), all impact share price. Due to these factors it is exceptionally difficult to estimate specific share price impacts. However, over time, poorly performing firms will witness reduced share prices and under-perform their industry, while strong-performing stocks will continue to increase in value and outperform their industry. On a day-today basis it may be virtually impossible to explain why a stock moves exactly the way it does, but over the long term, it is easier to assess if a company has what it takes to continue increasing in share price, or will collapse. Intangible financial statements can often uncover problems within the performance structure of an organization before financial statements confirm problems.

65

Benchmarking Intangible Performance

PROPOSITION 3: HOW DESTROYS VALUE

AN

EXPENSES—ONLY FOCUS

First and foremost, publicly traded firms exist to generate profit. To generate profit a firm must generate revenue. To generate revenue a firm must have employees who manage the quality and effectiveness of their knowledge assets and relationship assets for the benefit of their employer. Expenses play a secondary role in attaining business success. To the extent that accountants are rewarded on the basis of their ability to reduce costs, they will excel in doing so. As expenses are the “money seeds of revenue,” when accountants start removing required seeds from the plantation (future revenue streams), the firm will suffer long term. Unfortunately, with executive tenure routinely limited to around 18 months, few executives care what happens to a business when they are no longer there. Due to short job tenure, most executives are short-term (cost reduction) focused—not wealth creation (long-term) focused. As accounting statements do not deal with the long-term consequences of executive actions, many executives make decisions that are in their own individual interests but against those of shareholders and investors. Enron, WorldCom, and other scandals have shown outright fraud. It is for these reasons that intangible financial statements are critical in safeguarding investor wealth and understanding the business from an arm’s-length perspective.

INTANGIBLE FINANCIAL STATEMENTS The power of intangible finance is in its financial estimation of the value of nanotime. Nanotime (level 3 time analysis) looks at the business very differently than other management techniques, such as traditional cost-reduction methods, business process reengineering, knowledge management, intellectual capital management, and so on. A fundamental principle of all management techniques is that it is impossible to generate productivity in non-productive time. Nanotime takes this several steps further. An employee can “appear” productive, but actually be engaging in activities with a high non-productive time component. As a result, an understanding of nanotime removes the assumption that activities (as a whole) are either productive or non-productive. Instead nanotime asserts a more realistic notion that activities are composed of productive and nonproductive time components. Before nanotime, management also sought to eliminate non-productive time. With an understanding of nanotime, executives understand that some

66

Intangible Finance Standards

Figure 4.1

Dissecting Non-Productive Time.

overhead is essential and without it, burst time occurs, which ultimately harms the long-term value structure of the enterprise. Nanotime therefore seeks to better manage time without resorting to simplistic notions of “let’s eradicate all non-productive time.” (See Figure 4.1.) According to intangible analysis, non-productive time is composed of two components: (1) sustainability time, and (2) true non-productive time. That is: Aggregate non-productive time falls into two categories, sustainability time and true non-productive time. (intMgtOS®1001.D35a) Sustainability time is the component of aggregate non-productive time that is required in order to create a sustainable level of quality and business excellence. (intMgtOS®1001.D35b) True non-productive time is the component of aggregate non-productive time that is not required in order to create a sustainable level of quality and business excellence. (intMgtOS®1001.D35c)

If an organization decreases sustainability time as a method of cost reduction, it decreases the foundation of productivity, and the result is a decrease in the quality of earnings. Over time, the share price of the firm will decrease. In the next chapter we will investigate these issues further through the construction of a wide range of new financial reports.

CHAPTER

5

Intangible Management Economy Fundamental Analysis

THE ACCOUNTING CRISIS In many respects, the foundation of conventional accounting is the measurement, reporting, and analysis of financial transactions (exchanges of monetary value). The fundamental principles of accounting—conservatism, historical cost, monetary, materiality, consistency, entity, realization, and objectivity— have financial transactions as their core focus. If an exchange of money occurs (as evidenced by an exchange of legal property rights), then accounting value changes and the accounting system records the transaction. If an exchange of money does not occur, and there are no exchanges of legal property rights (legal ownership), then conventional accounting systems remain silent. Accounting therefore is exceptionally poor at identifying, if not completely blind to the awareness of, pre-contractual and post-contractual value movements in an organization. Even during contractual performance, accounting values typically change toward the end of the contract (sales revenue). Nanotime manufacturing issues are ignored. When financial transactions do occur they are grouped into asset, expense, revenue, liabilities, and capital depending on how those transactions are 67

68

Intangible Finance Standards

categorized by the organization’s nature, generally accepted accounting principles, and accounting standards. Financial transactions when materially aggregated are the basis of financial statements and are key inputs into the managerial, financial, and investing decision processes.

THE ROLE OF INTANGIBLE MANAGEMENT STANDARDS (INTMGTOS®) The new millennium is characterized by a heavy reliance on non-financial (or nanotime) transactions. Organizations have moved from central management to distributed management. Many employees are now working from home, and customers can purchase goods and services via their computer from any country. Economic systems have also changed. Today, most advanced economies have service level employment in excess of 70% of the population. Most publicly traded firms have book values a fraction of their market value. In short, the Intangible Management Economy is one in which intangibles dominate the value exchange process, employment, and GDP. Intangibles are therefore extremely important to measure, report, and manage. Intangible standards focus specifically on improving the level of financial reporting quality in the economy. Intangible standards are managed, deployed, and internationally implemented through one body—the International Intangible Management Standards Institute (for more information please see http://www.StandardsInstitute.org). To understand how little quality in financial reporting exists, we will take a brief look at some of the largest companies in the United States. Accounting value is the value of the company as reported by the conventional balance sheet (commonly referred to as “book value”). Market value is the value that investors assign to the company—a perfect indication of how much investors are prepared to pay to own a “slice” of that company. Market value is an attempt by investors to estimate the “future value,” or “intrinsic value,” of the organization. Ideally, the balance sheet and market value (and the intrinsic value) should be approximately equal. Hence, an investor who wanted to know if the value of their investment improved each quarter would only need to glance at a balance sheet to gain that understanding. Research by Arthur Andersen of 3500 companies revealed that in 1978 the balance sheet explained 95% of market value, in 1998 it explained only 28%, and in 2001 it explained less than 15% of market value. After 1978 the computing and telecommunications revolutions gave companies access to geographic markets and productivity

69

Intangible Management Economy Fundamental Analysis

technologies that allowed them to substantially leverage the knowledge, capabilities, and personal networks of their staff more than was previously possible. The result: book value (accounting value) and market value (investor value) started to significantly diverge. By 2004, the divergence was substantial (see Table 5.1). This brief analysis shows that a strict understanding of only book value (accounting value) would result in investor’s missing on average some 75% of the average value of these organizations. For example, Oracle Corporation (Ticker: ORCL) accounting value accounts for around 10% of Oracle’s market value. For SAP (Ticker: SAP), accounting value accounts for around 2% of market value. For Mitsubishi Tokyo Financial Group (Ticker: MTF), accounting value is less than 1% of the market value of the company. Clearly accounting needs to be updated to reflect the realities of the Intangible Management Economy.

TABLE 5.1 Intangible Value Across Various Firms

Name

Ticker

Market Cap ($M)

Tot. BV ($M)

Tot. IV ($M)

Int%

General Electric Company

GE

333,156

72,488

260,668

78.24%

Pfizer Inc.

PFE

296,485

68,299

228,186

76.96%

Microsoft Corporation

MSFT

291,017

69,076

221,941

76.26%

Wal-Mart Stores, Inc.

WMT

249,194

42,172

207,022

83.08%

Exxon Mobil Corporation

XOM

266,904

83,486

183,418

68.72%

Intel Corporation

INTC

201,708

37,965

163,743

81.18%

Citigroup Inc.

C

254,287

96,871

157,416

61.90%

Cisco Systems, Inc.

CSCO

170,789

27,752

143,036

83.75%

Int’l Business Machines Corp.

IBM

170,219

28,056

142,162

83.52%

Johnson & Johnson

JNJ

160,725

25,741

134,984

83.98%

America Movil S.A. de C.V.

AMX

209,955

86,401

123,554

58.85%

American Int’l Group, Inc.

AIG

188,242

68,179

120,063

63.78%

The Procter & Gamble Co.

PG

132,290

17,017

115,273

87.14%

The Coca-Cola Company

KO

125,003

13,525

111,477

89.18%

GlaxoSmithKline PLC

GSK

134,823

30,111

104,712

77.67%

Merck & Co., Inc.

MRK

108,446

15,259

93,187

85.93%

TOTAL S.A.

TOT

110,886

19,000

91,886

82.86% (continues)

70

Intangible Finance Standards

TABLE 5.1

(continues)

Name

Ticker

Market Cap ($M)

Tot. BV ($M)

Tot. IV ($M)

Int%

Altria Group, Inc.

MO

111,268

22,838

88,429

79.47%

Novartis AG

NVS

116,571

32,202

84,369

72.38%

Nokia Corporation

NOK

99,975

19,259

80,715

80.74%

Dell Inc.

DELL

84,366

5,865

78,501

93.05%

PepsiCo, Inc.

PEP

86,198

11,792

74,406

86.32%

Bank of America Corporation

BAC

119,269

47,918

71,351

59.82%

AstraZeneca PLC

AZN

84,463

13,222

71,241

84.35%

Eli Lilly & Co.

LLY

80,232

9,985

70,246

87.55%

Roche Holding AG

RHHBY

86,891

16,895

69,996

80.56%

Verizon Communications

VZ

102,592

33,428

69,163

67.42%

Berkshire Hathaway Inc.

BRK.A

138,540

71,782

66,757

48.19%

United Parcel Service

UPS

79,596

13,627

65,969

82.88%

Amgen, Inc.

AMGN

83,261

19,390

63,871

76.71%

Oracle Corporation

ORCL

70,782

7,266

63,516

89.74%

Wells Fargo & Company

WFC

96,894

33,950

62,944

64.96%

The Home Depot, Inc.

HD

82,659

22,280

60,379

73.05%

Abbott Laboratories

ABT

69,366

11,866

57,500

82.89%

France Telecom

FTE

62,327

5,786

56,541

90.72%

ChevronTexaco Corporation

CVX

91,310

35,241

56,069

61.40%

3M Company

MMM

61,945

7,786

54,159

87.43%

Royal Dutch Petroleum

RD

98,050

44,067

53,982

55.06%

American Express Company

AXP

68,250

15,110

53,141

77.86%

SAP AG

SAP

52,896

1,182

51,714

97.76%

UBS AG (NYSE)

UBS

79,846

28,972

50,874

63.72%

Aventis

AVE

62,903

13,375

49,528

78.74%

Medtronic, Inc.

MDT

57,270

8,172

49,098

85.73%

Mitsubishi Tokyo Fin. Group, Inc.

MTF

48,107

29

48,079

99.94%

SBC Communications Inc.

SBC

86,144

38,286

47,858

55.56%

Sanofi-Synthelabo

SNY

50,872

3,471

47,401

93.18%

Wyeth

WYE

55,829

8,673

47,156

84.46%

PetroChina Company Limited

PTR

88,281

41,447

46,835

53.05%

Telefonica Moviles, S.A.

TEM

50,884

4,634

46,250

90.89%

Bristol-Myers Squibb Co.

BMY

55,948

10,064

45,884

82.01%

6,067,908

1,461,261

4,606,647

75.92%

Totals

Source: Market value data from Copyright © Reuters, 2004 Date: Friday, February 6, 2004.

Intangible Management Economy Fundamental Analysis

71

ACCOUNTING PROBLEMS Existing accounting reports are of substantial interest to investors, but as shown above, caution must be used when examining them. Accounting methods are also prone to creative accounting (potential fraud and dishonesty by executives who seek to hide failure to match or better estimates). With the transition into the Intangible Management Economy, the relevance of accounting statements is continually declining. Many people have commentated on the numerous problems surrounding accounting statements; consider these few: “It has been 500 years since Pacioli published his seminal work on accounting and we have seen virtually no innovation in the practice of accounting— just more rules—none of which has changed the framework of measurement.”—Wired Magazine “There are going to be a lot of problems in the future as accounting is not tracking investments in knowledge assets.”—Alan Greenspan, Federal Reserve Board Chairman, USA “The GAAP system has, for all its faults, served business and the public well, like an octogenarian butler. At the same time there’s increasing evidence that the faithful servant isn’t just misplacing a spoon here or there but has lost track of some valuable jewels, paid no attention to the furnace and the water heater, and put the place at risk. Investors simply don’t value what accountants count.”—Thomas Stewart, Fortune “The income statement, balance sheet, and statement of cash flow are about as useful as an 80-year-old road map.”—Robert A. Howell, Professor at the Tuck School at Dartmouth “Investors must be thinking: ‘They have done all they can to comply with the accounting standards, but what does this tell you about the performance of the corporation?’ In short, there seems to be a widening gap between accounting standards and financial reality.”—Rob Elliott, Manager Policy Research, AICD, Australia “Since the applicability of the traditional accounting framework is constantly declining, there is no point in trying to include intangible assets on the [existing] balance sheet. Instead a whole new framework for measurement will eventually have to be developed.”—Silvia Wompa, American Management Association “Today substantially all of a company’s profitability depends on intangible assets, so the accounting problems associated with intangibles become quite serious.”—Peter J. Wallison, Resident Fellow, American Enterprise Institute “As intangible assets grow in size and scope, more and more people are questioning whether the true value—and the drivers of that value—are being

72

Intangible Finance Standards

reflected in a timely manner in publicly available disclosure.”—Arthur Levitt, Former Securities Exchange Commission Chairman, USA “Abnormal profits, dominant competitive positions, and sometimes even temporary monopolies are achieved by the sound deployment of intangibles, along with other types of assets.”—Baruch Lev “Without advances in the internal measurement and reporting of human capital, management are unable to fully recognize the value of their employees’ competencies and commitment for business performance.”—“Evaluating Human Capital,” The Chartered Institute of Personnel and Development, United Kingdom “The fastest growing sectors of today’s economy are knowledge based . . . IP industries represent the single largest sector of the American economy— almost 75% of GDP. Thus it is necessary for a knowledge-based business to find out what kind of intellectual property assets it has through an audit and then to value them.”—Steve T. Tsai, Attorney, USA “We now know that the source of wealth creation is something specifically human: knowledge. If we apply knowledge to tasks we already know how to do, we call it ‘productivity.’ If we apply knowledge to tasks that are new and different, we call it ‘innovation.’ Only knowledge allows us to achieve these two goals.”—Peter Drucker, Managing for the Future “Human capital is repeatedly identified as one of the most important intangible assets in the knowledge economy. The increasing importance of such assets poses a major challenge to existing methods of accounting and valuation methods. The scale of that challenge is reflected in the size of the gap between the value of the company’s tangible assets in its balance sheet and its stock market value.”—”Evaluating Human Capital,” The Chartered Institute of Personnel and Development, United Kingdom “In 1978 20% of corporate assets in the United States were intangible assets, of which intellectual property is a subset, but in 1997 73% of corporate assets were intangible assets. Globally trade in intellectual property assets makes up more than 20% of worldwide trade, approximately US $740 billion.”—K. Crosin, Management of IP Assets, ARA Bulletin “The idea is simple: creating value depends less and less on physical mass, and more and more on intangibles, such as human intelligence, creativity, and even personal warmth.”—“Getting the New Measure of the New Economy,” Work Foundation/iSociety, London

WHY ACCOUNTING PROBLEMS EXIST To understand how far-reaching accounting problems are in the Intangible Management Economy, the book Intangible Management: Tools for Solving the

Intangible Management Economy Fundamental Analysis

73

Accounting and Management Crisis (Academic Press, 2002) should be referred to. This was the only business book published that year that was acknowledged by the Association of American Publishers in its 2002 Outstanding Professional and Scholarly Titles Award; the book received an honorable mention as a work of exemplary scholarship and as one of the two outstanding business, management, and accounting books of 2002. It is therefore well regarded professionally and academically. By reading this book you will understand why the accounting profession will not be able to solve the problems inherent within accounting statements; the reasons are reflected throughout the entire book, but are primarily concentrated in Chapter 6 (intangible accounting). Figure 5.1 illustrates some of the reasons accounting cannot capture total value: Accounting measures changes in legal property rights as evidenced by financial transactions (end-state contractual performance). The results of contractual performance are typically classified as assets, expenses, liabilities, capital, revenue, and profit or loss. According to intangible management operating standards, these are defined as level 1 resources. In practicality, financial allocations occur because of the use of knowledge assets, relationship assets, motivation assets, and responsiveness assets (a fact accounting ignores). That is, decisions (soft) create financial performance (hard). Competitive intangibles are therefore the source of all value creation. Competitive intangibles cannot be owned by organizations, but can only be influenced; it is this fundamental lack of ownership that causes accounting to be blind to intangibles.1 The only intangibles that accounting recognizes are conventional intangible assets such as goodwill and intellectual property, but only to the degree that they have been substantiated by financial transactions (in accordance with accounting conventions such as the historical cost assumption, realization assumption, objectivity assumption, and the conservatism assumption). As accounting cannot account for intangibles (it would be a violation of accounting principles to do so), it should not be surprising that accounting statements are becoming increasingly obsolete in the Intangible Management Economy. Level 3 resources (competitive intangibles: knowledge assets, relationship assets, motivation assets, and responsiveness assets) create Level 2 resources (intellectual property rights: intellectual property), and both typically result in changes in legal property rights (level 1 resources). Therefore: Intangible performance creates financial performance (intMgtOS®2001.L1)

1

See Chapter 4 of my earlier book.

74

Intangible Finance Standards

FIGURE 5.1 Understanding L1, L2, and L3 Resources.

Intangible performance is created whenever knowledge assets, relationship assets, motivation assets, and responsiveness assets interact to create value.

SOLVING FUNDAMENTAL PROBLEMS Numerous issues2 prevent executives and investors from correctly managing their organizations according to the new requirements of the Intangible Management Economy. Intangible finance, intangible financial reporting, and intangible accounting are all sub-disciplines of “Intangible Management”—a new area of management science. This chapter investigates the role of intangible management, intangible finance, and intangible accounting in its ability to fundamentally reshape fundamental analysis. “Intangible management is one of the most important advances in management theory since the dawn of management theory itself (well over 1000 2

See my earlier book.

Intangible Management Economy Fundamental Analysis

75

years ago). The ability to measure and manage all forms of intangibles (intangible assets, intangible liabilities, intangible expenses, intangible revenues, and intangible capital) gives executives unprecedented power to manage their operations according to the new rules of the Knowledge Based Economy.”— E. Yap, CIO, Singapore “Intangible Management is the most compelling evidence yet that the knowledge based economy is upon us. By making use of existing accounting principles, Intangible Management has shown how attaching financial value to intangibles helps organisations to realise their true competitive advantage in the market place. Intangibles that have long been overlooked by traditional financial accounting include Knowledge Assets and Relationship assets.”— Torben Anderson, CEO, Alphaport Ltd, KM Delivery and Advisory Services, United Kingdom “Intangible Management has given us an answer to justify the existence of Knowledge Management (KM) to Corporate Management by linking knowledge to value. In these budget-constrained, uncertain economic times, practitioners need to be able to show the business value that knowledge sharing and reuse bring to their organizations. Intangible Management creates a financial measure of knowledge sharing that will show a one-to-one correlation between a knowledge-sharing action and a business result.”—Anthony Ting, Organizational Performance Consultant, Shell International Exploration and Production, The Netherlands “The only thing we learn from history is that we learn nothing from history. The notion of wealth and value is a constantly changing one. As new technologies are developed they replace old ones and change our political and social values in the process. Despite overwhelming proof that our lives are filled with disruptive and incomprehensible change, we still insist that the fundamentals of life do not, have not, and cannot change.”—Dr. Ken Standfield, Intangible Management—Tools for Solving the Accounting and Management Crisis, 2002 “By using intangible management we can release energy and capture efficiencies from people that previously we could only dream of.”—Frank Olsson, General Manager of NAB Japan “Intangible Management is light years ahead of any other management consulting technique available. It is a new double-ledger technique designed for the knowledge economy, which has conventional financial reports on one side and on the other human interactions as measured by Intangible Management reports.”—Freddie McMahon, CEO, Zeedv Ltd, Creators of Zeedv WorkbenchTM Software, United Kingdom “Intangible Management solves several of the most pressing challenges of the Internet age, namely the systematic identification, objective valuation,

76

Intangible Finance Standards

scientific management, and structured financial reporting of all forms of intangibles. These developments rival the development of accounting, finance, and economics, and will fundamentally reshape management and valuation theory.”—Jonathan Liew, Deputy Director, Internal Audit, JTC Singapore “Charles Darwin said that for a species to survive, it has to be adaptable to change. In the business world, this translates to an organization’s nimbleness in adapting to changing customer demands, the external environment, as well as nurturing a culture of constant innovation. Intangible Management provides executives with the skills required to better manage risks and create value for all stakeholders in rapidly changing competitive environments.”—Eric Goh, Managing Director of Compaq Computer Asia “Ultimately, the ability of your organization to meet not only its current goals and objectives, but also to grasp future opportunities, will depend on its ability to create value from its intangible assets. It is only by identifying, managing, and developing the full spectrum of intangibles that you will be able to unlock your full potential.”—“Creating value from your intangible assets: unlocking your true potential,” Department of Trade and Industry, United Kingdom, 2002 “We live our professional lives recklessly applying outdated and irrelevant problem-solving techniques to problems that could never have been contemplated by the creators of those techniques. We remain mentally shackled and emotionally imprisoned to obsolete management methods that destroy the very value they seek to enhance.”—Dr. Ken Standfield, Intangible Management— Tools for Solving the Accounting and Management Crisis, 2002

ACCOUNTING

OR INTANGIBLE

MANAGEMENT?

Accounting systematically identifies, objectively values, scientifically manages, and reports the impact of financial transactions (changes in legal property rights) on an organization. Intangible management systematically identifies, objectively values, scientifically manages, and reports the financial impact of nanotime transactions (changes in competitive intangibles) on an organization. Accounting and intangible management therefore are complementary to each other. One without the other is a problematic situation. The problem with accounting is that intangible management is missing—this is accounting’s only problem. Accounting measures money. Intangible management measures nanotime and shows how nanotime is converted into money and vice versa. As time is money and money is time, the two need to be side by side, and measured and reported together.

Intangible Management Economy Fundamental Analysis

77

In truth, nothing is actually “wrong” with accounting. It does exactly what it needs to do and claims to do—it measures changes in contractual legal property rights as evidenced by financial transactions. Today, accounting measures must be complemented by intangible management measures that throw a wider net to non-financial transactions that are involved in all stages of value creation. Both together allow executives, owners, and investors to see the more realistic financial performance of the organization. Intangible management reports have the added benefit of being able to actually show how financial performance was actually generated by the organization in terms of the application of the firm’s nanotime. Hence, intangible management reports actually explain financial performance in terms of the firm’s actual effectiveness. It does this in a way that does not allow competitive dissolution. Competitive dissolution is the presentation of results relating to the sources of competitive advantage (competitive intangibles), reported and financially valued so that competitors cannot reverse engineer, or otherwise decompile, an organization’s actual strategy from the representation of that information. (intMgtOS®5001.P3)

The issue of competitive dissolution has prevented many organizations from reporting their intangible performance in order to safeguard their sustainable competitive advantage. Reporting key performance indicators (KPIs) succinctly communicates the firm’s strategies to the competition and therefore creates competitive dissolution. Sustainable competitive advantage is the prolonged economic benefit and superior competitive position that results from the implementation of a unique nanotime strategy that combines competitive intangibles in an optimally effective way, which competitors cannot duplicate, imitate or create substitutes for (competitive effectiveness) due to the maintenance of an ever-increasing capability gap that competitors cannot close. (intMgtOS®11001.D12)

With the introduction of intMgtOS reports, organizations can report their strategic effectiveness without divulging the core operational mechanics of their strategy to their competitors, thereby providing a greater amount of financial quality to decision makers and investors, while simultaneously safeguarding sustainable competitive advantage.

APPLYING INTANGIBLE MANAGEMENT STANDARDS (INTMGTOS®) To update the basis of how companies can better value and manage the sources of their competitive advantage, a new valuation system was developed that

78

Intangible Finance Standards

focused on the core sources of value creation within an organization— competitive intangibles. This system, referred to as the intMgtOS Reporting Excellence Framework, was embodied in intangible management operating standards. To maintain quality adherence, the registered trademark intMgtOS® is used to designate intangible management operating standards approved management reports. Any statement claiming to financially value intangible value that does not possess this trademark is, in all probability, valuing intangibles in a way that is inconsistent and therefore violates international intangible standards. At the heart of intangible management and intangible finance is the structured and objective financial reporting of intangible value on an operational (or day-to-day) basis. The management of effectiveness, potential, productivity, market value, and brand value on a daily basis is critical to the financial health of all organizations. A failure to manage effectiveness is a failure to manage an organization’s source of value creation. According to intangible analysis, five areas affect the actual performance, brand performance, earnings, and market value of organizations on a daily basis: 1. 2. 3. 4. 5.

Knowledge Assets Relationship Assets Motivation Assets Responsiveness Assets Organizational Processes (typically “organizational assets”)

The quality of knowledge assets and relationship assets is directly affected by the quality of motivation assets (the level of emotional leadership and emotional intelligence of the organization), and of responsiveness assets (the level of responsiveness to change and speed of satisfying customer demands). These three asset categories are analyzed from two (2) fundamental dimensions: 1. A time dimension—Used in the construction of the intMgtOS® Intangible Management Time Statement and other intangible management reports, seeking to quantify how much nanotime (all qualities) is available and being used by the organization and in what way. 2. A value dimension—Used in the construction of financial valuation statements. The value dimension of intangible management arises from the concept that results occur during productive time, not in overhead time. As a result it becomes possible to link revenue to effective nanotime performance (productivity). Each of the five asset categories can simultaneously exist in any of the following forms.

Intangible Management Economy Fundamental Analysis

79

1. Intangible Capital: The total effective nanotime of the organization measured in hours. 2. Intangible Liability: The total potential nanotime of the organization measured in hours. 3. Intangible Asset: The total nanotime of the organization measured in hours. 4. Intangible Revenue: The total associated financial value of the intangible asset base of the organization. 5. Intangible Expense: The total associated financial value of the intangible liabilities of the organization. 6. Intangible Profit or Loss: The difference between intangible revenue and intangible expenses of an organization.

Intangible Finance Asset Classes Knowledge Asset Classifications At the heart of knowledge asset classifications is the concept of the asynchronous (non-interactive with another person) communication of information. (Asynchronous here means “delayed.”) For purposes of constructing intangible management reports, knowledge assets have seven (7) subclassifications, according to intMgtOS®5001 (see Figure 5.2). 1. Find/Retrieve: Nanotime spent finding or retrieving information. (int MgtOS®5001.D2) 2. Read/Learn: Nanotime spent reading or learning information. (intMgt OS®5001.D3) 3. Create/Apply: Total nanotime spent creating or applying information. (intMgtOS®5001.D4) 4. Email/Faxing: Total nanotime spent emailing, faxing, text messaging, or otherwise distributing information to an unseen party (asynchronous communications). (intMgtOS®5001.D5) 5. Invention/Innovation: Total nanotime spent inventing or innovating with information, products, or services. (intMgtOS®5001.D6)

intMgtOS®5001, the Intangible Valuation Standard, details the key definitions and classifications of intangible finance measures. It also contains the mathematics required to conduct intangible valuations.

FIGURE 5.2 intMgtOS®5001 Certification.

80

Intangible Finance Standards

6. Store/File: Total nanotime spent storing or filing information. (intMgtOS®5001.D7) 7. Other: Total nanotime spent performing other information/knowledge based activities not explicitly detailed above. (intMgtOS®5001.D8)

Relationship Asset Classifications At the heart of relationship asset classifications is the concept of the synchronous (interactive with another person) communication. (Synchronous here means “real-time” or “not delayed.”) For purposes of constructing intangible management reports, relationship assets have six (6) sub-classifications, according to intMgtOS®5001. 1. Meetings: Total nanotime spent meeting with others, face to face or electronically (teleconferencing, and so on), to discuss general issues as are discussed in typical meetings. This is a form of interactive (synchronous) communication based on the voice and the physical or digital presence of others. (intMgtOS®5001.D11) 2. Phone calls: Total nanotime spent communicating with others via phone, or other mediums to permit interactive (synchronous) voicebased communications. (intMgtOS®5001.D12) 3. Employee Networking: Total nanotime spent building relationships, and engaging other employees, partners, or likewise connected entities in general conversation, and other relationship-building activities, during work time. This component requires interactive (synchronous) communication. It is required for employee satisfaction, motivation, and sustainability. (intMgtOS®5001.D13) 4. Customer Contact: Total nanotime spent building relationships, and engaging customers or potential customers in general conversation, and other relationship-building activities. This component requires interactive (synchronous) communication. It is used to establish or increase the quality of the brand promise to customers. (intMgtOS®5001.D14) 5. Internal Support: Total nanotime spent assisting fellow staff members, contractors, partners, or likewise connected entities to solve, or attempt to solve, specific business issues. This component requires interactive (synchronous) communication. (intMgtOS®5001.D15) 6. Other: Total nanotime spent performing other relationship- or interaction-based activities not explicitly detailed above. (intMgtOS® 5001.D16)

Intangible Management Economy Fundamental Analysis

81

Organizational Asset Classifications Along with knowledge assets (capabilities) and relationship assets (relationships), organizational assets (leverage) constitute the third class of intangible assets needed to create sustainable value in the Intangible Management Economy. Organizational assets relate directly to the enterprise’s internal structure and how it functions in reality. 1. Process Impacts: Total nanotime spent by staff engaged in obsolete and ineffective processes, bottlenecks, and other related cycle-time issues. (intMgtOS®5001.D21) 2. Travel Overheads: Total nanotime spent by staff traveling internally and externally in order to leverage knowledge assets and relationship assets. (intMgtOS®5001.D23) 3. Stress Impacts: Total nanotime associated with staff stress. (intMgtOS®5001.D24) 4. Internal Politics: Total nanotime associated with internal politics. (intMgtOS®5001.D24a) 5. Red-Tape Impacts: Total nanotime spent by staff engaged in abiding by obsolete operating procedures and other bureaucratic issues. (intMgtOS®5001.D25) 6. Technological Impacts: Total nanotime spent by staff engaged in using the electronic infrastructure of the organization (includes computer networks, equipment, and so on). (intMgtOS®5001.D26) 7. Cultural Impacts: Total nanotime spent by staff engaged in abiding by the formal and informal politics (“unwritten rules”) of the organization. (intMgtOS®5001.D27) 8. Other Impacts: Total nanotime spent performing other organizationally based activities not explicitly detailed above. (intMgtOS®5001.D28)

FOUR APPROACHES TO INTANGIBLE VALUATION There are four fundamental ways in which to conduct intangible analysis on an organization’s performance. 1. Public data only: This approach to forming intangible analysis does not seek to modify publicly available data in any way. No adjustments are made to information. This is a pure arm’s-length analysis of a firm. 2. Benchmarked data: The “benchmarked data” technique investigates specific industries and sectors, and estimates more accurate statistics for those sectors than could be obtained from using public data only.

82

Intangible Finance Standards

3. Sampled Data: intMgtOS® Intangible Analysts can broadly investigate the operations of divisions (through questionnaires to senior management, through observation, and more detailed financial/operational information) to gain specific insights related to specific business functions. This helps to improve the accuracy of intangible management reports. 4. Audited Data: intMgtOS® Intangible Analysts use specialized software that collect and interpret data for use in intangible management reports in a manner compliant with intangible management operating standards. Audited data create the most accurate of all intangible management reports.

TRUE & FAIR VALUE CERTIFICATION Every intangible management report must be certified by a Certified intMgtOS® Intangible Analyst in order to receive an intMgtOS® certification number and bear the intMgtOS® certification logo. This ensures that only people with a qualified understanding of intangible management operating standards can form intangible management reports that carry the certification logo and the guarantee of strict quality adherence to intangible management operating standards (see Figure 5.3). People without Certified intMgtOS® Intangible Analyst status may form intangible management reports, but it is illegal for them to use the intMgtOS® brand name, or intMgtOS® logos when publishing, or otherwise showing, that statement to others. Intangible management operating standards require education and immersion to understand how they operate in practice. This immersion can only be guaranteed once a person has been qualified as a certified Intangible Analyst. Each intangible management report also bears an “intMgtOS® Certification Number”; this number is a guarantee to the general

The representation of intangible financial reports is governed by the Intangible Financial Reporting Standard (intMgtOS®5003). This standard is the representation of several standards, namely, the Intangible Valuation Standard (intMgtOS®5001); Intangible Finance Standard (intMgtOS®6001); Intangible Accounting Standard (intMgtOS®4001); Intangible Operating Structures Standard (intMgtOS®2001) and Intangible Foundations Standard (intMgtOS®1001). FIGURE 5.3 intMgtOS®5003 Certification.

Intangible Management Economy Fundamental Analysis

83

public that the intangible management statement has been independently formed and is free of personal bias.

CASE STUDY: MICROSOFT (NASDAQ: MSFT) The balance of this chapter is based on the analysis of Microsoft Corporation (MSFT) to show how actual financial performance and intangible (potential) performance relate. This is a pure-arm’s length analysis of Microsoft’s intangible performance. The analysis shows how the human capital of Microsoft is responsible for generating the firm’s revenue base. As human capital is leveraged through knowledge assets, relationship assets, and organizational assets—values for the actual and potential value of these assets, in financial terms, is given. No internal knowledge of Microsoft was used in creating these reports. The analysis will take you through some of the main steps required to make an arm’s length assessment.

STEP 1:

INTMGTOS®

PHYSICAL AVAILABILITY REPORT

Step 1 for an intMgtOS® Intangible Analyst is to develop the intMgtOS® Availability Statement. The purpose of this report is to estimate the true number of days that an employee is available for work over a 12-month period.

Microsoft Corporation (MSFT) intMgtOS® Availability Statement (intMgtOS®5003.iR1a) As of June 30, 2003 (Per Employee Basis) Days

Days

Total Available Employee Time Days in the Year Closure Overhead Holidays Weekends Other Closure Overhead Total Closure Overhead Open trade time Legal Closure Annual Leave Industrial Action Industrial Accident Downtime Other Legal Overhead Total Legal Closure Annual External Closure

Day (%)

365.24

100.00%

12.00 104.00 -

3.29% 28.47% 0.00% 31.76% 68.24%

116.00 249.24

20.00 1.00 -

5.48%

137.00

0.00% 5.75% 37.51%

228.24

62.49%

21.00

Gross Employee Availability Controllable Overhead Absenteeism Sick Leave Other Leave All Other Non-Statutory Overhead Total Controllable Overhead

Days

(1.00) (3.00) (0.25)

-0.27% -0.82% -0.07%

-

0.00% (4.25)

-1.16% ---------

Real Employee Availability

True annual unavailability (days)

223.99

61.33%

===== 141.25

38.67%

FIGURE 5.4 intMgtOS® Availability Statement (intMgtOS®5003.iR1a).

Notes

Values

intMgtOS Report

intMgtOS®5003.iR1a (employee) Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01) June 30, 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

Created By Data Date

intMgtOS® Certification No.

intMgtOS®-99755

FIGURE 5.4a True & Fair Value Certification.

Intangible Management Economy Fundamental Analysis

85

The Roman (Julian) year, composed of 365.25 days, was introduced in 45 BC by Julius Caesar. This is the conventional leap year calendar, providing for a leap year every four years (hence 365.25 days). The modern Gregorian year gives a more accurate annual days figure of 365.2425—which has a 4000-year cycle. Intangible management operating standards use the figure of 365.2422 days (effective for a cycle of 100,000 years) in all calculations. From this analysis, we can see that before the employee has an opportunity to generate productivity for MSFT, 38.67% of the work year has been forfeited. In 2003, Microsoft employed 55,000 employees. Assuming a common basis for all employees (using the public data only approach), the physical availability for all of MSFT’s staff is detailed in Figure 5.5. From this analysis, the intMgtOS® Intangible Analyst would conclude that Microsoft has approximately 12,319,571 organizational days in which to generate revenue, representing 61.33% of the gross annual time available. The intMgtOS® Intangible Analyst would conclude that approximately 55,000 organizational days were being lost due to absenteeism; 165,000 organizational days due to sick leave; 13,750 organizational days due to other leave; and 55,000 organizational days due to industrial accidents. Using other intangible financial statements, it is possible to place a dollar value on these times that reflects the true costs associated with those activities.

Microsoft Corporation (MSFT) intMgtOS® Availability Statement (intMgtOS®5003.iR1b) As of June 30, 2003 (Organizational Basis) Days

Days

Total Available Employee Time Days in the Year Closure Overhead Holidays Weekends Other Closure Overhead Total Closure Overhead Open trade time Legal Closure Annual Leave Industrial Action Industrial Accident Downtime Other Legal Overhead Total legal closure Annual External Closure

20,088,321

660,000 5,720,000 6,380,000 13,708,321

1,100,000 55,000 1,155,000 7,535,000

Gross Employee Availability Controllable Overhead Absenteeism Sick Leave Other Leave All Other Non Statutory Overhead Total Controllable Overhead

Days

12,553,321

(55,000) (165,000) (13,750) (233,750)

Real Employee Availability

12,319,571

True Annual Unavailability ( days)

7,768,750

FIGURE 5.5 intMgtOS® Availability Statement (intMgtOS®5003.iR1b).

Notes

Values

intMgtOS Report

intMgtOS®5003.iR1b (organization) Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01) June 30, 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

Created By Data Date

IntMgtOS® Certification Number

intMgtOS®-99771

FIGURE 5.5a True & Fair Value Certification.

87

Intangible Management Economy Fundamental Analysis

Microsoft Corporation (MSFT) intMgtOS® Daily Time Statement (intMgtOS®5003.iR2a) As of June 30, 2003 (Per Employee Basis) True Weekly Working Time Overtime (paid/unpaid) Breaks Lateness (penalized/unpenalized) Other Daily Adjustments Daily adjustment factor Days in the working week Weekly time adjustment Standard weekly working hours Total true weekly available time

Hours 0.75 (1.50) (0.25) -

Hours

Hours

Hours

(1.00) 5.00 (5.00) 38.00 33.00

True Days Per Week Days in working week Other Adjustments True working days per week

5.00 5.00

True Daily Working Time True daily working time (hours)

6.60

FIGURE 5.6 intMgtOS® Daily Time Statement (intMgtOS®5003.iR2a).

Notes

Values

intMgtOS Report

intMgtOS®5003.iR2a (employee) Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01) June 30, 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

Created By Data Date

IntMgtOS® Certification Number

intMgtOS®-99776

FIGURE 5.6a True & Fair Value Certification.

STEP 2:

INTMGTOS®

DAILY TIME REPORT

The second step for an intMgtOS® Intangible Analyst is to develop the intMgtOS® Daily Time Report. The purpose of this report is to estimate the

88

Intangible Finance Standards

true number of hours that an employee is available for work each day, taking into consideration overtime, statutory breaks, lateness, and other adjustments. (See Figures 5.6 and 5.6a.) This report shows that Microsoft employees are estimated to work for an average of 6.60 hours per day, or a total of 33.00 hours each week.

STEP 3:

INTMGTOS®

REAL REVENUE REPORT

According to intangible finance, gross revenue is composed of employeecontributed revenue and investment income. If an organization employing 55,000 employees made $30 b in revenue, then an intMgtOS® Intangible Analyst would look under this figure to determine its quality. If the firm made $25 b in investment income and only $5 b in revenue from 55,000 employees, then that is different from a firm making $5 b from investments and $25 b from employees, or an organization making $25 b in revenue and losing $5 b on investments. The intMgtOS® Real Revenue Report allows an intMgtOS® Intangible Analyst to view the investing effectiveness of an organization at a glance. See Figures 5.7 and 5.7a for the intMgtOS® Real Revenue Report for Microsoft on February 6, 2004. Notes to the Revenue Statement This statement illustrates a number of variables. The most important is the “Real Revenue Effect” value of $28,606,000,000. This figure of $28.606 b is interpreted as follows: Microsoft generated $32.187 b in revenue, but made a loss on investments of $3.581b, intMgtOS® Intangible Analysts assume investment losses are paid before all others, therefore the figure of $28.606 b is more representative of the revenue that Microsoft would have available to pay operational and non-operational expenses, etc. Effectively an investment burden of 11% on gross revenue was created due to the nonproductivity of investments.

STEP 4:

INTMGTOS®

APPORTIONMENT STATEMENT

At this stage it becomes possible for an intMgtOS® Intangible Analyst to start assessing the quality and effectiveness of intangible value at Microsoft. The apportionment statement allows external parties to understand how figures have been derived, therefore allowing a certain amount of transparency in the intangible finance process. Figure 5.8 illustrates intMgtOS® 5001.P1—the nanotime classification process.

Microsoft Corporation (MSFT) intMgtOS® Revenue Statement (intMgtOS®5003.iR3) As of June 30, 2003 (Per Employee Basis) $ 000s

$ 000s 32,187,000

Gross Revenue Cash Flow Analysis Investment Cash Flows Other Cash Flows from Investing Activities

(3,577,000) (4,000)

Investing Impact

(3,581,000)

Employee Contributed Revenue Real Revenue Effect

32,187,000 28,606,000

Cash Analysis Cash & Cash Equivalents Short-Term investments Long term investments Investment Funds Retained Earnings

6,438,000 42,610,000 13,692,000 62,740,000 25,676,000 -

Short-term debt Long term debt Total debt Market Value Analysis Market Value (02/03/2004) Book Value (02/03/2004) Intangible Value (02/03/2004)

291,016,810 69,075,910 221,940,900

100.00% 23.74% 76.26%

Ratio Analysis … Revenue Cash to … ST Investments to … LT Investments to … Total investments to … Investing Impact to … Revenue to … Real Revenue Effect to … Retained Earnings to … ST Debt to … LT Debt to .. Total Debt to … Retained earnings to … Investment % Employee Contributed %

20.00% 132.38% 42.54% 194.92% -11.13% 100.00% 88.87% 79.77% 79.77%

… Market Value 2.21% 14.64% 4.70% 21.56% -1.23% 11.06% 9.83% 8.82% 8.82% -11.11% 111.11%

FIGURE 5.7 intMgtOS® Revenue Statement (intMgtOS®5003.iR3).

90

Intangible Finance Standards

Notes

Values

intMgtOS Report

intMgtOS®5003.iR3 Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01) Information Technology Software & Programming Prepackaged Software 7372 Low: Aggregated arm's length June 30, 2003 Microsoft Corporation MSFT Large Cap 55000 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

Created By Sector Industry SIC Description SIC Code Quality Level Data Date Company Ticker Firm Size Employees

IntMgtOS® Certification Number

intMgtOS®-99787

FIGURE 5.7a True & Fair Value Certification.

FIGURE 5.8 Nanotime Classification Process.

Intangible Management Economy Fundamental Analysis

91

This process states that employees generate revenue from effective nanotime. Effectiveness costs result from the accumulation of non-effective nanotime. Not all effectiveness costs can be reduced without causing burst time. A sustainability margin is required to keep the organization running at sustainable levels over time. However, typically a large portion of gross revenue potential can be transformed into employee-contributed revenue through the process of artificial employment. A sustainability margin is the gross amount of nanotime required to keep employee satisfaction above the level at which turnover, sick leave, absenteeism, and reduced quality result from using an over-stressed, overworked, and tired workforce. (intMgtOS®1001.D39a)

The sustainability margin is different from that generic notion of sustainability: Sustainability is the competitive ability of the firm to continually grow the firm’s productivity, revenue, earnings, market value, and share price over time without resorting to methods and practices that undermine the firm’s competitive structure. (intMgtOS®1001.D39)

Artificial Employment Artificial employment is a breakthrough management technique. Artificial employment is a concept that does better with what the organization has currently. If the organization is growing, it will continually increase its employment base in order to meet increased customer demand. Consider Microsoft as an example. Table 5.2 details Microsoft’s gross revenue and employees from 1975 to 2003. Passing the data through an intMgtOS® Intangible Analyst software package, the following graph is formed: Microsoft grew its employee base exponentially (Figure 5.9) from 1975 to 2003. Using this software it was possible to estimate Microsoft’s employment base in 2004. Using an equation determined by the intMgtOS® Intangible Analyst software, we can mathematically estimate the number of employees in 2004 (correlation coefficient: 0.9952; standard error of the estimate: 1,240.6868; R-squared: 99.05%). The number obtained is 63582.3369102478; for conservatism, we will round this number down to a figure of 63,582 employees in 2004. Hence, in 2004, Microsoft would be expected to increase employees from 55,000 to 63,582 employees, an increase of 8,582 employees. From an intangible analysis perspective, this estimate actually states the following:

92

Intangible Finance Standards TABLE 5.2 Microsoft Revenue and Employee Data Year 1975

Gross Revenue ($) 16,000

Employees 3

1976

22,000

7

1977

382,000

9

1978

1,356,000

13

1979

2,390,000

28

1980

8,000,000

38

1981

16,000,000

130

1982

24,486,000

220

1983

50,065,000

476

1984

97,479,000

778

1985

140,417,000

1,001

1986

197,514,000

1,442

1987

345,890,000

2,258

1988

590,827,000

2,793

1989

803,530,000

4,037

1990

1,186,000,000

5,635

1991

1,847,000,000

8,226

1992

2,777,000,000

11,542

1993

3,786,000,000

14,430

1994

4,714,000,000

15,017

1995

6,075,000,000

17,801

1996

8,670,000,000

20,561

1997

11,360,000,000

22,232

1998

15,262,000,000

27,055

1999

19,747,000,000

31,396

2000

22,956,000,000

39,100

2001

25,296,000,000

47,600

2002

28,365,000,000

50,500

2003

32,187,000,000

55,000

Source: MSFT Annual Reports.

1. If Microsoft continues to grow its employment base at the rate it has maintained since 1975, mathematical estimations would predict employees to grow from 55,000 to 63,582 employees—an increase of 8,582 employees.

Intangible Management Economy Fundamental Analysis

93

FIGURE 5.9 MSFT Employee Growth.

2. Assuming past employee trends continue, from the intMgtOS® Physical Availability Report (intMgtOS®5001iR1), we know that these new employees will be available for work for approximately 223.99 days out of the year on average. 3. Assuming past employee trends continue, from the intMgtOS® Daily Time Report (intMgtOS®5001iR2), we know that these new employees’ gross work time is approximately 6.60 hours each day (breaks are excluded as they figure in statutory overhead). 4. Microsoft was therefore seeking to acquire approximately 1478.35 hours per employee, or an aggregate of 12,687,187 hours, of new total nanotime for 2004. As we can also see: 5. Microsoft’s 55,000 employees were working a total of 81,309,168.6 hours each year (55000 ¥ 223.99 ¥ 6.60). 6. An additional 12,687,187 hours would represent an increase of 15.60% on the organization’s existing total nanotime.

94

Intangible Finance Standards

7. If there were a way to increase the effectiveness of the existing 55,000 employees to capture this additional demand for 12.7 million hours, then no additional employees would need to be hired. This would enable the revenue effects of the hire to be captured without the associated wage cost—which would directly impact earnings, market value, and share price. 8. Assuming an average real annual wage cost of $55,000 per annum per new staff member, Microsoft would need to pay an additional $472 m to hire the 8,582 new employees. 9. This $472 m represents an expense that reduces cash flow and earnings. By focusing on artificial employment (making existing nanotime more effective) it becomes possible to significantly reduce the requirement to hire new employees, thereby allowing revenue to increase without associated wage costs. Potential revenue effects: 10. Microsoft is not in business to pay expenses, but to increase revenue, earnings, market value, and share price. Using intMgtOS® Intangible Analyst software, it is estimated that revenue would increase to $38,889,031,856, an increase of $6.7 b from 2003 levels. 11. Assuming a previous uniform productivity rate and incremental productivity rates based on the new data, this would mean that an addition of 8,582 new employees would be expected to increase revenue by $6.7 b, or an average of $780,941 per new employee. This analysis indicates that a cost saving of $472 m is not the only benefit of artificial employment. There is also an anticipated increase in gross revenue of $6.7 billion. Artificial employment is a powerful technique of increasing the effectiveness of existing nanotime in order to directly enhance results, earnings, and share price. Intangible management operating standards define artificial employment as follows: Artificial employment is the conversion of ineffective nanotime into effective nanotime that has an appropriate sustainability margin so as to ensure that ineffective time adjustments do not erode the competitive structure of the firm and do not lead to burst time. (intMgtOS®1001.D70) Burst time occurs when an organization has deficient nanotime to fulfill its workflow, and compensates by increasing productive time through excess discretionary time to unsustainable levels that can be maintained only on a short-term basis. (intMgtOS®1001.D29)

Artificial employment will be dealt with in more detail in later sections, but a basic understanding of it is essential at this point.

95

Intangible Management Economy Fundamental Analysis

intMgtOS®5001.iR4 and the Apportionment Statement In order to determine what competitive intangibles can become subject to artificial employment, we must first classify the nanotime contributions of knowledge assets, relationship assets, and organizational assets. This is achieved through the intMgtOS® Apportionment Statement, which uses data from the previous statements to determine a reasonable apportionment of total nanotime between effective and potential nanotime within the organization. Such apportionments depend on the sector, industry, firm size, and SIC code of the organization. For Microsoft Corporation, the relevant data are found in Table 5.3. Once these data have been associated (derived from intangible management operating standards), the intMgtOS® Apportionment Statement can be developed. Notes to the Apportionment Statement This statement initially investigates details on a per employee basis, so that the results can be easily comprehended (see Figure 5.10). Each employee works for an average of 6.60 hours each day (396 minutes). According to the sector, industry, and SIC code, the composition of knowledge assets, relationship assets, and organizational assets will vary. In this case, Microsoft (SIC Code: 7372—prepackaged software) is in the Technology sector in the Software & Programming industry, and is a large cap. Given these factors, an arm’s-length, low-quality estimate of the apportionment between competitive intangibles and an approximate percentage relationship between effective and potential nanotime is represented. The purpose of intMgtOS®5001.iR4 is to ensure that underlying calculations are not withheld from investor attention. This ensures that investors know what they are actually investigating, which increases their confidence. It also serves as a benchmark through which the company can compare its behaviors to the average behaviors of that sector, industry, and SIC code. TABLE 5.3 MSFT Intangible Analyst Information Notes Sector

Values Information Technology

Industry

Software & Programming

SIC Description

Prepackaged Software

SIC Code

7372

Firm Size

Large Cap

Employees

55,000

96

Intangible Finance Standards

Microsoft Corporation

(MSFT)

intMgtOS® Apportionment Statement (intMgtOS®5003.iR4) As of June 30, 2003

Intangible Category Classifications Total benchmarked daily time

Total Mins

Productive

NonProductive

Nanotime

Nanotime%

Nanotime%

396.0

Organizational Categories Process Impacts Travel Impacts Stress Impacts Internal Politics Red-Tape Impacts Technological Impacts Organizational Culture Impacts Other Impacts Total

Apportionment KA Apportionment RA Apportionment

31.8 8.5 18.5 14.5 10.5 19.7 11.6 115.1

9.5 15.6 19.4 45.9 1.92

90.5 84.4 80.6 100.0 100.0 100.0 54.1 -

Mins 280.9

Hours 4.68 2.52 2.16

%Apport.

Productive Nanotime% 14.3 25.7 89.4 35.8 94.6 25.4 -

NonProductive Nanotime% 85.7 74.3 10.6 64.2 5.4 74.6 -

Productive Nanotime% 18.7 68.5 74.6 92.3 75.8 -

NonProductive Nanotime% 81.3 31.5 25.4 7.7 24.2 -

%Apport. Knowledge Categories Find/Retrieve Read/Learn Create/Apply Email/Fax Invention/Innovation Store/File Other Total

11.4 31.6 32.5 10.8 5.2 8.5 100.0 %Apport.

Relationship Categories Meetings Phone Calls Employee Networking Customer Service Internal Support Other Total

49.5 25.9 5.8 10.6 8.2 100.0

53.9% 46.1%

FIGURE 5.10 intMgtOS® Apportionment Statement (intMgtOS®5003.iR4).

Intangible Management Economy Fundamental Analysis

Notes

Values

intMgtOS Report

intMgtOS®5003.iR4 Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Created By Sector

Information Technology

Industry SIC Description SIC Code Quality Level Data Date Company Ticker Firm Size Employees

Software & Programming Prepackaged Software 7372 Low: Aggregated arm's length June 30, 2003 Microsoft Corporation MSFT Large Cap 55000 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

97

intMgtOS®-99797

FIGURE 5.10a True & Fair Value Certification.

Interpreting intMgtOS®5001.iR4 This statement estimates that of the 396 minutes (6.60 hrs) of average time per day employees spend at work, 115.1 minutes (1.92 hrs) is apportioned to organizational activities, and the remaining 4.68 hrs is apportioned between knowledge asset categories (2.52 hrs) and relationship assets categories (2.16 hrs). Each of the knowledge categories has an apportionment percentage of the total knowledge time (2.52 hrs), which when added together equals 100% of the total knowledge time. For example, Find/Retrieve is 11.4% of the 2.52 hrs, with 14.3% of this time being effective nanotime, the remaining 85.7% being apportioned to potential nanotime. Each of the relationship categories has an apportionment percentage of the total relationship time (2.16 hrs), which when added together equals 100% of the total relationship time. For example, Meetings is 49.5% of the 2.16 hrs,

98

Intangible Finance Standards

with 18.7% of this time being effective nanotime, the remaining 81.3% being apportioned to potential nanotime.

STEP 5:

INTMGTOS® INTANGIBLE

BALANCE SHEET

At this stage, the intMgtOS® Intangible Analyst leverages previous intangible management reports to form an intangible balance sheet for the organization. The intangible balance sheet represents the total effective and potential nanotime of the organization, categorized in accordance with the intangible classification scheme. This statement shows the intMgtOS® Intangible Analyst where Microsoft is allocating time on an aggregated basis across its organizational structure (see Figure 5.11). Overall, MSFT has 81,309,169 hours but loses 50,537,267 to non-productive nanotime. MSFT therefore has a total of 30,771,902 hours in which to create the employee-contributed revenue of the corporation.

99

Intangible Management Economy Fundamental Analysis

Microsoft Corporation (MSFT) intMgtOS® Intangible Balance Sheet (intMgtOS®5003.iR5) As of June 30, 2003

Intangible Asset Analysis Min per Emp Day

Hrs per Org. Day

Hrs per Org Year

31.80 8.50 18.50 14.50 10.50 19.70 11.60 115.10

29,150 7,792 16,958 13,292 9,625 18,058 10,633 105,508

6,529,373 1,745,273 3,798,534 2,977,230 2,155,925 4,044,926 2,381,784 23,633,044

17.26 47.84 49.21 16.35 7.87 12.87 151.41

15,822 43,857 45,106 14,989 7,217 11,797 138,788

3,543,967 9,823,628 10,103,415 3,357,443 1,616,546 2,642,432 31,087,431

64.10 33.54 7.51 13.73 10.62 129.49

58,758 30,744 6,885 12,583 9,734 118,704

13,161,403 6,886,472 1,542,144 2,818,402 2,180,273 26,588,694

Organizational Assets Process Impacts Travel Impacts Stress Impacts Internal Politics Red-Tape Impacts Technological Impacts Cultural Impacts Other Impacts Total

Knowledge Assets Find/Retrieve Read/Learn Create/Apply Email/Fax Invention/Innovation Store/File Other Total

Relationship Assets Meetings Phone Calls Employee Networking Customer Service Internal Support Other Total

Total Intangible Assets

81,309,169

FIGURE 5.11 intMgtOS® Intangible Balance Sheet (intMgtOS®5003.iR5).

Intangible Liability Analysis Min per

Hrs per

Hrs per

Emp Day

Org. Day

Org Year

28.78 7.17 14.91 14.50 10.50 19.70 6.28 101.84

26,381 6,576 13,668 13,292 9,625 18,058 5,753 93,353

5,909,082 1,473,010 3,061,619 2,977,230 2,155,925 4,044,926 1,288,545 20,910,336

14.79 35.55 5.22 10.50 0.43 9.60 76.08

13,559 32,586 4,781 9,623 390 8,801 69,740

3,037,180 7,298,956 1,070,962 2,155,478 87,294 1,971,254 15,621,123

52.11 10.56 1.91 1.06 2.57 68.21

47,771 9,684 1,749 969 2,356 62,528

10,700,221 2,169,239 391,705 217,017 527,626 14,005,807

Organizational Liabilities Process Impacts Travel Impacts Stress Impacts Internal Politics Red-Tape Impacts Technological Impacts Cultural Impacts Other Impacts Total

Knowledge Liabilities Find/Retrieve Read/Learn Create/Apply Email/Fax Invention/Innovation Store/File Other Total

Relationship Liabilities Meetings Phone Calls Employee Networking Customer Service Internal Support Other Total

50,537,267

Total Intangible Liabilities

Intangible Capital Analysis Min per

Hrs per

Hrs per

Emp Day

Org. Day

Org Year

3.02 1.33 3.59 5.32 13.26

2,769 1,216 3,290 4,881 12,155

620,290 272,263 736,916 1,093,239 2,722,707

2.47 12.30 43.99

2,263 11,271 40,325

506,787 2,524,672 9,032,453

Organizational Capital Process Impacts Travel Impacts Stress Impacts Internal Politics Red-Tape Impacts Technological Impacts Cultural Impacts Other Impacts Total

Knowledge Capital Find/Retrieve Read/Learn Create/Apply

FIGURE 5.11 (continues)

101

Intangible Management Economy Fundamental Analysis Email/Fax Invention/Innovation Store/File Other Total

5.85 7.45 3.27 75.33

5,366 6,827 2,996 69,048

1,201,964 1,529,253 671,178 15,466,308

11.99 22.97 5.60 12.67 8.05 61.28

10,988 21,060 5,136 11,614 7,378 56,176

2,461,182 4,717,233 1,150,440 2,601,385 1,652,647 12,582,887

Relationship Capital Meetings Phone Calls Employee Networking Customer Service Internal Support Other Total

Total Intangible Capital

30,771,902

FIGURE 5.11 (continues)

Notes

Values

intMgtOS Report

intMgtOS®5003.iR5 Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01) June 30, 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

Created By Data Date

IntMgtOS® Certification Number

intMgtOS®-99853

FIGURE 5.11a True & Fair Value Certification.

STEP 6:

INTMGTOS®

NANOTIME PRODUCTIVITY

Intangible financial statements assist intMgtOS® Intangible Analysts in determining the underlying quality of results, productivity, revenue, earnings, and management effectiveness. The intMgtOS® Intangible Income Statement provides financial values for the nanotime determined in the intMgtOS® Balance Sheet. In order to estimate the financial value of time, it is essential to understand how effectiveness, nanotime, and revenue relate. This is accomplished by an intMgtOS® Intangible Analyst forming the intMgtOS® Nanotime Productivity Statement.

102

Intangible Finance Standards

Determining Nanotime Productivity The Intangible Management Economy has shifted the balance of productivity away from machines and into people. In highly automated operations (such as manufacturing), remaining staff can become even more important, as there are fewer of them who understand the complexities of the equipment within the business and how it works in practice. In service-based organizations, the means of production resides largely inside employees’ heads. In the manufacturing age, industrial action was organized and concentrated. This meant that unskilled workers would be led by trade unions to conduct strikes (stop production) against their employer in pursuit of better conditions and wages. In the Intangible Management Economy, employees are often highly skilled and have little direct supervision. As a result, non-motivated employees use their time for their own benefit and not for the benefit of the organization. It is common to see employees playing computer games, writing emails to friends, having personal phone calls, checking their stock portfolio—when they should be working. As the computer dominates the creation of value for many organizations, the potential for covert industrial action is becoming an ever-increasing problem to organizations. At the heart of this concept is nanotime. In nanotime, employees can be consciously or unconsciously engaged in covert industrial action. For example, an employee who does not know how to use a computer program will take significantly longer to create their work than would an expert at that program. This constitutes unconscious covert industrial action that could well be supported by the organization if it fails to train the employee. When staff engage in disputes, conflict, and politics with each other they engage in unconscious covert industrial action. As a person’s intellect creates effectiveness (intellectual capital), when employees are angry, stressed, and upset, their work effectiveness falls (or ceases), as do quality, customer service, and employee satisfaction. This is conceptually equivalent to sabotaging the mechanics of production. Sometimes employees are very dissatisfied with their employers. When this occurs, they can engage in conscious covert industrial action. Such behavior could result in anything from crashing computer networks, to disabling systems, to leaking confidential information to competitors, to deliberately engaging in alienating customers (to cause lost business), to theft, physical attacks on fellow employees, to embezzlement, fraud, and even industrial espionage. Intangible management operating standards define this behavior as knowledge worker syndrome; it is conscious covert industrial action taken by staff. To combat knowledge worker syndrome, and to assess the extent of conscious and unconscious covert industrial action

Intangible Management Economy Fundamental Analysis

103

FIGURE 5.12 Understanding Nanotime Productivity.

(as well as honest process inefficiencies), nanotime effectiveness must first be evaluated. Figure 5.12 illustrates a firm generating $10 m in revenue and paying $8 m in total expenses, bringing in that $10 m by applying effective time—which is a fraction of the total time the organization has at its disposal.

When employees are engaged in non-productive nanotime, they are effectively engaged in covert industrial action (conscious or unconscious).

This statement illustrates that Microsoft employees contribute $1045.99 per hour to the gross revenue of the firm per productive nanotime hour, and that the wage to revenue ratio is 28.12 to 1. This means that for every $1 of wage cost savings identified as a benefit within Microsoft, intMgtOS® Intangible Analysts would need to readjust this figure by 28.12 to determine the revenue effects (see Figures 5.13 and 5.13a).

104

Intangible Finance Standards

Microsoft Corporation (MSFT) intMgtOS® Productivity Report (intMgtOS®5003.iR6) As of June 30, 2003 $M Gross Revenue Investment Adjustments

$M

$ 32,187 -

Adjusted Revenue

$ 32,187

Org Hrs Intangible Assets Less Intangible Liabilities Intangible Capital

Org Hrs

81,309,169 50,537,267 30,771,902

Per Employee True Hourly Productivity True Daily Productivity True Annual Productivity

$ 1,045.99 $ 6,903.51 $1,546,332.89

Wage:Revenue Ratio

28.12

FIGURE 5.13 intMgtOS® Productivity Report (intMgtOS®5003.iR6).

Notes

Values

intMgtOS Report

intMgtOS®5003.iR6 Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01) June 30, 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

Created By Data Date

intMgtOS® Certification Number

intMgtOS®-99871

FIGURE 5.13a True & Fair Value Certification.

105

Intangible Management Economy Fundamental Analysis

STEP 7:

INTMGTOS® INCOME

STATEMENT

The intMgtOS® Income Statement is an extremely powerful intangible finance statement. It shows exactly how the firm made its money by leveraging its organizational infrastructure and its competitive intangibles (knowledge assets and relationship assets). This statement is directly substantiated by existing financial statements, as it shows exactly how a corporation generated its revenue (intangible profit), where it could have generated more (intangible expenses), and what latent productivity and revenue it has within its existing competitive infrastructure (intangible revenue) (see Figures 5.14 and 5.14a).

Microsoft Corporation (MSFT) intMgtOS® Intangible Income Statement (intMgtOS®5003.iR7) As of June 30, 2003

Intangible Revenue Analysis Value per

Value per

Value per

Emp.Day($)

Org.Day($)

Org Year($)

554.37 148.18 322.51 252.78 183.05 343.43 202.22 2,006.55

30,490,512 8,149,980 17,738,191 13,902,907 10,067,622 18,888,776 11,122,325 110,360,313

6,829,636,926 1,825,531,883 3,973,216,451 3,114,142,623 2,255,068,796 4,230,938,599 2,491,314,099 24,719,849,377

300.90 834.07 857.83 285.06 137.25 224.35 2,639.46

16,549,427 45,873,850 47,180,383 15,678,404 7,548,861 12,339,485 145,170,411

3,706,942,523 10,275,384,538 10,568,037,895 3,511,840,285 1,690,886,063 2,763,948,373 32,517,039,677

Organizational iRevenue Process Impacts Travel Impacts Stress Impacts Internal Politics Red-Tape Impacts Technological Impacts Cultural Impacts Other Impacts Total

Knowledge iRevenue Find/Retrieve Read/Learn Create/Apply Email/Fax Invention/Innovation Store/File Other Total

FIGURE 5.14 intMgtOS® Intangible Income Statement (intMgtOS®5003.iR7).

Relationship iRevenue Meetings Phone Calls Employee Networking Customer Service Internal Support Other Total

1,117.46 584.69 130.93 239.29 185.11 2,257.50

61,460,412 32,158,074 7,201,422 13,161,219 10,181,321 124,162,448

13,766,652,818 7,203,157,737 1,613,062,350 2,948,010,503 2,280,536,426 27,811,419,835 85,048,308,889 37.85%

Total Intangible iRevenue iRevenue Conversion

Intangible Expense Analysis Valueper

Valueper

Valueper

Emp.Day($)

Org.Day($)

OrgYear($)

501.71 125.07 259.95 252.78 183.05 343.43 109.40 1,775.38

27,593,914 6,878,583 14,296,982 13,902,907 10,067,622 18,888,776 6,017,178 97,645,961

6,180,821,418 1,540,748,909 3,202,412,459 3,114,142,623 2,255,068,796 4,230,938,599 1,347,800,927 21,871,933,732

257.87 619.71 90.93 183.01 7.41 167.37 1,326.30

14,182,859 34,084,270 5,001,121 10,065,536 407,639 9,205,256 72,946,680

3,176,849,742 7,634,610,712 1,120,212,017 2,254,601,463 91,307,847 2,061,905,486 16,339,487,267

908.50 184.18 33.26 18.43 44.80 1,189.16

49,967,315 10,129,793 1,829,161 1,013,414 2,463,880 65,403,563

11,192,288,741 2,268,994,687 409,717,837 226,996,809 551,889,815 14,649,887,890

Organizational iExpense Process Impacts Travel Impacts Stress Impacts Internal Politics Red-Tape Impacts Technological Impacts Cultural Impacts Other Impacts Total

Knowledge iExpense Find/Retrieve Read/Learn Create/Apply Email/Fax Invention/Innovation Store/File Other Total

Relationship iExpense Meetings Phone Calls Employee Networking Customer Service Internal Support Other Total

52,861,308,889

Total Intangible iExpense

Intangible Profit Analysis Valueper

Valueper

Valueper

Emp.Day($)

Org.Day($)

OrgYear($)

52.67 23.12 62.57 92.82 231.17

2,896,599 1,271,397 3,441,209 5,105,147 12,714,352

648,815,508 284,782,974 770,803,991 1,143,513,171 2,847,915,644

Organizational iProfit Process Impacts Travel Impacts Stress Impacts Internal Politics Red-Tape Impacts Technological Impacts Cultural Impacts Other Impacts Total

FIGURE 5.14 (continues)

107

Intangible Management Economy Fundamental Analysis Knowledge iProfit Find/Retrieve Read/Learn Create/Apply Email/Fax Invention/Innovation Store/File Other Total

43.03 214.36 766.90 102.05 129.84 56.99 1,313.16

2,366,568 11,789,579 42,179,263 5,612,869 7,141,223 3,134,229 72,223,731

530,092,781 2,640,773,826 9,447,825,878 1,257,238,822 1,599,578,216 702,042,887 16,177,552,410

208.97 400.51 97.68 220.87 140.32 1,068.34

11,493,097 22,028,281 5,372,261 12,147,806 7,717,441 58,758,885

2,574,364,077 4,934,163,050 1,203,344,513 2,721,013,694 1,728,646,611 13,161,531,946

Relationship iProfit Meetings Phone Calls Employee Networking Customer Service Internal Support Other Total

32,187,000,000

Total Intangible iProfit

Structural Valuation

Absenteeism Industrial Action Industrial Accident Downtime Sick Leave Other Leave All Other Non-Statutory Overhead Total Controllable Overhead

Value per Emp.Day($)

Value per Org. Day ($)

Value per Org Year ($)

30.82 30.82 92.46 7.71 161.81

1,695,118 1,695,118 5,085,353 423,779 8,899,369

379,693,172 379,693,172 1,139,079,516 94,923,293 1,993,389,152

FIGURE 5.14 (continues)

Notes

Values

intMgtOS Report

intMgtOS®5003.iR7 Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01) June 30, 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

Created By Data Date

IntMgtOS® Certification Number

intMgtOS®-99894

FIGURE 5.14a True & Fair Value Certification.

108

Intangible Finance Standards

This statement represents a breakthrough in valuation science. It is the first time that effectiveness has been reported and analyzed in a complete end-toend manner, showing operational effectiveness, and operational performance potential in one statement. As executives and regulators begin to understand the decreased role tangibles play in the value creation process, it will become mandatory for corporations to engage in intangible management reporting with the intMgtOS® model. Interpreting the Intangible Income Statement The intMgtOS® Intangible Income Statement is a very powerful statement. In one glance, we can estimate the following. Gross iRevenue Efficiency If Microsoft could make its workforce 100% productive and convert all potential nanotime into actual performance improvements, it would have the potential to generate $85.048 billion from 100% drawdown on its intangible revenue. Microsoft generated $32.2 billion from its competitive intangibles. It therefore had an intangible revenue conversion percentage of 37.85%. intMgtOS® Intangible Analysts know that reduction of non-productive overheads below the optimal sustainability threshold can, and will, damage the firm’s sustainable competitive advantage, due to the impacts of burst time, turnover, and knowledge worker syndrome. Hence, it would be unrealistic and undesirable for Microsoft to attempt to convert 100% of its potential operational nanotime into effective operational nanotime. Instead, the optimal amount of sustainable conversion from potential nanotime to effective nanotime would occur at the optimal sustainability threshold. The optimal sustainability threshold is the gross amount of potential nanotime required by an organization to ensure that unsustainable burst time, burnout, absenteeism, stress, turnover, and knowledge worker syndrome are minimized. (intMgt OS®1001.D29c)

The optimal sustainability threshold will fluctuate over time in accordance with technological breakthroughs, process improvement breakthroughs, and other levels of knowledge required to capture performance improvements from potential nanotime. To determine what this amount is, Certified intMgtOS® Intangible Analysts generate the intMgtOS® Sustainability Statement. Nanotime Potential Analysis Practically all consulting activities, process improvement programs, and business case development projects, as well as many other management func-

Intangible Management Economy Fundamental Analysis

109

tions, revolve around the “gut feel” reduction of intangible expenses associated with competitive intangibles. Before intangible finance it was impossible for executives to quantify the value to the organization of intangible expense reduction programs. With the introduction of intangible finance, it is now possible for executives to perform cost benefit analysis that transforms “gut feelings” into structured intangible management reports based on international intangible management operating standards. Consider Microsoft as an example. According to the intangible financial statements, Microsoft has a number of areas in which it can employ intangible management techniques to directly increase earnings, revenue, and share price by converting potential nanotime into actual operational nanotime through intangible performance improvements. Organizational Potential 1. Potential nanotime value related to processes within Microsoft has been valued at $6,180,821,418 pa. If Microsoft implemented intangible management performance improvement programs, up to $6.2 b in additional performance improvements would be expected to follow. 2. Potential nanotime value related to internal travel within Microsoft has been valued at $1,540,748,909 pa. If Microsoft implemented intangible management performance improvement programs, up to $1.5 b in additional performance improvements would be expected to follow. 3. Potential nanotime value related to stress impacts within Microsoft have been valued at $3,202,412,459 pa. If Microsoft implemented intangible management performance improvement programs, up to $3.2 b in additional performance improvements would be expected to follow. 4. Potential nanotime value related to internal politics within Microsoft has been valued at $3,114,142,623 pa. If Microsoft implemented intangible management performance improvement programs, up to $3.1 b in additional performance improvements would be expected to follow. 5. Potential nanotime value related to technological inefficiencies within Microsoft have been valued at $4,230,938,599 pa. If Microsoft implemented intangible management performance improvement programs, up to $4.2 b in additional performance improvements would be expected to follow. 6. Potential nanotime value related to cultural impacts within Microsoft have been valued at $1,347,800,927 pa. If Microsoft implemented intangible management performance improvement programs, up to $1.3 b in additional performance improvements would be expected to follow. By employing intangible management practices, nanotime potential can be systematically and scientifically transformed into actual performance improve-

110

Intangible Finance Standards

ments through artificial employment, thereby directly boosting Microsoft’s performance, share price performance, and investment attractiveness. Knowledge Potential Every year, MSFT employees have access to the following performance improvements by converting potential nanotime into actual results in relation to their knowledge assets: 7. Potential nanotime value related to finding or retrieving information of $3,176,849,742 pa. 8. Potential nanotime value related to reading and learning information of $7,634,610,712 pa. 9. Potential nanotime value related to creating and applying information of $1,120,212,017 pa. 10. Potential nanotime value related to emailing or faxing information of $2,254,601,463 pa. 11. Potential nanotime value related to innovating and inventing of $91,307,847 pa. 12. Potential nanotime value related to storing or filing information of $2,061,905,486 pa. As nanotime reverse engineers intangible transactions and financial performance at the pre-contractual, contractual, and post-contractual levels, significant levels of nanotime potential (performance improvements) can be identified at a level previously unattainable through conventional methods. Relationship Potential Every year, MSFT employees have access to the following performance improvements by converting potential nanotime into actual results in relation to their relationship assets: 13. Potential nanotime value related to participating in meetings of $11,192,288,741 pa. 14. Potential nanotime value related to making phone calls of $2,268,994,687 pa. 15. Potential nanotime value related to improving customer service of $226,996,809 pa. 16. Potential nanotime value related to improving internal support of $551,889,815 pa. Often companies mistakenly view customer service as the key driver of nanotime effectiveness. The information above illustrates that improving the customer service experience is only one area where performance improvement initiatives can be effective.

Intangible Management Economy Fundamental Analysis

111

Structural Potential Every year, MSFT employees have access to the following performance improvements by converting potential nanotime into actual results in relation to their organizational assets: 17. Potential nanotime value related to improving absenteeism issues of $379.7m pa. 18. Potential nanotime value related to improving sick leave issues of $1.139 billion pa. 19. Potential nanotime value related to improving industrial accident issues of $379m pa. 20. Potential nanotime value related to improving other leave-based issues of $94.92m pa. The Intangible Management Economy will be dominated by firms that capture the greatest potential from their knowledge assets, relationship assets, motivation assets, responsiveness assets, and organizational processes. The purpose of Intangible Management reports is to identify, classify, measure, and report performance improvement value in a systematic and scientific manner in strict accordance with international intangible standards. Notes on the Size of Potential Productivity Savings Productivity Potential People new to the concept of intangible finance often confuse productivity potential with attainable productivity. Productivity potential is the gross financial value of ineffective nanotime. It is not reduced to account for required sustainability and continuity impacts, and it does not reflect the true growth potential of the firm. It is a maximum amount if 100% of potential nanotime was converted into effective nanotime. Such a reduction is neither feasible nor desirable, as it would destroy the organization’s sustainable competitive advantage due to the impact of burst time (which results in staff burnout, increased stress, turnover, absenteeism, decreased quality, and a substantial number of other problems). (intMgtOS®1001.D29a)

Productivity potential quantifies the absolute maximum productivity gains possible if an organization were to transfer 100% of potential nanotime into effective nanotime. Not all “non-productive” nanotime is actually non-productive: Non-productive time: Non-productive time is the amount of time not available for an individual employee to generate effectiveness for the organization they work for. Non-productive time is composed of potential time and continuity time. Nonproductive time is referred to as potential time. (intMgtOS®1001.D35)

112

Intangible Finance Standards

Hence, intMgtOS® Intangible Analysts must be sure that an organization is converting only potential nanotime and not sustainability time. Attainable Productivity Productivity potential describes the absolute “best case scenario” in discussing the potential of the firm for increasing its actual operational results. After adjustments for sustainability, continuity, and natural market growth, the capacity of the firm to convert potential nanotime into actual results is reduced. As it is possible for a firm to have greater potential nanotime value than the firm’s current revenue base, it is essential for intMgtOS® Intangible Analysts to understand the difference between potential productivity and attainable productivity. Attainable productivity is the practical ability of the organization to operationally convert potential nanotime into actual results. Four major factors can reduce attainable productivity potential substantially, namely: (1) sustainable competitive advantage levels, (2) social capital effectiveness, (3) human capital effectiveness, and (4) natural revenue growth rates. (intMgtOS®1001.D29b)

Sustainable Competitive Advantage Levels Intangible management operating standards define sustainable competitive advantage as follows: Sustainable competitive advantage is the prolonged economic benefit and superior competitive position that results from the implementation of a unique nanotime strategy that combines competitive intangibles in an optimally effective way, which competitors cannot duplicate, imitate, or create substitutes for (competitive effectiveness), due to the maintenance of an ever-increasing capability gap that competitors cannot close. (intMgtOS®11001.D12) Nanotime strategy is the strategic management of intangible transactions as the method of strategically managing the firm’s short-term performance, results, brand value, earnings, free cash flows, and share price. Nanotime strategy is equally applicable to public sector organizations. (intMgtOS®1001.D26)

Intangible transactions create changes in competitive rights and are therefore non-financial transactions and are evidenced by changes in nanotime at the pre-contractual, contractual, and post-contractual level. Changes in competitive rights are classified into four key categories: intangible assets, intangible liabilities, intangible expenses, and intangible revenue. Intangible transactions result from the interaction of knowledge assets, relationship assets, emotional assets, responsiveness assets, and organizational processes as evidenced by nanotime transactions (intMgtOS®.1001.D22). Sustainable competitive advantage occurs through the strategic combinations of competitive intangibles that result in competitive effectiveness.

Intangible Management Economy Fundamental Analysis

113

Competitive effectiveness occurs when one firm possesses an ability to increase customers’ current and future willingness to purchase by strategically combining competitive intangibles. (intMgtOS®11001.D17)

Competitive effectiveness can occur from being the lowest cost producer, from product differentiation, from superior skills or superior resources, from leveraging nanotime more effectively than the competition, from strategically managing competitive intangibles, from rareness or value, or from competitors’ inability to imitate or to substitute. From an Intangible Analyst standpoint, firms create sustainable competitive advantage by strategically manipulating the components of nanotime. Social Capital Effectiveness Corporations do not exist independently of the markets they serve. If Microsoft were to increase its revenue at the expense of society in general, then longterm effects (such as boycotts, legal action, and general customer base erosion) would occur. Social capital is therefore essential to manage. Innovation and growth are often dependent on social networks. If the community regards an organization with fear, hatred, or anxiety, then the firm will experience marketing and sales difficulties. If the community regards a firm with pride, prestige, respect, and admiration, then the firm will experience greater access to community resources and community advantages and resources that would be withheld if less reputable firms required those resources. Intangible management operating standards define social capital as follows: Social capital is defined as the strength of current, repeat, and referred nanotime demand given by the general community to an organization as a direct result of the community’s perceived level of the social support, trust, goodwill, citizenship, and reputation of the organization. (intMgtOS®11001.D15)

Organizations with high-quality social capital can innovate, evolve, and grow far more quickly than organizations with low-quality social capital. Nanotime demand is the total amount of nanotime that customers and other entities supply to an organization in response to a perception of perceived value. (intMgtOS®1001.D26a)

Hence, social capital effectiveness can be a significant issue in determining how fast a company can and will grow over time, and how much potential nanotime it can convert into actual performance improvements. Human Capital Effectiveness Human capital effectiveness is linked to sustainable competitive advantage and the notion of sustainability. Intangible management operating standards define human capital as follows:

114

Intangible Finance Standards Human capital represents the knowledge assets, relationship assets, motivation assets, and responsiveness assets required to generate actual organizational results through the leveraging of organizational assets via effective nanotime. (intMgtOS®11001.D43)

It is due to the nature of human capital that nanotime requires its two components: potential time and sustainability time. Without sustainability time, human capital would become ineffective and results would be lost. Natural Revenue Growth Rates Firms tend to grow in mathematically calculable ways. Reconsider Microsoft’s revenue data from 1975 to 2003 (see Table 5.4). Since 1975, Microsoft gross revenue has grown exponentially. Using intMgtOS® Intangible Analyst software, the level of 2004 gross revenue was calculated to be $38,889,031,856—an increase of $6,702,031,856 over 2003 figures. Provided that Microsoft converted $6.7 b of non-productive nanotime into productive nanotime, it could avoid having to pay a minimum of $472 m in additional wage costs. Note that intangible management does not focus on reducing the current workforce. The focus of artificial employment is diverting incremental future employment into stronger current retention and customer satisfaction at more financially profitable levels. A major issue surrounding the conversion of potential nanotime to effective nanotime (a process referred to by intangible management operating standards as positive conversion) relates to ensuring that (1) sustainable competitive advantage levels are not eroded but maintained or improved, (2) social capital effectiveness is not eroded but maintained or improved, (3) human capital effectiveness is not eroded but maintained or improved, and (4) the amount of potential nanotime converted into effective nanotime can actually be translated into practical market benefit (as witnessed from previous revenue growth patterns).

STEP 8: INTMGTOS® SUSTAINABILITY STATEMENT (intMgtOS®5003.iR8) The power of the intMgtOS® Income Statement is in uncovering areas where organizations can release previously untapped performance improvements, thereby effectively increasing results, earnings, and share price. For the reasons outlined above, the sustainability statement is beyond the scope of this text, and is covered in the Certified intMgtOS® Intangible Analyst course (see www.StandardsInstitute.org for more information). The Intangible Management® Reporting Excellence Framework is also outside the scope of this text. It is also covered in the Intangible Analyst course.

115

Intangible Management Economy Fundamental Analysis TABLE 5.4 Microsoft Revenues 1975–2003 Year 1975

Gross Revenue ($) 16,000

1976

22,000

1977

382,000

1978

1,356,000

1979

2,390,000

1980

8,000,000

1981

16,000,000

1982

24,486,000

1983

50,065,000

1984

97,479,000

1985

140,417,000

1986

197,514,000

1987

345,890,000

1988

590,827,000

1989

803,530,000

1990

1,186,000,000

1991

1,847,000,000

1992

2,777,000,000

1993

3,786,000,000

1994

4,714,000,000

1995

6,075,000,000

1996

8,670,000,000

1997

11,360,000,000

1998

15,262,000,000

1999

19,747,000,000

2000

22,956,000,000

2001

25,296,000,000

2002

28,365,000,000

2003

32,187,000,000

Source: MSFT Annual Reports.

STEP 9: INTMGTOS® ARTIFICIAL EMPLOYMENT STATEMENT (INTMGTOS®5003.IR9) Leading on from the Sustainability Statement is the Artificial Employment Statement. This statement explores exactly how much potential nan-

116

Intangible Finance Standards

otime could be reasonably transformed into effective nanotime according to specific organizational requirements (such as increased staffing, automation, process improvement, and so on). The artificial employment statement is beyond the scope of this text, and is covered in the Certified intMgtOS® Intangible Analyst course (see www.StandardsInstitute.org for more information).

STEP 10: INTMGTOS® ROI STATEMENT (INTMGTOS®5003.IR10) The ROI Statement explores the intangible costs (expenses, productivity losses, potential market value impacts) and intangible benefits (expenses, productivity losses, potential market value impacts) associated with investing in the transformation of potential nanotime into effective nanotime. Return on investment calculations account for consulting impacts and can be used to conduct intangible cost benefit analysis (where wage costs, productivity costs, earnings impacts, and other impacts are factored). Intangible management operating standards manage nanotime through the application of intangible management practices.3 The intMgtOS® ROI Statement assists in placing a financial value on recommendations from quality management and cost management systems. This statement can be used with ISO 9000 systems to assess the potential productivity benefits of improving quality.4 The cost of poor quality (COPQ) was estimated by industry in Table 5.5. Cost of poor quality (COPQ) has typically been defined as follows: TABLE 5.5 Cost of Poor Quality by Selected Industries Industry Aluminum die castings

3

COPQ percentage of sales 4.3%–7.1%

Candy & confections

6.6%–7.1%

Commercial printing

5.6%–7.3%

Electronic components

6.3%–8.2%

Household appliances

6.6%–7.1%

Industry machinery

7.0%–8.2%

Lawn & garden equipment

6.4%–7.1%

Plastic products

6.9%–7.8%

Sport & athletic goods

6.3%–7.5%

For an explanation of those practices, please see my earlier book. See Imberman and DeForest, published in ASQ’s “Quality Progress” in 1995.

4

Intangible Management Economy Fundamental Analysis

117

“COPQ consists of those costs which are generated as a result of producing defective material. This cost includes the cost involved in fulfilling the gap between the desired and actual product/service quality. It also includes the cost of lost opportunity due to the loss of resources used in rectifying the defect. This cost includes all the labor cost, rework cost, disposition costs, and material costs that have been added to the unit up to the point of rejection. COPQ does not include detection and prevention cost.”5

Cost of poor quality under intangible management operating standards is significantly broadened as a definition: Cost of poor quality occurs when effective nanotime relating to competitive intangibles is transformed into potential nanotime. The COPQ, from an intangible management operating standards perspective, is therefore far broader than the definition given to COPQ as typically defined. (intMgtOS®4002.D6)

STEP 11: INTMGTOS® DAILY VALUE STATEMENT (INTMGTOS®5003.IR11) The intMgtOS® Daily Value Statement creates a degree of understanding on how investors may perceive the organization’s market value from an operational basis (see Figures 5.15 and 5.15a). It assumes that employee-contributed revenue and market value are simply linked in a proportional relationship. This statement is not meant to be a complex statement but a quick and dirty insight into how investors are potentially assessing the value of competitive intangibles across various competitive intangible categories. This statement estimated that: 1. $25.749 b of Microsoft’s market value was associated with organizational productivity ($19.637 b intangible value, $6.112 b book value, $3.032 b gross revenue, $900 m operating income, $786 m income after tax, $2.39 in share price, and $5.766 b in brand value), 2. $146.268 b of Microsoft’s market value was associated with knowledge assets ($111.55 b intangible value, $34.718 b book value, $17.223 b gross revenue, $5.115 m operating income, $4.462 m income after tax, $13.55 in share price, and $32.755 b in brand value), and 3. $118,999 b of Microsoft’s market value was associated with relationship assets ($90.753 b intangible value, $28.246 b book value, $14.012 b gross revenue, $4.161 m operating income, $3.630 m income after tax, $11.02 in share price, and $26.649 b in brand value).

5

Source: http://www.isixsigma.com/dictionary/Cost_of_Poor_Quality_-_COPQ-63.htm

118

Intangible Finance Standards

Microsoft Corporation (MSFT) intMgtOS® Daily Value Statement (intMgtOS®5003.iR11) As of Friday Feb 6, 2004 Market Value ($m)

Intangible Value ($m)

Book Value ($m)

Gross Rev ($m)

Op. Inc. ($m)

5,866 2,575 6,969 10,339 25,749

4,474 1,964 5,315 7,885 19,637

1,392 611 1,654 2,454 6,112

691 303 821 1,217 3,032

4,793 23,876 85,422 11,367 14,462 6,347 146,268

3,655 18,209 65,146 8,669 11,030 4,841 111,550

1,138 5,667 20,276 2,698 3,433 1,507 34,718

23,276 44,612 10,880 24,602 15,629 118,999

17,751 34,023 8,297 18,762 11,920 90,753

291,017

221,941

IAT ($m)

Share Price ($m)

Brand Value ($m)

205 90 244 362 900

179 79 213 315 786

0.54 0.24 0.65 0.96 2.39

1,314 577 1,561 2,315 5,766

564 2,812 10,059 1,339 1,703 747 17,223

168 835 2,987 398 506 222 5,115

146 728 2,606 347 441 194 4,462

0.44 2.21 7.91 1.05 1.34 0.59 13.55

1,073 5,347 19,129 2,546 3,239 1,421 32,755

5,525 10,589 2,582 5,840 3,710 28,246

2,741 5,253 1,281 2,897 1,840 14,012

814 1,560 380 860 547 4,161

710 1,361 332 751 477 3,630

2.16 4.13 1.01 2.28 1.45 11.02

5,212 9,990 2,436 5,509 3,500 26,649

69,076

34,268

10,177

8,878

26.96

65,170

Organizational Value Process Impacts Travel Impacts Legal Impacts Red-Tape Impacts Technological Cultural Impacts Other Impacts Total

Knowledge Value Find/Retrieve Read/Learn Create/Apply Email/Fax Invention/Innovation Store/File Other Total

Relationship Value Meetings Phone Calls Employee Netwkg. Customer Service Internal Support Other Total

Total Value

FIGURE 5.15 intMgtOS® Daily Value Statement (intMgtOS®5003.iR11).

This is a rapid statement, but one that assists intMgtOS® Intangible Analysts in understanding value movements across a variety of different measures at a glance.

STEP 12: INTMGTOS® MARKET VALUE STATEMENT (INTMGTOS®5003.IR12) Investors assess the future prospects of a firm when assigning a market value and share price of that firm. Every firm has a growth rate, at which it can

Intangible Management Economy Fundamental Analysis

Notes

Values

intMgtOS Report

intMgtOS®5003.iR11 Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01) February 6 th 2004, for stock based figures August 4 th 2003, BusinessWeek / Interbrand brand value estimate of Microsoft. This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

Created By Data Date Brand value source:

IntMgtOS® Certification Number

119

intMgtOS®-99912

FIGURE 5.15a True & Fair Value Certification.

reasonably capture market share and revenue in its market(s). If a firm has substantial intangible assets, this does not mean that those assets can be converted immediately into value. There are many factors intMgtOS® Intangible Analysts need to consider when creating the relationship between revenue growth and market value growth. The intMgtOS® Market Value Statement gives executives a rapid understanding of how the market value of their firm is potentially being interpreted by investors. This intangible financial report, like all intangible financial reports, can be done at varying levels of quality and reliability. What is presented in this chapter is a low-quality analysis of Microsoft and its potential linkages to market value. Market value analysis is quite complex and requires significant knowledge to conduct correctly. For this reason, the Market Value Statement is also covered in the Certified intMgtOS® Intangible Analyst course.

CHAPTER

6

intMgtOS® and Other Standards

“Good information is vitally important because it reduces the uncertainty associated with making investments, and thus reduces one element of investment risk. Reduced investment risk in turn reduces the cost of capital. If capital costs are low, more capital will be available for companies that need it, capital will be allocated more efficiently, we will have faster and broader-based economic growth, and the welfare of all will be enhanced.”—Peter J. Wallison, Resident Fellow, American Enterprise Institute, Congressional Testimony

Standards are designed to increase quality levels, safety, reliability, efficiency, and flexibility at an economical cost. Standards exist to perpetually improve the underlying foundation of quality within the economy. To understand how little financial reporting quality exists, we took a brief look over some of the largest companies in the United States. The analysis showed that a strict reliance on accounting value resulted in investors and decision makers ignoring an average of 75% of the average market value of the 50 organizations studied. For example: 1. Oracle Corporation (Ticker: ORCL) accounting value accounts for around 10% of Oracle’s market value. 2. SAP (Ticker: SAP) accounting value accounts for around 2% of SAP’s market value. 121

122

Intangible Finance Standards

3. For Mitsubishi Tokyo Financial Group (Ticker: MTF), accounting value is less than 1% of the market value of the company. The purpose of intMgtOS ® standards is to increase the quality of financial reporting by developing a new range of intangible management reports that complement (not replace) existing accounting reports. INTMGTOS®

STANDARDS

Intangible management operating standards (intMgtOS®) focus exclusively on the financial measurement, reporting, and management of competitive intangibles (knowledge assets, relationship assets, motivation assets, responsiveness assets, and organizational processes). Competitive intangibles are the source of operational performance, short-term results, competitive advantage, brand value, and effectiveness within every organization. Competitive intangibles directly influence productivity levels and actual result levels. As of the date of writing this book, ISO did not possess any standards (out of its 14,000 published standards) dealing with the objective financial valuation and structured financial reporting of competitive intangibles. Intangible management operating standards (intMgtOS®) are a set of comprehensive intangible standards that relate to the operational productivity of competitive intangibles (competitive advantage), their comprehensive objective financial valuation, and their structured financial reporting in a wide range of investor–management intangible management statements. intMgtOS® allow organizations to value the financial impacts of competitive advantage on operational nanotime and how these translate into effectiveness, productivity impacts, expense impacts, earnings impacts, market value impacts, and share price impacts. Traditional management logic was primarily developed in the manufacturing age, when tangibles were the dominant source of value creation. In the Intangible Management Economy, competitive intangibles dominate the value creation process. Most rules relating to competitive intangibles run contrary to conventional (tangible) management understanding. It is for this reason that intMgtOS—a completely new structured system of identifying, classifying, financially valuing, and reporting competitive intangibles—was developed.

INTANGIBLE STANDARDS There are more than 40 intangible management operating standards (intMgt OS®) as shown in Table 6.1. Every intangible standard relates to a specific way

TABLE 6.1 intMgtOS® Intangible Standards intMgtOS® Number

intMgtOS® Standard:

intMgtOS®1001:

Intangible Foundations Standard

intMgtOS®2001:

Intangible Operating Structures Standard

intMgtOS®3001:

Intangible Risk Management Standard

intMgtOS®4001:

Intangible Accounting Standard

intMgtOS®4002:

Intangible Cost Management Standard

intMgtOS®4003:

Intangible Cost Quality Standard

intMgtOS®4005:

Intangible Cost Quantification Standard

intMgtOS®5001:

Intangible Valuation Standard

intMgtOS®5002:

Intangible Strategy Standard

intMgtOS®5003:

Intangible Reporting Standard

intMgtOS®6001:

Intangible Finance Standard

intMgtOS®7001:

Intangible Economics Standard

intMgtOS®8001:

Intangible Project Management Standard

intMgtOS®9001:

Intangible Marketing Standard

intMgtOS®10001:

Knowledge Management Standard

intMgtOS®10002:

Knowledge Worker Syndrome Standard

intMgtOS®10010:

Intangible Information Management Standard

intMgtOS®11001:

Intangible Intellectual Capital Standard

intMgtOS®12001:

Intangible Return on Investment Standard

intMgtOS®13001:

Incentive and Remuneration Standard

intMgtOS®14001:

Intangible Change Management Standard

intMgtOS®15001:

Intangible Interaction Management Standard

intMgtOS®15002:

Emotional Asset Management Standard

intMgtOS®16001:

Intangible Resource Management Standard

intMgtOS®17001:

Intangible Production Management Standard

intMgtOS®18001:

Intangible Purchasing Standard

intMgtOS®19001:

Intangible Mapping Standard

intMgtOS®20001:

Intangible Consulting Standard

intMgtOS®21001:

Knowledge Reengineering Standard

intMgtOS®22001:

Operational Brand Management Standard

intMgtOS®23001:

Intangible Product Development Standard

intMgtOS®24001:

Emotional Leadership Standard

intMgtOS®25001:

intMgtOS® Reporting Excellence Framework – Government

intMgtOS®25002:

intMgtOS® Reporting Excellence Framework – Private Sector

intMgtOS®25003:

intMgtOS® Reporting Excellence Framework – Non-Profit Sector

intMgtOS®25004:

intMgtOS® Reporting Excellence Framework – Stress Valuation

intMgtOS®26001:

intMgtOS® Knowledge Risk, Flow & Complexity Analysis

intMgtOS®26002:

intMgtOS® Relationship Risk, Flow & Complexity Analysis

intMgtOS®26003:

intMgtOS® Process Risk, Flow & Complexity Analysis

intMgtOS®26004:

intMgtOS® Stress Risk, Flow & Complexity Analysis

intMgtOS®27001:

intMgtOS® Cost Productivity Analysis

124

Intangible Finance Standards

of classifying, financially valuing, managing, and scientifically reporting the value, and value movements, of competitive intangibles (knowledge assets, relationship assets, motivation assets, and responsiveness assets). The focus of intangible management operating standards is the comprehensive identification, structured classification, objective financial valuation, and structured financial reporting of the value of the sources and uses of competitive advantage of an organization (competitive intangibles).

ISO® STANDARDS ISO® is a registered trademark of the International Organization for Standardization. The International Organization for Standardization, or ISO®, is a network of national standards institutes of 148 countries, on the basis of one member per country, with a Central Secretariat in Geneva, Switzerland, that coordinates the system. ISO’s primary focus has been in developing technical standards for engineering, focusing on specific products, materials, and processes. As such, ISO products tend to relate specifically to the manufacturing and engineering environment, especially with a product focus. (For example, office chairs and children’s car seats are among the products covered by ISO standards.) All ISO standards are voluntary standards. Standards can be implemented and adopted for internal benefit only, without the requirement for ISO certification or ISO registration (see below). ISO does not audit, assess, register, or certify management systems, products, services, materials, or personnel. ISO does not endorse certification activities performed by other parties. ISO develops International Standards but does not operate any schemes for assessing conformity with them. ISO does not issue certificates relating to ISO9001, ISO14001, or any of the other thousands of standards it has developed.

ISO9000 (QMS)

AND

ISO14000 (EMS)

Introduced in 1987, the ISO9000 series of standards relates to generic quality process management and quality assurance systems to more comprehensively fulfill customer requirements. ISO9000 is a QMS (quality management system). In 1997, the ISO14000 series was introduced to cover generic environmental management systems to minimize harmful effects on the environment; it is an EMS (environmental management system). ISO9000 and ISO14000 each give organizations a “best practice process” model to emulate internally.

125

intMgtOS® and Other Standards

ISO9000 represents an international consensus on good management practices that can be used to satisfy customer requirements, enhance customer satisfaction, comply with regulatory issues, and engage in continual improvement. Table 6.2 outlines the nature and purpose of each standard in the ISO9000 standards family.1 TABLE 6.2 Standards in the ISO9000 Family Standards and Guidelines

Purpose

ISO 9000:2000, Quality management systems—Fundamentals and vocabulary

Defines the fundamental terms and definitions used in the ISO 9000 family for which you need to avoid misunderstandings in their use.

ISO 9001:2000, Quality management systems—Requirements

Used to assess your ability to meet customer and applicable regulatory requirements and thereby address customer satisfaction. It is now the only standard in the ISO 9000 family against which third-party certification can be carried.

ISO 9004:2000, Quality management systems—Guidelines for performance improvements

Provides guidance for continual improvement of your quality management system to benefit all parties through sustained customer satisfaction.

ISO 19011, Guidelines on Quality and/or Environmental Management Systems Auditing (currently under development)

Provides you with guidelines for verifying the system’s ability to achieve defined quality objectives. You can use this standard internally or for auditing your suppliers.

ISO 10005:1995, Quality management—Guidelines for quality plans

Provides guidelines to assist in the preparation, review, acceptance, and revision of quality plans.

ISO 10006:1997, Quality management—Guidelines for quality in project management

Provides guidelines to help you ensure the quality of both the project processes and the project products.

ISO 10007:1995, Quality management—Guidelines for configuration management

Provides gives you guidelines to ensure that a complex product continues to function when components are changed individually.

ISO/DIS 10012, Quality assurance requirements for measuring equipment—Part 1: Metrological confirmation system for measuring equipment

Gives you guidelines on the main features of a calibration system to ensure that measurements are made with the intended accuracy.

ISO 10012-2:1997, Quality assurance for measuring equipment—Part 2: Guidelines for control of measurement of processes

Provides supplementary guidance on the application of statistical process control when this is appropriate for achieving the objectives of Part 1.

(continues) 1

See http://www.iso.ch/iso/en/iso9000-14000/iso9000/selection_use/iso9000family.html for more information.

126

Intangible Finance Standards

TABLE 6.2

(continues)

Standards and Guidelines

Purpose

ISO 10013:1995, Guidelines for developing quality manuals

Provides guidelines for the development and maintenance of quality manuals, tailored to your specific needs.

ISO/TR 10014:1998, Guidelines for managing the economics of quality

Provides guidance on how to achieve economic benefits from the application of quality management.

ISO 10015:1999, Quality management—Guidelines for training

Provides guidance on the development, implementation, maintenance, and improvement of strategies and systems for training that affects the quality of products.

ISO/TS 16949:1999, Quality systems—Automotive suppliers— Particular requirements for the application of ISO 9001:1994

Sector specific guidance on the application of ISO 9001 in the automotive industry.

ISO Certification and Registration It is the certified assurance by an independent auditing body that an organization’s management system conforms to the requirements specified in an ISO standard. There are more than 750 certification bodies worldwide. ISO certification is made by these organizations and is not controlled by ISO. Conformity Assessment ISO does not assess the quality of the work of certification bodies or the adherence of organizations to standards. To create consumer confidence between customers and suppliers, “third party” conformity assessment services may independently test individual products for conformity to ISO standards. ISO develops voluntary standards and guidelines covering, but itself has no authority to control, conformity assessments. ISO Registration The auditing body then records the certified assurance in its client register, thereby registering the organization as being compliant with ISO standards. ISO Accreditation When a national accreditation body certifies an independent auditing body as having the required competencies to conduct ISO auditing, certification, and registration, the latter is deemed accredited. ISO develops, maintains, and publishes the ISO9000 and ISO14000 standards, but it does not audit or assess

intMgtOS® and Other Standards

127

the management systems of organizations to verify that they have been implemented in conformity with the requirements of the standards. Also, ISO does not issue ISO9001 or ISO14001 certificates.

COMPARING ISO® AND INTMGTOS® intMgtOS® standards are a set of more than 40 specific standards that relate solely and totally to the identification, objective financial measurement, management, and structured financial reporting of nanotime productivity in relation to the application of knowledge assets, relationship assets, motivation assets, and responsiveness assets (competitive intangibles). Where ISO® standards are denoted by the brand name ISO®, intangible management operating standards are denoted by the brand name intMgtOS®. intMgtOS® is not affiliated, or otherwise connected, with ISO®. ISO® does not endorse intMgtOS®, nor does intMgtOS® endorse ISO®. Unlike ISO®, intMgtOS® is not distributed through a network of affiliates. If an organization wishes to acquire intMgtOS® Certified status, it must subscribe as a corporate member. It is also advisable for a number of staff to commit to qualifying as Certified intMgtOS® Intangible Analysts, so that they will better understand how to manage and exploit competitive intangibles. Becoming intMgtOS® Intangible Analysts allows senior executives, finance specialists, accounting specialists, brand valuation specialists, knowledge managers, intellectual capital executives, balanced scorecard consultants, management consultants, and other managers to form a wide range of new management reports and deliver a wide range of new services to their organizations. Online eLearning certification, available from www.StandardsInstitute. org, qualifies professionals to: 1. Use the registered trademark intMgtOS® when forming intangible management reports to prove that those statements are formed in accordance with intangible management operating standards; 2. Use sophisticated expert systems and software to generate and interpret intMgtOS® intangible management reports; 3. Use their certification number in the True & Fair Value Certification section of the intangible management report; 4. Use standards-approved intMgtOS® logos in their reports; 5. Generate the intMgtOS® certification number as validation that the report has been formed in accordance with intangible management operating standards; 6. Use the registered trademark in their capacity as executives or consultants, and their certification numbers in promotional materials to promote their expertise; and

128

Intangible Finance Standards

7. Prove that they have a professional level of knowledge and expertise that is not possessed by those without the certification. The registered trademark intMgtOS® is proof that intangible management operating standards and rigorous quality standards have been applied in the development of intangible management reports.

ISO® COSTS For ISO9000 certification, ISO costs per employee range from US $4,500 to as low as US $1,000 per employee (depending on the size of the organization). An average figure of around $3,000 per employee is appropriate in most cases. It typically takes several years to implement ISO9000.

INTMGTOS®

ENTERPRISE CERTIFICATION

“Quality is abundant. Time is the new scarcity.” George Gilder

intMgtOS® Enterprise Certification allows organizations to manage by value and cost, not just cost. Certification allows organizations to report and measure value so that the productivity of costs (cost quality) can be determined for the first time on an enterprise-wide basis. When an initiative or action is undertaken, there are costs and benefits. A reliance on accounting practices defines benefits as “cost reductions.” Cost reductions are financial benefits. However, other benefits exist. Before intMgtOS® Enterprise Certification, non-financial (intangible) benefits were qualitatively referred to. Intangible benefits result from increases in productivity, effectiveness, results, knowledge, relationships (service, satisfaction, etc.), quality, and decreases in risk. Using the Intangible Management® Reporting Excellence Framework, the financial value of benefits (intangible benefits) can now be quantified in hard terms and reported in a structured and systematic manner in accordance with international intangible standards. This new perspective allows Cost ROI, Value ROI, and Intangible Management ROI to be determined. To gain intMgtOS® enterprise certification, the Intangible Management® Reporting Excellence Framework is implemented throughout the organization. This framework is used to transform white-collar workers into gold-collar workers and facilitate real time cost and value reporting. It is by combining knowledge assets, relationship assets, motivation assets, and responsiveness assets that organizations create value today. Today, it is the use of these four intangible value drivers that leads to the

intMgtOS® and Other Standards

129

creation, delivery, and continuity of value within public-sector and privatesector organizations. The Intangible Management® Reporting Excellence Framework gives private and public sector organizations a robust, intellectually sound method through which executives can systematically and scientifically manage, report, and financially measure value creation throughout all divisions of their organization. The result of the process is three intangible management reports that supplement existing management reports. The Intangible Management® Reporting Excellence Framework outlines a structured and scientific management reporting system that allows knowledge assets, relationship assets, motivation assets, and responsiveness assets to be reported and valued in a structured, consistent, and scientific manner under an accounting-like system that focuses specifically on the identification, classification, valuation, and reporting of value. These reports facilitate higher quality management, more effective decisions, and a structured approach to initiatives that allows managers to move from understanding “the cost of everything and the value of nothing” to a more realistic perspective of “knowing the costs and the value of everything.” The Intangible Management® Reporting Excellence Framework is shown above and below.

130

Intangible Finance Standards

The Intangible Management® Reporting Excellence Framework assists in transforming employees from white-collar workers into gold-collar workers. Gold-collar workers are more akin to internal management consultants than employees. Intangible management operating standards define them as: Gold-collar workers use knowledge, technology, and skills to manage the effectiveness, potential, value, and impact of nanotime relating to knowledge assets, relationship assets, motivation assets, and responsiveness assets so as to be rewarded for increases in operational results. Such workers convert potential performance improvements into increased operational results through strict adherence to intangible management operating standards and report value movements through the Intangible Management® Reporting Excellence Framework. (intMgtOS®26001.D1)

Various types of intMgtOS® software must be deployed throughout the organization, and a certain number of staff must be certified as intMgtOS® Intangible Analysts to enable organizational certification. intMgtOS® Real Time Reporting Private and public sector organizations manage two fundamental resources: time and money. Before money is allocated, decisions must be made. Time is

intMgtOS® and Other Standards

131

required for decisions. After financial allocations have been made, time is again required for action, as well as the creation and communication of value. Time is the platform upon which service, satisfaction, reputation, loyalty, and ultimately actual results are ultimately built. As time is money and money is time, an undeniable linkage exists between time transactions and financial transactions. Nanotime transactions are the basis through which decisions and actions involving knowledge assets, relationship assets, motivation assets, and responsiveness assets can be identified, managed, classified, and linked to actual operational performance. By understanding how decisions shape actions and performance, it becomes possible to show how financial performance was created through nanotime transactions. intMgtOS® Real Time Reporting software is useful on a daily basis in helping to deploy organizational strategy throughout an organization, manage the effectiveness of that strategy, control intangible costs, and financially report on how that strategy is being implemented in each part of the organization’s structure with respect to the operational effectiveness, operational potential, operational continuity, and the results generated from the actual use of knowledge assets, relationship assets, motivation assets, and responsiveness assets. Software captures feedback from individual employees and grosses that up to a managerial, departmental, divisional, and organizational levels form an organizational picture of the company’s operational strategic performance in nanotime terms and financial terms. intMgtOS® Real Time Reporting allows employees to be assessed and rewarded on their ability to contribute to strategy, their ability to control and manage results, potential, effectiveness, and competitive costs, and their ability to enhance the sustainable competitive advantage of the firm. All data are collected in strict accordance with intangible management operating standards. At the heart of the intMgtOS® Real Time Reporting system is the operational financial valuation of effectiveness and potential and the assessment of the quality and continuity of actual operational effectiveness. To ensure that measurement costs do not outweigh the benefits of measurement, the intMgtOS® Real Time Reporting system was designed to be simple and easy to use. The main purpose of this software is to provide a powerful view of operational effectiveness management, strategic effectiveness, and audited intangible management reports that can be used to increase the quality of operational decision making and quality of Annual Reports. The diagram below illustrates how organizations can better manage the effectiveness of their operations:

132

Intangible Finance Standards

Each organization manages its structural integrity through selecting its mission, vision, and objectives. The mission and vision come from meeting market requirements and assessing how technological impacts, economic impacts, social impacts, and political impacts influence the way the organization conducts its operations. The policy and planning (strategic) stage of the organization is where organizations limit decision making on their ability to deliver results in accordance with perceived matches in intangible demand (iD: demand for attention from the market) and intangible supply (iS: supply of attention to the market). Research and information is required to make decisions that minimize risk and maximize expected benefits. Initiatives are then formed that combine knowledge assets, relationship assets, motivation assets, and responsiveness assets into operational actions. The actual benefits that flow from this process are termed the results of the organization. The return of the organization depends on the effectiveness of strategy. More and more organizations are seeking to make their strategic infrastructures resilient. This is achieved through innovation and empowerment. The effectiveness of intangible strategy is managed through responsiveness, which is measured, valued, and reported through the Intangible Management® Reporting Excellence Framework.

intMgtOS® and Other Standards

133

intMgtOS® eLearning Certification Managing organizational productivity in the Intangible Management Economy requires new skills, new abilities, and new knowledge.2 Certified intMgtOS® online learning courses developed by the Intangible Management Standards Institute (www.StandardsInstitute.org) are designed to transfer practical skills and knowledge regarding how the operational performance of knowledge assets, relationship assets, motivation assets, and responsiveness assets (competitive advantage) can be systematically identified, consistently classified, objectively financially valued, systematically reported, and holistically managed—a skill set all Intangible Management Economy managers, executives, and employees must understand and implement to remain relevant to their organizations. There are four levels of certification within the Certified intMgtOS® course: (1) Practitioner, (2) Executive, (3) Management Consultant, and (4) Intangible Analyst. To progress to a higher level of certification, one needs to attain the level of certification below (for instance, you must do 1 before 2). Each module is self-contained and taught from a practical, hands-on perspective. The specific modules for each course are as follows: Certified intMgtOS® Practitioner 1. 2. 3. 4. 5. 6.

intMgtOS® Foundation Standards intMgtOS® Nanotime Manufacturing intMgtOS® Intangible Transaction Management intMgtOS® Cost Quality Management intMgtOS® Motivation & Responsiveness Asset Management intMgtOS® Intangible Management Reporting Excellence Framework – Introduction

Certified intMgtOS® Executive 1. 2. 3. 4. 5. 6. 7.

2

intMgtOS® Intangible Strategic Management intMgtOS® Effectiveness Valuation & Reporting intMgtOS® Intangible Management Reporting intMgtOS® Intangible Return on Investment (ROI) Analysis intMgtOS® Intangible Economics & Intangible Strategy intMgtOS® Sales & Purchase Benefit Analysis intMgtOS® Intangible Management Reporting Excellence Framework – Intermediate

The recommended texts for intMgtOS® certification are this book and my earlier book, both available from www.StandardsInstitute.org.

134

Intangible Finance Standards

Certified intMgtOS® Management Consultant 1. 2. 3. 4. 5.

intMgtOS® Intangible Cost Reduction intMgtOS® Intangible Change Management intMgtOS® Intangible Risk Management intMgtOS® Knowledge Reengineering intMgtOS® Intangible Management Reporting Excellence Framework – Advanced – Private Sector Analysis 6. intMgtOS® Intangible Management Reporting Excellence Framework – Advanced – Public Sector Analysis Certified intMgtOS® Intangible Analyst 1. 2. 3. 4. 5. 6.

intMgtOS® intMgtOS® intMgtOS® intMgtOS® intMgtOS® intMgtOS®

Intangible Finance Analysis Intangible Incentive & Remuneration Management Competitive Value Benchmarking Cost Quality Analysis Artificial Employment Analysis Market Value Management

Discounts on certification modules may be available to individuals or corporations when they join as Associate Members at www.StandardsInstitute.org. Figure 6.1 illustrates the structure of the institute’s website.

Website Overview Membership (Free, Associate, Member, Assoc. Fellow, Fellow, Senior Fellow, Corporate, Client)

Certification

Accreditation

Consulting

Resources

e-Courses

Reporting

Services

Knowledge Base

Benchmarking

Experts

Software

Community Newsletters

FIGURE 6.1 Structure of www.StandardsInstitute.org Website.

135

intMgtOS® and Other Standards

The relationships between certification modules are represented in Figure 6.2.

intMgtOS® eLearning Certification True Success Management

Knowledge Reengineering

Intangible Risk Management

Intangible Cost Reduction

Intangible Change Management

Emotional Leadership

ROI Analysis

Cost Justification

Cost Quality Management

Int. Corporate Reporting

Sales Benefit Analysis

Intangible Transaction Mgt

Productivity Reporting

Purchasing Benefit Analysis

Nanotime Manufacturing

Productivity Valuation

Operational Brand Mgt

Foundation Standards

Competitive Advantage

Competitive Analysis

Competitive Benchmarking

Share Price Analysis

Incentive Analysis

Value Benchmarking

Cost Management

Productivity Management

Artificial Employment

FIGURE 6.2 intMgtOS® Certification Process.

Market Value Management

136

Intangible Finance Standards

intMgtOS® Membership There are three types of intMgtOS membership—professional, corporate, and client. intMgtOS® Professional Membership Professional membership (personal in form) is for individual professionals seeking to extend their skills, qualifications, and competencies. Professionals interested in the area of intangibles, intangible management, and intangible standards join as Associates (students may join at a lower charge). (See Table 6.3.) To gain higher qualification levels, professionals must acquire appropriate intMgtOS® certification by passing the eLearning courses (assessment by practical application of intMgtOS®) (see Figure 6.3 and Table 6.4). TABLE 6.3 intMgtOS® Professional Membership—Annual Fees Professional Certification Level

Annual Membership $US

Student

intMgtOS® Certification Prerequisites

95

-none-

Associate

145

-none-

Member

205

intMgtOS® Practitioner

Associate Fellow

235

intMgtOS® Executive

Fellow

295

intMgtOS® Management Consultant

Senior Fellow

345

intMgtOS® Intangible Analyst

Membership (Free, Student, Associate, Member, Assoc. Fellow, Fellow, Senior Fellow, Corporate, Client)

Register

Associate, or Student

Member

Assoc. Fellow

Fellow

Free

Payment

Pass

Pass

Pass

Pass

Payment

Payment

Payment

Payment

Authorize

Limited Access

Limited Access

Snr.

Fellow

Practitioner

Executive

Mgt Cons

Analyst

eLearning

eLearning

eLearning

eLearning

FIGURE 6.3 intMgtOS® Membership Process.

137

intMgtOS® and Other Standards TABLE 6.4 intMgtOS® Corporate Membership Annual Fees Annual Gross Revenue ($US)

Annual Membership ($US)

Up to $ 50 m

$

8,333

$

100 m–$ 150 m

$

16,667

$

150 m–$ 250 m

$

25,000

$

250 m–$ 500 m

$

41,667

$

500 m–$ 750 m

$

83,333

$

750 m–$ 1,000 m

$

125,000

$ 1,000 m–$ 2,000 m

$

166,667

$ 2,000 m–$ 5,000 m

$

333,333

$ 5,000 m–$10,000 m

$

833,333

$ 10,000 m–$25,000 m

$ 1,666,667

$ 25,000 m–$50,000 m

$ 4,166,667

$ 50,000 m–$75,000 m

$ 8,333,333

$ 75,000 m +

$ 12,500,000

Source: 2004 ANSI Membership Application.

intMgtOS® Corporate Membership Corporate membership gives access to online expert systems that measure effectiveness and potential of knowledge assets, relationship assets, motivation assets, and responsiveness assets and form intMgtOS® intangible management reports for the use of the corporate member. Corporate members gain access to specialized custom-designed systems that make it possible to more accurately estimate intangible costs and intangible benefits, which can then be incorporated into the management process. Corporate membership allows management to estimate the actual performance and performance improvement potential of knowledge assets, relationship assets, motivation assets, and responsiveness assets by employee, manager, department, division, and organization. Intangible management® reports formed in accordance with the Intangible Management® Reporting Excellence Framework assist the organization in assessing how the quality of its competitive advantage compares to that of competitors. (See Figure 6.4.) intMgtOS® Client Membership Client membership gives consultants and clients access to intMgtOS® support tools and services to assist them in intMgtOS® client consulting.

138

Intangible Finance Standards

FIGURE 6.4 intMgtOS® Corporate Membership.

Client membership is only available when clients contract with intMgtOS® Consultants. At this point the website provides a framework for clients and customers to leverage intMgtOS® practices and knowledge—including project management and client feedback modules. The purpose of this framework is to provide an infrastructure to intMgtOS® Consultants and clients so that value can be better managed and quality standards are adhered to. (See Figure 6.5.)

ANSI® STANDARDS The American National Standards Institute (ANSI®3) mission is to “enhance both the global competitiveness of U.S. business and the U.S. quality of life by promoting and facilitating voluntary consensus standards and conformity assessment systems, and safeguarding their integrity.”4 Its purpose is to work with a wide variety of organizations in the development of voluntary national consensus standards. (ANSI is a registered trademark of the American National Standards Institute.) ANSI® has five classes of members for organizations interested in the development of voluntary standards: 3

ANSI is a registered trademark of the American National Standards Institute. http://www.ansi.org/about_ansi/overview/overview.aspx?menuid=1

4

intMgtOS® and Other Standards

139

FIGURE 6.5 intMgtOS® Client Consulting.

1. 2. 3. 4. 5.

Company members Educational members Government members Organizational members International members

ANSI® COSTS As of January 1, 2003, full membership in ANSI was $25,000 for members with revenue over $1 billion per year, and $2,995 for members with revenue under $1 billion per year.

ANSI® BENEFITS Full members gain participation rights (voting rights not guaranteed) to a variety of committees. Entry-level membership (US $495) allows members to participate in the committees they select at either information (read only) or participation level. See Table 6.5.

140

Intangible Finance Standards

TABLE 6.5 ANSI® Member Benefits Committee

Information

Participation

Patent Group

$ 5,000

$10,000*

National Policy Committee

$ 2,500

$ 7,500*

International Policy Committee

$ 2,500

$ 7,500*

Conformity Assessment Policy Committee

$ 2,500

$ 7,500*

International Conformity Assessment Committee

$ 2,500

$ 7,500*

ANSI ISO Council

$ 1,600

$ 5,000*

Informational Package—all of the above

$ 6,500

$ N/A

U.S. National Committee of the IEC

$ N/A

$ 5,000

Regional Standing Committees—All

$ N/A

$ 5,000*

Regional Standing Committees—Individual

$ N/A

$ 2,500

*Included with Full Membership. Source: 2004 ANSI Membership Application.

(Note that as of the date of the writing of this book, ANSI did not possess any standards dealing with the financial valuation and structured financial reporting of knowledge assets, relationship assets, motivation assets, and responsiveness assets.)

CHAPTER

7

Advances in Technical Analysis

Due to the problems inherent in accounting measures not reflecting the true value of publicly traded firms, many investors have turned to technical analysis as a way of “confirming” their opinion. Technical analysis is invaluable. Price and volume movements are the footprints of investor expectations, and how price and volume move can explain a tremendous amount about what investors “feel” about a stock—bullish, bearish, or undecided. Hence, the purpose of intangible finance is to extend the parameters of technical analysis. Intangible finance offers new insights into how to look at the economy, sectors, and industries from a completely new perspective. Where technical analysis has been specifically focused on a single security (or ETF), intangible finance analysis focuses on sectors, industries, and the whole economy. By using traditional technical analysis with intangible finance analysis, investors can better gauge the health of the sectors and industries their investments are in. They can better dissect firm performance based on new ways of classifying different types of firms. 141

142

Intangible Finance Standards

VALUE TYPES According to intangible finance, firms can be: Value Creating A value creating firm is one such that investors will pay more for ownership in the firm than the firm’s accounting (book) value. Value creating firms have positive intangible value. (intMgtOS® 6001.D53) Value Destroying A value destroying firm is one such that investors will pay less for ownership in the firm than the firm’s accounting (book) value. Value destroying firms have negative intangible value. (intMgtOS® 6001.D54) Value Unaccountable A value unaccountable firm is one such that investors cannot determine the intangible value of the firm, due to insufficient financial information. Value unaccountable firms have undeterminable intangible value. (intMgtOS® 6001.D55)

Intangible value is a leading sentiment indicator in the market. The greater the amount of intangible value a stock has, the more bullish it is for the firm. The lower the amount of intangible value a stock has, the more bearish it is for the firm.

POSITIVE INTANGIBLE VALUE Companies with positive intangible value have investor attention. Companies with investor attention are potential long (buy low sell high) investments. Investor attention is the positive amount of aggregate funds investors are prepared to invest in a stock, relative to that stock’s book value. As investor value exceeds book value, positive intangible value is created. The amount of positive intangible value, expressed as a percentage, is a proxy for investor attention. (intMgtOS®6001.D57)

On February 6, 2004, there were 5422 investor attention firms out of 8006 firms (67.72%). See Table 7.1.

NEGATIVE INTANGIBLE VALUE Companies with negative intangible value exhibit investor disgust. Companies with investor disgust are potential short (sell high buy low) investments. Investor disgust is the negative amount of aggregate funds investors are prepared to invest in a stock, relative to that stock’s book value. As investor value falls short of book value, negative intangible value is created. The amount of negative intangible value, expressed as a percentage, is a proxy for investor disgust. (intMgtOS®6001.D58)

143

Advances in Technical Analysis TABLE 7.1 Top 100 Value Creating Firms

Rank

Name

Ticker

Market Cap ($M)

Tot. BV ($M)

Tot. IV ($M)

IA% 78.24%

1

General Electric Company

GE

333,156

72,488

260,668

2

Pfizer Inc.

PFE

296,485

68,299

228,186

76.96%

3

Microsoft Corporation

MSFT

291,017

69,076

221,941

76.26%

4

Wal-Mart Stores, Inc.

WMT

249,194

42,172

207,022

83.08%

5

Exxon Mobil Corporation

XOM

266,904

83,486

183,418

68.72%

6

Intel Corporation

INTC

201,708

37,965

163,743

81.18%

7

Citigroup Inc.

C

254,287

96,871

157,416

61.90%

8

Cisco Systems, Inc.

CSCO

170,789

27,752

143,036

83.75%

9

Int’l Business Machines Corp.

IBM

170,219

28,056

142,162

83.52%

10

Johnson & Johnson

JNJ

160,725

25,741

134,984

83.98%

11

America Movil S.A. de C.V.

AMX

209,955

86,401

123,554

58.85%

12

American Int’l Group, Inc.

AIG

188,242

68,179

120,063

63.78%

13

The Procter & Gamble Co.

PG

132,290

17,017

115,273

87.14%

14

The Coca-Cola Company

KO

125,003

13,525

111,477

89.18%

15

GlaxoSmithKline plc (ADR)

GSK

134,823

30,111

104,712

77.67%

16

Merck & Co., Inc.

MRK

108,446

15,259

93,187

85.93%

17

TOTAL S.A. (ADR)

TOT

110,886

19,000

91,886

82.86%

18

Altria Group, Inc.

MO

111,268

22,838

88,429

79.47%

19

Novartis AG (ADR)

NVS

116,571

32,202

84,369

72.38%

20

Nokia Corporation (ADR)

NOK

99,975

19,259

80,715

80.74%

21

Dell Inc.

DELL

84,366

5,865

78,501

93.05%

22

PepsiCo, Inc.

PEP

86,198

11,792

74,406

86.32%

23

Bank of America Corporation

BAC

119,269

47,918

71,351

59.82%

24

AstraZeneca PLC (ADR)

AZN

84,463

13,222

71,241

84.35%

25

Eli Lilly & Co.

LLY

80,232

9,985

70,246

87.55%

26

Roche Holding AG (ADR)

RHHBY

86,891

16,895

69,996

80.56%

27

Verizon Communications

VZ

102,592

33,428

69,163

67.42%

28

Berkshire Hathaway Inc.

BRK.A

138,540

71,782

66,757

48.19%

29

United Parcel Service

UPS

79,596

13,627

65,969

82.88%

30

Amgen, Inc.

AMGN

83,261

19,390

63,871

76.71%

31

Oracle Corporation

ORCL

70,782

7,266

63,516

89.74%

32

Wells Fargo & Company

WFC

96,894

33,950

62,944

64.96%

33

The Home Depot, Inc.

HD

82,659

22,280

60,379

73.05%

34

Abbott Laboratories

ABT

69,366

11,866

57,500

82.89%

35

France Telecom (ADR)

FTE

62,327

5,786

56,541

90.72% (continues)

144

Intangible Finance Standards

TABLE 7.1

(continues)

Rank

Name

Ticker

Market Cap ($M)

Tot. BV ($M)

Tot. IV ($M)

IA% 61.40%

36

ChevronTexaco Corporation

CVX

91,310

35,241

56,069

37

3M Company

MMM

61,945

7,786

54,159

87.43%

38

Royal Dutch Petroleum

RD

98,050

44,067

53,982

55.06%

39

American Express Company

AXP

68,250

15,110

53,141

77.86%

40

SAP AG (ADR)

SAP

52,896

1,182

51,714

97.76%

41

UBS AG (NYSE)

UBS

79,846

28,972

50,874

63.72%

42

Aventis (ADR)

AVE

62,903

13,375

49,528

78.74%

43

Medtronic, Inc.

MDT

57,270

8,172

49,098

85.73%

44

Mitsubishi Tokyo Fin. Group

MTF

48,107

29

48,079

99.94%

45

SBC Communications Inc.

SBC

86,144

38,286

47,858

55.56%

46

Sanofi-Synthelabo (ADR)

SNY

50,872

3,471

47,401

93.18%

47

Wyeth

WYE

55,829

8,673

47,156

84.46%

48

PetroChina Company Limited

PTR

88,281

41,447

46,835

53.05%

49

Telefonica Moviles, S.A.

TEM

50,884

4,634

46,250

90.89%

50

Bristol-Myers Squibb Co.

BMY

55,948

10,064

45,884

82.01%

51

Deutsche Telekom AG (ADR)

DT

84,237

39,382

44,856

53.25%

52

Genentech, Inc.

DNA

50,238

6,211

44,026

87.64%

53

Siemens AG (ADR)

SI

73,475

30,717

42,758

58.19%

54

Texas Instruments

TXN

54,240

11,863

42,376

78.13%

55

Anheuser-Busch Companies

BUD

42,368

2,717

39,651

93.59%

56

eBay Inc.

EBAY

43,772

4,890

38,882

88.83%

57

QUALCOMM, Inc.

QCOM

46,447

7,955

38,492

82.87%

58

Morgan Stanley

MWD

60,867

23,117

37,750

62.02%

59

United Technologies

UTX

48,610

11,736

36,874

75.86%

60

E.I. DuPont de Nemours

DD

44,307

8,600

35,707

80.59%

61

BellSouth Corporation

BLS

55,092

19,746

35,346

64.16%

62

Taiwan Semiconductor Mfg.

TSM

44,742

9,485

35,257

78.80%

63

The Gillette Company

G

37,403

2,228

35,175

94.04%

64

U.S. Bancorp

USB

54,272

19,452

34,820

64.16%

65

Hewlett-Packard Company

HPQ

72,502

37,821

34,682

47.84%

66

Comcast Corporation

CMCSA

75,136

41,238

33,898

45.12%

67

Societe Generale Group

SCGLY

37,247

3,921

33,326

89.47%

68

Lowe’s Companies, Inc.

LOW

42,219

9,690

32,529

77.05%

69

Allianz AG (ADR)

AZ

35,107

3,347

31,760

90.47%

70

Boston Scientific Corp.

BSX

34,470

2,767

31,703

91.97% (continues)

145

Advances in Technical Analysis TABLE 7.1

(continues)

Rank

Name

Ticker

Market Cap ($M)

Tot. BV ($M)

Tot. IV ($M)

IA%

71

Unilever N.V. (ADR)

UN

39,793

8,278

31,515

79.20%

72

Schlumberger Limited

SLB

35,841

5,892

29,949

83.56%

73

The Dow Chemical Company

DOW

38,727

9,144

29,582

76.39%

74

UnitedHealth Group Inc.

UNH

34,682

5,108

29,574

85.27%

75

Applied Materials, Inc.

AMAT

37,631

8,088

29,544

78.51%

76

Wachovia Corporation

WB

61,231

32,329

28,902

47.20%

77

Kraft Foods Inc.

KFT

57,343

28,629

28,715

50.07%

78

Merrill Lynch & Co., Inc.

MER

53,962

25,299

28,663

53.12%

79

Colgate-Palmolive Company

CL

29,441

890

28,551

96.98%

80

Nortel Networks Corporation

NT

31,799

3,654

28,145

88.51%

81

Tyco International Ltd.

TYC

55,955

27,866

28,089

50.20%

82

Honda Motor Co., Ltd. (ADR)

HMC

40,965

13,046

27,919

68.15%

83

Walgreen Company

WAG

35,144

7,377

27,767

79.01%

84

The Goldman Sachs Group

GS

47,981

20,444

27,538

57.39%

85

The Boeing Company

BA

35,501

8,120

27,381

77.13%

86

Yahoo! Inc.

YHOO

30,559

4,178

26,381

86.33%

87

ING Groep N.V. (ADR)

ING

53,620

27,315

26,305

49.06%

88

Target Corporation

TGT

35,948

10,265

25,683

71.44%

89

Motorola, Inc.

MOT

37,826

12,151

25,675

67.88%

90

Canon Inc. (ADR)

CAJ

43,133

17,656

25,477

59.07%

91

Petroleo Brasileiro S.A. (ADR)

PBR

31,801

6,656

25,145

79.07%

92

Forest Laboratories, Inc.

FRX

27,620

2,764

24,856

89.99%

93

Nextel Communications

NXTL

29,621

4,951

24,670

83.29%

94

Fifth Third Bancorp

FITB

33,191

8,524

24,667

74.32%

95

First Data Corporation

FDC

28,336

4,140

24,197

85.39%

96

Banco Santander Central

STD

54,407

30,721

23,686

43.53%

97

Kimberly-Clark Corp.

KMB

30,197

6,556

23,641

78.29%

98

Koninklijke Philips Electronics

PHG

40,333

16,722

23,611

58.54%

99

The Walt Disney Company

DIS

47,759

24,170

23,590

49.39%

Carnival Corporation

CCL

37,826

14,269

23,557

62.28%

100

Source: Reuters Inc., Friday, February 6, 2004.

146

Intangible Finance Standards

Investor disgust must not be confused with potential share price returns. Depending on the stage of the business cycle, it is possible for negative intangible value firms to generate higher-percentage annual share price returns than investor attention stocks. Investor disgust is a proxy for the risk involved with investing in a stock. The greater the amount of investor disgust, the higher the probability that the firm’s share price could fall dramatically, even by 100%. Purchasing investor disgust stocks is a risky strategy, but can pay off handsomely when economies emerge from recessions (however, significant risk is always present). On February 6, 2004, there were 1154 investor disgust firms out of 8006 firms (14.14%). See Table 7.2. TABLE 7.2 Top 100 Value Destroying Firms

Rank

Name

Ticker

Market Cap ($M)

Tot. BV ($M)

Tot. IV ($M)

ID%

1

Companhia Paranaense

ELP

1,073

1,700,046 (1,698,973)

-99.87%

2

China Telecom Corporation

CHA

29,951

1,613,727 (1,583,777)

-96.36%

3

Unibanco-Uniao de Banco

UBB

6,235

1,133,564 (1,127,330)

-98.91%

4

Companhia Siderurgica

SID

5

BP p.l.c. (ADR)

BP

3,945

746,049

(742,104)

-98.95%

175,388

439,569

(264,181)

-42.96%

6

Fomento Economico

FMX

4,761

190,907

(186,146)

-95.13%

7

mmO2 p.l.c. (ADR)

OOM

13,742

187,736

(173,993)

-86.36%

8

Sinopec Shanghai Petro

SHI

3,283

176,327

(173,043)

-96.34%

9

Hitachi, Ltd. (ADR)

HIT

21,960

194,338

(172,378)

-79.69%

10

Mitsui & Co., Ltd. (ADR)

MITSY

11,924

173,308

(161,384)

-87.13%

11

HSBC Holdings plc (ADR)

HBC

149,380

307,366

(157,986)

-34.59%

12

Huaneng Power

HNP

10,328

148,872

(138,544)

-87.03%

13

Telefonos de Mexico, S.A.

TMX

20,985

141,935

(120,950)

-74.24%

14

Shell Transport & Trading

SC

64,128

177,312

(113,184)

-46.88%

15

Grupo Televisa, S.A. (ADR)

TV

6,247

118,872

(112,626)

-90.01%

16

Telecom Italia S.p.A. (ADR)

TI

91,976

203,623

(111,646)

-37.77%

17

Singapore Telecom

SGTJY

2,273

100,131

(97,858)

-95.56%

18

China Convergent Corp.

CVNGY

19

Grupo Financiero

GFBVY

16

95,977

(95,961)

-99.97%

9,876

105,064

(95,188)

-82.82%

20

OAO Tatneft (ADR)

TNT

2,443

96,957

(94,514)

-95.08%

21

CNOOC Limited (ADR)

CEO

16,543

107,007

(90,464)

-73.22%

22

WorldCom Group

WCOEQ

89

88,885

(88,796)

-99.80% (continues)

147

Advances in Technical Analysis TABLE 7.2

Rank 23

(continues)

Name

Ticker

Market Cap ($M)

Tot. BV ($M)

Tot. IV ($M)

44,624

126,990

(82,366)

ID% -47.99%

Enel S.p.A. (ADR)

EN

24

Brilliance China Automotive

CBA

1,861

79,306

(77,446)

-95.42%

25

Chung Hwa Telecom Co.

CHT

15,388

89,674

(74,286)

-70.71%

26

China Eastern Airlines

CEA

873

74,057

(73,184)

-97.67%

27

Empresa Nacional

EOC

3,262

76,086

(72,825)

-91.78%

28

Corus Group plc (ADR)

CGA

3,263

70,030

(66,766)

-91.09%

29

Sharp Corporation (ADR)

SHCAY

18,581

84,612

(66,031)

-63.99%

30

The News Corporation

NWS

47,814

113,170

(65,356)

-40.60%

31

Yanzhou Coal Mining Co.

YZC

2,927

63,024

(60,097)

-91.12%

32

EDP Electricidade de

EDP

8,148

67,618

(59,470)

-78.49%

33

Guangshen Railway Co. Ltd

GSH

1,299

60,303

(59,004)

-95.78%

34

National Australia Bank Ltd.

NAB

35,389

93,820

(58,431)

-45.22%

35

Grupo IMSA, S.A. DE C.V.

IMY

1,123

57,166

(56,043)

-96.15%

36

Vodafone Group Plc (ADR)

VOD

166,562

221,787

(55,225)

-14.22%

37

Barclays PLC (ADR)

BCS

61,555

116,306

(54,751)

-30.78%

38

TeliaSonera AB (ADR)

TLSN

23,965

76,566

(52,601)

-52.32%

39

EganaGoldpfeil (Holdings)

EGFLY

248

50,279

(50,032)

-99.02%

40

China Southern Airlines

ZNH

1,542

49,455

(47,913)

-93.95%

41

Assurant, Inc.

AIZ

3,811

50,817

(47,006)

-86.05%

42

China Mobile (Hong Kong)

CHL

62,123

105,186

(43,063)

-25.74%

43

LVMH Moet Hennessy L.V.

LVMUY

1,441

43,923

(42,483)

-93.65%

44

LM Ericsson (ADR)

ERICY

42,343

84,249

(41,905)

-33.10%

45

Signet Group plc (ADR)

SIGY

3,201

38,540

(35,339)

-84.66%

46

British Airways plc (ADR)

BAB

5,813

39,227

(33,414)

-74.19%

47

International Power plc

IPR

2,682

34,475

(31,793)

-85.56%

48

PT Telekomunikasi

TLK

8,634

39,378

(30,744)

-64.04%

49

Westpac Banking

WBK

22,632

51,908

(29,276)

-39.28%

50

Madeco S.A. (ADR)

MAD

297

29,354

(29,057)

-98.00%

51

BT Group plc (ADR)

BTY

28,614

57,434

(28,821)

-33.49%

52

Toyota Motor Corporation

TM

116,721

144,815

(28,094)

-10.74%

53

Jilin Chemical Industrial

JCC

694

28,102

(27,408)

-95.18%

54

J Sainsbury plc (ADR)

JSNSY

10,463

37,703

(27,240)

-56.56%

55

Sinopec Beijing Yanhua

BYH

1,147

27,068

(25,921)

-91.87%

56

ANZ Banking (ADR)

ANZ

20,832

44,437

(23,605)

-36.17% (continues)

148

Intangible Finance Standards

TABLE 7.2

Rank 57

(continues)

Name

Ticker

TV Azteca, S.A. de C.V.

TZA

58

WPP Group plc (ADR)

59

Scottish Power UK plc

Market Cap ($M)

Tot. BV ($M)

Tot. IV ($M)

ID% -88.82%

1,473

24,894

(23,421)

WPPGY

13,037

35,445

(22,409)

-46.22%

SPI

12,399

34,730

(22,332)

-47.38%

60

CEMEX S.A. de C.V. (ADR)

CX

9,238

31,274

(22,036)

-54.39%

61

Mobile TeleSystems OJSC

MBT

9,818

31,227

(21,409)

-52.16%

62

Controladora Comercial

MCM

1,262

22,444

(21,182)

-89.35%

63

The Furukawa Electric Co.

FUWAY

2,573

22,570

(19,997)

-79.53%

64

Ricoh Company Ltd. (ADR)

RICOY

13,818

33,604

(19,786)

-41.72%

65

Hanson PLC

HAN

5,865

25,455

(19,590)

-62.55%

66

AU Optronics Corp (ADR)

AUO

6,171

25,564

(19,393)

-61.11%

67

Sanyo Electric Co., Ltd.

SANYY

9,856

28,535

(18,679)

-48.65%

68

Fujitsu Limited (ADR)

FJTSY

12,412

30,799

(18,387)

-42.55%

69

Suprema Specialties

CHZEQ

73

18,209

(18,136)

-99.20%

70

Masisa S.A. (ADR)

MYS

357

18,085

(17,727)

-96.12%

71

BG Group plc (ADR)

BRG

18,623

35,840

(17,218)

-31.61%

6,971

23,374

(16,403)

-54.05%

180

16,323

(16,143)

-97.82%

72

Coles Myer Ltd. (ADR)

CM

73

OMV Aktiengesellschaft

OMVKY

74

Lloyds TSB Group plc

LYG

48,551

63,904

(15,353)

-13.65%

75

Aracruz Celulose S.A.

ARA

3,437

18,194

(14,757)

-68.22%

76

Sadia S.A. (ADR)

SDA

1,032

15,403

(14,371)

-87.44%

77

Tenaris S.A. (ADR)

TS

3,958

18,248

(14,290)

-64.35%

78

Rolls-Royce Group plc

RYCEY

5,352

18,533

(13,180)

-55.18%

79

Kobe Steel, Ltd. (ADR)

KBSTY

2,201

14,854

(12,652)

-74.19%

80

Kubota Corporation (ADR)

KUB

5,420

17,711

(12,291)

-53.14%

81

Chartered Semiconductor

CHRT

2,616

14,747

(12,131)

-69.87%

82

Asia Pulp & Paper

APUUY

83

Vina Concha y Toro S.A.

VCO

27

10,941

(10,913)

-99.50%

584

11,415

(10,831)

-90.27%

84

Telstra Corporation (ADR)

TLS

48,301

58,264

(9,963)

-9.35%

85

Indonesian Satellite Corp

IIT

1,926

11,766

(9,840)

-71.87%

1,873

11,607

(9,734)

-72.21%

516

10,027

(9,510)

-90.20%

86

Mayne Group Limited

MAYNY

87

Grupo Aeroportuario Del

ASR

88

Enron Corp.

ENRNQ

89

Quinenco S.A. (ADR)

LQ

90

Supermercados Unimarc

UNRMY

67

9,564

(9,498)

-98.61%

961

10,278

(9,317)

-82.90%

17

9,263

(9,245)

-99.62% (continues)

149

Advances in Technical Analysis TABLE 7.2

(continues)

Rank 91

Name

Market Cap ($M)

Ticker

MATAV

MTA

4,112

92

Telefonica del Peru (ADR)

TDP

93

Bank of Ireland (ADR)

IRE

94

SUNDAY Communications

SDAY

95

Amcor Limited (ADR)

AMCR

Tot. BV ($M)

Tot. IV ($M)

ID% -52.32%

13,138

(9,026)

496

9,482

(8,986)

-90.06%

13,053

21,737

(8,684)

-24.96%

245

8,802

(8,557)

-94.59%

4,829

13,184

(8,355)

-46.39%

96

NetEase.com, Inc.

NTES

1,298

9,501

(8,203)

-75.97%

97

Cadbury Schweppes plc

CSG

16,430

23,598

(7,168)

-17.91%

98

Legend Group Limited

LGHLY

3,440

10,493

(7,053)

-50.63%

99

Lihir Gold Limited (ADR)

LIHRY

1,098

8,138

(7,040)

-76.23%

100

Grupo Industrial Maseca

MSK

441

7,277

(6,835)

-88.56%

Source: Reuters Inc., Friday, February 6, 2004.

TABLE 7.3 Summary Analysis

Analysis

Top 100 Value Creating Firms

Top 100 Value Destroying Firms

Market Value ($m)

8,302,832.53

1,712,827

Book Value ($m)

2,153,343.00

11,582,879

Intangible Value ($m)

6,149,489.53

(9,870,052)

Avg. ID%

75.03%

-70.15%

Avg. Return

53.25%

75.44%

Highest Return

233.90%

346.80%

Lowest Return

(8.96)%

(80.71)%

RETURNS & RISK In 2003, America emerged from a multi-year bear market. Returns in 2003 were substantial, and practically every sector, industry, and stock rallied. Hence, 2003 was a turnaround year in which companies with negative intangible value became attractive. Negative intangible value stocks were profitable in 2003, due to economic conditions. As economic conditions improve, positive intangible value firms will become more favorable, due to solid growth prospects. For Tables 7.1 and 7.2, the summary information is in Table 7.3.

150

Intangible Finance Standards

The top 100 value creating firms were substantially larger than the top 100 value destroying firms. The average return was higher for the value destroying firms, but the greatest loss for value destroying firms (80.71%) was nearly 10 times greater than the greatest loss for value creating firms (8.96%). Value destroying firms from 2003 to 2004 carried a greater potential gain, but also a greater potential loss if incorrect stocks were selected, when compared to value creating firms, which performed consistently well. The following chapters will introduce a wide range of new, powerful, and extremely practical statements that can assist in giving technical analysts a market edge.

CHAPTER

8

Intangible Analysis of Sectors and Industries

SECTOR ANALYSIS There are four basic types of firms in the stock market (see Table 8.1). Depending on the economic climate, either large caps, medium caps, small caps, or micro caps will drive the stock market’s performance. On Tuesday, December 30, 2003, the following data were collected. Tables 8.2 and 8.2a are more easily understood on a relative basis. We know, from our preceding discussion of the intangible analysis of a single market, that indices are typically made up of large cap firms and medium cap firms. Small cap and micro cap firms are absent from index analysis (Tables 8.3 and 8.3a).

ANALYZING LARGE CAPS On the 30th of December, 2003, there were 674 large caps out of a total of 8103 firms (8.32%). Tables 8.4 and 8.4a run contrary to investment logic. It 151

TABLE 8.1 The Four Different Firm Types Firm Type

Capitalization From

Capitalization To

Micro Cap

$0

$250 m

Small Cap

$250 m

$1,000 m ($1b)

Medium Cap

$1,000 m

$5b

Large Cap

$5,000 m

Onwards

TABLE 8.2 intMgtOS® Firm Type by Sector Report (intMgtOS® 5003.iR20a)

Sector

Sum of Large Caps

Sum of Medium Caps

Sum of Small Caps

Sum of Micro Caps

Sum of Total

Basic Materials

43

89

86

251

469

Capital Goods

25

57

85

280

447

Conglomerates

15

9

4

1

29

Consumer Cyclical

30

58

64

256

408

Consumer/Non-Cyclical

41

38

46

158

283

Energy

38

59

65

141

303

Financial

136

152

246

724

1,258

Healthcare

53

90

173

538

854

150

285

322

1,061

1,818

Technology

89

200

350

1,295

1,934

Transportation

12

34

36

72

154

Utilities

42

48

23

33

146

674

1,119

1,500

4,810

8,103

Services

Grand Total

TABLE 8.2a intMgtOS® Firm Type by Sector Report Notes

Values

intMgtOS Report

intMgtOS®5003.iR20a

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

Tuesday December 30th 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1000781

153

Intangible Analysis of Sectors and Industries TABLE 8.3 intMgtOS® Firm Type by Sector Report (%) (intMgtOS® 5003.iR20b)

Sector

Sum of Large

Sum of Medium

Sum of Small

Sum of Micro

Sum of Total

Basic Materials

6.38%

7.95%

5.73%

5.22%

5.79%

Capital Goods

3.71%

5.09%

5.67%

5.82%

5.52%

Conglomerates

2.23%

0.80%

0.27%

0.02%

0.36%

Consumer Cyclical

4.45%

5.18%

4.27%

5.32%

5.04%

Consumer/Non-Cyclical

6.08%

3.40%

3.07%

3.28%

3.49%

Energy

5.64%

5.27%

4.33%

2.93%

3.74%

20.18%

13.58%

16.40%

15.05%

15.53% 10.54%

Financial Healthcare

7.86%

8.04%

11.53%

11.19%

Services

22.26%

25.47%

21.47%

22.06%

22.44%

Technology

13.20%

17.87%

23.33%

26.92%

23.87%

1.78%

3.04%

2.40%

1.50%

1.90%

Transportation Utilities Grand Total

6.23%

4.29%

1.53%

0.69%

1.80%

100.00%

100.00%

100.00%

100.00%

100.00%

TABLE 8.3a intMgtOS® Firm Type by Sector Report Notes

Values

intMgtOS Report

intMgtOS®5003.iR20b

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

Tuesday December 30th 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1000785

is assumed that an investor has $674,000 to invest in shares. As the investor is unaware of what shares will increase in value, the investor invests $1,000 in each large cap stock. The aggregated returns are listed in Table 8.4 in column [2], the “Large Cap Return on $1 k” column. As the investor invests $1,000 in each firm, the gross profit or loss (measured by column [3]) is determined by this logic: {[2] - ([1]*1000)}. The gross return or loss (column [4]) is determined by

154

Intangible Finance Standards

TABLE 8.4 intMgtOS® Large Cap Report (intMgtOS® 5003.iR21a) Number of Large Caps [1]

Large Cap Return on $1 k [2]

Gross Profit or Loss [3]

Gross Return or Loss [4]

Net Profit or Loss [5]

Net Return [6]

Basic Materials

43

59,641

16,641

38.70%

15,695

36.50%

Capital Goods

25

38,589

13,589

54.36%

13,039

52.16%

Conglomerates

15

21,294

6,294

41.96%

5,964

39.76%

Consumer Cyclical

30

41,296

11,296

37.65%

10,636

35.45%

Consumer/Non-Cyclical

41

45,781

4,781

11.66%

3,879

9.46%

Energy

38

53,852

15,852

41.72%

15,016

39.52%

136

183,673

47,673

35.05%

44,681

32.85% 31.18%

Sector

Financial Healthcare

53

70,691

17,691

33.38%

16,525

150

208,370

58,370

38.91%

55,070

36.71%

Technology

89

151,984

62,984

70.77%

61,026

68.57%

Transportation

12

15,395

3,395

28.29%

3,131

26.09%

Services

Utilities Grand Total

42

55,983

13,983

33.29%

13,059

31.09%

674

946,549

272,549

40.44%

257,721

38.24%

TABLE 8.4a intMgtOS® Large Cap Report Notes

Values

intMgtOS Report

intMgtOS®5003.iR21a

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

Tuesday December 30th 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001285

{[3] / ([1]*1000)}, expressed in percentage terms. The net profit or loss (column [5]) adjusts column [3] for transaction costs. It is assumed that total transaction costs of $22 are required to enter and exit stocks. The net return column measures the percentage increase or decrease on the investment of $1 k per stock after transaction costs.

Intangible Analysis of Sectors and Industries

155

There are two types of return—absolute return and relative return. Using the concept of absolute return we would seek the maximum values in column [2]. Using a relative approach we would judge column [4] and seek the maximum value. The highest relative return means the maximum return on minimal investment—the highest absolute return can be misleading, as it is increased due to the number of investment opportunities (especially if the absolute return in column [2] does not match the relative return in column [4]).

HIGHEST ABSOLUTE RETURN The highest absolute returns occur in the Services sector ($208,370), followed by the Financial sector ($183,673).

HIGHEST RELATIVE RETURN The highest relative returns occur in the Technology sector (70.77% average return per $1 k investment), followed by the Capital Goods sector (54.36% average return per $1 k investment).

LOWEST RELATIVE RETURN Some sectors are stronger than others. In 2002–2003, the strongest sectors were Technology (70.77%) and Capital Goods (54.36%). The weakest sectors were Consumer/Non-Cyclical (11.36%) and Transportation (28.29%).

ANALYZING MEDIUM CAPS On the 30th of December, 2003, there were 1,119 large caps out of a total of 8103 firms (13.81%). Table 8.5 runs contrary to investment logic. In Table 8.5, it is assumed that an investor has $1,119,000 to invest in shares. As the investor is unaware of what shares will increase in value, the investor invests $1,000 in each medium cap stock. The aggregated returns are listed in Table 8.5 in column [2], the “Medium Cap Return on $1 k” column. As the investor invests $1,000 in each firm, the gross profit or loss (measured by column [3]) is determined by this logic: {[2] - ([1]*1000)}. The gross return or loss (column [4]) is determined by {[3] / ([1]*1000)}, expressed in percentage terms. The net profit or loss (column

156

Intangible Finance Standards

TABLE 8.5 intMgtOS® Medium Cap Report (intMgtOS® 5003.iR22a)

Sector

Number of Medium Caps

Medium Cap Return on $1 k

Gross Profit or Loss

Gross Return or Loss

Net Profit or Loss

Net Return

131,456

42,456

47.70%

40,498

45.50%

Basic Materials

89

Capital Goods

57

96,676

39,676

69.61%

38,422

67.41%

Conglomerates

9

12,208

3,208

35.64%

3,010

33.44%

Consumer Cyclical

58

88,179

30,179

52.03%

28,903

49.83%

Consumer/Non-Cyclical

38

47,972

9,972

26.24%

9,136

24.04%

Energy

59

170,279

111,279

188.61%

Financial

152

204,730

52,730

34.69%

109,981 186.41% 49,386

32.49%

Healthcare

90

170,841

80,841

89.82%

78,861

87.62%

Services

285

448,118

163,118

57.23%

156,848

55.03%

Technology

200

364,266

164,266

82.13%

159,866

79.93%

Transportation

34

50,707

16,707

49.14%

15,959

46.94%

Utilities

48

59,826

11,826

24.64%

10,770

22.44%

1,119

1,845,257

726,257

64.90%

701,639

62.70%

Grand Total

TABLE 8.5a intMgtOS® Medium Cap Report Notes

Values

intMgtOS Report

intMgtOS®5003.iR22a

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

Tuesday December 30th 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001379

[5]) adjusts column [3] for transaction costs. It is assumed that total transaction costs of $22 are required to enter and exit individual stocks. The net return column measures the percentage increase or decrease on the investment of $1 k per stock after transaction costs.

157

Intangible Analysis of Sectors and Industries

HIGHEST RELATIVE RETURN For medium cap stocks the highest relative returns occur in the Energy sector (188.61% average return per $1 k investment in 59 medium cap stocks), followed by the Healthcare sector (89.82% average return per $1 k investment in 90 medium cap stocks).

LOWEST RELATIVE RETURN The Utilities sector was the worst-performing sector (24.64%), followed by the Consumer/Non-Cyclical sector (26.24%), as shown in Table 8.6. Comparison with Strongest Large Cap Results The two strongest large cap sectors were Technology (70.77%) and Capital Goods (54.36%). For medium caps, the Technology sector performance was 82.13% (a 16% improvement in relative performance), and for Capital Goods the performance was 69.61% (a 28% improvement in relative performance). This is summarized in Table 8.7. In summary, large caps returned a geometric mean of 62.02%, where the return for medium caps was 75.61%: 21.22% greater than for large caps.

TABLE 8.6 Medium Cap: Lowest Relative Return Stock Type

Strongest

Weakest

Large Cap

Technology (70.77%) Capital Goods (54.36%)

Consumer/Non-Cyclical (11.36%) Transportation (28.29%)

Medium Cap

Energy (188.61%) Healthcare (89.82%)

Utilities (24.64%) Consumer/Non-Cyclical (26.24%)

TABLE 8.7 Highest Relative Return (Comparing Medium and Large Cap) Strongest

Large Cap

Medium Cap

Change

Technology

70.77%

82.13%

16.05%

Capital Goods

54.36%

69.61%

28.05%

Averages

62.02%

75.61%

21.22%

158

Intangible Finance Standards TABLE 8.8 Lowest Relative Return (Comparing Medium and Large Cap) Weakest

Large Cap

Medium Cap

Change

Consumer/Non-Cyclical

11.36%

26.24%

130.99%

Transportation

28.29%

49.14%

73.70%

Averages

17.93%

35.91%

98.25%

Comparison with Weakest Large Cap Results If an investor invested in the two weakest large cap sectors but in medium cap stocks, the returns would have been incrementally better. For example, the worst-performing large cap sector was Consumer/Non-Cyclical, with an 11.36% return. In medium caps, the performance of this sector was 26.24% (a 130.99% improvement in relative performance). The Transportation sector had an aggregate return of 28.29%. For the medium caps, the return was 49.14% (a 73.70% improvement in relative performance). This is summarized in Table 8.8. In summary, medium caps returned a geometric mean of 17.93% for the weakest sectors, where the return for medium caps was 35.91%: 98.25% greater than for large caps.

ANALYZING SMALL CAPS On the 30th of December, 2003, there were 1500 large caps out of a total of 8103 firms (18.51%). In Tables 8.9 and 8.9a, it is assumed that an investor has $1,500,000 to invest in shares. As the investor is unaware of what shares will increase in value, the investor invests $1,000 in each small cap stock. The aggregated returns are listed in column [2], the “Medium Cap Return on $1 k” column. As the investor invests $1,000 in each firm, the gross profit or loss (measured by column [3]) is determined by this logic: {[2] ([1]*1000)}. The gross return or loss (column [4]) is determined by {[3] / ([1]*1000)}, expressed in percentage terms. The net profit or loss (column [5]) adjusts column [3] for transaction costs. It is assumed that total transaction costs of $22 are required to enter and exit individual stocks. The net return column measures the percentage increase or decrease on the investment of $1 k per stock after transaction costs.

159

Intangible Analysis of Sectors and Industries TABLE 8.9 intMgtOS® Small Cap Report (intMgtOS® 5003.iR23a)

Sector

Number of Small Caps

Small Cap Return from $1 k

Gross Profit or Loss

Gross Return

Net Profit or Loss

Net Return

Basic Materials

86

138,319

52,319

60.84%

50,427

58.64%

Capital Goods

85

151,244

66,244

77.93%

64,374

75.73%

Conglomerates

4

5,191

1,191

29.77%

1,103

27.57%

Consumer Cyclical

64

87,613

23,613

36.90%

22,205

34.70%

Consumer/Non-Cyclical

46

80,262

34,262

74.48%

33,250

72.28% 75.80%

Energy

65

115,699

50,699

78.00%

49,269

Financial

246

351,649

105,649

42.95%

100,237

40.75%

Healthcare

173

348,139

175,139

101.24%

171,333

99.04%

Services

322

2,023,660

1,701,660

528.47%

1,694,576

526.27%

Technology

350

877,144

527,144

150.61%

519,444

148.41%

Transportation

36

51,219

15,219

42.28%

14,427

40.08%

Utilities

23

32,166

9,166

39.85%

8,660

37.65%

1,500

4,262,304

2,762,304

184.15%

2,729,304

181.95%

Grand Total

TABLE 8.9a intMgtOS® Small Cap Report Notes

Values

intMgtOS Report

intMgtOS®5003.iR23a

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

Tuesday December 30th 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001412

HIGHEST RELATIVE RETURN For small cap stocks the highest relative returns occurred in the Services sector (528.47% average return per $1 k investment in 322 small cap stocks), followed by the Technology sector (150.61% average return per $1 k investment in 350 small cap stocks).

160

Intangible Finance Standards

LOWEST RELATIVE RETURN The Conglomerates sector was the worst-performing sector (29.77% average return per $1 k investment in 1191 small cap stocks), followed by the Consumer/Non-Cyclical sector (36.90% average return per $1 k investment in small cap stocks). Comparison with Strongest Large Cap Results The two strongest large cap sectors were Technology (70.77%) and Capital Goods (54.36%). For medium caps, the Technology sector performance was 82.13% (a 16% improvement in relative performance), and for Capital Goods the performance was 69.61% (a 28% improvement in relative performance). This is summarized in Table 8.10. In summary, large caps returned a geometric mean of 62.02% in the two strongest sectors, as compared to 75.61% for medium caps, and 108.34% for small caps. Small caps outperformed large caps by 112.82% in the Technology sector, and 43.36% for the Capital Goods sector. Small caps outperformed medium caps by 83.38% in the Technology sector, and 11.95% for the Capital Goods sector. In short, small caps significantly outperformed both medium caps (43.28%) and large caps in the two largest large cap sectors (21.91%). Comparison with Weakest Large Cap Results The weakest large cap sectors were Consumer/Non-Cyclical (11.36%) and the Transportation sector (28.29%). Table 8.11 shows that small caps significantly outperformed medium caps and large caps in the weakest large cap sector. For example, the large cap Consumer/Non-Cyclical returned 11.36%, whereas small caps returned 74.48%—a 555.63% increase over large-sector profitability. Small caps outperformed the second-weakest large cap sector (Transportation) by 49.45%. Small caps outperformed medium cap stocks by 183.34% (74.48% to 26.24%) in the weakest sector. However, in the second-weakest sector, small caps underperformed the Transportation sector by 13.96%. TABLE 8.10 Comparing Different Firm Types Large Cap

Medium Cap

Small Cap

Change L>S

Change M>S

Technology

70.77%

82.13%

150.61%

112.82%

83.38%

Capital Goods

54.36%

69.61%

77.93%

43.36%

11.95%

Averages

62.02%

75.61%

108.34%

21.91%

43.28%

Strongest

161

Intangible Analysis of Sectors and Industries

In summary, large caps returned a geometric mean of 17.93% in the two weakest sectors, as compared to 35.91% for medium caps, and 56.12% for small caps. Small caps outperformed large caps by 165.76%, and outperformed medium caps by 56.27%.

ANALYZING MICRO CAPS On the 30th of December, 2003, there were 4810 medium caps out of a total of 8103 firms (59.36%) (see Tables 8.12 and 8.12a). The largest gains were in the Services sector (144.89% average return per $1 k investment in 1061 micro cap

TABLE 8.11 Comparing Different Firm Types

Weakest

Large Cap

Medium Cap

Small Cap

Change L>S

Change M>S

Consumer/Non-Cyclical

11.36%

26.24%

74.48%

555.63%

183.84%

Transportation

28.29%

49.14%

42.28%

49.45%

-13.96%

Averages

17.93%

35.91%

56.12%

165.76%

56.27%

TABLE 8.12 intMgtOS® Micro Cap Report (intMgtOS® 5003.iR24a)

Sector

Number Micro Cap of Micro Return from Caps $1 k

Gross Profit or Loss

Gross Return

Net Profit or Loss

Net Return

Basic Materials

251

520,426

269,426

107.34%

263,904

105.14%

Capital Goods

280

362,957

82,957

29.63%

76,797

27.43% 99.90%

Conglomerates

1

2,021

1,021

102.10%

999

Consumer Cyclical

256

387,671

131,671

51.43%

126,039

49.23%

Consumer/Non-Cyclical

158

234,924

76,924

48.69%

73,448

46.49%

Energy

141

305,848

164,848

116.91%

161,746

114.71%

Financial

724

1,086,077

362,077

50.01%

346,149

47.81%

Healthcare

538

1,217,157

679,157

126.24%

667,321

124.04%

Services

1,061

2,598,324

1,537,324

144.89%

1,513,982

142.69%

Technology

1,295

2,917,755

1,622,755

125.31%

1,594,265

123.11%

Transportation

72

115,067

43,067

59.81%

41,483

57.61%

Utilities

33

47,446

14,446

43.78%

13,720

41.58%

4,810

9,795,672

4,985,672

103.65%

4,879,852

101.45%

Grand Total

162

Intangible Finance Standards

TABLE 8.12a intMgtOS® Micro Cap Report Notes

Values

intMgtOS Report

intMgtOS®5003.iR24a

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

Tuesday December 30th 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001534

TABLE 8.13 Comparing Different Firm Types

Large Cap

Medium Cap

Small Cap

Micro Cap

Technology

70.77%

82.13%

150.61%

125.31%

Capital Goods

54.36%

69.61%

77.93%

29.63%

Averages

62.02%

75.61%

108.34%

60.93%

-1.76%

Strongest

Change L > Mi

Change M > Mi

Change S > Mi

77.07%

52.58%

-16.80%

-45.49%

-57.43%

-61.98%

-19.41%

-43.76%

stocks) and the Healthcare sector (126.24% average return per $1 k investment in 538 micro cap stocks).

STRONGEST RELATIVE RETURNS For micro cap stocks the highest relative returns occurred in the Services sector (144.89% average return per $1 k investment in 1061 micro cap stocks) followed by the Healthcare sector (126.24% average return per $1 k investment in 538 small cap stocks) (Table 8.13).

WEAKEST RELATIVE RETURNS Micro caps outperformed the two weakest large cap sectors by an average of 200.97%. However, small caps (56.12%) outperformed micro caps (53.96%) by 3.83% (Table 8.14). In general, in 2002–2003 small caps performed best.

163

Intangible Analysis of Sectors and Industries TABLE 8.14 Comparing Different Firm Types

Weakest

Large Cap

Medium Cap

Small Cap

Micro Cap

Change L > Mi

Change1 M > Mi

Change S > Mi

Consumer/NonCyclical

11.36%

26.24%

74.48%

48.69%

328.61%

85.56%

-34.63%

Transportation

28.29%

49.14%

42.28%

59.81%

111.42%

21.71%

41.46%

Averages

17.93%

35.91%

56.12%

53.96%

200.97%

50.28%

-3.83%

INTANGIBLE ANALYSIS OF THE MARKET

THE ROLE

OF

-IV

Intangible value has a positive dimension (+IV) and negative dimension (-IV). When intangible value is negative, it means that the book value of the firm is greater than the market value of the firm. Enron is a good example. As of December 30, 2003, the company had negative intangible value of $7,416.73 m and a market value of $22.32 m (making it a small cap firm). In this case, a company supposedly worth nearly $8 billion in its accounting reports was valued at $22 m by investors; a high percentage of intangible value therefore can be indicative of a firm either in liquidation, with a strong potential for bankruptcy, or providing a potential warning sign of immediate short opportunities. The Worldcom Group (WCOEQ) became a micro cap firm with market value of $59.26 m and a -IV of $59,197.46 m. This means that WorldCom was trading at around 1/10 of 1% of its book value. WorldCom Inc–MCI Group (MCWEQ) was trading at 1/5 of 1% of its book value, namely $4.73 m in market value with -IV of $2,361.77. A medium cap firm named Mayne Group Ltd (MAYNY) had a market value of $1,911.77 m and a -IV of $12,291.55 m. Mayne was effectively trading at 13.46% of its book value. That its -IV was a substantial percentage of its market value was indicative of serious financial trouble and (typically) strong shorting opportunities.

THE ROLE

OF

+IV

A substantial amount of positive intangible value (+IV) means that investors believe strongly in the future prospects and profitability of the firm. When one is conducting analysis of a complete market, it is therefore critical to gauge

164

Intangible Finance Standards

and understand how sectors are changing in +IV (or in -IV). As +IV increases, investors become increasingly bullish about the prospects of a sector, industry, or firm. (As -IV increases, the amount of bearishness increases, indicating financial trouble, potential scandals, or bankruptcies.)

+IV

AND

-IV

FOR

LARGE CAPS

When performing intangible analysis, we divide stocks into their four categories: 1. 2. 3. 4.

Large cap Medium cap Small cap Micro cap

From there, we assess if the book value (BV) of the specific firm exceeds the market value of the firm (MV); this difference is referred to as intangible value (IV). Intangible value can be: 1. positive (+IV: value creating) 2. negative (-IV: value destroying) 3. undeterminable (value unaccountable) If a firm has +IV (positive intangible value), then we call its book value positive book value (+BV), and its market capitalization is called positive market value (+MV). If a firm has -IV (negative intangible value), then we call its book value negative book value (-BV), and its market capitalization is called negative market value (-MV). In this way, we can determine how individual sectors, industries, and stocks change in their ability to create or destroy value (or remain value stagnant). intMgtOS® Value Factors Standards institutes have registered trademarks that they use to differentiate their standards from the standards of other organizations. The registered trademark intMgtOS® is used to show that financial measures are formed according to intangible management operating standards and meet strict financial reporting standards that are specifically focused on identifying, classifying, categorizing, financially valuing, and reporting intangible value movements. By measuring +IV (value creation), -IV (value destruction), and value unaccountability, one finds it possible to apply three new financial measures for all

Intangible Analysis of Sectors and Industries

165

types of firms (large cap, medium cap, small cap, micro cap). These measures are embodied in the following intangible finance measures: 1. The intMgtOS® vCreation. This measures the number or percentage of firms that trade with +IV (positive intangible value) within a specific sector or industry, or for the entire economic system (all exchanges). The abbreviation vCreation means “value creation factor” (intMgtOS® 5003.D43). 2. The intMgtOS® vDestruction. This measures the number or percentage of firms that trade with -IV (negative intangible value) within a specific sector or industry, or for the entire economic system (all exchanges). The abbreviation vDestruction means “value destruction factor” (intMgtOS®5003.D44). 3. The intMgtOS® vUnaccountable. This measures the number or percentage of firms that trade with neither -IV (negative intangible value) nor +IV (positive intangible value) within a specific sector or industry, or for the entire economic system (all exchanges)—this usually occurs due to an unspecified or unavailable scenario in the raw data (intMgtOS®5003.D45). To explore how the intMgtOS® Value Factors work, we will analyze large caps across all sectors.

By Sector: ±IV for Large Caps Across all sectors, dealing only with large caps, we see the following in Tables 8.15 and 8.15a. From Table 8.15, it can be seen that the highest amount of wealth creation is occurring through the Conglomerates sector (intMgtOS® vCreation = 100%). The greatest amount of value destruction is occurring through the Capital Goods sector (intMgtOS® vDestruction = 24%). The greatest amount of unaccountable performance is occurring through the Consumer/NonCyclical sector (intMgtOS® vUnaccountable = 7.32%). These percentages refer to the number of large cap firms in these sectors, and across the entire economic system.

By Industry: ±IV% for Large Caps The following analysis effectively measures the percentage of publicly traded companies that are destroying wealth or creating wealth throughout the economy. It also seeks to measure the annual returns of investing $1000 in

1 7

11 34

Grand Total

674

12

42

Transportation

Utilities

10.39%

8.33% 16.67%

91.67% 80.95%

0 1

3

84

89

86.94%

3.37%

22

121

150

Technology

18

14.67%

80.67% 94.38%

7 2

1

51

53

70

1.89%

85.29% 96.23%

2 1

18

116

136

Financial

Healthcare

586

13.24%

92.11%

0

3

35

38

Services

4.88% 7.89%

87.80%

3

2

36

41

Consumer/Non-Cyclical

Energy

16.67%

83.33%

0

5

25

30

Consumer Cyclical

0.00%

100.00%

0

0

15

15

76.00%

0

6

Conglomerates

4.65% 24.00%

90.70%

2

2

19

25

39

43

Basic Materials

vDestruction

INTMGTOS®

vCreation

INTMGTOS®

Value Unaccountable Large Caps (NA/NM)

Value Destroying Large Caps (-IV)

Value Creating Large Caps (+IV)

Capital Goods

Sector

Number of Large Caps

TABLE 8.15 intMgtOS® Value Factor Report (LC)

2.67%

2.38%

0.00%

2.25%

4.67%

1.89%

1.47%

0.00%

7.32%

0.00%

0.00%

0.00%

4.65%

INTMGTOS® vUnaccountable Factor

167

Intangible Analysis of Sectors and Industries TABLE 8.15a intMgtOS® Value Factor Report (LC) Notes

Values

intMgtOS Report

intMgtOS®5003.iR25a

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

Tuesday December 30th 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001547

each of the firms to determine if wealth destroying companies generate more or less return than wealth creating companies. The table will show that 86.94% of firms across the three US exchanges created wealth, 10.39% of firms destroyed wealth, and 2.67% of large cap firms were not able to be analyzed due to missing data. The average book value percentage of value creating large caps was 34.03%, and intangible value was 65.56%. Wealth creating large cap companies returned an average of 42.90% per $1000 invested in all +IV large caps. The average book value for wealth destroying companies across all exchanges was 394.40%, and the average return on $1000 in all large cap wealth destroying companies was 45.21%. Large Cap Industry Returns Firms can create value (+IV) or destroy value (-IV). The analysis below illustrates the top 10 industries for value creating large caps and the top 10 industries for value destroying large caps. Top 10 Returns for Value Creating Large Cap Firms (+IV) The top 10 performing industries for value creating large cap firms are listed in Table 8.16. Overall, the top 10 performing large cap +IV firms averaged (geometric mean) an annualized return of 89.77% across the industry groups as listed in this table.

168

Intangible Finance Standards

TABLE 8.16 Top 10 Returns for +IV LC Firms Sector

Industry

per+IV

per-IV

perNA

%ret+IV

Technology

Communications Equipment

80.00%

6.67%

13.33%

127.52%

Technology

Computer Networks

100.00%

0.00%

0.00%

105.26%

Capital Goods

Construction Services

100.00%

0.00%

0.00%

95.81%

Technology

Computer Storage Devices

100.00%

0.00%

0.00%

91.59%

Services

Retail (Technology)

100.00%

0.00%

0.00%

91.58%

Basic Materials

Metal Mining

90.00%

0.00%

10.00%

85.81%

Technology

Electronic Instr. & Controls

100.00%

0.00%

0.00%

77.44%

Technology

Semiconductors

100.00%

0.00%

0.00%

76.83%

Services

Schools

100.00%

0.00%

0.00%

75.79%

Services

Recreational Activities

100.00%

0.00%

0.00%

70.10%

TABLE 8.17 Bottom 10 Returns for -IV LC Firms Sector

Industry

per+IV

per-IV

perNA

%ret+IV

100.00%

0.00%

0.00%

-12.81%

Consumer Cyclical

Photography

Basic Materials

Containers & Packaging

50.00%

50.00%

0.00%

-9.04%

Consumer/NonCyclical

Food Processing

92.86%

7.14%

0.00%

0.84%

Services

Printing & Publishing

88.89%

11.11%

0.00%

1.17%

Consumer Cyclical

Recreational Products

100.00%

0.00%

0.00%

1.69%

Consumer/NonCyclical

Beverages (Nonalcoholic)

80.00%

20.00%

0.00%

5.06%

Services

Business Services

71.43%

0.00%

28.57%

5.39%

Services

Motion Pictures

100.00%

0.00%

0.00%

9.40%

Consumer/NonCyclical

Personal & Household Prods.

100.00%

0.00%

0.00%

12.03%

Services

Retail (Drugs)

100.00%

0.00%

0.00%

12.87%

Bottom 10 Returns for Value Creating Large Cap Firms (+IV) The bottom 10 performing industries for value creating large cap firms are listed in Table 8.17. The bottom 10 performing large cap +IV firms averaged (arithmetic mean) an annualized return of 2.66% across the industry groups.

Intangible Analysis of Sectors and Industries

169

Top 10 Returns for Value Destroying Large Cap Firms (-IV) The top 10 performing industries for value destroying large cap firms are listed in Table 8.18. The top 10 performing large cap -IV firms averaged (geometric mean) an annualized return of 74.29% across the industry groups listed. Bottom 10 Returns for Value Destroying Large Cap Firms (-IV) The bottom 10 performing industries for value destroying large cap firms (-IV) are listed in Table 8.19. The bottom 10 performing large cap -IV firms averaged an annualized return of 14.16% across the industry groups listed in Table 8.19. Explaining the Total Industry Table The first three result columns of Table 8.20—per+IV (column [1]), per-IV (column [2]), and perNA (column [3])—measure the percentage of firms trading with either positive intangible value (wealth creating), negative intangible value (wealth destroying), or unaccountable intangible value (wealth unknown). In the Gold and Silver industry, all companies are wealth creating, measured by a per+IV of 100%. The results are given on a percentage basis, as it is changes in these percentages that intangible analysis tracks over time to determine the relative investment attractiveness of different industries. The next two columns, +IV BV% (column [4]) and +IV IV% (column [5]), measure the book value percentage and intangible value percentage of all firms taken as an aggregate. In the Gold and Silver industry, the average book value for a wealth creating company is 37.66% and intangible value is 62.34%. Column [7] measures the amount of book value in the average negative intangible value large cap. (Note, -IV means that book value exceeds market capitalization, hence the values for -IV BV% are all in excess of 100%.) In the case of the Iron and Steel industry, the average book value per wealth destroying firm is 304.32%. Suppose that an investor invests $1000 in each of the large caps in a particular industry. The return expressed as a percentage is found under the %ret+IV (column [6]) column. The way in which this value is calculated is found at the back of this chapter. For example, in the Gold and Silver industry, an average return of 42.82% would have been made from investing $1000 in all the large cap gold and silver stocks, and holding them for 12 months before selling. Column [8] explores the 12-month return in net terms on an investment of $1000 in all negative intangible value firms under analysis. In the case of the Iron and Steel

Communications Equipment

Computer Services

Audio & Video Equipment

Aerospace & Defense

Misc. Capital Goods

Retail (Department & Discount)

Iron & Steel

Communications Services

Oil & Gas Operations

Biotechnology & Drugs

Technology

Consumer Cyclical

Capital Goods

Capital Goods

Services

Basic Materials

Services

Energy

Healthcare

Industry

Technology

Sector

TABLE 8.18 Top 10 Returns for -IV LC Firms

90.48%

94.12%

63.83%

33.33%

87.50%

50.00%

87.50%

66.67%

92.31%

80.00%

per+IV

4.76%

5.88%

34.04%

33.33%

12.50%

50.00%

12.50%

33.33%

7.69%

6.67%

per-IV

4.76%

0.00%

2.13%

33.33%

0.00%

0.00%

0.00%

0.00%

0.00%

13.33%

perNA

18.44%

51.77%

39.70%

21.53%

24.46%

26.51%

37.35%

70.55%

39.35%

21.67%

+IV BV%

81.56%

48.23%

60.30%

78.47%

75.54%

73.49%

62.65%

29.45%

60.65%

78.33%

+IV IV%

48.48%

49.41%

57.15%

35.46%

29.14%

35.69%

30.74%

38.76%

49.21%

127.52%

%ret+IV

111.04%

641.03%

499.27%

304.32%

334.03%

873.03%

362.58%

418.54%

257.20%

301.84%

-IV BV%

53.38%

56.05%

56.10%

59.17%

60.54%

68.91%

82.94%

84.66%

109.22%

161.13%

%ret-IV

171

Intangible Analysis of Sectors and Industries TABLE 8.19 Bottom 10 Returns for -IV LC Firms Sector

Industry

per+IV

per-IV

perNA

%ret-IV -2.04%

Consumer/Non-Cyclical

Food Processing

92.86%

7.14%

0.00%

Financial

Insurance (Prop. & Casualty)

89.47%

10.53%

0.00%

2.64%

Financial

S&Ls/Savings Banks

87.50%

12.50%

0.00%

12.98%

Consumer Cyclical

Auto & Truck Manufacturers

80.00%

20.00%

0.00%

13.35%

Financial

Investment Services

91.67%

8.33%

0.00%

14.84%

Consumer/Non-Cyclical

Beverages (Nonalcoholic)

80.00%

20.00%

0.00%

16.13%

Energy

Oil & Gas—Integrated

85.71%

14.29%

0.00%

17.70%

Financial

Insurance (Life)

88.24%

5.88%

5.88%

21.63%

Technology

Office Equipment

66.67%

33.33%

0.00%

22.00%

Utilities

Natural Gas Utilities

88.89%

11.11%

0.00%

22.35%

industry, the average return was 59.17% on each $1000 invested across all large caps. The two highest-performing large cap sectors were Technology and Capital Goods; using Table 8.21, we can drill down into more detail to determine if +IV or -IV large cap firms were responsible for this performance. In the 2002–2003 period, -IV large caps tended to outperform +IV firms. In the Technology sector, 94.38% of the firms generated wealth and returned an average return on $1000 of 73.45%. Wealth destroying firms (3.37%) returned an average return of 97.45% per $1000. In the 2002–2003 period, -IV large caps tended to outperform +IV firms in the Capital Goods sector also. 76% of the firms generated wealth and returned an average return on $1000 of 54.67%. Wealth destroying firms (24%) returned an average return of 62.53% per $1000. (See Table 8.22.) By Industry: ±IV% for Medium Caps Medium caps had 1.98% more wealth creating firms and 2.16% fewer wealth destroying firms than large caps. On average, medium caps had 4.25% more book value for value creating firms and 6.60% less intangible value than comparable large caps. Overall, the average return for $1000 for medium caps was 54.05%, as compared with 42.90% for large caps. Medium cap value destroying firms had an average of 1790.60% more book value than their large cap counterparts, and returned 66.46% in comparison to the large cap average of 45.21%. Table 8.23 illustrates in more detail.

Conglomerates Sum

Conglomerates

Capital Goods Sum

Capital Goods

Basic Materials Sum

Basic Materials

Sector

Conglomerates

Aerospace & Defense Constr.—Supplies & Fixtures Constr. & Agric. Machinery Construction—Raw Materials Construction Services Mobile Homes & RVs Misc. Capital Goods

Chemical Manufacturing Chemicals—Plastics & Rubber Containers & Packaging Misc. Fabricated Products Fabricated Plastic & Rubber Gold & Silver Iron & Steel Forestry & Wood Products Metal Mining Non-Metallic Mining Paper & Paper Products

Industry

TABLE 8.20 Bottom 10 Returns for -IV LC firms.

100.00%

100.00%

76.00%

87.50% NA 100.00% 33.33% 100.00% NA 50.00%

90.70%

100.00% 100.00% 50.00% 100.00% NA 100.00% 33.33% 100.00% 90.00% NA 100.00%

per+IV [1]

0.00%

0.00%

24.00%

12.50% NA 0.00% 66.67% 0.00% NA 50.00%

4.65%

0.00% 0.00% 50.00% 0.00% NA 0.00% 33.33% 0.00% 0.00% NA 0.00%

per-IV [2]

0.00%

0.00%

0.00%

0.00% NA 0.00% 0.00% 0.00% NA 0.00%

4.65%

0.00% 0.00% 0.00% 0.00% NA 0.00% 33.33% 0.00% 10.00% NA 0.00%

perNA [3]

30.13%

30.13%

36.83%

37.35% NA 22.91% 18.21% 58.62% NA 26.51%

43.40%

38.86% 23.17% 22.84% 36.78% NA 37.66% 21.53% 45.99% 60.06% NA 49.55%

+IV BV% [4]

69.87%

69.87%

63.17%

62.65% NA 77.09% 81.79% 41.38% NA 73.49%

56.60%

61.14% 76.83% 77.16% 63.22% NA 62.34% 78.47% 54.01% 39.94% NA 50.45%

+IV IV% [5]

44.16%

44.16%

54.67%

30.74% NA 62.46% 16.77% 95.81% NA 35.69%

43.37%

25.68% 26.79% -9.04% 28.66% NA 43.82% 35.46% 29.84% 85.81% NA 33.87%

%ret+IV [6]

NA

NA

720.68%

362.58% NA NA 397.12% NA NA 873.03%

278.24%

NA NA 250.47% NA NA NA 304.32% NA NA NA NA

-IV BV% [7]

NA

NA

62.53%

82.94% NA NA 42.74% NA NA 68.91%

44.66%

NA NA 30.15% NA NA NA 59.17% NA NA NA NA

%ret-IV [8]

Appliance & Tool Apparel/Accessories Audio & Video Equipment Auto & Truck Manufacturers Auto & Truck Parts Footwear Furniture & Fixtures Jewelry & Silverware Recreational Products Photography Textiles—Non Apparel Tires

Energy

Consumer/NonCyclical Sum

Coal Oil & Gas—Integrated Oil & Gas Operations Oil Well Services & Equipment

Consumer/Non-Cyclical Crops Fish/Livestock Beverages (Alcoholic) Beverages (Nonalcoholic) Food Processing Office Supplies Personal & Household Prods. Tobacco

Consumer Cyclical Sum

Consumer Cyclical

NA 85.71% 94.12% 100.00%

87.80%

NA NA 100.00% 80.00% 92.86% NA 100.00% 40.00%

83.33%

50.00% 100.00% 66.67% 80.00% 100.00% 100.00% 100.00% NA 100.00% 100.00% NA NA

NA 14.29% 5.88% 0.00%

4.88%

NA NA 0.00% 20.00% 7.14% NA 0.00% 0.00%

16.67%

50.00% 0.00% 33.33% 20.00% 0.00% 0.00% 0.00% NA 0.00% 0.00% NA NA

NA 0.00% 0.00% 0.00%

7.32%

NA NA 0.00% 0.00% 0.00% NA 0.00% 60.00%

0.00%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% NA 0.00% 0.00% NA NA

NA 35.26% 51.77% 45.78%

21.14%

NA NA 44.29% 13.79% 25.71% NA 12.94% 18.62%

49.85%

22.21% 29.13% 70.55% 47.42% 41.06% 24.37% 42.55% NA 22.17% 77.49% NA NA

NA 64.74% 48.23% 54.22%

78.13%

NA NA 55.71% 86.21% 71.26% NA 87.06% 81.38%

50.15%

77.79% 70.87% 29.45% 52.58% 58.94% 75.63% 57.45% NA 77.83% 22.51% NA NA

NA 54.45% 49.41% 19.06%

13.84%

NA NA 42.29% 5.06% 0.84% NA 12.03% 25.37%

38.47%

39.03% 59.28% 38.76% 58.69% 29.71% 53.05% 29.88% NA 1.69% -12.81% NA NA

NA 241.17% 641.03% NA

128.78%

NA NA NA 148.70% 117.61% NA NA NA

172.62%

107.18% NA 418.54% 123.87% NA NA NA NA NA NA NA NA

(continues)

NA 17.70% 56.05% NA

7.05%

NA NA NA 16.13% -2.04% NA NA NA

46.79%

37.97% NA 84.66% 13.35% NA NA NA NA NA NA NA NA

Services

Industry

Advertising Security Systems & Services Broadcasting & Cable TV Casinos & Gaming

Biotechnology & Drugs Medical Equipment & Supplies Healthcare Facilities Major Drugs

Money Center Banks Regional Banks S&Ls/Savings Banks Investment Services Consumer Financial Services Misc. Financial Services Insurance (Accident & Health) Insurance (Life) Insurance (Miscellaneous) Insurance (Prop. & Casualty)

(continues)

Healthcare Sum

Healthcare

Financial Sum

Financial

Energy Sum

Sector

TABLE 8.20

75.00% NA 63.64% 100.00%

25.00% NA 9.09% 0.00%

1.89%

0.00% 0.00%

100.00% 100.00% 96.23%

4.76% 0.00%

90.48% 100.00%

13.24%

5.88% 0.00% 10.53%

88.24% 100.00% 89.47% 85.29%

12.50% 21.74% 12.50% 8.33% 0.00% 100.00% 0.00%

7.89%

per-IV [2]

81.25% 78.26% 87.50% 91.67% 100.00% 0.00% 100.00%

92.11%

per+IV [1]

0.00% NA 27.27% 0.00%

1.89%

0.00% 0.00%

4.76% 0.00%

1.47%

5.88% 0.00% 0.00%

6.25% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

0.00%

perNA [3]

23.54% NA 56.06% 19.15%

20.63%

36.23% 21.43%

18.44% 15.68%

43.79%

63.70% 28.75% 49.67%

41.79% 38.30% 44.88% 42.74% 31.92% NA 37.18%

38.34%

+IV BV% [4]

76.46% NA 43.94% 80.85%

79.37%

63.77% 78.57%

81.56% 84.32%

56.21%

36.30% 71.25% 50.33%

58.21% 61.70% 55.12% 57.26% 68.08% NA 62.82%

61.66%

+IV IV% [5]

32.06% NA 38.92% 56.61%

35.13%

24.84% 18.02%

48.48% 41.64%

38.81%

34.57% 16.62% 26.08%

42.89% 40.29% 56.69% 56.23% 32.60% NA 34.16%

45.07%

%ret+IV [6]

299.04% NA 2012.07% NA

111.04%

NA NA

111.04% NA

450.13%

111.79% NA 123.31%

202.79% 955.97% 134.73% 137.93% NA 118.76% NA

265.78%

-IV BV% [7]

27.96% NA 43.36% NA

53.38%

NA NA

53.38% NA

33.03%

21.63% NA 2.64%

44.41% 42.87% 12.98% 14.84% NA 22.31% NA

30.48%

%ret-IV [8]

Technology

Services Sum

Computer Peripherals Computer Networks Computer Services Computer Storage Devices Computer Hardware Communications Equipment Electronic Instr. & Controls

Communications Services Restaurants Hotels & Motels Recreational Activities Motion Pictures Printing & Publishing Printing Services Rental & Leasing Real Estate Operations Retail (Apparel) Retail (Department & Discount) Retail (Drugs) Retail (Grocery) Retail (Home Improvement) Retail (Catalog & Mail Order) Retail (Specialty) Retail (Technology) Schools Business Services Personal Services Waste Management Services

100.00% 100.00% 92.31% 100.00% 100.00% 80.00% 100.00%

0.00% 0.00% 7.69% 0.00% 0.00% 6.67% 0.00%

14.67%

0.00% 22.22% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

100.00% 77.78% 100.00% 100.00% 90.91% 100.00% 100.00% 71.43% 100.00% 100.00% 80.67%

34.04% 0.00% 0.00% 0.00% 0.00% 11.11% NA NA 0.00% 0.00% 12.50%

63.83% 100.00% 100.00% 100.00% 100.00% 88.89% NA NA 100.00% 100.00% 87.50%

0.00% 0.00% 0.00% 0.00% 0.00% 13.33% 0.00%

4.67%

0.00% 0.00% 0.00% 0.00% 9.09% 0.00% 0.00% 28.57% 0.00% 0.00%

2.13% 0.00% 0.00% 0.00% 0.00% 0.00% NA NA 0.00% 0.00% 0.00%

45.98% 15.24% 39.35% 24.85% 16.14% 21.67% 32.59%

36.43%

19.87% 26.52% 26.03% 61.31% 22.54% 16.89% 7.96% 15.76% 18.08% 32.55%

39.70% 27.06% 38.05% 45.04% 77.06% 25.32% NA NA 47.12% 26.12% 24.46%

54.02% 84.76% 60.65% 75.15% 83.86% 78.33% 67.41%

62.46%

67.14% 73.48% 73.97% 38.69% 77.46% 83.11% 92.04% 77.28% 81.92% 67.45%

60.30% 72.94% 49.93% 54.96% 22.94% 64.82% NA NA 52.88% 73.88% 75.54%

30.40% 105.26% 49.21% 91.59% 35.11% 127.52% 77.44%

38.77%

12.87% 17.51% 46.73% 47.56% 44.91% 91.58% 75.79% 5.39% 23.46% 28.45%

57.15% 52.25% 25.61% 70.10% 9.40% 1.17% NA NA 43.65% 30.40% 29.14%

NA NA 257.20% NA NA 301.84% NA

466.47%

NA 166.61% NA NA NA NA NA NA NA NA

499.27% NA NA NA NA 236.83% NA NA NA NA 334.03%

(continues)

NA NA 109.22% NA NA 161.13% NA

51.85%

NA 37.78% NA NA NA NA NA NA NA NA

56.10% NA NA NA NA 35.77% NA NA NA NA 60.54%

80.95% 86.94%

78.13% 88.89% 100.00%

91.67%

100.00% 66.67% 100.00% 100.00% 100.00% NA

Grand Total

Electric Utilities Natural Gas Utilities Water Utilities

Air Courier Airline Railroads Misc. Transportation Trucking Water Transportation

94.38%

66.67% 100.00% 100.00% 100.00%

per+IV [1]

Utilities Sum

Utilities

Transportation Sum

Transportation

Industry

Office Equipment Scientific & Technical Instr. Semiconductors Software & Programming

(continues)

Technology Sum

Sector

TABLE 8.20

10.39%

16.67%

18.75% 11.11% 0.00%

8.33%

0.00% 33.33% 0.00% 0.00% 0.00% NA

3.37%

33.33% 0.00% 0.00% 0.00%

per-IV [2]

2.67%

2.38%

3.13% 0.00% 0.00%

0.00%

0.00% 0.00% 0.00% 0.00% 0.00% NA

2.25%

0.00% 0.00% 0.00% 0.00%

perNA [3]

34.03%

56.92%

60.19% 41.34% 41.84%

40.59%

35.92% 47.98% 67.21% 89.85% 18.64% NA

23.80%

17.82% 24.60% 22.49% 18.26%

+IV BV% [4]

65.56%

41.63%

39.81% 48.75% 58.16%

59.41%

64.08% 52.02% 32.79% 10.15% 81.36% NA

75.51%

82.18% 75.40% 74.72% 81.74%

+IV IV% [5]

42.90%

35.88%

34.06% 44.00% 16.30%

30.58%

27.26% 47.29% 27.55% 16.34% 30.23% NA

73.45%

46.24% 39.41% 76.83% 59.17%

%ret+IV [6]

394.40%

405.17%

449.57% 188.32% NA

115.47%

NA 115.47% NA NA NA NA

270.75%

222.92% NA NA NA

-IV BV% [7]

45.21%

35.73%

37.96% 22.35% NA

29.47%

NA 29.47% NA NA NA NA

97.45%

22.00% NA NA NA

%ret-IV [8]

177

Intangible Analysis of Sectors and Industries TABLE 8.20a intMgtOS® Value Factor Report (LC:%) Notes

Values

intMgtOS Report

intMgtOS®5003.iR25a

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

Tuesday December 30th 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001561

Top 10 Medium Cap +IV Performance For medium cap firms, the strongest performance in terms of average return on $1000 for wealth creating firms (+IV) was in the following industries. The top 10 performing medium cap +IV firms averaged (geometric mean) an annualized return of 122.44% across the industry groups are listed in Table 8.24. Bottom 10 Medium Cap Performance The bottom 10 firms in terms of +IV shareholder performance are listed in Table 8.25. Overall, the bottom 10 performing medium cap +IV firms averaged (arithmetic mean) an annualized return of 4.18% across the industry groups listed above. Top 10 Medium Cap -IV Performance For medium cap firms, the strongest performance in terms of average return on $1000 for wealth destroying firms (-IV) was in the industries found in Table 8.26. Overall, the top 10 performing medium cap -IV firms averaged (geometric mean) an annualized return of 136.57% across the 10 industry groups as seen in Table 8.26.

Computer Peripherals Computer Networks Computer Services Computer Storage Devices Computer Hardware Communications Equipment Electronic Instr. & Controls Office Equipment Scientific & Technical Instr. Semiconductors Software & Programming

Industry

94.38%

100.00% 100.00% 92.31% 100.00% 100.00% 80.00% 100.00% 66.67% 100.00% 100.00% 100.00%

per+IV

Capital Goods Sum

Goods

Capital

Aerospace & Defense Constr.—Supplies & Fixtures Constr. & Agric. Machinery Construction—Raw Materials Construction Services Mobile Homes & RVs Misc. Capital Goods 76.00%

87.50% NA 100.00% 33.33% 100.00% NA 50.00%

per+IV

TABLE 8.22 Capital Goods Sector Analysis (Large Cap)

Technology Sum

Technology

Sector

TABLE 8.21 Capital Goods Sector Analysis (Large Cap)

24.00%

12.50% NA 0.00% 66.67% 0.00% NA 50.00%

per-IV

3.37%

0.00% 0.00% 7.69% 0.00% 0.00% 6.67% 0.00% 33.33% 0.00% 0.00% 0.00%

per-IV

0.00%

0.00% NA 0.00% 0.00% 0.00% NA 0.00%

perNA

2.25%

0.00% 0.00% 0.00% 0.00% 0.00% 13.33% 0.00% 0.00% 0.00% 0.00% 0.00%

perNA

36.83%

37.35% NA 22.91% 18.21% 58.62% NA 26.51%

+IV BV%

23.80%

45.98% 15.24% 39.35% 24.85% 16.14% 21.67% 32.59% 17.82% 24.60% 22.49% 18.26%

+IV BV%

63.17%

62.65% NA 77.09% 81.79% 41.38% NA 73.49%

+IV IV%

75.51%

54.02% 84.76% 60.65% 75.15% 83.86% 78.33% 67.41% 82.18% 75.40% 74.72% 81.74%

+IV IV%

54.67%

30.74% NA 62.46% 16.77% 95.81% NA 35.69%

%ret+IV

73.45%

30.40% 105.26% 49.21% 91.59% 35.11% 127.52% 77.44% 46.24% 39.41% 76.83% 59.17%

%ret+IV

720.68%

362.58% NA NA 397.12% NA NA 873.03%

-IV BV%

270.75%

NA NA 257.20% NA NA 301.84% NA 222.92% NA NA NA

-IV BV%

62.53%

82.94% NA NA 42.74% NA NA 68.91%

%ret-IV

97.45%

NA NA 109.22% NA NA 161.13% NA 22.00% NA NA NA

%ret-IV

179

Intangible Analysis of Sectors and Industries TABLE 8.23 Comparisons: Large Cap vs. Medium Cap per+IV

per-IV

perNA

+IV BV%

+IV IV%

%ret+IV

-IV BV%

%ret-IV

Grand Total— Large Cap

86.94%

10.39%

2.67%

34.03%

65.56%

42.90%

394.40%

45.21%

Grand Total— Medium Cap

88.92%

8.22%

2.86%

38.28%

58.96%

54.05%

2185.00%

66.46%

Total Difference

1.98%

-2.16%

0.19%

4.25%

-6.60%

11.15%

1790.60%

21.25%

Sector

TABLE 8.24 Top 10 Performing Industries (Medium Cap +IV) Sector

Industry

per+IV

per-IV

perNA

%ret+IV

Consumer Cyclical

Photography

100.00%

0.00%

0.00%

177.35%

Basic Materials

Metal Mining

100.00%

0.00%

0.00%

151.14%

Basic Materials

Iron & Steel

72.73%

27.27%

0.00%

145.35%

Services

Recreational Activities

80.00%

20.00%

0.00%

120.77%

Technology

Semiconductors

86.96%

10.87%

2.17%

120.34%

Services

Broadcasting & Cable TV

85.00%

10.00%

5.00%

111.22%

Services

Retail (Drugs)

66.67%

0.00%

33.33%

107.54%

Services

Communications Services

64.10%

20.51%

15.38%

106.45%

Technology

Communications Equipment

100.00%

0.00%

0.00%

106.03%

Financial

Consumer Financial Services

100.00%

0.00%

0.00%

99.10%

perNA

%ret+IV

TABLE 8.25 Bottom 10 Performing Industries (Medium Cap: +IV) Sector

Industry

per+IV

per-IV

Services

Printing Services

100.00%

0.00%

0.00%

-8.07%

Financial

Insurance (Misc.)

100.00%

0.00%

0.00%

-6.94%

Energy

Oil & Gas—Integrated

100.00%

0.00%

0.00%

-2.53%

Financial

Misc. Financial Services

83.33%

16.67%

0.00%

0.86%

Transportation

Misc. Transportation

85.71%

14.29%

0.00%

4.61%

Energy

Oil Well Services & Equipment

95.83%

0.00%

4.17%

8.38%

Consumer Cyclical

Appliance & Tool

80.00%

20.00%

0.00%

8.80%

Financial

Insurance (Prop. & Casualty)

Transportation

Trucking

Basic Materials

Containers & Packaging

88.89%

11.11%

0.00%

11.30%

100.00%

0.00%

0.00%

12.39%

80.00%

20.00%

0.00%

13.03%

180

Intangible Finance Standards

Bottom 10 Medium Cap -IV Performance For medium cap firms, the bottom performance in terms of average return on $1000 for wealth destroying firms (-IV) was in the industries listed in Tables 8.27 and 8.28. Overall, the bottom 10 performing medium cap -IV firms averaged an annualized return of 12.02% across the 10 industry groups in the table. All industries are represented in the table.

TABLE 8.26 Top 10 Performing Industries (Medium Cap: -IV) Sector

Industry

per+IV

per-IV

perNA

%ret-IV

Consumer Cyclical

Auto & Truck Manufacturers

66.67%

33.33%

0.00%

213.15%

Basic Materials

Chemicals—Plastics & Rubber

71.43%

28.57%

0.00%

161.51%

Services

Real Estate Operations

96.77%

1.61%

1.61%

153.30%

Energy

Coal

83.33%

16.67%

0.00%

149.37%

Energy

Oil & Gas Operations

85.71%

14.29%

0.00%

138.60%

Technology

Computer Services

84.62%

7.69%

7.69%

132.93%

Basic Materials

Iron & Steel

72.73%

27.27%

0.00%

125.58%

Transportation

Airline

50.00%

30.00%

20.00%

112.83%

Services

Retail (Grocery)

85.71%

14.29%

0.00%

105.70%

Technology

Semiconductors

86.96%

10.87%

2.17%

103.79%

TABLE 8.27 Bottom 10 Performing Industries (Medium Cap: -IV) Sector

Industry

per+IV

per-IV

perNA

%ret-IV

Capital Goods

Constr. & Agric. Machinery

75.00%

25.00%

0.00%

-13.21%

Financial

Insurance (Accident & Health)

87.50%

12.50%

0.00%

-9.98%

Consumer/NonCyclical

Food Processing

86.67%

13.33%

0.00%

3.27%

Healthcare

Healthcare Facilities

88.89%

11.11%

0.00%

15.64%

Financial

Misc. Financial Services

83.33%

16.67%

0.00%

17.31%

Utilities

Natural Gas Utilities

94.44%

5.56%

0.00%

17.67%

Consumer Cyclical

Apparel/Accessories

77.78%

22.22%

0.00%

19.69%

Basic Materials

Containers & Packaging

80.00%

20.00%

0.00%

21.87%

Financial

Regional Banks

96.55%

3.45%

0.00%

21.87%

Consumer/NonCyclical

Beverages (Nonalcoholic)

60.00%

40.00%

0.00%

26.03%

Conglomerates Sum

Conglomerates

Capital Goods Sum

Capital Goods

Basic Materials Sum

Basic Materials

Sector

Conglomerates

Aerospace & Defense Constr.—Supplies & Fixtures Constr. & Agric. Machinery Construction—Raw Materials Construction Services Mobile Homes & RVs Misc. Capital Goods

Chemical Manufacturing Chemicals—Plastics & Rubber Containers & Packaging Misc. Fabricated Products Fabricated Plastic & Rubber Gold & Silver Iron & Steel Forestry & Wood Products Metal Mining Non-Metallic Mining Paper & Paper Products

Industry

TABLE 8.28 Medium Cap Value Factor Report

66.67%

66.67%

92.98%

100.00% 50.00% 75.00% 85.71% 100.00% 100.00% 95.65%

33.33%

33.33%

5.26%

0.00% 50.00% 25.00% 14.29% 0.00% 0.00% 0.00%

10.11%

20.00% 0.00% 0.00% 7.69% 27.27% 0.00% 0.00% 0.00% 10.00%

80.00% 100.00% 100.00% 92.31% 72.73% 100.00% 100.00% 100.00% 90.00% 87.64%

0.00% 28.57%

per-IV

90.91% 71.43%

per+IV

0.00%

0.00%

1.75%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 4.35%

57.29%

57.29%

38.73%

28.41% 48.08% 45.69% 46.25% 40.65% 21.50% 37.60%

37.36%

32.51% 34.12% 32.56% 26.62% 32.40% 47.17% 43.19% 33.70% 56.59%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2.25%

37.67% 34.81%

+IV BV%

9.09% 0.00%

perNA

42.71%

42.71%

61.27%

71.59% 51.92% 54.31% 53.75% 59.35% 78.50% 62.40%

55.59%

67.49% 43.02% 67.44% 58.03% 46.75% 52.83% 56.81% 66.30% 43.41%

58.98% 65.19%

+IV IV%

29.52%

29.52%

64.91%

45.53% 55.95% 48.15% 47.35% 84.75% 70.67% 63.64%

46.89%

13.03% 21.75% 47.92% 60.44% 145.35% 93.18% 151.14% 62.08% 23.74%

18.00% 21.10%

%ret+IV

871.99%

871.99%

305.92%

NA 476.87% 224.72% 100.46% NA NA NA

3960.17%

117.33% NA NA 641.85% 11564.07% NA NA NA 491.16%

NA 983.61%

-IV BV%

(continues)

54.50%

54.50%

31.11%

NA 71.54% -13.21% 35.01% NA NA NA

97.18%

21.87% NA NA 37.80% 125.58% NA NA NA 93.37%

NA 161.51%

%ret-IV

Consumer/NonCyclical Sum

Consumer/NonCyclical

Industry

Crops Fish/Livestock Beverages (Alcoholic) Beverages (Nonalcoholic) Food Processing Office Supplies Personal & Household Prods. Tobacco

Appliance & Tool Apparel/Accessories Audio & Video Equipment Auto & Truck Manufacturers Auto & Truck Parts Footwear Furniture & Fixtures Jewelry & Silverware Recreational Products Photography Textiles—Non Apparel Tires

(continues)

Consumer Cyclical Sum

Consumer Cyclical

Sector

TABLE 8.28

78.95%

100.00% NA 100.00% 60.00% 86.67% 50.00% 100.00% 50.00%

87.93%

80.00% 77.78% 100.00% 66.67% 88.89% 100.00% 87.50% 100.00% 90.00% 100.00% 100.00% 100.00%

per+IV

15.79%

0.00% NA 0.00% 40.00% 13.33% 25.00% 0.00% 25.00%

8.62%

20.00% 22.22% 0.00% 33.33% 11.11% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

per-IV

5.26%

0.00% NA 0.00% 0.00% 0.00% 25.00% 0.00% 25.00%

3.45%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 12.50% 0.00% 10.00% 0.00% 0.00% 0.00%

perNA

46.11%

68.49% NA 55.31% 56.21% 48.55% 36.60% 22.59% 62.47%

37.89%

23.26% 46.98% 37.91% 16.01% 47.60% 27.12% 42.08% 30.94% 28.10% 12.15% 47.68% 48.72%

+IV BV%

52.27%

31.51% NA 44.69% 43.79% 47.76% 63.40% 77.41% 37.53%

62.11%

76.74% 53.02% 62.09% 83.99% 52.40% 72.88% 57.92% 69.06% 71.90% 87.85% 52.32% 51.28%

+IV IV%

28.89%

28.03% NA 15.30% 43.53% 16.94% 75.49% 35.72% 28.12%

56.21%

8.80% 36.66% 85.23% 84.60% 51.11% 78.03% 20.40% 37.24% 89.15% 177.35% 54.65% 66.94%

%ret+IV

1536.42%

NA NA NA 3698.52% 248.83% 187.97% NA 152.79%

1154.23%

117.51% 328.41% NA 3847.63% 200.80% NA NA NA NA NA NA NA

-IV BV%

31.54%

NA NA NA 26.03% 3.27% 97.93% NA 32.69%

68.31%

39.17% 19.69% NA 213.15% 49.86% NA NA NA NA NA NA NA

%ret-IV

Healthcare Sum

Healthcare

Financial Sum

Financial

Energy Sum

Energy

Biotechnology & Drugs Medical Equipment & Supplies Healthcare Facilities Major Drugs

Money Center Banks Regional Banks S&Ls/Savings Banks Investment Services Consumer Financial Services Misc. Financial Services Insurance (Accident & Health) Insurance (Life) Insurance (Misc.) Insurance (Prop. & Casualty)

Coal Oil & Gas—Integrated Oil & Gas Operations Oil Well Services & Equipment

5.56%

11.11% NA

88.89% NA 91.11%

6.00% 0.00%

90.00% 95.45%

7.24%

44.44% 0.00% 11.11%

44.44% 100.00% 88.89% 92.11%

0.00% 3.45% 0.00% 0.00% 0.00% 16.67% 12.50%

8.47%

16.67% 0.00% 14.29% 0.00%

100.00% 96.55% 100.00% 100.00% 100.00% 83.33% 87.50%

89.83%

83.33% 100.00% 85.71% 95.83%

3.33%

0.00% NA

4.00% 4.55%

0.66%

11.11% 0.00% 0.00%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

1.69%

0.00% 0.00% 0.00% 4.17%

26.98%

32.50% NA

26.57% 23.22%

43.72%

75.99% 23.15% 57.71%

53.68% 41.30% 47.47% 30.98% 47.54% 31.28% 36.51%

43.82%

31.79% 97.75% 42.27% 42.68%

73.02%

67.50% NA

73.43% 76.78%

52.49%

24.01% 76.85% 29.48%

46.32% 58.70% 48.92% 69.02% 52.46% 47.42% 63.49%

51.36%

68.21% 2.25% 54.01% 50.11%

71.79%

60.85% NA

83.72% 54.57%

37.46%

35.35% -6.94% 11.30%

40.91% 43.82% 35.42% 55.52% 99.10% 0.86% 54.57%

26.37%

67.02% -2.53% 36.33% 8.38%

233.69%

487.64% NA

126.56% NA

3114.66%

133.39% NA 128.86%

NA 11504.70% NA NA NA 108.34% 168.07%

2554.06%

2148.69% NA 2672.68% NA

(continues)

33.16%

15.64% NA

44.84% NA

40.92%

31.20% NA 91.44%

NA 21.87% NA NA NA 17.31% -9.98%

140.75%

149.37% NA 138.60% NA

Services Sum

Services

Sector

TABLE 8.28

Industry

Advertising Security Systems & Services Broadcasting & Cable TV Casinos & Gaming Communications Services Restaurants Hotels & Motels Recreational Activities Motion Pictures Printing & Publishing Printing Services Rental & Leasing Real Estate Operations Retail (Apparel) Retail (Department & Discount) Retail (Drugs) Retail (Grocery) Retail (Home Improvement) Retail (Catalog & Mail Order) Retail (Specialty) Retail (Technology) Schools Business Services Personal Services Waste Management Services

(continues)

7.02%

0.00% 14.29% 0.00% 0.00% 8.70% 100.00% 0.00% 0.00% 0.00% 0.00%

66.67% 85.71% 100.00% 100.00% 91.30% 0.00% 100.00% 91.30% 100.00% 100.00% 88.42%

0.00% 0.00% 10.00% 0.00% 20.51% 6.67% 0.00% 20.00% 0.00% 0.00% 0.00% 0.00% 1.61% 0.00% 42.86%

per-IV

83.33% 100.00% 85.00% 100.00% 64.10% 93.33% 85.71% 80.00% 100.00% 100.00% 100.00% 100.00% 96.77% 100.00% 57.14%

per+IV

4.56%

33.33% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 8.70% 0.00% 0.00%

16.67% 0.00% 5.00% 0.00% 15.38% 0.00% 14.29% 0.00% 0.00% 0.00% 0.00% 0.00% 1.61% 0.00% 0.00%

perNA

37.96%

29.59% 54.88% 21.56% 20.59% 30.87% NANA 17.10% 28.85% 37.28% 36.63%

29.64% 42.77% 32.87% 46.87% 46.50% 29.92% 54.13% 25.42% 41.61% 30.57% 94.25% 56.01% 47.14% 28.15% 24.01%

+IV BV% 39.45% 30.22% 111.22% 69.47% 106.45% 34.47% 32.42% 120.77% 19.29% 19.65% -8.07% 61.88% 29.90% 83.41% 18.91%

%ret+IV

58.99%

52.57%

70.41% 107.54% 64.12% 45.12% 78.44% 65.74% 79.41% 33.68% 50.58% 62.05% NA103.63% 36.79% 74.57% 82.90% 31.09% 71.15% 29.33% 62.72% 63.37% 26.19%

70.36% 57.23% 51.48% 53.13% 49.30% 70.08% 45.87% 74.58% 58.39% 65.43% 5.75% 43.99% 51.35% 71.85% 53.79%

+IV IV%

585.13%

NA NA NA NA

NA 416.78% NA NA 699.59%

NA NA 666.60% NA 850.81% 290.70% NA 137.55% NA NA NA NA 119.19% NA 135.29%

-IV BV%

68.74%

NA NA NA NA

NA 105.70% NA NA 48.71%

NA NA 89.20% NA 89.11% NA NA 44.82% NA NA NA NA 153.30% NA 48.51%

%ret-IV

83.33% 88.92%

75.86% 94.44% 100.00%

79.41%

NA 50.00% 75.00% 85.71% 100.00% 100.00%

91.50%

100.00% 100.00% 84.62% 100.00% 80.00% 100.00% 77.78% 100.00% 100.00% 86.96% 100.00%

Grand Total

Electric Utilities Natural Gas Utilities Water Utilities

Air Courier Airline Railroads Misc. Transportation Trucking Water Transportation

Computer Peripherals Computer Networks Computer Services Computer Storage Devices Computer Hardware Communications Equipment Electronic Instr. & Controls Office Equipment Scientific & Technical Instr. Semiconductors Software & Programming

Utilities Sum

Utilities

Transportation Sum

Transportation

Technology Sum

Technology

8.22%

16.67%

24.14% 5.56% 0.00%

14.71%

NA 30.00% 25.00% 14.29% 0.00% 0.00%

6.00%

0.00% 0.00% 7.69% 0.00% 20.00% 0.00% 14.81% 0.00% 0.00% 10.87% 0.00%

2.86%

0.00%

0.00% 0.00% 0.00%

5.88%

NA 20.00% 0.00% 0.00% 0.00% 0.00%

2.50%

0.00% 0.00% 7.69% 0.00% 0.00% 0.00% 7.41% 0.00% 0.00% 2.17% 0.00%

38.28%

60.66%

67.41% 50.36% 30.97%

39.91%

NA 37.73% 59.18% 22.76% 31.87% 67.04%

31.46%

23.21% 33.93% 32.55% 31.89% 62.35% 39.51% 39.17% 51.82% 27.08% 27.38% 25.50%

58.96%

39.34%

32.59% 49.64% 69.03%

54.64%

NA 62.27% 40.82% 67.51% 57.95% 32.96%

66.06%

76.79% 66.07% 67.45% 68.11% 37.65% 60.49% 54.21% 48.18% 69.72% 71.04% 69.04%

54.05%

25.82%

30.25% 19.53% 35.01%

40.91%

NA 82.88% 51.77% 4.61% 12.39% 81.62%

81.18%

98.88% 70.23% 75.04% 72.41% 47.34% 106.03% 62.03% 45.91% 59.53% 120.34% 57.43%

2185.00%

9267.18%

12237.68% 137.55% NA

1379.01%

NA 1273.15% 4916.42% 169.06% NA NA

351.02%

NA NA 285.09% NA 298.20% NA 413.62% NA NA 305.11% NA

66.46%

31.68%

33.68% 17.67% NA

93.97%

NA 112.83% 62.64% 68.74% NA NA

86.15%

NA NA 132.93% NA 33.69% NA 53.82% NA NA 103.79% NA

186

Intangible Finance Standards

TABLE 8.28a intMgtOS® Value Factor Report (MC:%) Notes

Values

intMgtOS Report

intMgtOS®5003.iR25c

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

Tuesday December 30th 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001613

TABLE 8.29 Comparison Between Firm Types Sector

per+IV

per-IV

perNA

+IV BV%

+IV IV%

%ret+IV

-IV BV%

Grand Total— Large Cap

86.94%

10.39%

2.67%

34.03%

65.56%

42.90%

394.40%

45.21%

Grand Total— Medium Cap

88.92%

8.22%

2.86%

38.28%

58.96%

54.05%

2185.00%

66.46%

Grand Total— Small Cap

90.07%

7.07%

2.87%

41.11%

55.34%

202.19%

561.54%

40.81%

S—L

3.13%

-3.32%

0.20%

7.08%

-10.22%

159.29%

167.14%

-4.40%

S—M

1.15%

-1.15%

0.01%

2.83%

-3.62%

148.14%

-1623.46%

-25.65%

%ret-IV

By Industry: ±IV% for Small Caps Small cap firms had the highest percentage of firms that were wealth creating (90.07%, that is, 3.13% more than large caps and 1.15% more than medium caps). Small caps also had the lowest number of value destroying firms (7.07%, that is, 3.32% less than large caps and 1.15% less than medium caps). See Table 8.29 The returns of small cap +IV dwarfed those of large caps and medium caps—202.19% average return on $1k averaged investment for +IV firms (as opposed to 42.90% for large caps and 54.05% for medium caps). Returns for -IV small cap firms was 40.81% (4.40% less than large caps and 25.65% less than medium caps). According to the tenets of intangible finance theory, this difference can be easily explained.

187

Intangible Analysis of Sectors and Industries TABLE 8.30 Top 10 Small Cap +IV Performance Sector

Industry

per+IV

+IV BV% +IV IV%

%ret+IV

Services

Communications Services

69.44%

35.91%

57.65%

6085.24%

Consumer/NonCyclical

Fish/Livestock

33.33%

16.08%

83.92%

996.34%

Consumer Cyclical

Auto & Truck Manufacturers

100.00%

2.60%

97.40%

255.49%

Technology

Communications Equipment

247.86%

Technology

Computer Peripherals

Technology Technology

93.02%

36.39%

61.31%

100.00%

38.89%

61.11%

228.95%

Electronic Instr. & Controls

93.62%

35.69%

62.87%

224.08%

Computer Networks

92.31%

37.83%

62.17%

217.03%

Financial

Misc. Financial Services

71.43%

50.80%

42.03%

178.74%

Technology

Scientific & Technical Instr.

100.00%

38.57%

57.09%

178.62%

Constr. & Agric. Machinery

Capital Goods

100.00%

32.84%

67.16%

173.73%

Geometric Mean

81.73%

26.71%

63.77%

344.74%

Arithmetic Mean

85.32%

32.56%

65.27%

878.61%

Small caps were driving the economy from 2002 to 2003 and behaving according to intangible finance criteria. Stocks with -IV should underperform stocks with +IV unless -IV stocks are recovering from a bear market beating (as was the case in 2002–2003). Small caps also had a significantly lower percentage of book value to market value compared with medium caps (561.54% compared with 2185%). This further shows the intangible health of small caps. Top 10 Small Cap +IV Performance For medium cap firms, the strongest performance in terms of average return on $1000 for wealth creating firms (+IV) was in the following industries. In Table 8.30, small caps had significant returns for the 2002–2003 years. The top 10 performing small cap +IV firms averaged an annualized return of 344.74% (geometric mean) across the industry groups as listed in the table. Bottom 10 Small Cap +IV Performance The bottom 10 firms in terms of +IV shareholder performance for small caps are listed in Table 8.31. Overall, the bottom 10 performing small cap +IV firms averaged (arithmetic mean) an annualized return of 12.86% across the industry groups listed in the table.

188

Intangible Finance Standards

TABLE 8.31 Bottom 10 Small Cap +IV Performance Sector

Industry

per+IV

+IV BV%

+IV IV%

%ret+IV -5.59%

Consumer/NonCyclical

Beverages (Nonalcoholic)

66.67%

27.35%

72.65%

Services

Personal Services

75.00%

26.73%

35.51%

4.55%

Consumer/NonCyclical

Tobacco

33.33%

85.99%

14.01%

12.32%

Consumer/NonCyclical

Office Supplies

100.00%

42.82%

57.18%

13.05%

Utilities

Water Utilities

100.00%

55.23%

44.77%

14.10%

Financial

Insurance (Life)

63.64%

78.52%

13.44%

16.62%

Energy

Oil Well Services & Equipment

91.67%

50.89%

45.05%

17.79%

Basic Materials

Fabricated Plastic & Rubber

100.00%

48.75%

51.25%

18.36%

Financial

Insurance (Prop. & Casualty)

66.67%

61.39%

25.26%

18.59%

Basic Materials

Paper & Paper Products

100.00%

50.95%

30.82%

18.81%

TABLE 8.32 Top 10 Small Cap -IV Performance Sector

Industry

per-IV

%ret-IV

Technology

Electronic Instr. & Controls

2.13%

309.18%

Energy

Oil & Gas Operations

5.13%

211.58%

Utilities

Natural Gas Utilities

25.00%

184.57%

Consumer/Non-Cyclical

Beverages (Nonalcoholic)

33.33%

152.22%

Consumer/Non-Cyclical

Fish/Livestock

66.67%

145.78%

Financial

Regional Banks

1.63%

108.50%

Services

Retail (Specialty)

3.57%

107.16%

Basic Materials

Containers & Packaging

40.00%

96.47%

Consumer/Non-Cyclical

Food Processing

10.00%

92.18%

Basic Materials

Iron & Steel

20.00%

84.80%

Geometric Mean

11.09%

137.11%

Arithmetic Mean

20.75%

149.24%

Top 10 Small Cap -IV Performance For small cap firms, the strongest performance in terms of average return on $1000 for wealth destroying firms (-IV) was in the following industries seen in Table 8.32.

189

Intangible Analysis of Sectors and Industries TABLE 8.33 Bottom 10 Small Cap -IV Performance Sector

Industry

per-IV

%ret-IV

Financial

Investment Services

18.18%

-57.94%

Services

Business Services

Consumer/Non-Cyclical

Personal & Household Prods.

1.96%

-44.72%

12.50%

-37.71%

Healthcare

Healthcare Facilities

13.04%

-30.89%

Consumer Cyclical

Appliance & Tool

33.33%

-26.02%

Technology

Semiconductors

Consumer Cyclical

Apparel/Accessories

1.61%

-25.33%

20.00%

-21.67%

Conglomerates

Conglomerates

50.00%

-19.93%

Financial

Insurance (Prop. & Casualty)

33.33%

-18.65%

Basic Materials

Chemicals—Plastics & Rubber

33.33%

-14.10%

Geometric Mean

14.26%

N/A

Arithmetic Mean

21.73%

-29.70%

Overall, the top 10 performing medium cap -IV firms averaged an annualized return of 137.11% across the 10 industry groups in the table. Bottom 10 Small Cap -IV Performance For small cap firms, the bottom performance in terms of average return on $1000 for wealth destroying firms (-IV) was in the following industries seen in Table 8.33. Overall, across the 10 industry groups above, the bottom 10 performing small cap -IV firms averaged an annualized return of -29.70%. This pattern of returns is consistent with intangible finance theory, penalizing negative intangible value. All industries are represented Tables 8.34 and 8.34a. By Industry: ±IV% for Micro Caps Micro cap firms had the highest percentage of wealth destroying firms (20.37%, that is, 9.98% more than large caps, 12.15% more than medium caps, and 13.30% more than small caps). Micro caps also had, not surprisingly, the highest number of value unaccountable firms (28.09%, that is, 25.42% more than large caps, 25.23% more than medium caps, and 25.22% more than small caps). Small caps were significantly less value creating than their large, medium, and small counterparts: 51.21%, that is, 35.73% less than large caps, 37.71% less than medium caps, and 38.86% less than small caps. The results are summarized in Table 8.35.

Conglomerates Sum

Conglomerates

Capital Goods Sum

Capital Goods

Basic Materials Sum

Basic Materials

Sector

Conglomerates

Aerospace & Defense Constr.—Supplies & Fixtures Constr. & Agric. Machinery Construction—Raw Materials Construction Services Mobile Homes & RVs Misc. Capital Goods

Chemical Manufacturing Chemicals—Plastics & Rubber Containers & Packaging Misc. Fabricated Products Fabricated Plastic & Rubber Gold & Silver Iron & Steel Forestry & Wood Products Metal Mining Non-Metallic Mining Paper & Paper Products

Industry

TABLE 8.34 Small Cap Value Factor Report

50.00%

50.00%

89.41%

92.31% 91.67% 100.00% 100.00% 88.89% 100.00% 80.95%

82.56%

93.33% 50.00% 60.00% 81.25% 100.00% 100.00% 80.00% 66.67% 100.00% 0.00% 100.00%

per+IV

50.00%

50.00%

8.24%

7.69% 8.33% 0.00% 0.00% 7.41% 0.00% 14.29%

13.95%

0.00% 33.33% 40.00% 18.75% 0.00% 0.00% 20.00% 33.33% 0.00% 50.00% 0.00%

per-IV

0.00%

0.00%

2.35%

0.00% 0.00% 0.00% 0.00% 3.70% 0.00% 4.76%

3.49%

6.67% 16.67% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 50.00% 0.00%

perNA

47.31%

47.31%

51.32%

54.41% 44.27% 32.84% 69.58% 51.97% 48.20% 54.28%

43.46%

49.59% 38.32% 51.31% 44.74% 48.75% 20.07% 47.20% 48.45% 58.02% NA 50.95%

+IV BV%

52.69%

52.69%

46.77%

45.59% 55.73% 67.16% 30.42% 42.76% 51.80% 45.72%

51.70%

50.41% 61.68% 37.10% 55.26% 51.25% 69.61% 52.80% 51.55% 41.98% NA 30.82%

+IV IV%

83.86%

83.86%

83.54%

90.58% 42.52% 173.73% 145.19% 96.97% 30.17% 61.30%

67.78%

88.65% 66.37% 40.06% 91.14% 18.36% 69.68% 51.42% 35.85% 132.19% NA 18.81%

%ret+IV

342.91%

342.91%

863.19%

100.10% 5059.03% NA NA 733.55% NA 139.28%

717.15%

NA 128.41% 233.09% 2655.73% NA NA 114.42% 1157.40% NA 121.95% NA

-IV BV%

-19.93%

-19.93%

35.20%

22.18% 9.96% NA NA 55.71% NA 34.28%

59.56%

NA -14.10% 96.47% 50.16% NA NA 84.80% 73.96% NA 47.84% NA

%ret-IV

Consumer/NonCyclical Sum

Consumer/NonCyclical

Consumer Cyclical Sum

Consumer Cyclical

Crops Fish/Livestock Beverages (Alcoholic) Beverages (Nonalcoholic) Food Processing Office Supplies Personal & Household Prods. Tobacco

Appliance & Tool Apparel/Accessories Audio & Video Equipment Auto & Truck Manufacturers Auto & Truck Parts Footwear Furniture & Fixtures Jewelry & Silverware Recreational Products Photography Textiles—Non Apparel Tires

80.43%

100.00% 33.33% 75.00% 66.67% 90.00% 100.00% 87.50% 33.33%

82.81%

66.67% 80.00% 100.00% 100.00% 75.00% 100.00% 85.71% 100.00% 83.33% 100.00% 50.00% 100.00%

17.39%

0.00% 66.67% 25.00% 33.33% 10.00% 0.00% 12.50% 33.33%

14.06%

33.33% 20.00% 0.00% 0.00% 12.50% 0.00% 14.29% 0.00% 16.67% 0.00% 50.00% 0.00%

2.17%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 33.33%

3.13%

0.00% 0.00% 0.00% 0.00% 12.50% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

43.57%

28.07% 16.08% 47.37% 27.35% 52.35% 42.82% 22.70% 85.99%

48.38%

38.74% 45.73% 0.00% 2.60% 61.03% 45.32% 44.70% 69.69% 49.02% 58.11% 69.78% 50.75%

56.43%

71.93% 83.92% 52.63% 72.65% 47.65% 57.18% 77.30% 14.01%

49.17%

61.26% 54.27% 0.00% 97.40% 33.57% 54.68% 55.30% 30.31% 50.98% 41.89% 30.22% 49.25%

76.96%

29.34% 996.34% 72.45% -5.59% 49.17% 13.05% 92.81% 12.32%

50.82%

87.26% 54.15% NA 255.49% 27.87% 49.76% 68.63% 53.38% 43.42% 78.82% 90.23% 64.77%

918.58%

NA 1244.49% 1822.82% 118.48% 392.82% NA 848.89% 149.25%

278.12%

1160.10% 124.48% NA NA 110.17% NA 116.01% NA 379.60% NA 139.47% NA

(continues)

78.65%

NA 145.78% 24.93% 152.22% 92.18% NA -37.71% 13.83%

-0.28%

-26.02% -21.67% NA NA 27.20% NA -0.59% NA -4.65% NA 22.29% NA

Industry

Biotechnology & Drugs Medical Equipment & Supplies Healthcare Facilities Major Drugs

Money Center Banks Regional Banks S&Ls/Savings Banks Investment Services Consumer Financial Services Misc. Financial Services Insurance (Accident & Health) Insurance (Life) Insurance (Miscellaneous) Insurance (Prop. & Casualty)

Coal Oil & Gas—Integrated Oil & Gas Operations Oil Well Services & Equipment

(continues)

Healthcare Sum

Healthcare

Financial Sum

Financial

Energy Sum

Energy

Sector

TABLE 8.34

93.06%

92.71% 96.30% 86.96% NA

90.65%

NA 97.56% 100.00% 81.82% 86.67% 71.43% 100.00% 63.64% 100.00% 66.67%

92.31%

100.00% NA 92.31% 91.67%

per+IV

3.47%

2.08% 1.85% 13.04% NA

8.54%

NA 1.63% 0.00% 18.18% 13.33% 21.43% 0.00% 36.36% 0.00% 33.33%

4.62%

0.00% NA 5.13% 4.17%

per-IV

3.47%

5.21% 1.85% 0.00% NA

0.81%

NA 0.81% 0.00% 0.00% 0.00% 7.14% 0.00% 0.00% 0.00% 0.00%

3.08%

0.00% NA 2.56% 4.17%

perNA

29.03%

27.20% 28.13% 37.60% NA

45.49%

NA 41.61% 46.48% 28.21% 44.77% 50.80% 30.65% 78.52% 57.77% 61.39%

46.45%

38.79% NA 44.32% 50.89%

+IV BV%

69.75%

72.80% 69.88% 58.81% NA

48.36%

NA 55.81% 51.48% 55.06% 35.98% 42.03% 49.94% 13.44% 42.23% 25.26%

50.07%

61.21% NA 52.34% 45.05%

+IV IV%

109.00%

107.59% 114.37% 101.29% NA

47.52%

NA 36.60% 55.82% 66.56% 59.11% 178.74% 72.10% 16.62% 27.45% 18.59%

71.67%

35.31% NA 106.61% 17.79%

%ret+IV

193.36%

230.09% 277.20% 118.22% NA

268.73%

NA 371.28% NA 154.73% 161.50% 540.87% NA 120.80% NA 216.08%

1681.76%

NA NA 2076.62% 133.69%

-IV BV%

8.19%

63.09% 15.62% -30.89% NA

15.50%

NA 108.50% NA -57.94% 53.50% 47.98% NA 30.65% NA -18.65%

153.79%

NA NA 211.58% 38.23%

%ret-IV

Services Sum

Services

Advertising Security Systems & Services Broadcasting & Cable TV Casinos & Gaming Communications Services Restaurants Hotels & Motels Recreational Activities Motion Pictures Printing & Publishing Printing Services Rental & Leasing Real Estate Operations Retail (Apparel) Retail (Department & Discount) Retail (Drugs) Retail (Grocery) Retail (Home Improvement) Retail (Catalog & Mail Order) Retail (Specialty) Retail (Technology) Schools Business Services Personal Services Waste Management Services 89.13%

83.33% 100.00% 78.95% 84.62% 69.44% 100.00% 80.00% 80.00% 80.00% 90.00% 100.00% 100.00% 90.91% 100.00% 0.00% 100.00% 88.89% NA 100.00% 96.43% 100.00% 66.67% 96.08% 75.00% 100.00% 6.83%

0.00% 0.00% 10.53% 15.38% 16.67% 0.00% 20.00% 20.00% 0.00% 0.00% 0.00% 0.00% 7.27% 0.00% 100.00% 0.00% 11.11% NA 0.00% 3.57% 0.00% 0.00% 1.96% 25.00% 0.00% 4.04%

16.67% 0.00% 10.53% 0.00% 13.89% 0.00% 0.00% 0.00% 20.00% 10.00% 0.00% 0.00% 1.82% 0.00% 0.00% 0.00% 0.00% NA 0.00% 0.00% 0.00% 33.33% 1.96% 0.00% 0.00% 43.54%

19.85% 42.25% 42.99% 35.80% 35.91% 48.90% 82.84% 48.24% 44.74% 32.41% 54.90% 76.82% 51.87% 51.34% NA 64.12% 54.13% NA 43.11% 34.77% 56.16% 26.42% 36.50% 26.73% 20.27% 52.57%

80.15% 57.75% 50.36% 64.20% 57.65% 51.10% 17.16% 51.76% 55.26% 67.59% 45.10% 23.18% 48.13% 42.46% NA 35.88% 45.87% NA 56.89% 59.47% 43.84% 73.58% 58.62% 35.51% 57.36% 588.51%

129.84% 59.51% 50.54% 48.33% 6085.24% 38.27% 32.94% 28.28% 80.78% 47.43% 36.65% 65.06% 46.57% 36.53% NA 55.68% 122.26% NA 29.97% 69.30% 52.55% 64.38% 114.31% 4.55% 48.44% 250.66%

NA NA 334.25% 137.45% 411.65% NA 145.77% 193.42% NA NA NA NA 141.81% NA 123.15% NA 141.84% NA NA 132.98% NA NA 112.11% 133.24% NA

(continues)

35.91%

NA NA -5.67% 33.58% 66.98% NA 28.47% 37.48% NA NA NA NA 15.15% NA 25.30% NA 4.96% NA NA 107.16% NA NA -44.72% 56.48% NA

86.96% 90.07%

91.67% 75.00% 100.00%

72.22%

100.00% 60.00% 75.00% 66.67% 80.00% 75.00%

Grand Total

Electric Utilities Natural Gas Utilities Water Utilities

Air Courier Airline Railroads Misc. Transportation Trucking Water Transportation

95.71%

100.00% 92.31% 97.50% 100.00% 88.89% 93.02% 93.62% 100.00% 100.00% 96.77% 95.79%

per+IV

Utilities Sum

Utilities

Transportation Sum

Transportation

Industry

Computer Peripherals Computer Networks Computer Services Computer Storage Devices Computer Hardware Communications Equipment Electronic Instr. & Controls Office Equipment Scientific & Technical Instr. Semiconductors Software & Programming

(continues)

Technology Sum

Technology

Sector

TABLE 8.34

7.07%

13.04%

8.33% 25.00% 0.00%

19.44%

0.00% 20.00% 25.00% 33.33% 10.00% 25.00%

1.71%

0.00% 0.00% 2.50% 0.00% 0.00% 4.65% 2.13% 0.00% 0.00% 1.61% 1.05%

per-IV

2.87%

0.00%

0.00% 0.00% 0.00%

8.33%

0.00% 20.00% 0.00% 0.00% 10.00% 0.00%

2.57%

0.00% 7.69% 0.00% 0.00% 11.11% 2.33% 4.26% 0.00% 0.00% 1.61% 3.16%

perNA

41.11%

60.98%

65.30% 54.17% 55.23%

49.07%

47.08% 53.30% 50.10% 32.32% 41.73% 61.01%

34.10%

38.89% 37.83% 28.36% 41.82% 32.15% 36.39% 35.69% 40.57% 38.57% 35.04% 31.98%

+IV BV%

55.34%

39.02%

34.70% 45.83% 44.77%

41.88%

52.92% 35.03% 49.90% 67.68% 51.88% 19.80%

62.78%

61.11% 62.17% 69.58% 58.18% 67.85% 61.31% 62.87% 59.43% 57.09% 57.13% 65.50%

+IV IV%

202.19%

29.23%

25.06% 44.44% 14.10%

58.07%

26.60% 135.97% 50.76% 49.63% 24.14% 37.11%

157.73%

228.95% 217.03% 133.70% 133.35% 83.79% 247.86% 224.08% 69.68% 178.62% 141.24% 99.21%

%ret+IV

561.54%

291.03%

168.64% 453.65% NA

1987.95%

NA 4779.27% 104.82% 2252.25% 105.26% 169.09%

349.55%

NA NA 154.99% NA NA 275.69% 102.09% NA NA 829.19% 123.76%

-IV BV%

40.81%

127.51%

13.39% 184.57% NA

32.92%

NA 49.49% 22.92% 47.23% NA 80.67%

89.82%

NA NA 53.29% NA NA 60.14% 309.18% NA NA -25.33% 81.52%

%ret-IV

195

Intangible Analysis of Sectors and Industries TABLE 8.34a intMgtOS® Value Factor Report (SC:%) Notes

Values

intMgtOS Report

intMgtOS®5003.iR25d

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

Tuesday December 30th 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001631

TABLE 8.35 Comparing Value Factors by Firm Type per+IV

per-IV

perNA

+IV BV%

+IV IV%

%ret+IV

-IV BV%

%ret-IV

Grand Total— Large Cap

86.94%

10.39%

2.67%

34.03%

65.56%

42.90%

394.40%

45.21%

Grand Total— Medium Cap

88.92%

8.22%

2.86%

38.28%

58.96%

54.05%

2185.00%

66.46%

Grand Total— Small Cap

90.07%

7.07%

2.87%

41.11%

55.34%

202.19%

561.54%

40.81%

Grand Total— Micro Cap

51.21%

20.37%

28.09%

44.04%

52.76%

123.32%

1198.09%

155.68% 110.47%

Sector

Micro—Large

-35.73%

9.98%

25.42%

10.01%

-12.80%

80.42%

803.69%

Micro—Medium

-37.71%

12.15%

25.23%

5.76%

-6.20%

69.27%

-986.91%

89.22%

Micro—Small

-35.73%

9.98%

25.42%

10.01%

-12.80%

80.42%

803.69%

110.47%

The returns of micro cap +IV (123.32%) were substantially above large caps (42.90%) and medium caps (54.05%), but below small caps (202.19%) for an average return on $1k invested in micro cap +IV firms. Returns for -IV micro cap firms was 155.68%, substantially above large caps (45.21%), medium caps (66.46%) and small caps (40.81%). Top 10 Micro Cap +IV Performance For micro cap firms, the strongest performance in terms of average return on $1000 for wealth creating firms (+IV) was in Table 8.36. In the table, micro caps had significant returns for the 2002–2003 years. The top 10 performing micro cap +IV firms averaged an annualized return of 256.94% (geometric mean) across the industry groups are listed.

49.68%

Chemical Manufacturing

Software & Programming

Printing Services

Crops

Semiconductors

Communications Equipment

Basic Materials

Technology

Services

Consumer/Non-Cyclical

Technology 47.31% 49.21%

Arithmetic Mean

60.00%

50.00%

52.04%

48.53%

36.36%

Geometric Mean

Technology

56.67%

Retail (Drugs)

Services

77.78%

30.00%

Construction—Raw Materials

Gold & Silver

Basic Materials

31.03%

per+IV

Capital Goods

Motion Pictures

Industry

Services

Sector

TABLE 8.36 Top 10 Micro Cap +IV Performance

22.00%

18.94%

17.83%

25.56%

26.67%

20.00%

11.48%

19.12%

18.18%

7.41%

60.00%

13.79%

per-IV

28.64%

25.03%

32.48%

17.78%

13.33%

30.00%

36.48%

30.88%

45.45%

14.81%

10.00%

55.17%

perNA

45.73%

43.54%

43.06%

42.49%

65.39%

37.93%

31.98%

45.68%

34.51%

30.96%

84.23%

41.03%

+IV BV%

50.52%

47.27%

54.14%

53.65%

34.61%

62.07%

64.81%

53.25%

65.49%

42.47%

15.77%

58.97%

+IV IV%

271.77%

256.94%

192.32%

202.53%

204.30%

204.51%

232.98%

254.33%

267.42%

268.47%

314.08%

576.73%

%ret+IV

Intangible Analysis of Sectors and Industries

197

Bottom 10 Micro Cap +IV Performance The bottom 10 firms in terms of +IV shareholder performance for micro caps are listed in Table 8.37. Overall, the bottom 10 performing micro cap +IV firms averaged an annualized return of 4.00% across the industry groups listed in this table. Top 10 Micro Cap -IV Performance For micro cap firms, the strongest performance in terms of average return on $1000 for wealth destroying firms (-IV) was in the industries found in Table 8.38. Overall, the top 10 performing micro cap -IV firms averaged an annualized return of 516.93% across the 10 industry groups in the table. The geometric mean is used in order to decrease the distortion of outlying values. Bottom 10 Micro Cap -IV Performance For micro cap firms, the bottom performance in terms of average return on $1000 for wealth destroying firms (-IV) was in the industries found in Table 8.39. Overall, across the 10 industry groups above, the bottom 10 performing small cap -IV firms averaged an annualized return of -50.90%. This pattern of returns is consistent with intangible finance theory, penalizing negative intangible value. All industries are represented in Table 8.40.

CONCLUSION It is essential to understand what type of firm you are investing in—large cap, medium cap, small cap, or micro cap. From there, by understanding how +IV and -IV work, you will find it possible to limit your investment universe to higher-probability investments. This analysis has conclusively shown that a good investment in a specific type of firm with a specific value creation type can be disastrous in a different industry with a different value creation type. It is therefore essential to assess: 1. Firm type (large cap, medium cap, small cap, micro cap) 2. Value type (creation, destruction, or unaccountable) In general, the market seeks to penalize negative intangible value. The exception is the situation where an industry is in “turnaround phase”; in that case, -IV (value destroying) firms will frequently outperform +IV (value creating) ones.

Misc. Transportation Office Equipment

Transportation Technology Consumer Cyclical Services Basic Materials Technology Services

Broadcasting & Cable TV Geometric Mean Arithmetic Mean

Apparel/Accessories Retail (Grocery) Misc. Fabricated Products Computer Services

Retail (Home Improvement) Personal Services Healthcare Facilities

Industry

Services Services Healthcare

Sector

TABLE 8.38 Top 10 Micro Cap -IV Performance

Office Supplies 40.39%

37.98%

23.37% 28.66%

12.33%

47.95% 32.54% 38.42%

66.67% 34.78%

9.52% 39.13%

13.04%

25.00% 34.48%

50.00% 41.38%

30.43%

13.33%

58.33% 11.11% 17.48%

60.00%

8.33% 51.85% 45.63%

per-IV

NA

28.98%

per+IV

31.25% 50.00%

37.50% 25.00%

30.76% 32.21%

56.52%

39.27%

23.81% 26.09%

25.00% 24.14%

257.90% 478.99%

283.11% 2111.12%

134.19%

131.18% 173.44% 1337.03%

194.72%

116.10% 170.86% 20.00%

138.13% 37.04% 36.89%

+IV BV%

54.29%

53.51%

49.80%

49.71% 54.62%

53.11%

33.33%

perNA

21.18%

NA

25.00%

23.81% 31.25%

27.78%

0.00% 0.00% 10.00%

66.67%

44.75% 39.74% 71.08% 51.07%

27.27%

0.00% 55.56% 30.00% 16.67%

67.79%

33.33%

9.52%

44.44% 60.00%

Textiles—Non Apparel Natural Gas Utilities Printing & Publishing Retail (Grocery) Constr.—Supplies & Fixtures

61.25%

33.33%

+IV BV%

50.00% 45.45%

perNA

58.33%

per-IV

55.56%

8.33% 16.67% 22.73% 100.00%

Retail (Home Improvement) Insurance (Accident & Health) Hotels & Motels Water Utilities

Services Financial Services Utilities Consumer Cyclical Utilities Services Services Capital Goods Consumer/Non-Cyclical Geometric Mean Arithmetic Mean

per+IV

Industry

Sector

TABLE 8.37 Bottom 10 Micro Cap +IV Performance

516.93% 1671.74%

221.30%

227.99%

266.42% 237.41%

282.81% 268.96%

596.67%

81.34%

171.91% NA

160.33%

23.65% 41.24%

154.36% 38.33% 48.25%

133.81% 645.64%

1135.08%

-47.73% 89.22%

%ret+IV

4.00%

NA

24.30% 26.62%

23.65%

22.63%

13.50% 14.27% 16.20%

-47.73% -44.76% -8.70%

%ret+IV

12835.12%

+IV IV%

39.31% 41.95%

50.20%

50.29% 45.38%

46.89%

33.16% 60.26% 13.44% 48.93%

32.21%

38.75%

+IV IV%

31.03% 33.24% 37.15%

Gold & Silver

Air Courier

Advertising

Recreational Activities

Retail (Technology)

Motion Pictures

Geometric Mean

Arithmetic Mean

Basic Materials

Transportation

Services

Services

Services

Services

20.00%

22.73%

50.00%

25.00%

77.78%

20.00%

60.00%

Natural Gas Utilities

Mobile Homes & RVs

40.00%

25.00%

Capital Goods

Non-Metallic Mining

per+IV

Utilities

Forestry & Wood Products

Basic Materials

Industry

Basic Materials

Sector

TABLE 8.39 Bottom 10 Micro Cap -IV Performance

26.91%

23.54%

13.79%

40.00%

27.27%

15.63%

50.00%

7.41%

40.00%

30.00%

20.00%

25.00%

per-IV

35.71%

31.85%

55.17%

40.00%

47.73%

34.38%

25.00%

14.81%

40.00%

10.00%

40.00%

50.00%

perNA

168.12%

112.66%

576.73%

54.69%

156.10%

179.90%

157.50%

268.47%

67.22%

16.20%

150.91%

53.51%

%ret+IV

4843.44%

842.85%

759.79%

137.01%

241.33%

462.14%

901.82%

36441.02%

123.07%

4805.12%

4380.00%

183.06%

-IV BV%

-51.90%

#NUM!

-26.67%

-26.82%

-37.92%

-39.55%

-47.96%

-50.00%

-56.57%

-56.61%

-80.00%

-96.93%

%ret-IV

Conglomerates Sum

Conglomerates

Capital Goods Sum

Capital Goods

Basic Materials Sum

Basic Materials

Sector

Conglomerates

Aerospace & Defense Constr.—Supplies & Fixtures Constr. & Agric. Machinery Construction—Raw Materials Construction Services Mobile Homes & RVs Misc. Capital Goods

Chemical Manufacturing Chemicals—Plastics & Rubber Containers & Packaging Misc. Fabricated Products Fabricated Plastic & Rubber Gold & Silver Iron & Steel Forestry & Wood Products Metal Mining Non-Metallic Mining Paper & Paper Products

Industry

TABLE 8.40 Small Cap Value Factor Report

0.00%

0.00%

39.29%

50.00% 37.50% 28.57% 30.00% 39.73% 20.00% 39.29%

44.62%

48.53% 33.33% 45.83% 39.13% 42.31% 77.78% 18.18% 25.00% 46.15% 40.00% 30.00%

per+IV

0.00%

0.00%

34.29%

23.53% 31.25% 57.14% 60.00% 38.36% 40.00% 30.36%

25.10%

19.12% 16.67% 16.67% 34.78% 30.77% 7.41% 31.82% 25.00% 30.77% 20.00% 60.00%

per-IV

100.00%

100.00%

26.07%

26.47% 31.25% 14.29% 10.00% 21.92% 40.00% 29.46%

29.48%

30.88% 50.00% 37.50% 26.09% 26.92% 14.81% 45.45% 50.00% 23.08% 40.00% 10.00%

perNA

NA

NA

54.25%

36.76% 54.62% 89.70% 84.23% 66.80% 87.71% 45.79%

49.44%

45.68% 78.10% 56.29% 56.18% 52.25% 30.96% 82.03% 66.14% 33.09% 82.89% 54.21%

NA

NA

45.75%

63.24% 45.38% 10.30% 15.77% 33.20% 12.29% 54.21%

41.41%

53.25% 21.90% 43.71% 31.31% 47.75% 42.47% 17.97% 33.86% 34.29% 17.11% 34.82%

+IV BV% +IV IV%

NA

NA

80.70%

68.33% 24.30% 82.50% 314.08% 68.79% 67.22% 92.93%

160.76%

254.33% 144.32% 79.42% 41.24% 68.44% 268.47% 119.80% 53.51% 65.88% 150.91% 29.12%

%ret+IV

NA

NA

3588.35%

126.11% 235.59% 136.83% 154.91% 14801.78% 123.07% 134.80%

788.80%

145.94% 117.09% 194.34% 134.19% 144.95% 36441.02% 201.96% 183.06% 114.77% 4380.00% 5176.13%

-IV BV%

NA

NA

23.97%

-6.01% 0.26% -15.71% 26.72% 54.41% -56.57% 26.53%

71.29%

-3.14% 17.34% 26.62% 237.41% -7.64% -50.00% 5.96% -96.93% 209.17% -80.00% 11.50%

%ret-IV

Energy

Consumer/NonCyclical Sum

Consumer/NonCyclical

Consumer Cyclical Sum

Consumer Cyclical

Coal Oil & Gas—Integrated Oil & Gas Operations Oil Well Services & Equipment

Crops Fish/Livestock Beverages (Alcoholic) Beverages (Nonalcoholic) Food Processing Office Supplies Personal & Household Prods. Tobacco

Appliance & Tool Apparel/Accessories Audio & Video Equipment Auto & Truck Manufacturers Auto & Truck Parts Footwear Furniture & Fixtures Jewelry & Silverware Recreational Products Photography Textiles—Non Apparel Tires

50.00% NA 60.91% 55.17%

48.73%

60.00% 20.00% 30.77% 60.00% 55.93% 25.00% 45.65% 50.00%

42.58%

30.00% 41.38% 55.56% 85.71% 42.50% 80.00% 42.11% 28.57% 33.93% 30.77% 44.44% 100.00%

0.00% NA 23.64% 20.69%

24.68%

26.67% 40.00% 30.77% 20.00% 25.42% 50.00% 17.39% 0.00%

32.42%

50.00% 34.48% 22.22% 0.00% 25.00% 10.00% 47.37% 50.00% 32.14% 30.77% 55.56% 0.00%

50.00% NA 15.45% 24.14%

26.58%

13.33% 40.00% 38.46% 20.00% 18.64% 25.00% 36.96% 50.00%

24.61%

20.00% 24.14% 22.22% 14.29% 32.50% 10.00% 10.53% 21.43% 32.14% 38.46% 0.00% 0.00%

17.16% NA 42.71% 55.19%

50.23%

65.39% 72.51% 77.98% 44.04% 45.92% 49.80% 50.11% 10.39%

52.00%

67.18% 61.73% 29.43% 49.83% 48.22% 51.13% 55.74% 63.00% 51.52% 38.14% 71.08% 3.31%

82.84% NA 54.60% 44.81%

48.84%

34.61% 27.49% 22.02% 55.96% 52.16% 50.20% 49.89% 89.61%

46.06%

32.82% 33.27% 70.57% 50.17% 50.88% 48.87% 44.26% 37.00% 47.63% 61.86% 13.44% 96.69%

53.11% NA 122.82% 142.77%

84.69%

204.30% 103.29% 73.39% 142.30% 39.69% 26.62% 94.76% 79.05%

74.93%

52.24% 48.25% 110.67% 91.90% 103.08% 172.42% 34.73% 57.71% 29.50% 174.66% 14.27% 118.75%

NA NA 2702.60% 200.13%

2850.72%

154.07% 1783.16% 160.58% 154.07% 4874.07% 973.80% 165.46% NA

1743.99%

140.88% 173.44% 146.43% NA 168.74% 100.50% 135.79% 10845.31% 160.24% 1216.65% 138.86% NA

(continues)

NA NA 102.76% -7.69%

25.04%

10.39% 166.67% 41.67% 45.84% -2.24% 7.72% 43.23% NA

88.50%

36.42% 268.96% 1.77% NA 34.42% 4.87% 21.28% 19.05% 37.83% 15.81% 71.76% NA

Services

Industry

Advertising Security Systems & Services Broadcasting & Cable TV Casinos & Gaming

Biotechnology & Drugs Medical Equipment & Supplies Healthcare Facilities Major Drugs

Money Center Banks Regional Banks S&Ls/Savings Banks Investment Services Consumer Financial Services Misc. Financial Services Insurance (Accident & Health) Insurance (Life) Insurance (Misc.) Insurance (Prop. & Casualty)

(continues)

Healthcare Sum

Healthcare

Financial Sum

Financial

Energy Sum

Sector

TABLE 8.40

50.00% 45.16% 30.43% 43.33%

62.27%

71.02% 60.00% 45.63% NA

74.45%

NA 96.18% 91.49% 46.15% 32.20% 34.94% 16.67% 33.33% 81.82% 25.71%

59.57%

per+IV

15.63% 12.90% 13.04% 26.67%

11.15%

8.98% 10.53% 17.48% NA

15.47%

NA 3.13% 7.98% 25.64% 35.59% 28.92% 50.00% 60.00% 9.09% 57.14%

22.70%

per-IV

34.38% 41.94% 56.52% 30.00%

25.84%

19.59% 27.89% 36.89% NA

10.08%

NA 0.69% 0.53% 28.21% 32.20% 36.14% 33.33% 6.67% 9.09% 17.14%

17.73%

perNA

39.97% 28.88% 21.16% 60.74%

30.80%

27.82% 30.09% 44.25% NA

52.25%

NA 48.42% 60.50% 45.89% 41.22% 53.19% 67.79% 79.96% 45.25% 60.45%

44.85%

60.03% 38.93% 54.56% 39.26%

68.48%

70.89% 69.91% 55.75% NA

45.63%

NA 49.61% 36.90% 54.11% 58.78% 46.81% 32.21% 20.04% 39.66% 30.98%

53.11%

+IV BV% +IV IV%

179.90% 48.27% 171.91% 158.04%

143.06%

153.93% 130.28% 133.81% NA

51.31%

NA 44.81% 38.10% 129.65% 124.53% 88.74% -44.76% 78.25% 34.24% 84.94%

125.79%

%ret+IV

462.14% 260.21% 2111.12% 211.58%

218.86%

298.22% 134.00% 170.86% NA

209.97%

NA 209.61% 126.74% 151.71% 306.54% 160.68% 180.86% 218.17% 110.01% 207.26%

1904.29%

-IV BV%

-39.55% -24.34% 221.30% 1.86%

211.08%

19.27% 30.96% 645.64% NA

41.66%

NA 16.79% 3.56% 23.65% 30.75% 75.62% 53.83% -11.97% 187.04% 76.16%

82.05%

%ret-IV

Services Sum

Technology

Computer Peripherals Computer Networks Computer Services Computer Storage Devices Computer Hardware Communications Equipment Electronic Instr. & Controls Office Equipment

Communications Services Restaurants Hotels & Motels Recreational Activities Motion Pictures Printing & Publishing Printing Services Rental & Leasing Real Estate Operations Retail (Apparel) Retail (Department & Discount) Retail (Drugs) Retail (Grocery) Retail (Home Improvement) Retail (Catalog & Mail Order) Retail (Specialty) Retail (Technology) Schools Business Services Personal Services Waste Management Services

43.66% 57.14% 47.95% 38.10% 33.33% 49.68% 48.00% 50.00% 18.31% 10.20% 12.33% 19.05% 20.51% 17.83% 23.33% 25.00%

25.35%

18.18% 66.67% 58.33% 23.53% 28.81% 40.00% 17.65% 18.85% 11.11% 23.08%

36.36% 9.52% 8.33% 38.24% 28.81% 20.00% 47.06% 45.03% 51.85% 41.03% 36.19%

21.47% 24.10% 45.45% 27.27% 13.79% 16.67% 20.00% 34.78% 36.62% 52.00% 87.50%

24.61% 39.76% 22.73% 22.73% 31.03% 55.56% 50.00% 30.43% 54.93% 24.00% 0.00%

38.03% 32.65% 39.27% 42.86% 46.15% 32.48% 28.67% 25.00%

37.89%

45.45% 23.81% 33.33% 38.24% 40.68% 40.00% 35.29% 35.08% 37.04% 35.90%

53.40% 36.14% 27.27% 47.73% 55.17% 27.78% 30.00% 34.78% 8.45% 24.00% 12.50%

37.48% 39.31% 34.97% 30.89% 35.40% 43.06% 44.77% 65.88%

44.90%

34.51% 49.71% 61.25% 44.56% 53.67% 61.71% 39.45% 47.67% 41.58% 37.66%

42.90% 55.27% 44.75% 15.10% 41.03% 53.11% 37.93% 40.11% 49.60% 44.68% NA

62.52% 59.61% 60.45% 69.11% 42.29% 54.14% 55.23% 34.12%

47.22%

65.49% 50.29% 38.75% 32.91% 46.33% 38.29% 60.55% 48.21% 48.21% 62.34%

50.06% 33.61% 33.16% 43.90% 58.97% 46.89% 62.07% 27.56% 43.31% 55.32% NA

191.97% 110.22% 160.33% 81.86% 105.16% 192.32% 168.59% 38.33%

134.16%

267.42% 23.65% -47.73% 134.27% 157.62% 54.69% 158.70% 180.10% 89.22% 48.22%

187.80% 34.41% -8.70% 156.10% 576.73% 22.63% 204.51% 67.42% 42.42% 46.06% NA

1.39% 9.97% 23.37% -37.92% -26.67% 21.99% 19.14% 1.52% 1.29% -11.14% 75.53%

148.23% 103.81% 283.11% 210.96% 146.27% 503.30% 172.82% 131.18%

1153.33%

(continues)

13.77% 27.59% 227.99% 29.08% 77.99% 53.90% 53.82% 282.81%

371.79%

-21.29% 519.12% 1337.03% 266.42% 138.13% 12835.12% 147.56% 45.61% 160.49% 52.84% -26.82% 137.01% 155.76% 92.49% 200.42% 15.56% 116.10% 1135.08% 348.41% 26.06%

5759.35% 148.41% 358.31% 241.33% 759.79% 294.07% 126.09% 174.58% 160.88% 166.73% 162.12%

51.21%

Grand Total

42.86% 60.00% 100.00%

41.67%

25.00% 0.00% 60.00% 60.00% 48.00% 45.45%

63.64%

Electric Utilities Natural Gas Utilities Water Utilities

Air Courier Airline Railroads Misc. Transportation Trucking Water Transportation

51.12%

69.47% 56.67% 52.04%

per+IV

Utilities Sum

Utilities

Transportation Sum

Transportation

Industry

Scientific & Technical Instr. Semiconductors Software & Programming

(continues)

Technology Sum

Sector

TABLE 8.40

20.37%

21.21%

28.57% 30.00% 0.00%

22.22%

50.00% 16.67% 40.00% 13.33% 16.00% 36.36%

15.68%

12.63% 25.56% 11.48%

per-IV

28.09%

15.15%

28.57% 10.00% 0.00%

34.72%

25.00% 83.33% 0.00% 20.00% 36.00% 18.18%

33.13%

17.89% 17.78% 36.48%

perNA

44.04%

49.30%

69.03% 51.07% 39.74%

58.55%

74.43% NA 49.14% 55.48% 66.35% 53.61%

37.62%

37.85% 42.49% 31.98%

52.76%

50.70%

30.97% 48.93% 60.26%

39.92%

25.57% NA 50.86% 36.66% 33.65% 46.39%

59.19%

59.53% 53.65% 64.81%

+IV BV% +IV IV%

123.32%

35.77%

88.76% 16.20% 13.50%

95.91%

157.50% NA 51.22% 154.36% 61.94% 86.75%

182.57%

117.31% 202.53% 232.98%

%ret+IV

1198.09%

3636.55%

383.59% 4805.12% NA

213.26%

901.82% 131.85% 181.22% 194.72% 168.30% 135.58%

276.35%

116.31% 140.27% 463.12%

-IV BV%

155.68%

50.57%

130.97% -56.61% NA

110.54%

-47.96% 4.52% 18.31% 596.67% 72.09% 84.31%

75.69%

10.09% 40.49% 63.50%

%ret-IV

205

Intangible Analysis of Sectors and Industries TABLE 8.40a intMgtOS® Value Factor Report (MiC:%) Notes

Values

intMgtOS Report

intMgtOS®5003.iR25e

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

Tuesday December 30th 2003 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001662

CALCULATIONS Determining Percentage Return for a firm with ±IV:

If

= 0 or “”

Sum_gRet_±IV_L then

then do not return an error and inform the user that the values are not available “NA”



“NA” 

else If there is a value, then take the amount of that return

Sum_gRet_±IV_L 

∏

Sum of Firms±IV_L 

1000

)

And divide it by the number of firms that have +IV in that sector, industry, etc.

]

From the result subtract the initial investment of $1000

-

1000 

[(

If the aggregated return for IV_L firms is either 0, or “” . . .

∏

Then divide by the initial investment of $1000 to find the percentage return on $1000 invested in associated +IV stocks for that specific sector, industry, etc.

CHAPTER

9

The intMgtOS® Economy Statement

This statement provides a bird’s-eye view of the economy, productivity levels, firm effectiveness, investment attractiveness, and time capital information.

WHAT THE STATEMENT MEASURES INTMGTOS®6001.D110:

GROSS TIME CAPITAL (GTC)

Growing sectors, industries, and firms require more nanotime to satisfy customer demand than do sectors, industries, and firms that have reached saturation (due to maturity) and are cutting back employees and costs due to excess competition. Growing sectors, industries, and firms witness increases in nanotime demand, whereas contracting sectors, industries, and firms witness a reduction in nanotime demand. Gross Time Capital (GTC) is the estimated amount of total nanotime available to a sector, industry, or firm; it is determined by multiplying the number of employees in a firm by a constant representative of the amount of gross nanotime an average full-time employee is available to work for an entity, measured in millions of hours. (intMgtOS®6001.D110)

207

208

Intangible Finance Standards GTC is calculated via the formula in intMgtOS®6001.D110a. It states that an organization has access to an average of 2000 hours of gross annual time per employee. GTC is then converted in a statistic expressed in millions.

GTC =

(Emp * 2000)

1, 000, 000 Gross Time Capital (intMgtOS‚6001.D110a) Gross Time Capital percentage (GTC%) is the percentage of gross time capital to total gross time capital under analysis. (intMgtOS®6001.D111)

The gross time capital for each sector of the economy is presented in Figures 9.1 and 9.1a. The leading three time capital sectors account for 57.19% of the time capital of the US economy, namely: (1) Services 34.73%, (2) Technology 11.97%, and (3) Consumer Cyclical 10.49%.

INTMGTOS®6001.D120:

REV:MV GEARING

In a bull economy or a bear economy, it is essential to understand how different sectors, industries, and firms reward changes in revenue. In bear markets, revenue tends to contract, as does market value. In bull markets, revenue tends to expand, as does market value. Rev:MV gearing shows the

Sector Basic Materials Capital Goods Conglomerates Consumer Cyclical Consumer/Non-Cyclical Energy Financial Healthcare Services Technology Transportation Utilities Grand Total

Gross Time Capital (M hrs) 1,746.10 1,085.14 301.91 1,986.87 942.92 621.81 885.46 1,108.53 6,575.84 2,265.92 982.51 432.82 18,935.84

Gross Time Capital % 9.22% 5.73% 1.59% 10.49% 4.98% 3.28% 4.68% 5.85% 34.73% 11.97% 5.19% 2.29% 100.00%

FIGURE 9.1 intMgtOS® Gross Time Capital by Sector Report (intMgtOS®5003.iR60).

209

The intMgtOS® Economy Statement

Notes

Values

intMgtOS Report

intMgtOS®5003.iR60 Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01) January 30th, 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

Created By Data Date

IntMgtOS® Certification Number

intMgtOS®-1001078

FIGURE 9.1a intMgtOS® Gross Time Capital by Sector.

relationship between revenue and market value in order to specifically uncover how revenue leverages market value. Rev:MV Gearing: Shows how a 100% change in revenue has historically translated into a percentage change in market value. (intMgtOS®6001.D120; in particular, see D120a and D120b)

È (MV - GR) ˘ Rev: MV = Í ˙˚ + 1 . . intMgtOS‚6001.D120a GR Î MV . . intMgtOS‚6001.D120b Rev: MV = GR Rev: MV Gearing (intMgtOS‚6001.D120 a b) On the 30th of January, 2004, the Healthcare sector had a Rev:MV gearing factor of 202.26%, meaning that changes in revenue translated into a 202.26% change in market value. Hence, if the Healthcare sector reported an increase in revenue of $5 b, the Rev:MV gearing would predict an increase in market value of $10.11 b. On the same day, the Basic Materials sector had a Rev:MV of 87.83%, meaning that a 100% change in revenue translated into an 87.83% change in market value. For example, if the Basic Materials sector reported an increase in revenue of $5 b, the Rev:MV gearing factor would predict an increase in market value of $4.39 b. For all sectors on the 30th of January, 2004, the Rev:MV gearing factor is represented in Figure 9.2. In Figure 9.2, the second column [$5 b Rev Chg ($b)] relates to how a $5 b change in revenue related to that sector would translate into a change in market value. The Healthcare sector reported the largest potential increase ($10.11 b), followed by the Technology sector ($9 b), with the Financial sector in third place ($8.58 b).

210

Intangible Finance Standards Sector

Rev:MV

$5b Rev Chg ($b) $4.39

Basic Materials

87.83%

Capital Goods

77.23%

Conglomerates

64.98%

$3.25

Consumer Cyclical

67.59%

$3.38

Consumer/Non-Cyclical

$3.86

63.74%

$3.19

Energy

116.15%

$5.81

Financial

171.63%

$8.58

Healthcare

202.26%

$10.11

Services

111.05%

$5.55

Technology

180.08%

$9.00

Transportation

64.85%

$3.24

Utilities

75.15%

$3.76

112.73%

$5.64

Grand Total

FIGURE 9.2 intMgtOS® Rev:MV Sector Report (intMgtOS®5003.iR61).

Notes

Values

intMgtOS Report

intMgtOS®5003.iR61 Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01) January 30th, 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

Created By Data Date

IntMgtOS® Certification Number

intMgtOS®-1001123

FIGURE 9.2a intMgtOS® Rev:MV Sector Report.

INTMGTOS®6001.D130:

BV:MV GEARING

Book value is often associated with the “accounting value” of an organization. Over time, accounting value has come to refer, not to the business’s true value in the stock market, but to its liquidation value. In general, companies that have a market value below their book value are in serious trouble. For such companies, investors are stating that $1 of liquidation value is worth less than $1 of share price. Consider, WorldCom Inc.–MCI Group (Ticker: MCWEQ). On Friday, the 30th of January, 2004, MCWEQ had a market value of $4.73 m and

The intMgtOS® Economy Statement

211

$2,366.50 m of book value. Investors were therefore stating that they were prepared to pay no more than 2 cents out of every $1 of liquidation value to own shares in the company. On the same day, the WorldCom Group (Ticker: WCOEQ) had a market value of $88.89 m and $44,442.54 m in book value. In this case, investors were again asserting that they were prepared to pay no more than 0.20% of book value to own shares in the company. Investors in Polaroid Corporation (Ticker: PRDCQ), which had a market value of $1.34 m and a book value of $1,339.95m, were prepared to pay no more than 0.10% of book value to own shares in the company. Investors in Hitachi (Ticker: HIT), which had a market value of $21,404 m and a book value of $175,014 m, were prepared to pay no more than 12.23% of liquidation value to own stock in the firm. On the opposite side, TASR International (Ticker: TASR) saw exceptional growth in its share price in 2003. As of January 30, 2004, investors were prepared to pay 3763.76% more than its liquidation value to own its stock. Investors of Mitsubishi Tokyo Fin. Group Inc. (Ticker: MTF), which had a market value of $48,149 m and a book value of 22.02 m, were prepared to pay 218,663.40% book value to own the stock. BV:MV gearing illustrates forward perceptions of investor value. Where BV:MV is below 100%, investors are not prepared to pay the liquidation value to own stock in a firm. This means that investors are exceptionally bearish on the prospects of the firm and expect continued value destruction. Where BV:MV is greater than 100%, investors are prepared to pay a premium to the liquidation value of the firm to own stock. The higher the percentage over 100%, the more bullish investors are regarding future value creation. (intMgtOS®6001.D130; in particular, see D130a and D130b)

Figures 9.3 and 9.3a illustrate aggregated BV:MV gearing for all sectors on the 30th of January, 2004. This table illustrates that the most bullish sectors of the economy were: (1) Healthcare, (2) Technology, and (3) Financial. The most bearish sectors were: (1) Utilities, (2) Basic Materials, and (3) Consumer/Non-Cyclical. The second column measures the estimated change in market value associated with a $5 b change in book value. The Healthcare sector records the highest impact, with a $5 b change in book value having an estimated $13.81 b change in market value.

INTMGTOS®6001.D140—MV:EMP Market value per employee (MV:Emp) is used in intangible finance to gauge the amount of market capitalization on an average employee annualized basis. It is used as a proxy for the ability of firms to transform their human capital into investment capital. (intMgtOS®6001.D140; in particular, see D140a)

212

Intangible Finance Standards

Sector

BV:MV

MV Chg ($b): $5b BV Chg

Basic Materials

19.73%

$0.99

Capital Goods

171.50%

$8.58

Conglomerates

34.84%

$1.74

Consumer Cyclical

93.41%

$4.67

Consumer/Non-Cyclical

33.17%

$1.66

Energy

33.81%

$1.69

Financial

192.55%

$9.63

Healthcare

276.26%

$13.81

Services

128.07%

$6.40

Technology

197.10%

$9.86

Transportation Utilities Grand Total

40.86%

$2.04

5.55%

$0.28

50.41%

$2.52

FIGURE 9.3 intMgtOS® BV:MV Sector Report (intMgtOS®5003.iR62).

Notes

Values

intMgtOS Report

intMgtOS®5003.iR62 Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01) January 30th, 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

Created By Data Date

IntMgtOS® Certification Number

intMgtOS®-1001127

FIGURE 9.3a intMgtOS® BV:MV Sector Report.

MV : Emp =

(MV *1000000) Emp

. . intMgtOS‚6001.D140a

Market value per employee (intMgtOS‚6001.D140a) Multiplication by 1 million is required to convert market value figures into equivalent units to be associated with employees. Typically, the greater the contribution of market value per employee, the more valuable is the human capital of that sector. On the 30th of January, 2004, the Financial sector had the largest MV : Emp figure of any sector, this being $754,914.61. Hence, on average, employees in the Financial sector contributed

The intMgtOS® Economy Statement

213

around $755 k of market value to the organizations they worked for. The Utilities sector had the second greatest value of human capital, this being $486 k per employee per annum, followed by the Energy sector, with $433 k per employee per annum.

INTMGTOS®6001.D160—OPINC% Intangible analysts need to track the health of the operating income and income after tax margins of individual firms, industries, and sectors. Intangible analysts calculate the opInc% to determine what percentage of gross revenue translates into operating income. opInc% estimates the average percentage of operating income associated with gross revenue for a firm, industry, sector, or economy. (intMgtOS®6001.D160; in particular, see D160a)

È Â opInc ˘ opInc% = Í ˙ . . intMgtOS‚6001.D160a Î Â Rev ˚ Operating Income (intMgtOS‚6001.D160a)

INTMGTOS®6001.D170—IAT% IAT% estimates the average percentage of income after tax associated with gross revenue for a firm, industry, sector, or economy. (intMgtOS®6001.D170; in particular, see D170a)

È Â IAT ˘ IAT % = Í ˙ . . intMgtOS‚6001.D170a Î Â Rev ˚ Income after tax gearing (intMgtOS‚6001.D170a) On the 30th of January, 2004, the MV:Emp, opInc%, and IAT% figures were as follows (Figures 9.4 and 9.4a). These figures show that the greatest leverage of human capital (MV : Emp) occurred in the Financial sector. The Financial sector also recorded the largest opInc% figure (19.34%) and largest IAT% figure (11.82%). This means that the Financial sector is very effective at leveraging its human capital to create shareholder value and earnings.

STANDFIELD FACTOR The calculation of the Standfield factor requires three statistics to be determined first:

214

Intangible Finance Standards

Sector

MV:Emp

opInc%

IAT%

4.00%

0.73%

205,868

7.01%

3.81%

135,181

10.47%

6.12%

Consumer Cyclical

136,202

4.71%

2.50%

Consumer/Non-Cyclical

181,242

3.58%

0.81%

Energy

433,464

7.85%

5.24%

Financial

754,915

19.34%

11.82%

Healthcare

368,447

9.00%

4.17%

Services

198,120

5.80%

2.73%

Technology

412,814

4.62%

3.31%

Transportation

115,103

2.16%

0.13%

Utilities

486,369

9.82%

2.67%

Grand Total

265,061

6.93%

3.46%

Basic Materials

232,066

Capital Goods Conglomerates

FIGURE 9.4 intMgtOS® Income Sector Report (intMgtOS®5003.iR63).

Notes

Values

intMgtOS Report

intMgtOS®5003.iR63 Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01) January 30th, 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

Created By Data Date

IntMgtOS® Certification Number

intMgtOS®-1001131

FIGURE 9.4a intMgtOS® Income Sector Report.

1. Sector share price 2. Sector book value per share 3. Sector intangible value per share The power of the Standfield factor is to show the degree of bullishness and bearishness of firms, industries, and sectors. It does this on a sector-by-sector basis, industry-by-industry basis, and firm-by-firm basis. In this analysis, we shall investigate the sector-by-sector basis of the Standfield factor. intMgtOS®6001.D180—SSP The sector share price (SSP) is different from the normal share price of a single firm. The sector share price treats an entire sector the same as a single firm. (intMgtOS®6001.D180; in particular, see D180a)

215

The intMgtOS® Economy Statement

È Â MVSector ˘ SSP = Í ˙ . . intMgtOS‚6001.D180a Î Â SO ˚ Sector share price (SSP) (intMgtOS‚6001.D180a) This creates a proxy for the share price of an entire sector in dollar terms. intMgtOS®6001.D185—SBV/S The sector book value per share (SBV/S) is different from the normal book value per share of a single firm. The sector book value per share treats an entire sector the same as a single firm. (intMgtOS®6001.D185; in particular, see D185a)

È Â BVSector ˘ SBV S = Í ˙ . . intMgtOS‚6001.D185a Î Â SO ˚ Sector book value per share (SBV S) (intMgtOS‚6001.D185a) This creates a proxy for the book value per share of an entire sector in dollar terms. intMgtOS®6001.D190—SIV/S Intangible analysts determine the sector intangible value per share (SIV/S) as a leading indicator of investor sentiment for a specific sector. SIV/S estimates the difference between the sector share price (SSP) and the sector book value per share (SBV/S). This figure is a leading indicator of the degree of value creation or value destruction occurring in the sector. (intMgtOS®6001.D190; in particular, see D190a)

(

)

È Â MV -  BV ˘ SIV S = Í ˙ . . intMgtOS‚6001.D190a  SO ÍÎ ˙˚ Sector intangible value per share (SIV S) (intMgtOS‚6001.D190a) If SIV/S is negative, then the total book value of the sector is greater than the total market value of the sector, and investors are discounting liquidation value in order to acquire ownership in that sector; investors therefore regard sectors with negative SIV/S as having bearish bias. If it is positive, then the total book value of the sector is less than the total market value of the sector, and investors are paying a premium above liquidation value in order to acquire ownership in that sector; investors therefore regard sectors with positive SIV/S as having bullish bias. intMgtOS®6001.D190—Standfield Factor The Standfield factor does more than determine the bullishness or bearishness of a sector (or industry, or firm); it also explains numerically the power, or

216

Intangible Finance Standards

Sector Basic Materials Capital Goods Conglomerates Consumer Cyclical Consumer/Non-Cyclical Energy Financial Healthcare Services Technology Transportation Utilities Grand Total

SSP [A] 2.05 26.29 13.01 12.76 8.33 7.84 25.54 24.91 12.11 8.46 5.33 0.37

SBV/S [B] 10.40 15.33 37.34 13.67 25.13 23.18 13.27 9.02 9.46 4.29 13.05 6.58

SIV/S [C] (8.41) 10.96 (24.33) (1.35) (17.09) (15.61) 12.28 14.97 2.09 4.05 (7.97) (6.22)

Standfield [C]/[A] (4.10) 0.42 (1.87) (0.11) (2.05) (1.99) 0.48 0.60 0.17 0.48 (1.49) (17.00)

4.39

8.71

(4.44)

(1.01)

FIGURE 9.5 intMgtOS® Standfield Sector Report (intMgtOS®5003.iR64).

Notes

Values

intMgtOS Report

intMgtOS®5003.iR63 Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01) January 30th, 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

Created By Data Date

IntMgtOS® Certification Number

intMgtOS®-1001133

FIGURE 9.5a intMgtOS® Standfield Sector Report.

momentum, of that bullishness or bearishness. The Standfield factor is a critical tool in the intangible analyst’s toolkit, as it explains a substantial amount of information quickly. See Figures 9.5 and 9.5a. The interpretation of the Standfield Factor will be covered in the next chapter.

CHAPTER

10

The IntMgtOS® Standfield Statement

As a follow-on from the intMgtOS® Economy Statement, the intMgtOS® Standfield Statement assists in determining the force of bullishness and bearishness across the economic system for all industries by looking at one intangible management statement (Tables 10.1 and 10.1a). The strongest-performing industries across all exchanges were: 1. 2. 3. 4.

Micro caps: Tires (Consumer Cyclical: 40.73) Small caps: Auto & Truck Manufacturers (Consumer Cyclical: 34.53) Large caps: Schools (Services: 10.49) Medium caps: Photography (Services: 5.91)

THE INTMGTOS® STANDFIELD STATEMENT ANALYSIS Following on from the intMgtOS® Economy Statement, the L2 Standfield factor has exceptional power at identifying the bullish or bearish implications of sectors, industries, and stocks. There is a five-step plan that intangible analysts use to apply the Standfield factor into a trading system. This chapter focuses only on Stage 1 and Stage 2 217

2.42

2.42

Conglomerates Total

(0.36)

Conglomerates

Capital Goods Total

Conglomerates

0.98 N/A 3.19 (0.52) 0.77 (0.78) N/A

Aerospace & Defense Constr.—Supplies & Fixtures Constr. & Agric. Machinery Construction—Raw Materials Construction Services Misc. Capital Goods Mobile Homes & RVs

Capital Goods

0.75 1.92 1.33 0.40 (0.97) 0.90 1.21 1.82 (0.18)

(0.24) N/A 1.06 1.46 (0.16) 0.57 1.42 N/A 0.97

(0.65)

(0.65)

0.72

2.53 (0.73) (0.06) 0.85 1.52 1.68 3.78

(0.81)

1.57 (0.58)

Medium

1.57 3.03

Large

1.02

Chemical Manufacturing Chemicals—Plastics & Rubber Containers & Packaging Fabricated Plastic & Rubber Forestry & Wood Products Gold & Silver Iron & Steel Metal Mining Misc. Fabricated Products Non-Metallic Mining Paper & Paper Products

Industry

Basic Materials Total

Basic Materials

Sector

TABLE 10.1 intMgtOS® Standfield Industry Statement

(0.33)

(0.33)

(0.05)

0.74 (0.70) 1.88 0.40 0.12 0.46 1.07

(0.20)

0.01 0.91 (0.77) 2.62 0.86 1.05 (0.75) (0.24) 0.61

0.94 0.41

Small

N/A

N/A

(0.89)

1.22 (0.06) 0.00 (0.08) (0.97) 0.54 0.12

(0.47)

0.29 0.59 0.76 (0.68) (0.25) 0.49 0.22 0.00 (0.94)

1.20 (0.02)

Micro

1.72

1.72

(0.32)

1.04 (0.69) 1.81 (0.32) (0.32) (0.66) 2.07

(0.39)

0.25 1.05 0.43 1.08 (0.95) 0.60 (0.28) 1.20 0.32

1.52 0.82

Grand Total

Energy Total

0.16

N/A 0.16 (0.15) 2.06

Energy

Coal Oil & Gas—Integrated Oil & Gas Operations Oil Well Services & Equipment

2.78

Consumer/Non-Cyclical Total

1.22 3.18 N/A N/A 1.70 N/A 6.45 4.76

Beverages (Alcoholic) Beverages (Nonalcoholic) Crops Fish/Livestock Food Processing Office Supplies Personal & Household Prods. Tobacco

Consumer/Non-Cyclical

2.32 0.49 (0.29) 0.18 1.40 3.20 1.29 N/A 0.29 3.49 N/A 1.16 0.15

Apparel/Accessories Appliance & Tool Audio & Video Equipment Auto & Truck Manufacturers Auto & Truck Parts Footwear Furniture & Fixtures Jewelry & Silverware Photography Recreational Products Textiles—Non Apparel Tires

Consumer Cyclical Total

Consumer Cyclical

(0.67)

(0.83) N/A (0.78) 1.27

(0.68)

0.67 (0.95) 0.57 (0.93) 0.46 0.50 3.14 0.07

(0.10)

0.15 1.97 3.78 (0.91) 0.88 2.62 1.45 2.11 5.91 0.59 1.04 1.22

(0.23)

1.73 N/A (0.45) 0.87

(0.46)

(0.88) 0.99 2.82 (0.77) (0.28) 1.44 (0.38) (0.12)

0.32

0.57 (0.59) 4.57 34.53 0.45 1.29 0.85 0.36 N/A 0.20 (0.03) 0.99

(0.69)

4.53 N/A (0.75) 0.32

(0.75)

0.41 1.36 (0.58) (0.65) (0.86) (0.60) 0.65 9.90

(0.80)

0.14 (0.05) 1.41 0.94 0.56 0.69 0.29 (0.99) (0.69) 0.25 0.12 40.73

(continues)

(0.07)

(0.81) 0.16 (0.55) 1.62

0.91

0.84 (0.02) 0.20 (0.88) 0.98 0.59 5.15 3.40

0.03

0.52 0.47 (0.25) (0.07) 1.00 2.47 1.23 (0.89) 0.25 1.16 0.83 1.19

3.81 0.00 0.01 4.90 4.26 (0.46)

Advertising Broadcasting & Cable TV Business Services Casinos & Gaming Communications Services

Services

3.75 1.82 3.74 5.66

Healthcare Total

(0.03)

Biotechnology & Drugs Healthcare Facilities Major Drugs Medical Equipment & Supplies

1.71 1.78 0.60 2.48 1.02 1.28 (0.00) 0.37 (0.67) 0.39

Large

Healthcare

Consumer Financial Services Insurance (Accident & Health) Insurance (Life) Insurance (Misc.) Insurance (Prop. & Casualty) Investment Services Misc. Financial Services Money Center Banks Regional Banks S&Ls/Savings Banks

Industry

Financial Total

Financial

Sector

TABLE 10.1 (continues)

2.57 (0.18) 2.70 1.12 (0.53)

1.66

2.04 0.58 N/A 3.33

0.93

1.44 0.70 0.04 3.27 0.48 2.28 1.47 0.78 1.09 0.99

Medium

4.04 0.18 1.42 1.03 (0.18)

1.79

2.10 1.19 N/A 1.66

0.43

0.68 1.75 0.02 0.78 (0.09) 0.92 (0.50) N/A 0.83 1.09

Small

1.11 (0.87) 0.83 0.66 (0.91)

1.57

1.71 0.80 N/A 1.91

0.62

(0.09) (0.44) (0.18) 1.27 (0.24) 0.76 0.77 N/A 1.01 0.59

Micro

0.26 (0.03) 2.84 1.79 (0.47)

3.35

3.05 1.05 3.74 4.30

0.03

1.57 1.47 0.55 2.42 0.88 1.37 0.05 0.37 (0.58) 0.51

Grand Total

1.97 5.34 5.92 1.27 0.91 2.32 0.65

Communications Equipment Computer Hardware Computer Networks Computer Peripherals Computer Services Computer Storage Devices Electronic Instr. & Controls

Technology

1.66 (0.26) 2.06 3.40 1.00 1.92 0.00

0.22

1.81 0.03 3.61 (0.31) 0.04 5.29 1.42 1.65

2.72 0.42 2.82 4.19 4.80 10.49 N/A 1.90 (0.15)

0.91 1.33 1.79 2.07 0.03 1.12 0.73 0.80 1.10 2.80 N/A 0.37

1.18 0.23 4.42 (0.01) N/A 1.24 1.54 N/A 2.83 2.51 0.81 2.20

Services Total

Hotels & Motels Motion Pictures Personal Services Printing & Publishing Printing Services Real Estate Operations Recreational Activities Rental & Leasing Restaurants Retail (Apparel) Retail (Catalog & Mail Order) Retail (Department & Discount) Retail (Drugs) Retail (Grocery) Retail (Home Improvement) Retail (Specialty) Retail (Technology) Schools Security Systems & Services Waste Management Services 1.70 1.95 2.14 1.63 2.50 1.37 1.74

0.66

0.52 0.48 N/A 1.61 0.85 3.69 1.60 2.73

0.12 1.34 0.93 1.99 0.93 0.76 0.14 0.49 1.15 0.88 1.35 (0.26)

0.26 0.47 1.06 1.91 1.22 2.46 0.85

(0.62)

2.33 (0.90) (0.20) 0.03 (0.03) 1.15 0.27 1.38

(0.49) 1.48 1.23 1.48 1.09 0.26 (0.10) 0.24 0.36 (0.04) 0.41 (0.25)

(continues)

1.88 3.79 2.65 1.41 0.99 2.13 0.43

(0.11)

2.55 0.27 2.82 0.64 2.55 7.27 1.15 1.82

0.98 0.34 2.35 0.17 0.28 1.07 1.19 0.63 1.78 2.04 0.83 1.98

(0.24) 0.33

Utilities Total

Grand Total

0.58 (0.30) 0.17 1.51

Electric Utilities Natural Gas Utilities Water Utilities

Utilities

1.72 (0.47) 0.17 0.36 4.26 N/A

Transportation Total

2.31

Air Courier Airline Misc. Transportation Railroads Trucking Water Transportation

(0.05) 2.86 3.14 4.20

Large

Technology Total

Office Equipment Scientific & Technical Instr. Semiconductors Software & Programming

Industry

Transportation

Sector

TABLE 10.1 (continues)

(0.51)

(0.94)

(0.96) 0.98 2.16

(0.61)

N/A (0.85) 0.90 (0.88) 1.72 0.52

0.94

0.98 2.72 0.55 2.76

Medium

0.27

0.15

0.32 (0.14) 0.83

(0.79)

0.88 (0.94) (0.82) 0.45 1.18 0.29

1.97

1.43 1.65 1.98 2.23

Small

(0.46)

(0.74)

(0.41) (0.89) 1.62

0.20

(0.86) (0.23) 0.96 0.64 0.40 0.64

0.98

0.32 1.88 1.14 1.18

Micro

0.09

(0.76)

(0.80) 0.17 1.51

(0.23)

1.52 (0.77) 0.03 (0.38) 3.39 0.43

1.96

0.07 2.49 2.30 3.64

Grand Total

223

The IntMgtOS® Standfield Statement

TABLE 10.1a intMgtOS® Standfield Industry Statement All exchanges as of January 30, 2004 (intMgtOS® 5003.iR65) Notes

Values

intMgtOS Report

intMgtOS®5003.iR65

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

January 30th 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001015

analysis, the remaining analysis requiring further statements to be formed and being beyond the scope of this chapter.

STAGE 1 ANALYSIS For analyzing a Standfield Statement, the key is to initially identify the highest L2 Standfield factor for each firm type. In the Basic Materials sector, the highest Standfield factor for large cap firms was 3.03 for the Chemicals—Plastic & Rubber industry. In the Basic Materials sector, the highest Standfield factor for medium cap firms was 1.92 for the Fabricated Plastic & Rubber industry. In the Basic Materials sector, the highest Standfield factor for small cap firms was 2.62 for the Gold & Silver industry. In the Basic Materials sector, the highest Standfield factor for micro cap firms was 1.20 for the Chemical Manufacturing industry.

In the previous Standfield Statement, the highest Standfield factors have been highlighted by firm type.

STAGE 2 ANALYSIS The higher the Standfield factor, the greater the bullish implications for an industry. Hence, once a complete sector analysis has been performed, the next

224

Intangible Finance Standards

stage is to rank the industries in terms of their Standfield factors. In the Basic Materials sector, the ranking for the highest Standfield factors was as follows: 1. 2. 3. 4.

Chemicals—Plastic & Rubber (large cap: 3.03) Gold & Silver (small cap: 2.62) Fabricated Plastic & Rubber (medium cap: 1.92) Chemical Manufacturing (micro cap: 1.20)

Stage 2 allows us to identify the strongest-performing long firm sizes across all industries and sectors very quickly. Given limited investment funds, it is appropriate to select investments that have the greatest profit potential, that is, the highest L2 Standfield factors for long investments and the lowest L2 Standfield factors for short investments.

STAGE 3 ANALYSIS This stage concerns itself with identifying target firms within the chosen industry with high-performing Standfield factors.

STAGE 4 ANALYSIS This stage concerns itself with analyzing the underlying activity of the firm, identifying strengths and weaknesses in its brand value, productivity, and fundamental performance.

STAGE 5 ANALYSIS This stage concerns itself with creating an appropriate entry and exit system to scale into trades and scale out of trades, in such a way as to hold on to winners and eradicate losers as quickly as possible. Stage 5 analysis also employs a special form of stock purchasing, which can substantially reduce losses and result in far higher percentage returns for winners.

STANDFIELD EXCHANGE ANALYSIS The intMgtOS® Standfield Statement can also be used to analyze the performance of sectors and industries by exchange. There are four exchanges: 1. NASDAQ 2. AMEX

The IntMgtOS® Standfield Statement

225

3. OTC 4. NYSE

NASDAQ ANALYSIS The composition of the NASDAQ intMgtOS® Standfield Statement is different from that of the total exchange statement (Tables 10.2 and 10.2a). Investors may have preferences for different exchanges at different times. Upon reading the exchange version of the Standfield Statement, it becomes clearer where to invest funds to generate the greatest profit. The strongest-performing industries across the NASDAQ exchange were as follows. 1. 2. 3. 4.

Large caps: Chemical Manufacturing (Basic Materials: 15.12) Micro caps: Tobacco (Consumer/Non-Cyclical: 9.90) Medium caps: Metal Mining (Basic Materials: 8.27) Small caps: Beverages—Non-Alcoholic (Consumer/Non-Cyclical: 7.17)

AMEX ANALYSIS The AMEX exchange comprises 512 firms, so it has a very different composition from the NASDAQ exchange with 3164 firms. The strongest-performing industries in the AMEX exchange were (Tables 10.3 and 10.3a): 5. 6. 7. 8.

Micro caps: Insurance—Miscellaneous (Financial: 20.04) Small caps: Software & Programming (Technology: 18.34) Medium caps: Oil & Gas Operations (Energy: 12.82) Large caps: Oil & Gas Integrated (Energy: 2.66)

OTC ANALYSIS The OTC exchange comprised 2369 firms (AMEX: 512 firms, NASDAQ: 3164 firms) on the 30th of January, 2004. The strongest-performing industries in the OTC exchange were (Tables 10.4 and 10.4a): 1. 2. 3. 4.

Small caps: Electronic Instr. & Controls (Technology: 64.27) Micro caps: Tires (Consumer Cyclical: 40.73) Medium caps: Medical Equipment & Supplies (Healthcare: 39.94) Large caps: Money Center Banks (Financial: 8.32)

(0.87) N/A 0.02 (0.32) 0.72 N/A N/A N/A

Consumer Cyclical

Apparel/Accessories Appliance & Tool Audio & Video Equipment Auto & Truck Manufacturers Auto & Truck Parts Footwear Furniture & Fixtures

Capital Goods Total

N/A N/A N/A N/A 0.97 (0.93) N/A

Aerospace & Defense Constr.—Supplies & Fixtures Constr. & Agric. Machinery Construction—Raw Materials Construction Services Misc. Capital Goods Mobile Homes & RVs

Capital Goods

15.12 N/A (0.62) N/A N/A 0.84 N/A N/A N/A N/A N/A

Large

0.87

Chemical Manufacturing Chemicals—Plastics & Rubber Containers & Packaging Fabricated Plastic & Rubber Forestry & Wood Products Gold & Silver Iron & Steel Metal Mining Misc. Fabricated Products Non-Metallic Mining Paper & Paper Products

Industry

Basic Materials Total

Basic Materials

Sector

TABLE 10.2 intMgtOS® Standfield NASDAQ Industry Statement

(0.60) (0.09) 1.89 N/A 3.82 N/A 7.79

3.33

7.24 N/A 2.53 N/A N/A 3.15 N/A

0.29

2.04 N/A (0.14) N/A N/A (0.86) 0.93 8.27 5.30 5.42 0.94

Medium

(0.03) 1.39 4.57 N/A 0.50 2.68 1.17

0.76

0.77 0.90 2.65 N/A 0.62 0.69 N/A

1.86

1.79 N/A 4.73 0.25 0.82 3.78 1.81 N/A 1.62 N/A 0.76

Small

0.16 1.84 1.20 1.09 0.76 0.73 0.83

0.53

1.81 0.35 0.01 (0.15) 0.29 0.78 0.02

0.53

0.99 0.46 0.79 0.86 0.76 N/A 0.07 0.02 0.53 N/A (0.09)

Micro

(0.45) 0.05 (0.25) 0.73 0.97 1.35 1.71

(0.74)

1.64 0.70 1.71 (0.15) 0.79 (0.86) 0.02

0.73

5.69 0.46 (0.42) 0.53 0.81 0.39 0.81 3.96 2.09 5.42 0.83

Grand Total

Financial Total

2.05

N/A N/A N/A N/A N/A 0.21 4.25 N/A N/A 2.12 4.63

Financial

Consumer Financial Services Insurance (Accident & Health) Insurance (Life) Insurance (Misc.) Insurance (Prop. & Casualty) Investment Services Misc. Financial Services Money Center Banks Regional Banks S&Ls/Savings Banks

Energy Total

N/A N/A N/A

Energy

Coal Oil & Gas Operations Oil Well Services & Equipment

0.59

Consumer/Non-Cyclical Total

0.13 N/A N/A N/A 1.94 N/A N/A N/A

Consumer/Non-Cyclical

Beverages (Alcoholic) Beverages (Nonalcoholic) Crops Fish/Livestock Food Processing Office Supplies Personal & Household Prods. Tobacco

(0.00)

N/A 0.04 N/A N/A N/A

Consumer Cyclical Total

Jewelry & Silverware Photography Recreational Products Textiles—Non Apparel Tires

1.16

1.68 N/A (0.09) 3.67 0.38 2.67 1.55 0.78 1.32 1.16

(0.43)

N/A (0.69) 2.50

0.06

N/A N/A N/A N/A 1.16 1.00 N/A (0.37)

0.25

2.55 5.91 4.78 N/A N/A

1.08

1.97 1.23 (0.15) 0.95 0.40 2.95 0.73 N/A 1.32 1.11

1.28

1.73 2.19 0.74

0.57

0.73 7.17 1.19 3.42 1.25 N/A (0.17) N/A

0.75

N/A N/A 0.68 0.88 1.33

0.73

0.66 (0.09) 0.06 0.87 (0.13) 0.96 0.89 N/A 0.99 0.61

(0.43)

N/A (0.51) 0.02

0.46

(0.16) 1.48 0.52 (0.95) 0.93 N/A 0.56 9.90

0.57

0.53 0.11 0.59 (0.04) N/A

(continues)

1.28

1.55 0.96 (0.08) 1.93 0.29 3.26 1.07 0.78 1.51 1.19

(0.20)

1.73 (0.51) 0.96

0.42

0.16 4.65 0.71 0.04 1.45 1.00 (0.12) (0.34)

0.12

2.22 0.10 1.19 0.56 1.33

3.63 (0.62) 0.97 3.12 N/A (0.20) N/A N/A 3.30 N/A N/A N/A N/A N/A 5.45 N/A 0.81 N/A 3.50 N/A N/A 4.06

Advertising Broadcasting & Cable TV Business Services Casinos & Gaming Communications Services Hotels & Motels Motion Pictures Personal Services Printing & Publishing Printing Services Real Estate Operations Recreational Activities Rental & Leasing Restaurants Retail (Apparel) Retail (Catalog & Mail Order) Retail (Department & Discount) Retail (Drugs) Retail (Grocery) Retail (Home Improvement) Retail (Specialty)

3.53 N/A 6.30

Large

Services

Biotechnology & Drugs Healthcare Facilities Medical Equipment & Supplies

Industry

Healthcare Total

Healthcare

Sector

TABLE 10.2 (continues)

2.01 0.72 2.95 1.40 0.79 N/A 1.12 N/A 3.23 N/A 1.46 4.21 2.29 2.67 3.58 N/A 1.02 N/A 4.22 4.35 (0.65)

2.42

2.20 2.31 3.40

Medium

3.25 0.09 1.57 1.54 1.23 N/A 1.21 0.81 1.25 N/A 1.49 1.24 0.70 1.20 0.93 1.39 N/A 4.61 1.20 N/A 2.43

1.89

2.12 1.28 1.68

Small

1.75 1.70 0.80 0.77 (0.62) (0.31) 1.44 1.28 1.93 0.71 0.40 (0.36) 0.21 0.45 0.41 0.76 (0.30) 2.24 (0.14) (0.19) 0.31

1.47

1.47 0.95 1.83

Micro

(0.34) 0.83 2.16 1.43 (0.09) (0.31) 1.14 1.77 2.79 0.71 1.11 2.72 1.21 2.80 1.69 0.85 0.89 3.49 1.49 1.84 0.79

2.64

2.75 1.64 2.58

Grand Total

N/A 1.30

Grand Total

N/A N/A N/A

Utilities Total

(0.41)

Electric Utilities Natural Gas Utilities Water Utilities

Utilities

N/A (0.41) N/A N/A N/A N/A

Transportation Total

3.04

Air Courier Airline Misc. Transportation Railroads Trucking Water Transportation

Technology Total

Transportation

0.66 1.35 5.76 5.92 N/A 4.98 N/A 1.48 N/A N/A 4.06 3.87

Communications Equipment Computer Hardware Computer Networks Computer Peripherals Computer Services Computer Storage Devices Electronic Instr. & Controls Office Equipment Scientific & Technical Instr. Semiconductors Software & Programming

Technology

N/A 10.49 N/A N/A

Services Total

Retail (Technology) Schools Security Systems & Services Waste Management Services

0.97

N/A

N/A N/A N/A

2.15

N/A 1.57 4.71 N/A 1.66 0.66

1.11

1.59 0.78 2.16 3.98 0.26 2.60 0.38 0.77 3.59 0.52 2.96

0.57

N/A 4.64 1.15 3.69

1.48

1.27

1.18 1.61 N/A

0.88

0.88 0.49 2.34 N/A 1.18 0.40

2.15

2.20 1.95 2.18 1.86 2.54 1.51 2.06 1.35 2.02 1.96 2.29

1.15

1.05 3.69 1.73 1.97

0.66

1.11

(0.62) 0.57 1.62

0.27

0.50 (0.19) 0.36 1.78 0.32 1.91

1.48

1.39 0.92 1.05 2.15 1.35 2.47 1.21 1.30 1.72 1.09 1.89

0.00

(0.48) 1.65 0.49 1.52

1.21

1.19

1.05 0.97 1.62

0.72

0.88 (0.12) 3.99 1.78 1.33 0.55

2.43

1.42 4.84 2.87 3.03 1.64 2.22 1.13 0.99 2.65 2.46 3.52

0.64

0.55 7.78 1.12 2.50

230

Intangible Finance Standards

TABLE 10.2a intMgtOS® Standfield NASDAQ Industry Statement NASDAQ exchange as of January 30, 2004 (intMgtOS® 5003.iR66) Notes

Values

intMgtOS Report

intMgtOS®5003.iR66

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

January 30th 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001021

NYSE ANALYSIS The NYSE exchange comprised 1987 firms (OTC: 2369 firms, AMEX: 512 firms, NASDAQ: 3164 firms) on the 30th of January, 2004. The strongest-performing industries in the NYSE exchange were (Tables 10.5 and 10.5a): 1. 2. 3. 4.

Small caps: Auto & Truck Manufacturers (Consumer Cyclical: 34.53) Large caps: Software & Programming (Technology: 9.28) Medium caps: Advertising (Services: 7.99) Micro caps: Beverages—Alcoholic (Consumer/Non-Cyclical: 3.09)

CONCLUSION The choice of exchange will have a significant influence on returns and portfolio composition. The strongest-performing industries across all exchanges were as follows: 1. 2. 3. 4.

Micro caps: Tires (Consumer Cyclical: 40.73) Small caps: Auto & Truck Manufacturers (Consumer Cyclical: 34.53) Large caps: Schools (Services: 10.49) Medium caps: Photography (Services: 5.91)

The strongest-performing industries across the NASDAQ exchange were: 5. Large caps: Chemical Manufacturing (Basic Materials: 15.12) 6. Micro caps: Tobacco (Consumer/Non-Cyclical: 9.90)

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Apparel/Accessories Audio & Video Equipment Auto & Truck Manufacturers Auto & Truck Parts Footwear Furniture & Fixtures Jewelry & Silverware Recreational Products Textiles—Non Apparel

Consumer Cyclical

N/A

Conglomerates Total

N/A

Conglomerates

Capital Goods Total

Conglomerates

N/A N/A N/A N/A

Aerospace & Defense Constr.—Supplies & Fixtures Construction Services Misc. Capital Goods

Capital Goods

N/A

N/A N/A N/A N/A N/A N/A N/A N/A N/A

0.28

0.28

4.91

N/A N/A 4.91 N/A

1.87

N/A

Paper & Paper Products N/A

N/A N/A N/A 1.87 N/A N/A

Medium

N/A N/A N/A N/A N/A N/A

Large

Chemical Manufacturing Containers & Packaging Fabricated Plastic & Rubber Gold & Silver Metal Mining Misc. Fabricated Products

Industry

Basic Materials Total

Basic Materials

Sector

TABLE 10.3 intMgtOS® Standfield AMEX Industry Statement

N/A N/A N/A N/A N/A N/A N/A 4.16 N/A

N/A

N/A

0.81

N/A N/A 1.83 0.29

1.99

N/A

N/A N/A N/A 2.12 0.93 N/A

Small

0.49 2.94 0.44 0.08 1.21 1.13 (0.47) 0.27 0.50

N/A

N/A

0.57

0.51 (0.05) 0.79 0.55

0.94

0.71

2.33 0.78 0.32 1.92 0.76 (0.00)

Micro

(continues)

0.49 2.94 0.44 0.08 1.21 1.13 (0.47) 2.99 0.50

0.28

0.28

1.81

0.51 (0.05) 3.34 0.41

1.59

0.71

2.33 0.78 0.32 2.05 0.88 (0.00)

Grand Total

Financial Total

N/A

N/A N/A N/A N/A N/A N/A N/A

Financial

Consumer Financial Services Insurance (Misc.) Insurance (Prop. & Casualty) Investment Services Misc. Financial Services Regional Banks S&Ls/Savings Banks

1.09

Energy Total

N/A 2.66 0.29 1.60

Energy

Coal Oil & Gas—Integrated Oil & Gas Operations Oil Well Services & Equipment

N/A

N/A N/A N/A N/A N/A N/A N/A

Consumer/Non-Cyclical Total

N/A

Beverages (Alcoholic) Beverages (Nonalcoholic) Fish/Livestock Food Processing Office Supplies Personal & Household Prods. Tobacco

Large

Consumer/Non-Cyclical

Industry

Consumer Cyclical Total

Sector

TABLE 10.3 (continues)

1.16

N/A N/A N/A N/A 0.60 1.83 N/A

12.82

N/A N/A 12.82 N/A

N/A

N/A N/A N/A N/A N/A N/A N/A

N/A

Medium

0.95

N/A N/A N/A N/A 0.72 1.63 1.38

1.16

N/A N/A 0.47 2.88

0.49

N/A 0.88 (0.23) 2.92 N/A 1.80 N/A

4.16

Small

0.94

0.52 20.04 1.03 2.71 0.98 1.13 0.73

1.85

4.53 N/A 1.89 1.44

0.76

(0.13) 0.56 N/A 1.34 0.23 0.58 N/A

0.56

Micro

0.99

0.52 20.04 1.03 2.71 0.72 1.40 0.92

1.21

4.53 2.66 0.53 1.67

N/A

(0.13) 0.80 (0.23) 1.67 0.23 1.06 N/A

0.82

Grand Total

N/A N/A N/A

Communications Equipment Computer Networks

Technology

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Services Total

N/A

Advertising Broadcasting & Cable TV Business Services Casinos & Gaming Communications Services Hotels & Motels Motion Pictures Personal Services Real Estate Operations Recreational Activities Restaurants Retail (Apparel) Retail (Catalog & Mail Order) Retail (Grocery) Retail (Home Improvement) Retail (Specialty) Schools Security Systems & Services Waste Management Services

N/A N/A N/A

Services

Biotechnology & Drugs Healthcare Facilities Medical Equipment & Supplies

Healthcare Total

Healthcare

N/A N/A

0.42

N/A N/A N/A N/A 0.42 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

3.97

4.78 N/A 2.11

N/A N/A

1.47

N/A N/A N/A N/A 1.87 N/A 1.49 N/A 0.86 N/A N/A N/A N/A N/A N/A N/A N/A N/A 8.01

2.23

2.67 1.06 5.13

0.90 2.09

0.27

(0.63) 14.12 1.99 0.48 (0.07) (0.64) 9.16 1.49 0.35 1.38 0.85 N/A (0.07) (0.12) (0.17) 1.11 6.18 0.36 0.34

3.00

5.71 1.01 2.71

(continues)

0.90 2.09

N/A

(0.63) 14.12 1.99 0.48 0.42 (0.64) 1.52 1.49 0.51 1.38 0.85 N/A (0.07) (0.12) (0.17) 1.11 6.18 0.36 3.58

3.26

4.58 1.03 2.54

N/A 1.09

Utilities Total

Grand Total

N/A N/A N/A

Utilities

Electric Utilities Water Utilities

Transportation Total

N/A N/A N/A N/A N/A N/A

1.25

N/A

N/A N/A

N/A

N/A N/A N/A N/A N/A N/A

2.00

N/A N/A N/A N/A N/A 2.00 N/A N/A

N/A N/A N/A N/A N/A N/A N/A N/A N/A

Air Courier Airline Misc. Transportation Railroads Trucking Water Transportation

Medium

Large

Transportation

Computer Peripherals Computer Services Computer Storage Devices Electronic Instr. & Controls Office Equipment Scientific & Technical Instr. Semiconductors Software & Programming

Industry

Technology Total

Sector

TABLE 10.3 (continues)

1.41

0.67

N/A 0.67

N/A

N/A N/A N/A N/A N/A N/A

3.14

N/A N/A N/A N/A N/A 2.01 N/A 18.34

Small

0.96

0.56

0.50 1.54

0.71

N/A N/A 1.38 (0.38) 0.92 0.32

1.34

1.01 5.19 13.96 0.85 0.24 2.77 5.76 0.22

Micro

N/A

0.61

0.50 0.73

N/A

N/A N/A 1.38 (0.38) 0.92 0.32

1.75

1.01 5.19 13.96 0.85 0.24 2.17 5.76 1.43

Grand Total

235

The IntMgtOS® Standfield Statement TABLE 10.3a intMgtOS® Standfield AMEX Industry Statement AMEX exchange as of January 30, 2004 (intMgtOS® 5003.iR67) Notes

Values

intMgtOS Report

intMgtOS®5003.iR67

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

January 30th 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001032

7. Medium caps: Metal Mining (Basic Materials: 8.27) 8. Small caps: Beverages—Non-Alcoholic (Consumer/Non-Cyclical: 7.17) The strongest-performing industries in the AMEX exchange were: 9. 10. 11. 12.

Micro caps: Insurance—Miscellaneous (Financial: 20.04) Small caps: Software & Programming (Technology: 18.34) Medium caps: Oil & Gas Operations (Energy: 12.82) Large caps: Oil & Gas Integrated (Energy: 2.66)

The strongest-performing industries in the OTC exchange were: 13. 14. 15. 16.

Small caps: Electronic Instr. & Controls (Technology: 64.27) Micro caps: Tires (Consumer Cyclical: 40.73) Medium caps: Medical Equipment & Supplies (Healthcare: 39.94) Large caps: Money Center Banks (Financial: 8.32)

The strongest-performing industries in the NYSE exchange were: 17. 18. 19. 20.

Small caps: Auto & Truck Manufacturers (Consumer Cyclical: 34.53) Large caps: Software & Programming (Technology: 9.28) Medium caps: Advertising (Services: 7.99) Micro caps: Beverages—Alcoholic (Consumer/Non-Cyclical: 3.09)

The choice of exchange has a substantial bearing on the effectiveness of an intangible finance investment strategy.

1.53 N/A N/A (0.76) 2.11 N/A

Apparel/Accessories Appliance & Tool Audio & Video Equipment Auto & Truck Manufacturers Auto & Truck Parts

Consumer Cyclical

1.53

Conglomerates Total

(0.16)

Conglomerates

Conglomerates

Capital Goods Total

0.16 (0.70) N/A N/A N/A 0.49 N/A N/A

Aerospace & Defense Constr.—Supplies & Fixtures Constr. & Agric. Machinery Construction—Raw Materials Construction Services Misc. Capital Goods Mobile Homes & RVs

N/A 1.07 N/A N/A N/A N/A N/A 0.08 N/A N/A N/A

Large

Capital Goods

Chemical Manufacturing Chemicals—Plastics & Rubber Containers & Packaging Fabricated Plastic & Rubber Forestry & Wood Products Gold & Silver Iron & Steel Metal Mining Misc. Fabricated Products Non-Metallic Mining Paper & Paper Products

Industry

Basic Materials Total

Basic Materials

Sector

TABLE 10.4 intMgtOS® Standfield OTC Industry Statement

N/A N/A N/A N/A N/A

(0.97)

(0.97)

7.08

N/A N/A N/A 7.08 N/A N/A N/A

(0.33)

N/A 1.89 N/A N/A N/A N/A (0.77) N/A 1.18 N/A N/A

Medium

N/A (0.91) N/A N/A N/A

N/A

N/A

4.90

N/A N/A N/A N/A 4.90 N/A N/A

1.74

N/A N/A N/A N/A N/A N/A 1.74 N/A N/A N/A N/A

Small

0.59 (0.89) 0.73 N/A 0.30

N/A

N/A

(0.99)

1.42 0.01 (0.06) 0.21 (1.00) (0.44) N/A

(0.91)

0.92 (1.00) (0.41) (0.03) N/A (0.88) (0.55) 0.46 (0.39) 0.00 (1.00)

Micro

0.59 (0.91) (0.76) 2.11 0.30

(0.55)

(0.55)

N/A

(0.70) 0.01 (0.06) 5.15 (0.79) (0.44) N/A

N/A

0.92 1.32 (0.41) (0.03) N/A (0.88) (0.72) 0.08 1.16 0.00 (1.00)

Grand Total

N/A N/A N/A 1.78 N/A N/A N/A (0.00) 8.32 (0.68) 0.87

Financial

Consumer Financial Services Insurance (Accident & Health) Insurance (Life) Insurance (Misc.) Insurance (Prop. & Casualty) Investment Services Misc. Financial Services Money Center Banks Regional Banks S&Ls/Savings Banks

Energy Total

N/A N/A N/A

Energy

Coal Oil & Gas Operations Oil Well Services & Equipment

2.88

Consumer/Non-Cyclical Total

7.45 N/A N/A N/A N/A N/A 0.50 N/A

Consumer/Non-Cyclical

Beverages (Alcoholic) Beverages (Nonalcoholic) Crops Fish/Livestock Food Processing Office Supplies Personal & Household Prods. Tobacco

(0.53)

N/A N/A N/A N/A N/A N/A 1.16

Consumer Cyclical Total

Footwear Furniture & Fixtures Jewelry & Silverware Photography Recreational Products Textiles—Non Apparel Tires

N/A N/A N/A N/A N/A N/A N/A N/A 0.09 N/A

N/A

N/A N/A N/A

(0.62)

N/A N/A N/A N/A (0.62) N/A N/A N/A

(0.12)

4.92 N/A N/A N/A (0.46) N/A N/A

N/A N/A 0.16 N/A N/A 13.31 N/A N/A 0.82 0.96

0.64

N/A 0.64 N/A

0.28

N/A N/A N/A N/A 0.28 N/A N/A N/A

(0.91)

N/A N/A N/A N/A N/A N/A N/A

(0.90) 0.52 (0.57) 1.78 (0.91) (0.01) (0.28) N/A 1.05 0.15

(0.94)

N/A (0.95) 2.20

(0.97)

0.96 6.19 (0.87) (0.92) (0.99) (1.00) 2.12 N/A

(0.97)

N/A (0.19) (0.99) (0.90) 0.08 0.01 40.73

(continues)

(0.90) 0.52 1.75 1.78 (0.91) 5.22 (0.01) 8.32 (0.63) 0.81

N/A

N/A (0.93) 2.20

N/A

7.36 6.19 (0.87) (0.92) (0.83) (1.00) 0.51 N/A

(0.67)

4.92 (0.19) (0.99) (0.90) (0.45) 0.01 1.23

3.57 N/A N/A N/A N/A 3.49 N/A N/A N/A N/A N/A 5.70 N/A N/A N/A N/A N/A N/A N/A (0.08) N/A N/A

Advertising Broadcasting & Cable TV Business Services Casinos & Gaming Communications Services Hotels & Motels Motion Pictures Personal Services Printing & Publishing Printing Services Real Estate Operations Recreational Activities Rental & Leasing Restaurants Retail (Apparel) Retail (Catalog & Mail Order) Retail (Department & Discount) Retail (Drugs) Retail (Grocery) Retail (Home Improvement) Retail (Specialty)

Services

1.01 N/A 4.17 N/A

Healthcare Total

(0.19)

Biotechnology & Drugs Healthcare Facilities Major Drugs Medical Equipment & Supplies

Large

Healthcare

Industry

Financial Total

Sector

TABLE 10.4 (continues)

N/A 3.91 N/A N/A (0.98) 1.16 N/A N/A 1.19 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

(0.47)

N/A (0.75) N/A 39.94

0.09

Medium

N/A N/A N/A N/A 4.18 N/A N/A N/A N/A N/A N/A N/A 0.33 4.93 N/A N/A N/A N/A N/A N/A N/A

0.21

N/A 0.54 N/A 0.03

1.28

Small

(0.40) (0.97) 0.38 0.65 (0.98) (0.12) 1.35 10.24 3.40 0.61 (0.41) (0.25) 0.12 (0.05) (0.63) 0.73 (1.00) 2.84 (1.00) (0.39) (0.54)

1.27

1.79 0.18 N/A 2.12

0.03

Micro

(0.40) (0.76) 0.38 0.65 (0.92) 1.11 1.35 10.24 1.41 0.61 3.94 (0.25) 0.25 1.65 (0.63) 0.73 (1.00) 2.84 (0.18) (0.39) (0.54)

1.79

1.07 (0.70) 4.17 5.38

(0.17)

Grand Total

3.59 0.02

Utilities Total

Grand Total

N/A 3.59 N/A

Utilities

Electric Utilities Natural Gas Utilities Water Utilities

0.33

Transportation Total

N/A 0.66 0.17 N/A N/A N/A

Transportation

Air Courier Airline Misc. Transportation Railroads Trucking Water Transportation

(0.24)

Technology Total

0.07 1.78 N/A N/A N/A (0.57) N/A N/A (0.56) N/A 4.92 2.01

Communications Equipment Computer Hardware Computer Networks Computer Peripherals Computer Services Computer Storage Devices Electronic Instr. & Controls Office Equipment Scientific & Technical Instr. Semiconductors Software & Programming

Technology

N/A N/A N/A N/A

Services Total

Retail (Technology) Schools Security Systems & Services Waste Management Services

(0.75)

N/A

N/A N/A N/A

(0.41)

N/A N/A (0.41) N/A N/A N/A

(0.80)

N/A (0.66) N/A N/A N/A N/A (0.91) N/A N/A N/A 5.61

(0.89)

N/A N/A N/A N/A

0.04

N/A

N/A N/A N/A

N/A

N/A N/A N/A N/A N/A N/A

(0.05)

(0.74) N/A N/A N/A N/A N/A 64.27 N/A N/A N/A 1.02

2.95

N/A N/A N/A N/A

(0.93)

(0.96)

(0.66) (0.99) 1.23

(0.57)

(0.97) N/A 2.35 (0.81) 3.79 N/A

(0.08)

0.05 (0.36) 0.77 2.18 0.54 (0.59) (0.57) 1.35 1.91 1.74 (0.54)

(0.93)

(0.98) 1.17 (0.16) 1.42

N/A

(0.15)

(0.66) (0.11) 1.23

N/A

(0.97) 0.66 (0.03) (0.81) 3.79 N/A

(0.42)

1.12 (0.65) 0.77 2.18 (0.55) (0.59) (0.88) (0.56) 1.91 4.51 0.90

(0.59)

(0.98) 1.17 (0.16) 1.42

240

Intangible Finance Standards

TABLE 10.4a intMgtOS® Standfield OTC Industry Statement OTC exchange as of January 30, 2004 (intMgtOS® 5003.iR68) Notes

Values

intMgtOS Report

intMgtOS®5003.iR68

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

January 30th 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001037

2.32 3.71 0.42 0.11 1.40

Consumer Cyclical

Apparel/Accessories Appliance & Tool Audio & Video Equipment Auto & Truck Manufacturers Auto & Truck Parts

2.45

2.45

Conglomerates

Conglomerates

Conglomerates Total

(0.11)

Capital Goods Total

1.19 1.59 N/A 3.19 (0.52) 1.03 (0.65) N/A

Aerospace & Defense Constr.—Supplies & Fixtures Constr. & Agric. Machinery Construction—Raw Materials Construction Services Misc. Capital Goods Mobile Homes & RVs

1.12 3.34 3.69 N/A 1.06 2.21 (0.16) 0.83 1.42 N/A 0.97

Large

Capital Goods

Chemical Manufacturing Chemicals—Plastics & Rubber Containers & Packaging Fabricated Plastic & Rubber Forestry & Wood Products Gold & Silver Iron & Steel Metal Mining Misc. Fabricated Products Non-Metallic Mining Paper & Paper Products

Industry

Basic Materials Total

Basic Materials

Sector

TABLE 10.5 intMgtOS® Standfield NYSE Industry Statement

0.71 3.38 6.10 (0.91) 0.68

0.12

0.12

0.57

2.32 (0.73) (0.20) 0.69 1.36 1.51 3.78

(0.84)

1.49 (0.69) 1.14 1.92 1.33 2.11 (0.98) 0.74 0.71 1.25 (0.27)

Medium

0.90 1.43 N/A 34.53 0.38

(0.33)

(0.33)

(0.19)

0.73 (0.76) 1.66 0.40 (0.04) 0.38 1.07

(0.41)

0.80 0.41 (0.22) 1.16 (0.85) 4.20 0.66 1.08 (0.82) (0.24) 0.59

Small

(0.31) (0.15) N/A N/A (0.33)

N/A

N/A

0.19

1.03 (0.34) 0.12 N/A 0.18 0.38 0.15

(0.01)

1.15 (0.13) N/A 0.40 N/A N/A (0.49) 1.00 (0.03) N/A (0.74)

Micro

(continues)

1.09 2.75 0.48 (0.14) 1.01

2.25

2.25

(0.02)

1.58 (0.73) 1.84 (0.34) 0.77 (0.50) 2.09

(0.46)

1.17 0.78 1.01 1.35 0.42 2.20 (0.95) 0.82 (0.50) 0.78 0.46

Grand Total

1.71 1.78 0.51 2.48 1.04 1.22

Financial

Consumer Financial Services Insurance (Accident & Health) Insurance (Life) Insurance (Miscellaneous) Insurance (Prop. & Casualty) Investment Services

0.15

Energy Total

N/A 0.15 (0.17) 2.10

Energy

Coal Oil & Gas—Integrated Oil & Gas Operations Oil Well Services & Equipment

2.87

Consumer/Non-Cyclical Total

1.15 3.18 N/A N/A 1.70 N/A 7.11 4.76

Beverages (Alcoholic) Beverages (Nonalcoholic) Crops Fish/Livestock Food Processing Office Supplies Personal & Household Prods. Tobacco

Consumer/Non-Cyclical

1.83 1.25 1.97 N/A 2.22 1.04 1.22

3.20 1.29 N/A 1.50 3.49 N/A N/A

1.30 0.70 0.08 3.17 0.50 2.19

(0.68)

(0.83) N/A (0.79) 1.23

(0.70)

0.67 (0.95) 0.57 (0.93) 1.21 0.39 3.14 0.66

(0.13)

Medium

Large

0.37

Footwear Furniture & Fixtures Jewelry & Silverware Photography Recreational Products Textiles—Non Apparel Tires

Industry

Consumer Cyclical Total

Sector

TABLE 10.5 (continues)

0.17 1.94 0.09 0.65 (0.36) 0.51

(0.35)

N/A N/A (0.52) 0.83

(0.66)

(0.95) (0.11) 3.80 (0.90) (0.56) 1.44 (0.63) (0.12)

0.50

0.98 (0.05) 0.36 N/A 0.03 (0.44) 0.79

Small

0.59 (0.61) (0.76) N/A (0.01) 0.56

0.30

N/A N/A 0.29 0.34

0.49

3.09 N/A (0.49) 0.36 0.12 N/A 0.59 N/A

(0.08)

(0.28) (0.28) 0.85 2.90 (0.07) 0.22 N/A

Micro

1.62 1.47 0.47 2.46 0.92 1.29

(0.07)

(0.83) 0.15 (0.56) 1.65

1.01

0.75 (0.02) 1.08 (0.91) 1.39 0.61 6.05 4.08

0.24

2.47 1.15 1.67 1.51 2.01 0.87 1.12

Grand Total

3.28 (0.18) 6.40 4.26 (0.47) 1.18 0.23 5.72 (0.01) N/A 1.07 1.54 N/A 2.37 2.51 N/A 2.20 2.62 2.34 2.82 4.67 4.80

Services

Advertising Broadcasting & Cable TV Business Services Casinos & Gaming Communications Services Hotels & Motels Motion Pictures Personal Services Printing & Publishing Printing Services Real Estate Operations Recreational Activities Rental & Leasing Restaurants Retail (Apparel) Retail (Catalog & Mail Order) Retail (Department & Discount) Retail (Drugs) Retail (Grocery) Retail (Home Improvement) Retail (Specialty) Retail (Technology)

3.85

Healthcare Total

4.19 1.82 3.71 5.64

Healthcare

Biotechnology & Drugs Healthcare Facilities Major Drugs Medical Equipment & Supplies

(0.04)

N/A 0.33 (0.70) 0.31

Financial Total

Misc. Financial Services Money Center Banks Regional Banks S&Ls/Savings Banks

7.99 (0.50) 2.66 1.07 (0.15) 0.65 1.55 1.79 1.99 0.03 1.12 0.18 0.47 0.73 2.47 N/A 0.01 1.81 (0.19) 3.41 0.00 0.04

1.95

1.60 1.96 N/A 2.70

0.89

1.58 N/A 1.16 0.88

9.78 0.41 1.29 0.56 (0.64) 0.12 N/A 10.61 2.19 0.93 0.72 (0.10) 0.45 0.90 0.83 1.11 (0.26) 0.19 0.28 N/A 1.12 0.69

1.45

0.87 1.18 N/A 1.91

(0.16)

(0.76) N/A (0.06) 0.94

N/A N/A 0.68 0.42 (0.90) (0.35) N/A 0.12 0.42 2.32 0.32 (0.08) 0.45 0.01 (0.53) 0.14 (0.14) N/A N/A N/A (0.27) 0.38

0.86

1.14 0.08 N/A 1.20

0.15

1.15 N/A N/A N/A

(continues)

3.56 (0.22) 3.27 1.92 (0.47) 1.00 0.29 2.78 0.14 0.26 1.03 1.14 0.46 1.48 2.22 0.52 2.03 2.44 1.21 2.84 0.48 2.75

3.67

3.57 1.81 3.71 5.01

(0.00)

(0.15) 0.33 (0.67) 0.36

(0.25) 0.27

Utilities Total

Grand Total

(0.30) 0.07 1.51

Utilities

Electric Utilities Natural Gas Utilities Water Utilities

0.69

Transportation Total

1.72 (0.59) N/A 0.36 4.26 N/A

Transportation

Air Courier Airline Misc. Transportation Railroads Trucking Water Transportation

2.19

Technology Total

3.48 5.08 N/A 1.27 1.14 2.32 0.54 3.94 2.86 2.19 9.28

(0.62)

(0.94)

(0.96) 0.98 2.16

(0.78)

N/A (0.91) 1.53 (0.88) 1.95 0.50

1.57

2.23 0.55 1.90 2.27 2.04 1.63 1.10 1.05 2.49 0.71 2.26

0.51

6.80 1.72 1.40

N/A N/A 1.90 (0.20)

Communications Equipment Computer Hardware Computer Networks Computer Peripherals Computer Services Computer Storage Devices Electronic Instr. & Controls Office Equipment Scientific & Technical Instr. Semiconductors Software & Programming

Medium

Large

Technology

Schools Security Systems & Services Waste Management Services

Industry

Services Total

Sector

TABLE 10.5 (continues)

(0.26)

0.07

0.23 (0.19) 0.89

(0.87)

N/A (0.95) (0.88) 0.45 N/A 0.24

1.30

1.93 N/A 1.54 0.94 2.16 1.05 1.23 1.57 0.79 2.69 1.15

0.36

N/A 1.42 2.61

Small

(0.06)

0.46

0.19 0.53 N/A

0.25

(0.50) (0.42) N/A 0.94 N/A 0.43

(0.52)

(0.94) N/A N/A 0.67 N/A N/A 0.62 0.08 N/A (0.11) 1.75

(0.18)

(0.43) N/A N/A

Micro

0.01

(0.76)

(0.80) 0.20 1.53

(0.31)

1.69 (0.85) (0.52) (0.38) 4.13 0.40

2.04

3.23 4.70 1.88 1.29 1.26 2.11 0.76 2.73 2.44 1.98 5.56

(0.14)

5.81 1.61 1.73

Grand Total

245

The IntMgtOS® Standfield Statement TABLE 10.5a intMgtOS® Standfield NYSE Industry Statement NYSE exchange as of January 30, 2004 (intMgtOS® 5003.iR69) Notes

Values

intMgtOS Report

intMgtOS®5003.iR69

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

January 30th 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001067

CHAPTER

12

Pattern Return Analysis

Investment logic dictates that investors should created a manageable diversified portfolio of investments. To reduce transaction costs, this portfolio should be manageable—perhaps 10 different stocks. The trouble with this approach is, which 10 stocks should you pick? Intangible Analysis takes a contrary approach. The stock market has been described in many ways—ranging from an angry beast, to an unpredictable 2-year-old child, to an absolute mystery. The market often does the exact opposite of what people think. Therefore, personal opinions on what the market has done or will do are simply opinions, nothing more and nothing less. With this in mind, intangible analysis seeks only to reveal the actual truth of the market and eliminate all perceptions and all personal and emotional biases, and to uncover the market in its raw and naked form. To do this requires a fundamentally different way of thinking. Pattern return analysis is the first stage in uncovering the actual truth of the market and separating opinion from fact, and fantasy from reality. The financial news abounds with opinions, projections, estimations, and “expert advice.” Frequently, listening to this advice will cause an investor’s portfolio 269

270

Intangible Finance Standards

to shrink substantially. Pattern return analysis seeks only to uncover what the pattern of returns has actually been over time.

L1 PATTERN-BASED ANALYSIS The first place to start in understanding the pattern of returns in the market is to assume that you have the economic power to invest $1000 in every stock that is reporting sufficient information to warrant itself as an accountable firm. An accountable firm is: A firm that provides financial information about its market value, share price, 12month percentage return, and book value.

If a firm does not provide these basic details, then it is classified as “unaccountable” from an intangible finance perspective.

CAPITAL CREATION (CC) ANALYSIS To any investor CC, or capital creation, is the most important issue. Capital creation can be either positive or negative. Positive capital creation represents a share price increase. Negative CC represents either a zero or negative return. Total capital destruction (or CC = -100%) represents a 100% loss of a capital investment in the share under consideration. Intangible finance analysis uses the following classification system to measure capital creation. Negative Share Price Movements Intangible finance is designed to reduce the probability of unwittingly selecting a firm that behaves opposite to the way in which you want. At all times, it must be remembered that the stock market can behave like a spoiled 2-yearold child, so trade management is critical, as any stock you hold has the potential to become a TCD holding (CC = -100). There are six CC factors to measure negative share price performance: 1. CC -100: Firms that have lost 100% of their value over the past 12 months. (intMgtOS®5001.D40) 2. CC -80: Firms that have lost between 80% and just under 100% of their value over the past 12 months. (intMgtOS®5001.D40a) 3. CC -60: Firms that have lost between 60% and just under 80% of their value over the past 12 months. (intMgtOS®5001.D40b) 4. CC -40: Firms that have lost between 40% and just under 60% of their value over the past 12 months. (intMgtOS®5001.D40c)

Pattern Return Analysis

271

5. CC -20: Firms that have lost between 20% and just under 40% of their value over the past 12 months. (intMgtOS®5001.D40d) 6. CC 0: Firms that have lost between 0% and just under 20% of their value over the past 12 months. (intMgtOS®5001.D40e) Positive Share Price Movements Here are nine CC factors to measure positive share price performance: 7. CC +20: Firms that have created a positive share price return of more than 0% and up to 20% of their value in the past 12 months. (intMgtOS®5001.D41a) 8. CC +40: Firms that have created a positive share price return of more than 20% and up to 40% of their value in the past 12 months. (intMgtOS®5001.D41b) 9. CC +60: Firms that have created a positive share price return of more than 40% and up to 60% of their value in the past 12 months. (intMgtOS®5001.D41c) 10. CC +80: Firms that have created a positive share price return of more than 60% and up to 80% of their value in the past 12 months. (intMgtOS®5001.D41d) 11. CC +100: Firms that have created a positive share price return of more than 80% and up to 100% of their value in the past 12 months. (intMgtOS®5001.D41e) 12. CC +150: Firms that have created a positive share price return of more than 100% and up to 150% of their value in the past 12 months. (intMgtOS®5001.D41f) 13. CC +300: Firms that have created a positive share price return of more than 150% and up to 300% of their value in the past 12 months. (intMgtOS®5001.D41g) 14. CC +600: Firms that have created a positive share price return of more than 300% and up to 600% of their value in the past 12 months. (intMgtOS®5001.D41h) 15. CC +600+: Firms that have created a positive share price return of more than 600% of their value in the past 12 months. (intMgtOS®5001.D41i)

LARGE CAP ANALYSIS Let us suppose that you were seeking to only invest in large cap firms. It would be helpful to understand the previous performance of these firms, what sectors

272

Intangible Finance Standards

TABLE 12.1 intMgtOS® Value Report (intMgtOS®5003.iR50.LC) +IV Large [3]

+IV Large % [4]

Sector

No. Large [1]

Basic Materials

43

6.38%

39

6.68%

Capital Goods

25

3.71%

19

Conglomerates

15

2.23%

15

Consumer Cyclical

29

4.30%

Consumer/NonCyclical

42

6.23%

Energy Financial

Large % [2]

-IV Large [5]

-IV Large % [6]

No. NA_Large [7]

NA Large % [8]

2

2.78%

2

11.11%

3.25%

6

8.33%

—

0.00%

2.57%

—

0.00%

—

0.00%

24

4.11%

5

6.94%

—

0.00%

37

6.34%

2

2.78%

3

16.67%

38

5.64%

35

5.99%

3

4.17%

—

0.00%

136

20.18%

116

19.86%

18

25.00%

2

11.11%

Healthcare

54

8.01%

52

8.90%

1

1.39%

1

5.56%

147

21.81%

118

20.21%

22

30.56%

7

38.89%

Technology

90

13.35%

84

14.38%

4

5.56%

2

11.11%

Transportation

12

1.78%

11

1.88%

1

1.39%

—

0.00%

Utilities

43

6.38%

34

5.82%

8

11.11%

1

5.56%

674

100.00%

584

100.00%

72

100.00%

18

100.00%

Services

Grand Total

TABLE 12.1a intMgtOS® Value Report (intMgtOS®5003.R50.LC) Notes

Values

intMgtOS Report

intMgtOS®5003.iR50.LC

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

February 2nd 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1000267

were “hot” and what sectors were “cold.” Even though large cap firms are those that have in excess of $5b in market capitalization, not all of these firms report enough financial information to be analyzed by accounting or intangible finance measures. In Table 12.1, there are 674 large cap firms—584 value

Pattern Return Analysis

273

creating, 72 value destroying, and 18 value unaccountable (see also Table 12.1a). This table breaks up large caps between the various sectors (column [1]) and shows where the large caps dominate the various sectors (column [2]). For example, the largest concentration of large cap firms is in the Services sector (21.81%). The table then breaks the aggregated figure (column [1]) into value creating large caps—in absolute terms (column [3]) and as a percentage (column [4]). Similarly, the table breaks the aggregated figure (column [1]) into value destroying large caps—in absolute terms (column [5]) and as a percentage (column [6]). The largest number of value destroying large caps is in the Services sector (30.56%). Finally, the table breaks the aggregated figure (column [1]) into value unaccountable large caps—in absolute terms (column [7]) and as a percentage (column [8]). The largest number of value unaccountable large caps, by a significant margin, is also in the Services sector (38.89%). This table is useful, but we still do not know the pattern of returns for these large caps. Large Cap +IV Pattern Return Analysis As shown in Table 12.1, there are 584 value creating large cap firms. But how much value did these firms create? What sectors dominated this value creation? What was the distribution of returns in these sectors? See Table 12.2. This analysis shows that the performance of the 584 large caps is better understood graphically in Figure 12.1. Again, the category “-100” means total loss of investor wealth, and “-80” means a loss of investor wealth between just under 100% and 80%. Hence, to interpret the scale correctly, the x-axis is read from left to right, meaning that the number to the immediate left is used first (say, -100) followed by the number to the right (where your focus is)—say, -80. On the positive side of the scale, if your focus is at +60, you can interpret the result as “over 100 large caps generated positive annual returns of 40 to 60%.” For large caps, we can see that the pattern of returns is mainly concentrated in the 0 to +80% range. This can be more easily seen if we convert the above absolute figures into relative (percentage) figures and graph them as in Figure 12.2. By using a cumulative frequency distribution, we can assess the probability of excess returns. For example, around 60% of the large cap firms were under the +40% category. Around 80% of the large cap firms generated under +60% returns. By knowing this, investors understand that there is a less than

Grand Total

Utilities

Transportation

Technology

1 6

2

Services

41

2

8

5

2

Healthcare 1

2 6

9

Financial

1

Energy

Consumer/Non-Cyclical

Cyclical

1 4

1

0

Conglomerates

-20

Consumer

-40

2

-60 2

-80

Basic Materials

-100

Capital Goods

Sector (+IV Analysis)

TABLE 12.2 Large Cap +IV Pattern Return Analysis

136

13 173

10

2

18

12 6

32

15

45

9

8

5

7

6

16

+40

29

13

29

9

14

3

2

6

+20

106

3

2

17

20

7

21

11

3

6

6

2

8

+60

50

2

1

14

8

7

9

1

3

1

2

2

+80

25

1

6

9

3

1

1

2

2

+100

24

9

3

2

2

1

1

3

3

+150

14

2

6

2

1

1

2

+300

2

1

1

+600

+600+

6

1

1

3

1

NA

530

31

11

83

104

45

110

33

26

19

14

17

37

+SP

48

2

11

7

6

2

10

5

1

2

2

-SP

275

Pattern Return Analysis Absolute Pattern Return Analysis (Large Caps) 200 180 Number of Large Caps

160 140 120 100 80 60 40 20 600

600+

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

-100

-

Return Category

FIGURE 12.1 Large Cap Absolute +IV Pattern Return Analysis.

10% chance of a large cap return being more than 100%. This method of analysis is particularly useful for analyzing different firm types (large cap, medium cap, small cap, micro cap) (see Figure 12.3). Measuring Absolute Returns Let us suppose that you invested $1000 each in 578 of the large caps; then your total capital invested (not including commissions and so on) would be $578,000. Let us further suppose that you completely ignored this investment for 12 months and you now wish to analyze how much money you made or lost, in what sectors, and so on (see Tables 12.3 and 12.3a). At the start of the 12-month period, you would have invested $530,000 in stocks (+SP: positive share price) that increased in value, and $48,000 that decreased in value (hence -SP: negative share price). For every $11 of total capital investment, roughly $1 of stock was invested in stocks that decreased in value (-SP), and $10 was invested in stocks that increased in value (+SP). Overall, over the 12-month period, investments in +SP stocks increased capital from $530,000 to $766,908; investments in -SP stocks decreased from $48,000 to $43,442. The graph below summarizes the information in visual form, to show that the greatest amount of absolute returns were gained from investing in stocks that gained from 40% to 60% of their value.

276

Intangible Finance Standards

Relative Pattern Return Analysis (Large Caps) 35.00%

25.00% 20.00% 15.00% 10.00% 5.00%

600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

-100

0.00%

Return Category

FIGURE 12.2 Large Cap Relative +IV Pattern Return Analysis.

Cumulative Frequency Distribution of Relative Returns (Large Caps) 100.00% 90.00% % Large Caps (+IV) Return

80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

0.00% -100

% Large Caps (+IV) Return

30.00%

Return Category

FIGURE 12.3 Large Cap Cumulative Frequency Distribution of Relative Returns.

-40

-20 0

1,000 4,000

1,000

1,000

Conglomerates

Consumer Cyclical

Consumer/Non-Cyclical 9,000

2,000

2,000

Capital Goods

14,000

3,000

6,000

2,000

+20

2 41

Basic Materials

Sector

Initial Investment:

Grand Total

Utilities

Transportation 6

Services

1

2

Healthcare

Technology

5

2

Financial 8

2 6

Energy

1

1

Consumer/Non-Cyclical 9

4

1

Consumer Cyclical

0

1

-20

2

-40

Conglomerates

-60

Capital Goods

-80 2

-100

Basic Materials

Sector (+IV Analysis)

Investments by Capital Creation:

TABLE 12.3 Aggregated Return Report

8,000

5,000

7,000

6,000

16,000

+40

136

13 173

10

2

18

12 6

32

15

45

9

8

5

7

6

16

+40

29

13

29

9

14

3

2

6

+20

3,000

6,000

6,000

2,000

8,000

+60

106

3

2

17

20

7

21

11

3

6

6

2

8

+60

3,000

1,000

2,000

2,000

+80

50

2

1

14

8

7

9

1

3

1

2

2

+80

1,000

2,000

2,000

24

9

3

2

2

1

1

3

3

+150

+100

25

1

6

9

3

1

1

2

2

+100

1,000

1,000

3,000

3,000

+150

14

2

6

2

1

1

2

+300

+300

2

1

1

+600

+600

+600+

5,000

1,000

2,000

(continues)

26,000

19,000

14,000

17,000

2,000

-SP

48

2

11

7

6

2

10

5

1

2

2

-SP

10,000

530

31

11

83

104

45

110

33

26

19

14

17

37

+SP

37,000

+SP

6

1

1

3

1

NA

571

4,646

1,563

1,533

Healthcare

Services 7,320

32,430

5,746

Financial

Technology

10,091

1,974

13,166

32,216

14,547

15,540

8,467

744

Consumer/Non-Cyclical

Energy

676

Consumer Cyclical 3,245

945

Conglomerates 3,733

6,698 2,270

+20

136,000

1,887

0

41,000

1,816

-20

6,000

6,000 13,000

Basic Materials

-40

1,000

2,000

12,000

29,000

13,000

29,000

9,000

-20

Capital Goods

Sector

12-Month Returns:

Grand Total

Utilities

Transportation

8,000

2,000

1,000

Services

Technology

5,000

2,000

Healthcare

-40

2,000

-60

6,000

-80

Energy

-100

Financial

Sector (+IV Analysis)

Initial Investment

TABLE 12.3 (continues)

0

23,337

41,545

19,164

57,958

11,606

10,167

6,524

8,986

7,776

20,452

+40

173,000

10,000

2,000

18,000

32,000

15,000

45,000

9,000

+20

+60

25,622

29,832

10,333

31,171

16,672

4,300

8,724

9,112

2,843

11,943

+60

106,000

3,000

2,000

17,000

20,000

7,000

21,000

11,000

+40

24,191

13,311

11,711

15,225

1,705

5,174

1,775

3,365

3,390

+80

50,000

2,000

1,000

14,000

8,000

7,000

9,000

1,000

+80

11,516

17,001

5,732

2,000

1,944

3,752

3,670

+100

25,000

1,000

6,000

9,000

3,000

9,000

3,000

2,000

2,000

20,132

6,357

4,273

4,554

2,162

2,221

6,510

6,815

+150

5,683

2,734

2,952

5,959

300

14,000

2,000

6,000

2,000

1,000

1,000

2,000

+600

16,085

+300

24,000

+150

1,000

+100

4,924

5,129

600

2,000

1,000

1,000

+600+

138,972

151,074

62,762

150,021

48,032

32,170

27,832

19,873

26,516

52,967

+SP

530,000

31,000

11,000

83,000

104,000

45,000

110,000

7,000

6,000

2,000

-SP

9,424

6,209

5,746

1,974

9,211

4,408

945

1,816

1,887

48,000

2,000

11,000

+SP

33,000

NA

—

—

(437)

—

—

—

Energy

Financial

Healthcare

—

—

-40

—

—

Sector

Basic Materials

Capital Goods

Percentage Returns:

—

—

-20

270 1,986 3,112

+80

51,946

1,466

930

8,622

9,832

3,333

10,171

5,672

1,300

2,724

1,891

29,025

—

—

11,132

3,357

2,273

2,554

—

1,162

1,221

—

3,510

3,815

+150

53,025

+150

22,506

891

—

5,516

8,001

—

2,732

1,000

—

944

—

1,752

1,670

+100

47,506

+100

34,908

1,401

660

10,191

5,311

4,711

6,225

705

—

2,174

775

1,365

1,390

+80

84,908

3,401

1,660

87.62% 116.99%

+60

49,660

2,691

455

5,337

9,545

4,164

12,958

2,606

2,167

1,524

843

3,943

+60

157,946

4,466

2,930

83.48% 127.17%

+40

15,059

943

912

1,166

3,216

1,547

3,430

1,091

1,540

245

1,776

4,452

+40

222,660

698 —

2,455 12,691

-9.20% 13.51% 29.59% 42.17% 68.25%

+20

(2,645)

(179)

—

—

(680)

(354)

(254)

(26)

(533)

(268)

(55)

(184)

+20

151,059

(113)

0

6,912 13,943

-5.64% 11.63% 27.82% 49.28% 69.52%

0

(1,484)

—

—

Transportation

Utilities

(429)

—

—

Grand Total

(467)

(429)

Technology

Services

(256)

—

Consumer/Non-Cyclical

—

(324)

—

—

—

—

Capital Goods

Consumer Cyclical

—

—

Basic Materials

1,821 38,355

Conglomerates

-20

4,516

-40

571

Sector

Profit/Loss:

Grand Total

Utilities

Transportation

—

—

300

25,751

4,339

—

10,085

3,683

1,734

1,952

3,959

—

—

—

—

—

300

39,751

6,339

—

—

600

8,053

—

—

3,924

4,129

—

—

—

—

—

—

—

—

600

10,053

55.98%

43.15%

+SP

1,821

-9.20%

-5.64%

-SP

(4,558)

(179)

—

—

(1,576)

(791)

(254)

(26)

(789)

(592)

(55)

(184)

(113)

-SP

43,442

(continues)

236,908

11,732

2,957

55,972

47,074

17,762

40,021

15,032

6,170

8,832

5,873

9,516

15,967

+SP

766,908

42,732

13,957

+20

+40 +60

+150

197.93%

7.26% 26.91% 48.86% 70.07%

-42.89% -24.74% -6.45% 11.07% 28.71% 49.01% 69.82%

-8.95%

216.95% 90.02% 120.94% 183.94%

89.10%

91.93% 123.69% 168.08%

15.20% 22.77% 46.48% 66.00%

9.72% 29.65% 50.71% 72.79%

—

113.67% 173.36% 88.90% 111.90% 184.17%

91.08% 127.70% 195.17%

-1.29% 12.12% 28.96% 51.56% 70.50% 100.00%

+600+

-SP -5.51%

+SP

-4.23%

-1.29%

-7.89%

39.47% -11.30%

36.38%

45.55%

23.73%

46.48% -11.83%

41.95%

NA

402.63% 44.70%

37.84%

26.88%

392.37% 67.44%

-9.50%

-8.95%

412.89% 45.26% -14.33%

+600

-4.23% 11.83% 28.79% 48.43% 69.16%

116.23%

+300

-21.84% -7.08% 11.90% 27.76% 47.61% 67.30%

True & Fair Value Certification

Grand Total

Utilities

Transportation

Technology

Services

+100

94.36% 122.13%

+80

-42.89% -23.36% -8.50% 11.09% 29.83% 49.16% 66.38%

—

Healthcare

—

Energy

—

Financial

Conglomerates

-25.60% -5.92% 11.00% 27.09% 43.33%

0

Consumer/NonCyclical

-20 28.37% 51.87% 77.52%

-40

8.17% 30.47% 45.40% 72.47%

-60

-5.51%

-80

-32.41% -6.69%

-100

Consumer Cyclical

Sector (+IV Analysis)

Percentage Returns:

TABLE 12.3 (continues)

281

Pattern Return Analysis TABLE 12.3a intMgtOS® Aggregated Return Report Notes

Values

intMgtOS Report

intMgtOS®5003.R52.LC.+IV

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

February 2nd 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1000312

In Figures 12.4 and 12.5 you can see that 600%+ returns did not occur in large cap firms, although there were some large caps that did earn returns up to 600% in the past 12 months. By Sector Extending the above analysis, we shall now investigate by sector where the returns were on the total of $578,000 of investment (see Tables 12.4 and 12.4a). Graphically, trends can be more easily seen in Figure 12.6. The Consumer Non-Cyclical sector performed the worst in 2002–2003. The Technology sector performed the best for large cap firms in 2002–2003. This can be more clearly seen in Figure 12.7. If we graph the initial capital (light area) against the return (darker area) by sector using the ranking system above, we can see the how the relative returns match up with absolute returns in Figure 12.8. Conclusions for +IV Large Caps (See Figures 12.9 to 12.11) Large Cap ±IV Pattern Return Analysis In this section, we will assume that the graphs convey the majority of the information you would require as an investor, and will dispense with much of the preceding analysis.

282

Intangible Finance Standards

Net Capital Change on $1k Investment (Large Caps) 60,000

Large Caps Value Change

50,000 40,000 30,000 20,000 10,000

600+

600

300

+150

(10,000)

+100

+80

+60

+40

+20

0

-20

-40

-60

-100

-80

-

Return Category

FIGURE 12.4 Net Capital Change in LC Investments.

Average Return on Investment (Large Caps: +IV) 450.00% 400.00%

300.00% 250.00% 200.00% 150.00% 100.00% 50.00%

-100.00% Return Category

FIGURE 12.5 Average Returns +IV LC Investments.

600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-50.00%

-80

0.00%

-100

% Large Caps (+IV) Return

350.00%

283

Pattern Return Analysis TABLE 12.4 Sector Return Report Sector

Capital

Return

Change

% Chg

Basic Materials

39,000

54,854

15,854

40.65%

Capital Goods

19,000

28,332

9,332

49.12%

Conglomerates

15,000

20,818

5,818

38.79%

Consumer Cyclical

24,000

32,240

8,240

34.34%

Consumer/Non-Cyclical

36,000

41,381

5,381

14.95%

Energy Financial Healthcare

35,000

50,006

15,006

42.87%

116,000

155,767

39,767

34.28%

52,000

68,971

16,971

32.64%

115,000

160,498

45,498

39.56%

Technology

83,000

138,972

55,972

67.44%

Transportation

11,000

13,957

2,957

26.88%

Services

Utilities Grand Total

33,000

44,553

11,553

35.01%

578,000

810,350

232,350

40.20%

True & Fair Value Certification

TABLE 12.4a intMgtOS® Sector Return Report Notes

Values

intMgtOS Report

intMgtOS®5003.iR52.LC.+IV

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

February 2nd 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1000324

284

Intangible Finance Standards

Relative Return on Investment (Large Caps) 80.00%

Number of Large Caps

70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

FIGURE 12.6 Investment Summary Graph.

Relative Return on Investment (Large Caps: +IV) 80.00%

+IV: Annual % Chg in SP

70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

FIGURE 12.7 LC Relative Return on Investment.

285

Pattern Return Analysis

Absolute Return on Sector Investment (Large Caps: +IV)

Absolute Return by Sector (+IV)

$250,000 $200,000 $150,000 $100,000 $50,000 $0

FIGURE 12.8 LC +IV Absolute Return on Sector Investment.

Relative Pattern Return Analysis (Large Caps: -IV) 35.00%

% Large Caps (-IV) Return

30.00% 25.00% 20.00% 15.00% 10.00% 5.00%

600+

600

300

+150

+100

+80

+60

+40

0

-20

-40

-60

-80

+20

-5.00%

-100

0.00%

Return Category

FIGURE 12.9 Large Cap +IV Returns. The intangible analysis of the large cap sector (for +IV) revealed that the majority of large cap returns were concentrated in the range +20 to +60.

286

Intangible Finance Standards

Average Return on Investment (Large Caps) 450.00% 400.00%

Number of Large Caps

350.00% 300.00% 250.00% 200.00% 150.00% 100.00% 50.00%

600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

-50.00%

-100

0.00%

-100.00% Return Category

FIGURE 12.10 Large Cap +IV Average ROI. Significant returns did exist for the large cap sector, but there were very few large caps that experienced returns outside the +20 to +60 range. On a percentage basis, few large cap firms produced significant returns, but in a balanced portfolio ($1k average per large cap), these returns were negligible.

Relative Return on Investment (Large Caps: +IV) 80.00%

+IV: Annual % Chg in SP

70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

FIGURE 12.11 Relative ROI by Sector. On a sector basis, Consumer/Non-Cyclical produced the lowest average returns, with Technology producing the highest average returns for large caps.

287

Pattern Return Analysis

Relative Pattern Return Analysis (Large Caps: +IV) 35.00%

% Large Caps (+IV) Return

30.00% 25.00% 20.00% 15.00% 10.00% 5.00%

600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

-100

0.00%

Return Category

FIGURE 12.12 Large Cap +IV Returns. Previously, the return structure of +IV large cap firms was concentrated mainly around the +20 to +60 range.

Relative Pattern Return (±IV) Analysis This method of intangible finance allows us to see how returns are distributed for wealth creating (+IV) and wealth destroying (-IV) firms in the large cap sector. (See Figures 12.12 and 12.13.) Average Return on Investment (±IV) Analysis This intangible finance method visually illustrates the specific stock performance over the past 12 months by return category for wealth creating (+IV) and wealth destroying (-IV) large cap firms. (See Figures 12.14 and 12.15.) These figures show that -IV firms and +IV firms returned around the same returns for performance between 0 and +300. However, +IV firms made more losses (-40, -20), which were offset by higher gains (+600). Relative Return on Sector Investment (±IV) Analysis This intangible finance method visually illustrates the specific annual change in share price performance over the past 12 months, ranked by sector for wealth creating (+IV) and wealth destroying (-IV) large cap firms. (See Figures 12.16 and 12.17.)

288

Intangible Finance Standards

Relative Pattern Return Analysis (Large Caps: -IV) 35.00%

% Large Caps (-IV) Return

30.00% 25.00% 20.00% 15.00% 10.00% 5.00%

600+

600

300

+150

+80

+60

+40

+20

0

-20

-40

-60

+100

-5.00%

-80

-100

0.00%

Return Category

FIGURE 12.13 Large Cap -IV Returns. The intangible analysis of the large cap sector (for -IV) reveals a fundamentally different structure than that of +IV returns for large caps. It can be seen that -IV firms received much higher average returns: +40, +60, and +150, compared to large cap +IV firms’ +20 or at best +40.

Average Return on Investment (Large Caps: -IV) 450.00%

350.00% 300.00% 250.00% 200.00% 150.00% 100.00% 50.00%

Return Category

FIGURE 12.14 Average ROI -IV.

600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-50.00%

-80

0.00% -100

Large Cap Value Change (-IV)

400.00%

289

Pattern Return Analysis

Average Return on Investment (Large Caps) 450.00% 400.00%

300.00% 250.00% 200.00% 150.00% 100.00% 50.00%

-100.00% Return Category

FIGURE 12.15 Average ROI +IV.

Relative Return on Investment (Large Caps: -IV) 100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

FIGURE 12.16 Relative ROI -IV.

600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

-50.00%

-100

0.00%

-IV: Annual % Chg in SP

Number of Large Caps

350.00%

290

Intangible Finance Standards

Relative Return on Investment (Large Caps: +IV) 100.00% +IV: Annual % Chg in SP

90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

FIGURE 12.17 Relative ROI +IV.

This analysis shows that the Consumer/Non-Cyclical sector was the worstperforming sector for both +IV and -IV large caps. Technology was the bestperforming sector for both +IV and -IV large caps. Absolute Return on Sector Investment (±IV) Analysis This intangible finance method visually illustrates the investment (dark filled area) and the annual absolute ($) return (hollow white area) if an investor was to invest $1,000 in each of the firms that make up the specific sector for +IV and -IV firms in the large cap sector. (See Figures 12.18 and 12.19.) To facilitate comparison, the same scales have been used on the y-axis (the vertical one). The x-axis is the ranked sector (see the section on relative return on sector investment). Conclusions Investors always run the risk of confusing absolute return (the total amount of investment return they make) with relative return (how much a specific stock increases or decreases). This investment analysis has shown the substantial difference between the two, given a completely balanced population portfolio:1 1

A completely balanced population portfolio is a portfolio composed of all the stocks under analysis, with an equal amount of capital ($1000) in each stock.

Pattern Return Analysis Absolute Return on Sector Investment (Large Caps: -IV)

Absolute Return by Sector (-IV)

$250,000 $200,000 $150,000 $100,000 $50,000 $0

FIGURE 12.18 Absolute Return on Sector Investment -IV.

Absolute Return on Sector Investment (Large Caps: +IV)

Absolute Return by Sector (+IV)

$250,000 $200,000 $150,000 $100,000 $50,000 $0

FIGURE 12.19 Absolute Return on Sector Investment +IV.

291

292

Intangible Finance Standards

1. For a total investment in -IV large cap firms of $71,000, capital would have grown to $103,898—a 46.34% increase (or a $32,898 profit). 2. For a total investment in +IV large cap firms of $578,000, capital would have grown to $810,350—a 40.20% increase (or a $232,350 profit). In short, investing in all large cap +IV firms would have returned 600% more capital in absolute terms ($232,350 as opposed to $32,898) than investments in -IV firms.

MEDIUM CAP ANALYSIS Relative Pattern Return (±IV) Analysis This method of intangible finance allows us to see how returns are distributed for wealth creating (+IV) and wealth destroying (-IV) medium cap firms. For comparison purposes, the large cap +IV and large cap -IV graphs are presented in Figures 12.20 and 12.21. In the above analysis for large cap +IV, we see that 80% of returns are achieved in large caps at the +60 return category (see cumulative frequency distribution above).

Relative Pattern Return Analysis (Large Caps: +IV) 35.00%

25.00% 20.00% 15.00% 10.00% 5.00%

Return Category

FIGURE 12.20 Relative Pattern Return Analysis (+IV LC).

600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

0.00% -100

% Large Caps (+IV) Return

30.00%

293

Pattern Return Analysis

600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% -100

% Large Caps (+IV) Return

Cumulative Frequency Distribution of Relative Returns (Large Caps: +IV)

Return Category

FIGURE 12.21 Cumulative Frequency Distribution of Relative Returns (LC: +IV).

For +IV medium caps, 80% of returns are created at the +80 return category. Hence, +IV medium caps outperformed +IV large caps in the 2002–2003 period. (See Figures 12.22 and 12.23.) For +IV large caps, 80% of returns were at or under the +60 return category. For -IV medium caps, the return distribution is substantially different. Most of the returns in -IV mid caps were concentrated in the +300 area. (See Figures 12.24 to 12.27.) Average Return on Investment (±IV) Analysis This intangible finance method visually illustrates the specific stock performance over the past 12 months by return category for wealth creating (+IV) and wealth destroying (-IV) medium cap firms. The analysis in Figures 12.28 and 12.29 compares average annual return on investment for large caps and medium caps for +IV firms. For large cap firms, there are no returns in the +600 category. For +IV medium caps, there is a substantial return on investment in the +600+ category. Notably, medium caps experienced returns in the -60, -20, and 0 category, whereas +IV large cap firms experienced -40, -20, and 0 returns. Medium caps were therefore more risky, but had greater upside potential in the 2002–2003 period. For -IV firms the comparisons are shown in Figures 12.30 and 12.31. In this case, -IV large cap firms outperformed -IV medium cap firms on a risk adjusted basis (as evidenced by most positive returns being practically identical, despite greater loss in the 0 and -20 categories for medium caps).

294

Intangible Finance Standards

Relative Pattern Return Analysis (Medium Caps: +IV) 35.00%

% Medium Caps (+IV) Return

30.00% 25.00% 20.00% 15.00% 10.00% 5.00%

600

600+

300

+150

+80

+100

+60

+40

0

+20

-20

-40

-60

-80

-100

0.00%

Return Category

FIGURE 12.22 Relative Pattern Return Analysis (+IV Medium Cap).

Cumulative Frequency Distribution of Relative Returns (Medium Caps: +IV)

90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00%

Return Category

FIGURE 12.23 Cumulative Frequency Distribution of Relative Returns (Medium Cap: +IV).

600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

0.00%

-100

% Medium Caps (+IV) Return

100.00%

295

Pattern Return Analysis

Relative Pattern Return Analysis (Large Caps: -IV) 35.00%

% Large Caps (-IV) Return

30.00% 25.00% 20.00% 15.00% 10.00% 5.00%

600+

600

300

+150

+100

+80

+60

+40

0

-20

-40

-60

-80

+20

-5.00%

-100

0.00%

Return Category

FIGURE 12.24 Relative Pattern Return Analysis (-IV Large Cap).

600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% -100

% Large Caps (+IV) Return

Cumulative Frequency Distribution of Relative Returns (Large Caps: +IV)

Return Category FIGURE 12.25 Cumulative Frequency Distribution of Relative Returns (Large Cap: +IV).

296

Intangible Finance Standards

Relative Pattern Return Analysis (MediumCaps: -IV) 45.00% 40.00%

% Medium Caps (-IV) Return

35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

-5.00%

-100

0.00%

Return Category

FIGURE 12.26 Relative Pattern Return Analysis (-IV Medium Cap).

Cumulative Frequency Distribution of Relative Returns (Medium Caps: -IV) 100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% - 10.00% Return Category

FIGURE 12.27 Cumulative Frequency Distribution of Relative Returns (Medium Cap: -IV).

297

Pattern Return Analysis

Average Return on Investment (Large Caps: +IV) 450.00% 350.00% 300.00% 250.00% 200.00% 150.00% 100.00% 50.00%

600+

600

300

+150

+80

+60

+40

+20

0

-20

-40

-60

+100

-100.00%

-80

0.00% -50.00%

-100

% Large Caps (+IV) Return

400.00%

Return Category

FIGURE 12.28 Average ROI (Large Cap: +IV).

Average Return on Investment (Medium Caps: +IV) 900.00%

700.00% 600.00% 500.00% 400.00% 300.00% 200.00% 100.00%

Return Category

FIGURE 12.29 Average ROI (Medium Cap: +IV).

600

600+

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-100.00%

-80

0.00%

-100

% Medium Caps (+IV) Return

800.00%

Average Return on Investment (Large Caps: -IV) 450.00%

350.00% 300.00% 250.00% 200.00% 150.00% 100.00% 50.00%

Return Category FIGURE 12.30 Average ROI (Large Cap: -IV).

Average Return on Investment (Medium Caps: -IV) 450.00%

Medium Cap Value Change (-IV)

400.00% 350.00% 300.00% 25 0.00% 200.00% 150.00% 100.00% 50 .00% 0.00% -5 0.00%

Return Category FIGURE 12.31 Average ROI (Medium Cap: -IV).

600+

300 600

+100 +150

+40 +60 +80

0 +20

-40 -20

-50.00%

-80 -60

0.00% -100

Large Cap Value Change (-IV)

400.00%

299

Pattern Return Analysis

Relative Return on Sector Investment (±IV) Analysis The analysis below shows that medium cap +IV Basic Materials and +IV Capital Goods outperformed large cap +IV Basic Materials and Capital Goods by around 10%. After we graph the sectors by their relative performance, the pattern is easier to see in Figures 12.32 to 12.35. Whereas the Technology sector was the largest gainer in both +IV large caps and medium caps, the Energy sector was the best-performing sector for -IV medium caps. (See Figures 12.36 and 12.37.) Absolute Return on Sector Investment (±IV) Analysis This intangible finance method visually illustrates the investment (dark filled area) and the annual absolute ($) return (hollow white area) if an investor was to invest $1,000 in each of the firms that make up the specific sector for +IV and -IV firms in the large cap sector. In this analysis, it can be clearly seen that +IV medium cap firms outperformed +IV large caps, -IV large caps, and -IV medium caps in absolute terms. (See Figures 12.38 to 12.41.)

FIGURE 12.32 Relative Sector ROI (Large Cap: +IV).

Technology

Capital Goods

Energy

Services Basic Materials

Conglomerates

Utilities

Financial

Consumer Cyclical

Healthcare

Transportation

100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Consum er/Non-

+IV: Annual % Chg in SP

Relative Return on Investment (Large Caps: +IV)

300

Intangible Finance Standards

Relative Return on Investment (Medium Caps: +IV) 90.00%

70.00% 60.00% 50.00% 40.00% 30.00% 20.00%

FIGURE 12.33 Relative Sector ROI (Medium Cap: +IV).

Relative Return on Investment (Large Caps: +IV)

FIGURE 12.34 Ranked Relative Sector ROI (Large Cap: +IV).

Technology

Capital Goods

Energy

Services Basic Materials

Conglomerates

Utilities

Financial

Consumer Cyclical

Healthcare

Transportation

Consum er/Non-

100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

Utilities

Transportation

Technology

Services

Healthcare

Financial

Energy

Consumer Cyclical Consum er/Non-

Conglomerates

Capital Goods

0.00%

Basic Materials

10.00%

+IV: Annual % Chg in SP

+IV: Annual % Chg in SP

80.00%

301

Pattern Return Analysis

Relative Return on Investment (Medium Caps: +IV) 100.00% +IV: Annual % Chg in SP

90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% Technology

Healthcare

Capital Goods

Services

Basic Materials Consumer Cyclical

Transportation

Financial

Energy

Consum er/Non-

Conglomerates

Utilities

0.00%

FIGURE 12.35 Ranked Relative Sector ROI (Medium Cap: +IV).

Relative Return on Investment (Large Caps: -IV) 100.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00%

FIGURE 12.36 Ranked Relative ROI (LC: -IV).

Technology

Services

Capital Goods

Healthcare

Basic Materials Consumer Cyclical

Utilities

Energy

Financial

Transportation

Consum er/Non-

0.00% Conglomerates

-IV:Annual % Chg in SP

90.00%

FIGURE 12.38 Absolute Sector ROI (LC: +IV).

Technology

Capital Goods

Energy

Basic Materials

Services

Conglomerates

Utilities

Consumer Cyclical

Financial

Healthcare

FIGURE 12.37 Ranked Relative ROI (Med Cap: -IV.

Absolute Return on Sector Investment (Large Caps: + IV)

$600,000

$500,000

$400,000

$300,000

$200,000

$100,000

$0

Energy

Transportation

Basic Materials

Technology

Services

Consumer Cyclical

Utilities

Financial

Healthcare

Consumer/Non-Cyclical

Capital Goods

Conglomerates

0.00%

Transportation

Consum er/Non-

Absolute Return by Sector (+IV)

-IV: Annual % Chg in SP

302 Intangible Finance Standards

Relative Return on Investment (Medium Caps: -IV)

160.00%

140.00%

120.00%

100.00%

80.00%

60.00%

40.00%

20.00%

FIGURE 12.40 Absolute Sector ROI (MC: +IV).

Technology

Healthcare

Capital Goods

Services

Basic Materials Consumer Cyclical

Transportation

Financial

Consum er/Non-

Energy

Conglomerates

Utilities

Absolute Return by Sector (+IV)

FIGURE 12.39 Absolute Sector ROI (LC: -IV).

Absolute Return on Sector Investment (Medium Caps: +IV)

$600,000

$500,000

$400,000

$300,000

$200,000

$100,000

$0 Technology

Services

Capital Goods

Healthcare

Consumer Cyclical

Basic Materials

Utilities

Energy

Financial

Transportation

Consum er/Non-

Conglomerates

Absolute Return by Sector (-IV)

Pattern Return Analysis

303

Absolute Return on Sector Investment (Large Caps: -IV)

$250,000

$200,000

$150,000

$100,000

$50,000

$0

304

Intangible Finance Standards

Absolute Return on Sector Investment (Medium Caps: -IV)

$200,000 $150,000 $100,000

Energy

Transportation

Basic Materials

Technology

Services

Consumer Cyclical

Utilities

Financial

Healthcare

Capital Goods

$0

Consumer/Non-Cyclical

$50,000

Conglomerates

Absolute Return by Sector (-IV)

$250,000

FIGURE 12.41 Absolute Sector ROI (MC: -IV).

Conclusions Given a completely balanced population portfolio and a comparison between large caps and medium caps, we can conclude the following: 1. For a total investment in -IV large cap firms of $71,000, capital would have grown to $103,898—a 46.34% increase (or a $32,898 profit). 2. For a total investment in +IV large cap firms of $578,000, capital would have grown to $810,350—a 40.20% increase (or a $232,350 profit). 3. For a total investment in -IV medium cap firms of $87,000, capital would have grown to $148,228—a 70.38% increase (or a $61,228 profit). 4. For a total investment in +IV medium cap firms of $963,000, capital would have grown to $1,480,696—a 53.76% increase (or a $517,696 profit).

SMALL CAP ANALYSIS Tables 12.5 and 12.5a illustrate the number of small cap firms by value creation (+IV), value destruction (-IV), and value unaccountability (NA). The

305

Pattern Return Analysis TABLE 12.5 intMgtOS® Value Report (intMgtOS®5003.iR50.SC) No Small

Sector

Small %

+IV Small

+IV Small %

NoIV_S

-IV Small %

No NA Small

NA Small %

Basic Materials

86

5.75%

71

5.27%

12

11.32%

3

7.14%

Capital Goods

85

5.69%

76

5.64%

7

6.60%

2

4.76%

Conglomerates

4

0.27%

2

0.15%

2

1.89%

—

0.00%

Consumer Cyclical

63

4.21%

52

3.86%

9

8.49%

2

4.76%

Consumer/NonCyclical

44

2.94%

36

2.67%

7

6.60%

1

2.38%

Energy

65

4.35%

59

4.38%

4

3.77%

2

4.76%

Financial

240

16.05%

219

16.26%

20

18.87%

1

2.38%

Healthcare

170

11.37%

158

11.73%

6

5.66%

6

14.29%

Services

324

21.67%

289

21.46%

22

20.75%

13

30.95%

Technology

354

23.68%

338

25.09%

7

6.60%

9

21.43%

37

2.47%

27

2.00%

7

6.60%

3

7.14%

Transportation Utilities Grand Total

23

1.54%

20

1.48%

3

2.83%

—

0.00%

1,495

100.00%

1,347

100.00%

106

100.00%

42

100.00%

TABLE 12.5a intMgtOS® Value Report (intMgtOS®5003.R50.SC) Notes

Values

intMgtOS Report

intMgtOS®5003.iR50.SC

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

February 2nd 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number True & Fair Value Certification

intMgtOS®-1000345

306

Intangible Finance Standards TABLE 12.6 Intangible Finance Measures for Small Caps Measure

Small Caps

+IV Firm %

90.10%

-IV Firm %

7.09%

NA Firm %

2.81%

+IV to -IV Ratio

12.71

+IV to NA Ratio

32.07

table shows that of 1495 small cap firms, 42 were value unaccountable, 1347 were value creating, and 106 were value destroying. +IV & -IV Ratios Table 12.6 illustrates five intangible finance measures that measure small cap performance on a summarized basis. +IV firm % This intangible finance measure measures the number of value creating firms as a percentage to determine overall value creation performance. In the 2002–2003 year, +IV firms composed 90% of small caps. -IV firm % This intangible finance measure measures the number of value destroying firms as a percentage to determine overall value destruction. In the 2002–2003 year, -IV firms composed 7.09% of small caps. NA Firm % This intangible finance measure measures the number of value unaccountable firms as a percentage to determine overall value unaccountability. In the 2002–2003 year, unaccountable IV firms composed 2.81% of small caps. +IV to -IV Ratio This intangible finance measure measures the ratio of value creating firms to value destroying firms to give an indication of the value creating health of small caps as a whole. In the 2002–2003 year, the +IV to -IV ratio was 12.71

Pattern Return Analysis

307

for small caps. This means that for every 1 value destroying small cap firm, there were 12.71 value creating small cap firms. +IV to NA Ratio This intangible finance measure measures the ratio of value creating firms to value unaccountable firms to give an indication of how value creating firms compared to value unaccountable firms. In the 2002–2003 year, the +IV to NA Ratio was 32.07 for small caps. This means that for every 1 value unaccountable small cap firm, there were 32.07 value creating small cap firms. Sector Return on Investment Analysis Tables 12.7 and 12.7a illustrate the distribution of returns for +IV and -IV small cap firms by sector for 2002–2003. The table assumes investment of $1,000 in each small cap stock and tracks the actual return of doing so at the end of 12 months by sector. For +IV small cap firms, the Technology sector provided the greatest percentage return on investment of 119.40%, followed by the Healthcare sector with 102.12%. For -IV small cap firms, the Consumer Cyclical sector provided the greatest percentage return on investment of 300.00%, followed by the Energy sector with 168.80%. (See Figures 12.42 to 12.44.) Wealth Creating (+IV) Small Caps In the analysis in Figures 12.45 and 12.46, the Technology sector performed best among small cap +IV firms, with the Utilities sector performing worst. Figures 12.47 and 12.48 illustrate the pattern of returns for +IV small caps by return category. In this analysis, we see that 25% of investments in +IV small cap firms returned the +300 return category, 20% the +600 category, and around 10% the +600+ category. In percentage terms, this translated through to returns of around 200% on investment in the +300 category, 400% in the +600 category, and around 800% for the +600+ category. Wealth Destroying (-IV) Small Caps In the analysis in Figures 12.49 and 12.50, the Energy sector performed best, with the Consumer Cyclical sector performing worst, for -IV small caps. Performance for -IV small caps was very different than for +IV small caps. Around 40% of investments in small caps produced returns in the +300% category (meaning returns between +150% and just +300%), with the average return on investment in percentage terms for this return category being a little

3,524

277,000

320,000

Services

Technology

1,290,000

True & Fair Value Certification

Grand Total

24,000

156,000

Healthcare

20,000

206,000

Financial

Transportation

56,000

Energy

Utilities

36,000

Consumer/Non-Cyclical

2,370,429

25,116

41,832

702,081

491,126

315,313

311,206

94,972

60,134

76,780

2,000

50,000

Consumer Cyclical

Conglomerates

133,326

75,000

115,018

68,000

Return

Basic Materials

Capital

Capital Goods

Sector (+IV)

1,080,429

5,116

17,832

382,081

214,126

159,313

105,206

38,972

24,134

26,780

1,524

58,326

47,018

Change

+IV Small Cap Firms

TABLE 12.7 intMgtOS® Return Report (intMgtOS®5003.iR51.SC)

83.75%

25.58%

74.30%

119.40%

77.30%

102.12%

51.07%

69.59%

67.04%

53.56%

76.22%

77.77%

69.14%

% Chg

101,000

3,000

6,000

7,000

22,000

5,000

18,000

4,000

7,000

8,000

2,000

7,000

12,000

Capital

146,428

5,741

9,345

11,696

29,447

5,975

23,079

10,752

11,464

8,832

1,525

9,421

19,153

Return

45,428

2,741

3,345

4,696

7,447

975

5,079

6,752

4,464

832

(475)

2,421

7,153

Change

-IV Small Cap Firms

44.98%

91.36%

55.76%

67.08%

33.85%

19.50%

28.21%

168.80%

63.77%

300.00%

0.00%

34.58%

59.61%

% Chg

309

Pattern Return Analysis TABLE 12.7a intMgtOS® Return Report (intMgtOS®5003.R51.SC) Notes

Values

intMgtOS Report

intMgtOS®5003.iR51.SC

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

February 2nd 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1000375

Absolute Pattern Return Analysis (Small Caps: +IV) 300

Number of Firms

250 200 150 100 50

600+

600

300

+150

+100

Return Category

+80

+60

+40

+20

0

-20

-40

-60

-80

-100

-

FIGURE 12.42 Absolute Pattern Return Analysis (SC: +IV). For the purpose of analyzing small cap firms by return category, absolute numbers can be seen. For example, close to 300 small cap firms received returns in the +40 return category.

310

Intangible Finance Standards

35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00%

600

600+

300

+80

+100 +150

+60

+40

0

+20

-40 -20

-60

-80

0.00%

-100

% Small Caps Firm Distribution

Relative Pattern Return Analysis (Small Caps: +IV)

Return Category

FIGURE 12.43 Relative Pattern Return Analysis (SC: +IV). This figure shows the relative numbers; for example, those firms receiving returns in the +40 return category amounted to about 20% of the small cap total. This figure also shows that only around 10% of small cap firms generated returns less than the 0 return category.

Cumulative Frequency Distribution of Relative Returns (Small Caps: +IV) 100.00%

% of total firms analyzed

90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 600+

600

300

+150

+100

+80

+60

+40

0

+20

-20

-40

-60

-80

-100

0.00% Return Category

FIGURE 12.44 Cumulative Frequency Distribution of Relative Returns (SC: +IV). By using a cumulative frequency distribution of relative returns, we can see the number of firms, expressed in a percentage, that was at or below a specific return category. In this example, approximately 80% of small cap firms received generated returns at +150% or below.

FIGURE 12.46 Ranked Relative SP ROI (SC: +IV).

Technology

Healthcare

Capital Goods

Services

Conglomerates

Transportation

Energy

Consumer Cyclical Consum er/NonBasic Materials

Financial

Utilities

+IV: Annual % Chg in SP

FIGURE 12.45 Relative SP ROI (SC: +IV).

Relative Return on Investment (Small Caps: +IV)

100.00%

90.00%

80.00%

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00% Utilities

Transportation

Technology

Services

Healthcare

Financial

Energy

Consum er/Non-

Consumer Cyclical

Conglomerates

Capital Goods

Basic Materials

+IV: Annual % Chg in SP

Relative Return on Investment (Small Caps: +IV)

140.00%

120.00%

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%

312

Intangible Finance Standards

Relative Pattern Return Analysis (Small Caps: +IV)

25.00% 20.00% 15.00% 10.00% 5.00%

600

Return Category

FIGURE 12.47 Relative Pattern Return Analysis (SC: +IV).

Average Return on Investment (Small Caps: +IV) 900.00% 800.00% 700.00% 600.00% 500.00% 400.00% 300.00% 200.00% 100.00%

Return Category

FIGURE 12.48 Relative ROI (SC: +IV).

600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

-100.00%

-100

0.00%

600+

300

+150

+100

+80

+60

+40

0

-20

-40

-60

-80

+20

-5.00%

-100

0.00%

% Returns by Return Category

Number of Firms (+IV) as a %

30.00%

313

Pattern Return Analysis

Relative Return on Investment (Small Caps: -IV) 180.00%

% Annual SP Performance

160.00% 140.00% 120.00% 100.00% 80.00% 60.00% 40.00% 20.00%

Utilities

Transportation

Technology

Services

Healthcare

Financial

Energy

Consumer Cyclical Consum er/Non-Cyclical

Conglomerates

Capital Goods

Basic Materials

0.00%

FIGURE 12.49 Relative ROI, SP Performance (SC: -IV).

Relative Return on Investment (Small Caps: -IV) 160.00%

120.00% 100.00% 80.00% 60.00% 40.00% 20.00%

FIGURE 12.50 Relative ROI, Change in SP (SC: -IV).

Energy

Transportation

Basic Materials

Technology

Services

Consumer Cyclical

Utilities

Financial

Healthcare

Consum er/Non-

Capital Goods

0.00%

Conglomerates

-IV: Annual%ChginSP

140.00%

314

Intangible Finance Standards

Relative Pattern Return Analysis (Small Caps: -IV) 45.00%

35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00%

600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-5.00%

-80

0.00%

-100

Number of Firms (+IV) as a %

40.00%

-10.00%

Return Category

FIGURE 12.51 Relative Pattern Return Analysis (SC: -IV).

under 250%. However, many -IV small cap investments lost substantial amounts of money, as evidenced by readings in the -60, -40, -20, and 0 categories. Therefore, investing in -IV small caps carried substantial risk in 2002–2003, with the potential for gain but more potential for loss. Investing in +IV small caps would have been a lower-risk strategy. (See Figures 12.51 and 12.52.)

MICRO CAP ANALYSIS Tables 12.8 and 12.8a illustrate the number of micro cap firms by value creation (+IV), value destruction (-IV), and value unaccountability (NA). The table shows that of 4814 micro cap firms, 1345 were value unaccountable, 2488 were value creating, and 968 were value destroying. +IV & -IV Ratios Table 12.9 illustrates five intangible finance measures that measure micro cap performance on a summarized basis.

315

Pattern Return Analysis

Average Return on Investment (Small Caps: -IV) 450.00%

250.00%

150.00%

600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-50.00%

-80

50.00% -100

% Returns by Return Category

350.00%

-150.00% Return Category

FIGURE 12.52 Relative ROI (SC: -IV).

+IV Firm % This intangible finance measure measures the number of value creating firms as a percentage to determine overall value creation performance. In the 2002–2003 year, +IV firms composed 51.68% of micro caps. -IV Firm % This intangible finance measure measures the number of value destroying firms as a percentage to determine overall value destruction. In the 2002–2003 year, -IV firms composed 20.11% of micro caps. NA Firm % This intangible finance measure measures the number of value unaccountable firms as a percentage to determine overall value unaccountability. In the 2002–2003 year, unaccountable IV firms composed 27.94% of micro caps.

True & Fair Value Certification

4,814

33

Utilities

Grand Total

71

Transportation

1,059

Healthcare

1,294

727

537

Financial

Technology

142

Energy

Services

160

Consumer/Non-Cyclical

1

Conglomerates

258

281

Consumer Cyclical

251

Capital Goods

No Micro

Basic Materials

Sector

100.00%

0.69%

1.47%

26.88%

22.00%

11.15%

15.10%

2.95%

3.32%

5.36%

0.02%

5.84%

5.21%

Micro %

2,488

21

29

666

388

341

542

86

77

109

—

113

116

+IV Micro

100.00%

0.84%

1.17%

26.77%

15.59%

13.71%

21.78%

3.46%

3.09%

4.38%

0.00%

4.54%

4.66%

+IV Micro %

TABLE 12.8 intMgtOS® Return Report (intMgtOS®5003.iR50.MiC)

968

7

16

200

268

58

111

31

40

84

—

94

59

No-IV_S

100.00%

0.72%

1.65%

20.66%

27.69%

5.99%

11.47%

3.20%

4.13%

8.68%

0.00%

9.71%

6.10%

-IV Micro %

1,345

5

25

427

398

136

74

25

42

64

1

74

74

No NA Micro

100.00%

0.37%

1.86%

31.75%

29.59%

10.11%

5.50%

1.86%

3.12%

4.76%

0.07%

5.50%

5.50%

NA Micro %

317

Pattern Return Analysis TABLE 12.8a intMgtOS® Value Report (intMgtOS®5003.R50.MiC) Notes

Values

intMgtOS Report

intMgtOS®5003.iR50.MiC

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

February 2nd 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1000378

TABLE 12.9 Micro Cap Summary Measures Measure

Small Caps

+IV Firm %

51.68%

-IV Firm %

20.11%

NA Firm %

27.94%

+IV to -IV Ratio

2.57

+IV to NA Ratio

1.85

+IV to -IV Ratio This intangible finance measure measures the ratio of value creating firms to value destroying firms to give an indication of the value creating health of micro caps as a whole. In the 2002–2003 year, the +IV to -IV ratio was 2.57 for micro caps. This means that for every 1 value destroying micro cap firm, there were 2.57 value creating micro cap firms. +IV to NA Ratio This intangible finance measure measures the ratio of value creating firms to value unaccountable firms to give an indication of how value creating firms compared to value unaccountable firms. In the 2002–2003 year, the +IV to NA

318

Intangible Finance Standards

Ratio was 1.85 for micro caps. This means that for every 1 value unaccountable micro cap firm, there were 1.85 value creating micro cap firms.

SECTOR RETURN

ON INVESTMENT

ANALYSIS

Tables 12.10 and 12.10a illustrate the distribution of returns for +IV and -IV micro cap firms by sector for 2002–2003. The table assumes investment of $1000 in each micro cap stock, and tracks the actual return of doing so at the end of 12 months by sector. For +IV micro cap firms, the Technology sector provided the greatest percentage return on investment of 137.83%, followed by the Healthcare sector with 135.69%. For -IV micro cap firms, the Consumer Cyclical sector provided the greatest percentage return on investment of 300.00%, followed by the Utilities sector with 113.08%. (See Figures 12.53 to 12.55.)

RETURN

BY

SECTOR ANALYSIS

Figures 12.56 to 12.63 illustrate the percentage return in share price for micro cap stocks by sector over the 2002–2003 period for wealth creating (+IV) micro caps and wealth destroying (-IV) micro caps. Wealth Creating (+IV) Micro Caps In the analysis below, the Technology sector performed best, with the Utilities sector performing worst, for +IV micro caps. (See Figures 12.56 and 12.57.) Figures 12.58 and 12.59 illustrate the pattern of returns for +IV micro caps by return category. In this analysis, we see that 25% of investments in +IV micro cap firms returned the +300 return category, 20% the +600 category, and around 10% the +600+ category. In percentage terms, this translated through to returns of around 200% on investment in the +300 category, 400% in the +600 category, and around 800% for the +600+ category. Wealth Destroying (-IV) Micro Caps In the analysis in Figures 12.60 and 12.61, the Utilities sector performed best, with the Services sector performing worst, for -IV micro caps. -IV micro cap firms were a high risk strategy, with numerous $1k investments generating negative returns in the -80, -60, -20, and 0 categories. There

—

Conglomerates

368,000

639,000

Services

Technology

2,409,000

True & Fair Value Certification

Grand Total

21,000

337,000

Healthcare

28,000

531,000

Financial

Utilities

84,000

Energy

Transportation

75,000

Consumer/Non-Cyclical

105,000

113,000

Consumer Cyclical

108,000

Basic Materials

Capital

Capital Goods

Sector (+IV)

4,928,981

28,148

56,274

1,519,739

786,539

794,291

814,659

188,429

132,138

191,622

—

193,938

223,204

Return

2,519,981

7,148

28,274

880,739

418,539

457,291

283,659

104,429

57,138

86,622

—

80,938

115,204

Change

+IV Micro Cap Firms

TABLE 12.10 intMgtOS® Return Report (intMgtOS®5003.iR51.MiC)

104.61%

34.04%

100.98%

137.83%

113.73%

135.69%

53.42%

124.32%

76.18%

82.50%

0.00%

71.63%

106.67%

% Chg

918,000

6,000

16,000

190,000

249,000

56,000

106,000

28,000

39,000

81,000

—

90,000

57,000

Capital 69,419

1,252,355

12,785

33,273

272,252

302,504

82,954

156,864

50,652

52,152

102,611

—

116,890

334,355

6,785

17,273

82,252

53,504

26,954

50,864

22,652

13,152

21,611

—

26,890

12,419

Change

-IV Micro Cap Firms Return

36.42%

113.08%

107.95%

43.29%

21.49%

48.13%

47.99%

80.90%

33.72%

300.00%

0.00%

29.88%

21.79%

% Chg

320

Intangible Finance Standards

TABLE 12.10a intMgtOS® Return Report (intMgtOS®5003.R51.MiC) Notes

Values

intMgtOS Report

intMgtOS®5003.iR51.MiC

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

February 2nd 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1000413

Absolute Pattern Return Analysis (M icro Caps: +IV) 400

Number of Firms

350 300 250 200 150 100 50 600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

-100

-

Return Category

FIGURE 12.53 Absolute Pattern Return Analysis (MiC: +IV). For analyzing micro cap firms by return category, absolute numbers can be seen in this figure.

321

Pattern Return Analysis

Relative Pattern Return Analysis (Micro Caps: +IV)

% Small Caps Firm Distribution

35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 600

600+

300

+150

+80

+100

+60

+40

0

+20

-20

-40

-60

-80

-100

0.00%

Return Category

FIGURE 12.54 Relative Pattern Return Analysis (MiC: +IV) This figure shows that micro cap firm returns did not dominate any specific return category, in the same way as we have seen for large caps, medium caps, or small caps.

Cumulative Frequency Distribution of Relative Returns (Micro Caps: +IV) 100.00%

% of total firms analyzed

90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 600+

600

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

-100

0.00%

Return Category FIGURE 12.55 Cumulative Frequency Distribution of Relative Returns (MiC: +IV). By using a cumulative frequency distribution of relative returns, we can see the number of firms, expressed in a percentage that was at or below a specific return category. In this example, approximately 80% of micro cap firms received generated returns at +150% or below.

FIGURE 12.57 Ranked Sector ROI (MiC: +IV).

Technology

Healthcare

Energy

Services

Basic Materials

Transportation

Consum er/NonConsumer Cyclical

Capital Goods

Financial

Utilities

Conglomerates

+IV: Annual % Chg in SP

Utilities

Transportation

Technology

Services

Healthcare

Financial

Energy

Consumer Cyclical Consum er/Non-Cyclical

Conglomerates

Capital Goods

Basic Materials

+IV: Annual % Chg in SP

322 Intangible Finance Standards

Relative Return on Investment (Micro Caps: +IV)

160.00%

140.00%

120.00%

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%

FIGURE 12.56 Relative Sector ROI (MiC: +IV).

Relative Return on Investment (Micro Caps: +IV)

160.00%

140.00%

120.00%

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%

323

Pattern Return Analysis

Relative Pattern Return Analysis (Micro Caps: +IV) 30.00%

20.00% 15.00% 10.00% 5.00%

Return Category

FIGURE 12.58 Relative Pattern Returns (MiC: +IV).

Cumulative Frequency Distribution of Relative Returns (Micro Caps: +IV) 100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00%

Return Category

FIGURE 12.59 Cumulative Pattern Returns (MiC: +IV).

600

600+

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

-10.00%

-100

0.00%

600+

600

300

+150

-5.00%

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

-100

0.00%

Number of Firms (+IV) as a %

Number of Firms (+IV) as a%

25.00%

FIGURE 12.61 Ranked Relative ROI (MiC: -IV).

Utilities

Transportation

Energy

Healthcare

Financial

Technology

Consum er/Non-Cyclical

Capital Goods

Consumer Cyclical

120.00%

Basic Materials

Services

Conglomerates

-IV: Annual % Chg in SP

Utilities

Transportation

Technology

Services

Healthcare

Financial

Energy

Consumer Cyclical Consum er/Non-

Conglomerates

Capital Goods

Basic Materials

% Annual SP Performance

Relative Return on Investment (Micro Caps: -IV)

120.00%

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%

FIGURE 12.60 Relative ROI (MiC: -IV).

Relative Return on Investment (Micro Caps: -IV)

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%

325

Pattern Return Analysis

Relative Pattern Return Analysis (Micro Caps: -IV) 50.00%

30.00% 20.00% 10.00%

600+

600

300

+150

+80

+60

+40

+20

0

-20

-40

-60

+100

-10.00%

-80

0.00% -100

Number of Firms (+IV) as a %

40.00%

-20.00% -30.00%

Return Category FIGURE 12.62 Relative Pattern Analysis (MiC: -IV).

were several returns in the +300, +600, and +600+ categories, but these were counteracted by losses in the negative return categories. (See Figures 12.62 and 12.63.)

SUMMARY Large caps, medium caps, small caps, and micro caps performed differently for value creating and value destroying firms. It is essential to keep track of how value changes occur, so that entry and exit positions in markets can be better timed. The diagrams below are formed by analyzing approximately 9000 stocks across the AMEX, OTC, NASDAQ and NYSE exchanges. Data are divided into those for wealth creating firms (+IV), wealth destroying firms (-IV), and value unaccountable firms. A market portfolio of stocks is then purchased in each specific stock of each sector and held for 12 months; the return is displayed as annual return (y-axis). Individual stocks are further subdivided according to their market capitalization, and placed in the large cap, medium cap, small

326

Intangible Finance Standards

Average Return on Investment (Micro Caps: -IV) 400.00%

200.00%

100.00%

600

600+

300

+150

+100

+80

+60

+40

+20

0

-20

-40

-60

-80

0.00% -100

% Returns by Return Category

300.00%

-100.00%

-200.00% Return Category

FIGURE 12.63 Average ROI (MiC: -IV).

cap, and micro cap categories. The resulting analysis is then graphed to arrive at what Intangible Finance terms Market Return Analysis. +IV Summary Investors hold stocks to make a profit. The purpose of Market Return Analysis is to determine how much this return would have been if every stock in a specific sector was held for 12 months. Sectors are further broken into market capitalization so as to more clearly distinguish between large firms and micro firms. The analysis below illustrates the findings for value creating firms over the 2002–2003 period. (See Figure 12.64.) Generally, in the 2002–2003 period, +IV micro caps outperformed +IV small caps, which outperformed +IV medium caps, which outperformed +IV large caps on an annual return basis. To help you to better understand the relationships between firms of different sizes, the graph below illustrates a ranking by micro cap performance. (See Figures 12.65 to 12.68.)

327

Pattern Return Analysis

+IV Market Return Analysis 160.00% 140.00%

100.00% 80.00% 60.00% 40.00%

Large

Medium

Small

FIGURE 12.64 +IV Market Return Analysis.

+IV Market Return Analysis (Ranked by Micro Cap) 160.00% 140.00% 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00%

Large

Medium

Small

Micro

FIGURE 12.65 +IV Market Return Analysis (Ranked by Micro Cap).

Grand Total

Utilities

Transportation

Technology

Services

Healthcare

Financial

Energy

Consumer Cyclical

Conglomerates

Capital Goods

Basic Materials

0.00%

Consumer/NonCyclical

20.00%

Annual return (%)

Annual return (%)

120.00%

Micro

+IV Market Return Analysis (Rankedby Small Cap) 160.00% 140.00% 120.00% 100.00%

Annual return (%)

80.00% 60.00% 40.00% 20.00% 0.00%

Large

Medium

Small

Micro

FIGURE 12.66 +IV Market Return Analysis (Ranked by Small Cap). This figure also shows that +IV small cap firms outperformed micro caps in the Conglomerate sector and the Capital Goods sector. Small caps significantly outperformed large cap businesses.

+IV Market Return Analysis (Ranked by Medium Cap) 160.00% 140.00% 120.00% 100.00%

Annual return (%)

80.00% 60.00% 40.00% 20.00% 0.00%

Large

Medium

Small

Micro

FIGURE 12.67 +IV Market Return Analysis (Ranked by Medium Cap). This figure also shows that +IV medium cap firms underperformed small caps and micro caps. Large cap returns exceeded medium cap returns in the Utilities, Conglomerates, and Energy sectors.

329

Pattern Return Analysis

+IV Market Return Analysis (Ranked by Large Cap) 160.00% 140.00% 120.00% 100.00%

Annual return (%)

80.00% 60.00% 40.00% 20.00% 0.00%

Large

Medium

Small

Micro

FIGURE 12.68 +IV Market Return Analysis (Ranked by Large Cap). This figure also shows that +IV large cap firms significantly underperformed small caps and micro caps, and underperformed most medium cap sector returns. Notably, the Healthcare and Technology sectors were strong regardless of firm size.

-IV Summary Intangible Finance theory holds that a firm will generally be penalized when its market value is less than the book value (breakup value). For instance, a firm trading at $100m market value and $500m in book value has negative intangible value, or -IV, of $400m. When a firm trades at far less than its breakup value, it is generally because the risk of the stock is viewed as exceptionally high by investors. Sometimes, -IV can become +IV when companies are “turned around,” are “restructured,” or emerge from bankruptcy. These actions happen and contribute to returns on -IV firms. In 2003 the exchanges were starting to emerge from the bear market caused by the NASDAQ IT bubble burst of 2000. When an economy recovers from a severe market correction, -IV firms (with earnings potential) that survive are good candidates to have their values increased when the stock market recovers. Such stocks are often referred to as “value stocks.” It should be noted that in healthy economies, -IV firms are typically punished by investors for having

330

Intangible Finance Standards

-IV Market Return Analysis 200.00%

100.00%

Large

Medium

Small

Grand Total

Utilities

Transportation

Technology

Services

Healthcare

Financial

Consumer Cyclical

Conglomerates

Capital Goods

-50.00%

Basic Materials

0.00%

Energy

50.00%

Consumer/NonCyclical

Annual return (%)

150.00%

Micro

FIGURE 12.69 -IV Market Return Analysis.

-IV. As a result, in a healthy environment (such as the small cap environment in 2003) -IV firms had lower overall performance than +IV firms. Figure 12.69 shows the unranked market investment performance data for -IV firms. In this case, the picture is very different from that for +IV firms in terms of how firm returns were distributed. The Energy sector had the greatest returns. (See Figures 12.70 to 12.73.) Cross-Sectional IV Analysis The final way of analyzing across sectors is through the use of Cross-Sectional IV Analysis. This technique gives a super-summary of a number of different investment variables in order to decrease analysis complexity. There are eight basic cross-sectional measures. They are numbered and presented in Tables 12.11 and 12.11a).

IV MARKET COMPOSITION INDICATORS Intangible value market composition indicators measure the amount of value creation, destruction, and non-accountability between different firm

331

Pattern Return Analysis

-IV Market Return Analysis (ranked by microcaps) 200.00%

Annual return (%)

150.00%

100.00%

50.00%

Large

Medium

Small

Utilities

Transportation

Energy

Healthcare

Financial

Technology

Grand Total

Consum er/Non-

Capital Goods

Basic Materials Consumer Cyclical

Services

-50.00%

Conglomerates

0.00%

Micro

FIGURE 12.70 -IV Market Return Analysis (Ranked by Micro Cap). From a ranking by micro cap performance, it is clear that -IV micro cap returns did not exceed -IV small cap returns, -IV medium cap returns, or -IV large cap returns, as +IV micro caps did. In fact, the only sector where -IV micro caps outperformed all other firm types was in the Utilities sector.

-IV Market Return Analysis (rankedby small caps) 200.00%

100.00% 50.00%

Large

Medium

Small

Energy

Utilities

Technology

Transportation Basic Materials Consum er/Non-

Grand Total

Capital Goods

Services

Financial

-50.00%

Healthcare

0.00% Conglomerates Consumer Cyclical

Annual return (%)

150.00%

Micro

FIGURE 12.71 -IV Market Return Analysis (Ranked by Small Cap). In a ranking by small cap performance, -IV small caps had returns greater than other firms in only two sectors—the Energy sector and the Consumer/Non-Cyclical sector.

332

Intangible Finance Standards

-IV Market Return Analysis (rank: medium caps) 200.00%

Annual return (%)

150.00%

100.00%

50.00%

Medium

Small

Energy

Technology Basic Materials Transportation

Services

Utilities

Large

Conglomerates Consumer Cyclical Grand Total

Financial

-50.00%

Capital Goods Consum er/NonHealthcare

0.00%

Micro

FIGURE 12.72 -IV Market Return Analysis (Ranked by Medium Cap). In a ranking by medium cap performance, -IV medium caps did quite well. Medium cap -IV sectors that outperformed all other firm types were: Conglomerates, Consumer/Cyclical, Services, and Basic Materials sectors (as well as in the Grand Totals). Overall, -IV medium caps were the safest investment in -IV firms.

-IV Market Return Analysis (ranked by large caps) 200.00%

Annual return (%)

150.00%

100.00%

50.00%

0.00%

-50.00%

Large

Medium

Small

Micro

FIGURE 12.73 -IV Market Return Analysis (Ranked by Large Cap). When ranked by large cap performance, -IV large caps underperformed significantly. Large cap -IV firms outperformed other firm types in the Healthcare, Capital Goods, and Technology sectors.

333

Pattern Return Analysis TABLE 12.11 intMgtOS® Cross-Sectional Report (intMgtOS®5003.iR53) Measure

Large

Medium

Small

Micro

+IV Firm %

[1]

86.65%

89.04%

90.10%

51.68%

-IV Firm %

[2]

10.68%

8.00%

7.09%

20.11%

NA Firm %

[3]

2.67%

2.96%

2.81%

54.06%

+IV to -IV Ratio

[4]

8.11

11.13

12.71

2.57

+IV to NA Ratio

[5]

32.44

30.03

32.07

1.85 2.62

[+IV / -IV] Invest

[6]

8.14

11.07

12.77

[+IV / -IV] Return

[7]

7.80

9.99

16.19

5.37

[+IV / -IV ] Profit/Loss

[8]

7.06

8.46

23.78

7.54

True & Fair Value Certification

TABLE 12.11a intMgtOS® Cross-Sectional Report Notes

Values

intMgtOS Report

intMgtOS®5003.iR53

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

February 2nd 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1000421

types (large cap, medium cap, small cap, and micro cap). These indicators are summarized in Figure 12.74. +IV Firm % This simple statistic determines the ratio of the number of value creating firms to the total number of firms in a specific firm type. For example, a figure of 86.65% in large caps means that 86.65% of large cap firms were value creating.

334

Intangible Finance Standards

+IV -IV NA Market Composition 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Large +IVFir m %

Medium -IVFir m %

Small

Micro

NA Firm %

FIGURE 12.74 Market Composition. This analysis shows that large, medium, and small caps were all primarily value creating firms, with the majority of them creating value, and very few destroying value or being non-accountable. Micro cap firms were a very different story. Most micro cap firms were non-accountable. Analysis has found that non-accountable firms frequently have that status because they have incurred 100% share price reduction. Investing in non-accountable firms can be very dangerous to financial health.

-IV Firm % This measures the ratio of the number of value destroying firms to the total number of firms in a specific firm type. For example, a figure of 10.68% in large caps means that 10.68% of large cap firms were value destroying. NA Firm % This measures the ratio of the number of value non-accountable firms to the total number of firms in a specific firm type. For example, a figure of 54.06% in micro caps means that 54.68% of micro cap firms were non-accountable under intangible finance terms, as they did not report key information such as market capitalization, book value, and so on.

IV RELATIVE PERFORMANCE INDICATORS Intangible value relative performance indicators measure the relativity of one measure to another, thereby transforming absolute amounts into relative amounts. Table 11.12 summarizes the three core IV Relative Performance Indi-

335

Pattern Return Analysis TABLE 12.12 intMgtOS® Cross-Sectional Report (extract) Measure

Large

Medium

Small

Micro

+IV to -IV Ratio

8.11

11.13

12.71

2.57

+IV to NA Ratio

32.44

30.03

32.07

1.85

-IV to NA Ratio

4.00

2.70

2.52

0.72

IV Relative Performance Indicators 35.00

+IV to -IV Ratio +IV to NA Ratio -IV to NA Ratio

30.00 25.00 20.00 15.00 10.00 5.00 Large

Medium

Small

Micro

FIGURE 12.75 IV Relative Performance Indicators. These figures are graphed visually to illustrate the patterns between the data. The +IV to NA ratio is substantially more than the +IV to -IV ratio, which is to be expected. When they are approximately equal, as is the case in the micro cap firm type, it shows significant underlying structural problems, as a large majority of firms are not recording enough information for financial analysts or intelligent investors to make meaningful investment decisions.

cators. (When these three measures are analyzed together, they can be used to draw interesting conclusions.) (See Figure 12.75.) +IV to -IV Ratio This measures the ratio of the number of value creating firms to the number of value destroying firms in a specific firm type. For example, a figure of 8.11 in large caps reflects the fact that there were 584 +IV firms and 72 -IV firms, and the ratio between the two is 8.11. This means that for every 1 -IV firm, there are 8.11 +IV firms.

336

Intangible Finance Standards

The higher the +IV to -IV ratio for a firm type, the more value creating firms there are relative to value destroying firms. If the +IV to -IV ratio equals one (1), then there are as many +IV firms as there are -IV firms. If the ratio is below one, the -IV firms outnumber the +IV firms. +IV to NA Ratio This measures the ratio of the number of value creating firms to the number of value unaccountable firms. For example, for micro caps, the +IV to NA ratio is 1.85. This means that for every 1 NA firm there were 1.85 +IV firms. This compares substantially to the +IV to NA ratio of medium caps of 30.03, meaning that for every 1 NA medium cap firm there were 30.03 +IV firms. Where the number of NA firms increases, it is a sign of economic instability and of industry and sector problems. -IV to NA Ratio This measures the ratio of the number of value destroying firms to the number of value unaccountable firms. For micro cap firms this value is 0.72. This was derived from the ratio of -IV small cap firms (968) to NA small cap firms (1345). As the ratio is below one (1), the ratio expresses that there are more NA firms than -IV firms (which is the case).

IV RETURN COMPOSITION INDICATORS Investors invest to make money. As a result, nothing is more important than the performance of their funds. There are four (4) such indicators as seen in Table 12.13. +IV to -IV Invest Ratio In the case of large caps, this value is 8.14. This was calculated as the ratio of capital invested in a market portfolio of +IV large caps ($578,000) to the value of capital invested in a market portfolio of -IV large caps ($71,000). The resulting number illustrates that an investor would require 8.14 times more money to invest in a population of +IV large cap firms as compared to a population of -IV large cap firms. To make comprehension of these measures easier we will refer to the relevant large cap data found in Tables 12.14 and 12.14a. As the economy goes into recession, the number of large cap -IV firms will increase, thereby lowering the +IV to -IV Invest Ratio. The ratio therefore assists in understanding the position of the economy, a sector, or an industry,

337

Pattern Return Analysis TABLE 12.13 intMgtOS® Cross-Sectional Report (extract) Measure

Large

Medium

Small

Micro

[+IV/-IV ] Invest

8.14

11.07

12.77

2.62

[+IV/-IV ] Return

7.80

9.99

16.19

5.37

[+IV/-IV ] Profit/Loss

7.06

8.46

23.78

7.54

-0.34

-1.08

+3.42

+2.75

Return Velocity

in the business cycle. Such knowledge is essential in sector rotation strategies (discussed next chapter). +IV to -IV Return Ratio In the case of large caps, this value is 7.80. This was calculated as the ratio of total capital value of the large cap market portfolio at the end of 12 months of +IV large caps ($810,350) to the total capital value of the large cap market portfolio at the end of 12 months of -IV large caps ($103,898). This means, in absolute terms, that full investment in large cap +IV firms returned 7.80 times more than full investment in a population of -IV large cap firms. Return Velocity The +IV to -IV return ratio assists in determining return velocity. Return velocity illustrates how effective an investment is in terms of its total amount of return. Investments with a low return velocity return less than portfolios with a high return velocity. The return velocity can be easily seen in the following diagram. For large caps and medium caps, return velocity is negative, whereas it is positive for small caps and micro caps. The larger the return velocity, the greater an investor’s returns. (See Figure 12.76.) +IV to -IV Profit Ratio. This is the most important ratio under analysis here. In the case of small caps, it can be seen that the Profit/Loss was greatest for small caps. For small caps, the +IV to -IV Profit ratio is 23.78—calculated as the ratio of aggregated profit or loss for +IV firms ($1,080,429) to aggregated profit or loss for -IV firms ($45,428). The greater this value, the greater the profitability of the investment.

116,000

52,000

Financial

Healthcare

33,000

Utilities

True & Fair Value Certification

578,000

11,000

Transportation

Grand Total

83,000

Technology

115,000

35,000

Energy

Services

24,000

15,000

Conglomerates

36,000

19,000

Consumer/Non-Cyclical

39,000

Basic Materials

Capital Goods

Consumer Cyclical

Capital

Sector

810,350

44,553

13,957

138,972

160,498

68,971

155,767

50,006

41,381

32,240

20,818

28,332

54,854

Return

232,350

11,553

2,957

55,972

45,498

16,971

39,767

15,006

5,381

8,240

5,818

9,332

15,854

Change

+IV Large Cap Firms

TABLE 12.14 intMgtOS® Cross-Sectional Analysis (intMgtOS®5003.iR54)

40.20%

35.01%

26.88%

67.44%

39.56%

32.64%

34.28%

42.87%

14.95%

34.34%

38.79%

49.12%

40.65%

% Chg

71,000

8,000

1,000

4,000

21,000

1,000

18,000

3,000

2,000

5,000

—

6,000

2,000

Capital

103,898

10,814

1,213

7,634

33,484

1,561

23,434

3,930

2,190

7,254

—

9,517

2,866

32,898

2,814

213

3,634

12,484

561

5,434

930

190

2,254

—

3,517

866

Change

-IV Large Cap Firms Return

46.34%

35.18%

21.33%

90.86%

59.45%

56.09%

30.19%

31.00%

9.51%

45.08%

0.00%

58.62%

43.31%

% Chg

339

Pattern Return Analysis TABLE 12.14a intMgtOS® Invest Ratio Report Notes

Values

intMgtOS Report

intMgtOS®5003.iR54

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

February 2nd 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1000427

IV Return Composition Indicators 25.00

20.00

[+IV / -IV ] Invest [+IV / -IV ] Return [+IV / -IV ] Profit/Loss return Velocity

15.00

10.00

5.00

-

(5.00) Large

Medium

Small

Micro

FIGURE 12.76 IV Return Composition Indicators.

CHAPTER

11

The IntMgtOS® Smart Money Statement

The intMgtOS® Smart Money Statement allows an intangible analyst to conduct Level 3 analysis on Standfield factors identified from the intMgtOS® Standfield Statement. Recapping the results of these factors are found in Table 11.1. The choice of exchange has a substantial bearing on the effectiveness of an intangible finance investment strategy.

WHY SMART MONEY? Uncovering hidden gems in the stock market is not an easy thing to do. It requires substantial amounts of time and expertise. — Smart money participants understand how the markets work, have experienced losses and gains, and understand that the market has a short-term downward bias and a long-term upward bias. They understand that buying when others are selling and selling when others are buying is the key to success. Such people often have access to information sources that place them incrementally ahead of average traders. 247

248

Intangible Finance Standards

TABLE 11.1 Recap of Intangible Performance Exchange(s)

Large

Medium

Small

Micro

All

Schools: 10.49

Photography: 5.91

Auto & Truck Manufacturers: 34.53

Tires: 40.73

NASDAQ

Chemical Manufacturing: 15.12

Metal Mining: 8.27

Beverages— Non-Alcoholic: 7.17

Tobacco: 9.90

AMEX

Oil & Gas Integrated: 2.66

Oil & Gas Operations: 12.82

Software & Programming: 18.34

Insurance— Miscellaneous: 20.04

OTC

Money Center Banks (Financial: 8.32)

Medical Equipment & Supplies (Healthcare: 39.94)

Electronic Instr. & Controls (Technology: 64.27)

Tires (Consumer Cyclical: 40.73)

NYSE

Software & Programming (Technology: 9.28)

Advertising (Services: 7.99)

Auto & Truck Manufacturers (Consumer Cyclical: 34.53)

Beverages— Alcoholic (Consumer/ Non-Cyclical: 3.09)

Most importantly, smart money participants can control their emotions (fear, greed, and impatience) substantially better than the average investor, thereby avoiding falling prey to the problem of “weak hands.” (intMgtOS®6001.D7) — Weak hands, originally a gambling term, describes novice gamblers who get easily bluffed out of betting on a hand of cards when the stakes increase too high for them to emotionally deal with. (intMgtOS®6001.D7a) Moving from being a weak hand to a smart money trader is not an easy process. Smart Money statements are designed to make it easier to identify what stocks traders are putting money into over time at a rate greater than normal. By using the Smart Money statement, one finds it possible to identify stocks that could have potential upside, or positive, volatility. — Positive volatility relates to a stock that varies substantially around its average price but is in a strong uptrend. (intMgtOS®6001.D7b)

The IntMgtOS® Smart Money Statement

249

SPECIFIC EXCHANGE SMART MONEY STATEMENTS When analyzing an exchange according to investment attractiveness, intangible analysts would need to detail specific recommendations for stocks that are exhibiting high attractiveness. Tracking the Standfield factor over time is an essential task of all intangible analysts. The intMgtOS® Smart Money Statement therefore shows the firms and their Standfield factors, but the analysis is limited to the highest-performing industries as determined from the Standfield statement (see Tables 11.2 and 11.2a).

NYSE ANALYSIS The summary of this analysis is to select high-performing stocks according to the highest Standfield factor value (see Tables 11.3, 11.4, and 11.4a). A graphical analysis of the stocks shows that the firms are in strong uptrends and holding support well (see Figures 11.1 to 11.4).

NASDAQ ANALYSIS In the preceding analysis, ALTI (Altair Nanotechnologies, Inc.) stands out for warranting inclusion on an intangible finance watch list. ALTI is attracting substantial investor interest and significantly outperforming other firms of similar size (micro caps) (see Table 11.5 and Figures 11.5 to 11.9).

Beverages (Alcoholic)

Auto & Truck Manufacturers Total Adolph Coors Company Allied Domecq PLC (ADR) Anheuser-Busch Companies, Inc.

RKY AED BUD

CBA DCX FIA F GM HMC IR NAV OSK TM WNC N/A 0.35 14.85

0.11

N/A 0.17 (0.36) 1.38 0.10 2.16 1.57 N/A N/A (0.21) N/A

Brilliance China Automotive Hldg. (ADR) DaimlerChrysler AG (ADR) Fiat S.p.A (ADR) Ford Motor Company General Motors Corporation Honda Motor Co., Ltd. (ADR) Ingersoll-Rand Company Limited Navistar International Oshkosh Truck Corporation Toyota Motor Corporation (ADR) Wabash National Corp.

N/A N/A 2.34 4.02 2.99 N/A N/A

Large

Auto & Truck Manufacturers

AD POS IPG OMC PUB RHD VCI

Ticker

3.28

ADVO, Inc. Catalina Marketing Corp. Interpublic Group of Companies, Inc. Omnicom Group Inc. Publicis Groupe S.A. (ADR) R.H. Donnelley Corp. Valassis Communications

Name

Advertising Total

Advertising

Industry

TABLE 11.2 intMgtOS® Smart Money NYSE Statement True & Fair Value Certification

0.79 N/A N/A

(0.91)

(0.98) N/A N/A N/A N/A N/A N/A 9.69 2.62 N/A N/A

7.99

N/A 3.24 N/A N/A N/A N/A 30.93

Medium

N/A N/A N/A

34.53

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 34.53

9.78

9.78 N/A N/A N/A N/A N/A N/A

Small

N/A N/A N/A

N/A

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

N/A

N/A N/A N/A N/A N/A N/A N/A

Micro

9.28 0.55

Software & Programming Total

Grand Total

3.01 N/A N/A N/A 2.45 N/A N/A N/A N/A N/A N/A 43.70 N/A N/A N/A

DOX BMC CDN CBR CA CTG KEA KNM MWY MNS NET SAP SAY SRX SY

1.15 Amdocs Limited BMC Software, Inc. Cadence Design Systems CIBER, Inc. Computer Associates International, Inc. Computer Task Group, Inc. Keane, Inc. Konami Corporation (ADR) Midway Games Inc. MSC.Software Corp. Network Associates, Inc. SAP Satyam Computer (ADR) SRA International, Inc. Sybase, Inc.

5.10 N/A 0.15 3.81 N/A N/A

Software & Programming

BF.B STZ DEO LQU SAM VCO

Beverages (Alcoholic) Total

Brown-Forman Corporation Constellation Brands Inc. Diageo plc (ADR) Quilmes Industrial S.A. (ADR) The Boston Beer Company, Inc. Vina Concha y Toro S.A. (ADR)

(0.59)

2.26

N/A 2.69 2.00 N/A N/A N/A 1.26 2.68 N/A N/A 2.35 N/A 2.45 N/A 1.82

0.67

N/A 0.61 N/A N/A N/A N/A

(0.68)

1.15

N/A N/A N/A 0.71 N/A N/A N/A N/A N/A 0.41 N/A N/A N/A 2.20 N/A

(0.95)

N/A N/A N/A N/A N/A (0.95)

2.19

1.75

N/A N/A N/A N/A N/A 0.57 N/A N/A 2.75 N/A N/A N/A N/A N/A N/A

3.09

N/A N/A N/A N/A 3.09 N/A

252

Intangible Finance Standards

TABLE 11.2a intMgtOS® Smart Money NYSE Statement NYSE exchange as of January 30, 2004 (intMgtOS® 5003.iR70) Notes

Values

intMgtOS Report

intMgtOS®5003.iR70

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

January 30th 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001123

TABLE 11.3 intMgtOS® Smart Money NYSE Summary Large

Medium

Small

Micro

Exchange: NYSE

Software & Programming (Technology: 9.28)

Advertising (Services: 7.99)

Auto & Truck Manufacturers (Consumer Cyclical: 34.53)

Beverages— Alcoholic (Consumer/ Non-Cyclical: 3.09)

Stocks

SAP AG (ADR) —SAP: 43.70

Valassis Communications —VCI: 30.93

Wabash National Corp—WNC: 34.53

The Boston Beer Company, Inc. —SAM: 3.09

N/A N/A 15.12 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

ACET ABTXQ AKZOY ALCD ALTI APFC ARWM CCMP CENT CFCI EDEN FAME HWKN ISON JLMI KMGB

N/A N/A N/A

Large

N/A

Aceto Corporation AgriBioTech, Inc. Akzo Nobel N.V. (ADR) Alcide Corporation Altair Nanotechnologies, Inc. American Pacific Corp. Arrow-Magnolia International, Inc. Cabot Microelectronics Central Garden & Pet Co. CFC International, Inc. EDEN Bioscience Corp. Flamemaster Corporation Hawkins, Inc. Isonics Corporation JLM Industries, Inc. KMG Chemicals, Inc.

COKE HANS LBIX

Ticker

Chemical Manufacturing

Coca-Cola Bottling Co. Consolidated Hansen Natural Corp. Leading Brands, Inc.

Name

Beverages (Nonalcoholic) Total

Beverages (Nonalcoholic)

Industry

TABLE 11.4 intMgtOS® Smart Money NASDAQ Statement True & Fair Value Certification

N/A N/A N/A N/A N/A N/A N/A 2.90 N/A N/A N/A N/A N/A N/A N/A N/A

N/A

N/A N/A N/A

Medium

N/A N/A N/A N/A N/A N/A N/A N/A 0.58 N/A N/A N/A N/A N/A N/A N/A

7.17

7.17 N/A N/A

Small

(continues)

1.81 N/A N/A 1.26 22.77 (0.14) (0.35) N/A N/A 0.00 0.09 0.29 0.85 3.04 (0.01) 0.50

1.48

N/A 1.78 0.56

Micro

N/A 15.12

Tobacco Total

Grand Total

N/A N/A N/A STSI SWMAY

Tobacco

Star Scientific, Inc. Swedish Match AB (ADR)

Metal Mining Total

N/A N/A

HSVLY HUGO

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

LSCO MEOH NCEM NUCO PENX SIAL SDIX SRDX SMMX NZYM TORM 15.12

Highveld Steel and Vanadium (ADR) Ivanhoe Mines, Ltd.

Large

Ticker

Metal Mining

LESCO, Inc. Methanex Corporation Nevada Chemicals, Inc. NuCo2, Inc. Penford Corporation Sigma-Aldrich Corporation Strategic Diagnostics Inc. SurModics, Inc. Symyx Technologies, Inc. Synthetech, Inc. TOR Minerals Int’l, Inc.

Name

Chemical Manufacturing Total

Industry

TABLE 11.4 (continues)

0.57

(0.37)

N/A (0.37)

8.27

N/A 8.27

2.04

N/A 0.53 N/A N/A N/A 3.17 N/A N/A N/A N/A N/A

Medium

2.21

N/A

N/A N/A

N/A

N/A N/A

1.79

N/A N/A N/A N/A N/A N/A N/A 3.21 4.37 N/A N/A

Small

0.90

9.90

9.90 N/A

0.02

0.02 N/A

0.99

0.35 N/A 0.60 3.23 0.26 N/A 1.64 N/A N/A 0.77 1.60

Micro

TABLE 11.4a intMgtOS® Smart Money NASDAQ Statement NASDAQ exchange as of January 30, 2004 (intMgtOS® 5003.iR71) Notes

Values

intMgtOS Report

intMgtOS®5003.iR71

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

January 30th 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001134

FIGURE 11.1 12-Month Analysis of SAP. This chart shows that SAP has been strongly performing over time and kept above its 150 and 200 day moving averages.

256

Intangible Finance Standards

FIGURE 11.2 12-Month Analysis of VCI. VCI is more volatile than SAP, but is currently in a consistent uptrend. Volatility is a companion to an intangible analyst. Intangible analysts buy when stocks are decreasing in value through a strategy known as tripwire trading, which is a long-term trading system designed to extract maximum potential out of an uptrending stock.

The IntMgtOS® Smart Money Statement

257

FIGURE 11.3 12-Month Analysis of WNC. WNC is more a steady climber in a consistent uptrend. WNC has low volatility.

258

Intangible Finance Standards

FIGURE 11.4 12-Month Analysis of SAM. SAM has low volatility, in a consistent uptrend, and looks to have turned around from its recent declines.

TABLE 11.5 intMgtOS® Smart Money NASDAQ Summary Large

Medium

Small

Micro

Exchange: NASDAQ

Chemical Manufacturing: 15.12

Metal Mining: 8.27

Beverages— Non-Alcoholic: 7.17

Tobacco: 9.90

Stocks

Akzo Nobel N.V. (ADR)—AKZOY: 15.12

Ivanhoe Mines, Ltd.—HUGO: 8.27

Coca-Cola Bottling Co. Consolidated —COKE: 7.17

Star Scientific, Inc.—STSI: 9.90

Watch list

Altair Nanotechnologies, Inc.—ALTI: 22.77

FIGURE 11.5 12-Month share price of AHZOY. AHZOY has low volatility, is in a consistent uptrend, and looks to have turned around from recent declines.

260

Intangible Finance Standards

FIGURE 11.6 12-Month share price of HUGO. HUGO has extremely high volatility, is in a consistent downtrend, and is a risky stock to go long in. Tripwire trading can make stocks like this profitable in long positions, provided they are executed correctly and turned over relatively quickly.

The IntMgtOS® Smart Money Statement

261

FIGURE 11.7 12-Month share price of COKE. COKE has moderate volatility, is in a sideways trend that could witness a potential upside or downside move. Earnings have been positive for the past two quarters, so an upside break would be predicted if third quarter earnings are positive. If they are negative, a (potentially sizeable) downside movement would be predicted.

262

Intangible Finance Standards

FIGURE 11.8 12-Month Share Price of STSI. STSI has moderate volatility, has a downward bias, but looks to be consolidating having held support around the $2 zone for around 6 months. Earnings have been down for the past several quarters, which may shake investor confidence and cause the share price to decrease over time. Large purchases in December seemed to move the stock very little, indicating substantial overhead resistance.

The IntMgtOS® Smart Money Statement

263

FIGURE 11.9 12-Month Share Price of ALTI. ALTI has medium-to-high volatility, and has an upward bias. Earnings have been down for the past four quarters. However, ALTI is the nanotechnology space and has become an economic powerhouse due to its technology. ALTI is therefore moving upward, but should hopes of the future be unfounded, a severe price correction would occur.

264

Intangible Finance Standards

AMEX ANALYSIS For the AMEX exchange, the intMgtOS® Smart Money Statement assists in determining a cut-down list of investment opportunities that have investor attention and the potential for large gains. The above analysis is summarized in Tables 11.6, 11.6a, and 11.7.

CONCLUSIONS The intMgtOS® Smart Money Statement allows an intangible analyst to shortlist firms that have shown significant investor interest. Although technical, fundamental, and intangible analysis still need to be performed on selected firms, using the intMgtOS® Smart Money Statement can be a quick and easy way of identifying strongly performing stocks that have exceptional investor interest.

N/A N/A N/A N/A N/A N/A 0.29 N/A N/A N/A N/A N/A N/A N/A N/A AE ARD BRN SNG LNG MCF DVN GEL HEC HOC MWP MAX MXC PHX PEX

Oil & Gas Operations Adams Resources & Energy, Inc. Arena Resources, Inc. Barnwell Industries, Inc. Canadian Superior Energy Cheniere Energy, Inc. Contango Oil & Gas Co. Devon Energy Corporation Genesis Energy, L.P. Harken Energy Corporation Holly Corporation MarkWest Hydrocarbon, Inc. Mercury Air Group Inc. Mexco Energy Corporation Panhandle Royalty Company PetroCorp Incorporated

2.66

Oil & Gas—Integrated Total

N/A IMO

N/A

Large

2.66

Imperial Oil Limited

BXX

Ticker

Oil & Gas—Integrated

Brooke Corporation

Name

Insurance (Misc.) Total

Insurance (Misc.)

Industry

TABLE 11.6 intMgtOS® Smart Money AMEX Statement True & Fair Value Certification

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

N/A

N/A

N/A

N/A

Medium

N/A N/A N/A N/A N/A N/A N/A N/A N/A 0.60 N/A N/A N/A N/A N/A

N/A

N/A

N/A

N/A

Small

(continues)

0.23 4.83 1.58 3.76 10.26 1.96 N/A 1.64 3.00 N/A 0.71 (0.35) 1.75 1.50 0.11

N/A

N/A

20.04

20.04

Micro

N/A 1.00

Software & Programming Total

Grand Total

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

AXO GVP IW IDN INS IPI KFX MCZ UDW GVI

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 0.29

AXS-One Inc. GSE Systems, Inc. ImageWare Systems, Inc. Intelli-Check, Inc. Intelligent Systems Corporation Island Pacific, Inc. KFX Inc. Mad Catz Interactive, Inc. US Dataworks, Inc. VI Group Plc (ADR)

PRL PYR TGC TPE TPY TGA TMG TIV UPL WOC

Prolong International Corporation PYR Energy Tengasco, Inc. Teton Petroleum Company Tipperary Corporation TransGlobe Energy Corporation TransMontaigne, Inc. Tri-Valley Corporation Ultra Petroleum Corp. Wilshire Enterprises, Inc.

Large

Software & Programming

Ticker

Name

Oil & Gas Operations Total

Industry

TABLE 11.6 (continues)

12.82

N/A

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

12.82

N/A N/A N/A N/A N/A N/A N/A N/A 12.82 N/A

Medium

1.21

18.34

N/A N/A N/A N/A N/A N/A 18.34 N/A N/A N/A

0.47

N/A N/A N/A N/A N/A N/A 0.30 N/A N/A N/A

Small

1.43

0.22

N/A 0.75 4.44 124.57 2.68 3.51 N/A 0.76 3.54 (0.96)

1.89

0.52 21.39 (0.13) 4.14 2.56 3.85 N/A 102.82 N/A 0.74

Micro

267

The IntMgtOS® Smart Money Statement

TABLE 11.6a intMgtOS® Smart Money AMEX Statement AMEX exchange as of January 30, 2004 (intMgtOS® 5003.iR72) Notes

Values

Intangible Financial Report

intMgtOS®5003.iR72

Created By

Dr Ken Standfield, Certified intMgtOS® Intangible Analyst (111291-AKS01)

Data Date

January 30th 2004 This report was compiled in strict accordance with intangible management operating standards and is deemed as being intMgtOS®5003 (International Intangible Reporting Standard) Certified.

IntMgtOS® Certification Number

intMgtOS®-1001141

TABLE 11.7 intMgtOS® Smart Money AMEX Summary Large

Medium

Exchange: AMEX

Oil & Gas Integrated: 2.66

Oil & Gas Operations: 12.82

Software & Programming: 18.34

Insurance— Miscellaneous: 20.04

Stocks

Imperial Oil Limited— IMO: 2.66

Ultra Petroleum Corp.—UPL: 12.82

KFX Inc.—KFX: 18.34

Brooke Corporation— BXX: 20.04

Micro: Cheniere Energy, Inc. —LNG: 10.26 Micro: PYR Energy—PYR: 21.39 Micro: Tri-Valley Corporation —TIV:102.82

Micro: Intelli-Check, Inc.—IDN: 124.57

Watch list

Small

Micro

CHAPTER

13

Conclusion

“It has been 500 years since Pacioli published his seminal work on accounting, and we have seen virtually no innovation in the practice of accounting—just more rules—none of which has changed the framework of measurement.”—Wired Magazine

This book, and its companion reference book Intangible Management: Tools for Solving the Accounting and Management Crisis (Academic Press, Ken Standfield, 2002), provide the new value framework required to identify, value, financially report, and manage the value, potential, and sustainability of knowledge assets, relationship assets, motivation assets, and responsiveness assets. These texts make it clear that intangible value can be financially valued and objectively reported. These texts introduce the new management reporting framework that leverages the best of existing accounting practices through a new range of intMgtOS® intangible management reports and intangible financial statements. There are significant costs and problems associated with not measuring, and correctly understanding, the role of intangible value. A failure to manage intangibles results in long-term business failure. A failure to correctly financially value and correctly report intangibles is contributing to the increasing instability of the financial system. 341

342

Intangible Finance Standards

A failure to use intangible corporate reporting within organizations results in executives and managers not knowing how to manage value according to the realities of the Intangible Management Economy. A failure by the academic system to teach intangible management in undergraduate and postgraduate qualifications results in graduates who are ignorant as to how total intangible value (knowledge assets, relationship assets, motivation assets, responsiveness assets, and organizational processes) cause financial performance—the key issue professionals must understand if they are to safeguard organizational value, customer value, and shareholder value. A failure by investors to measure intangible value results in their losing a critical dimension of their understanding regarding stock performance, and missing profitable market opportunities. A failure by executives to understand intangible value explains why executives continue to make short-sighted, value destroying decisions that destroy customer value, shareholder value, and organizational value.

Intangible management operating standards (intMgtOS®) represent a substantial advance in numerous management disciplines, from accounting, to finance, to economics, to strategy. It is imperative to integrate the new knowledge of intangible management, intangible accounting, intangible finance, and intangible reporting, contained within these two texts, into all management courses at all levels (undergraduate, postgraduate, doctoral, and so on). Failure to do so will result in the academic industry’s continuing to graduate professionals with deficient knowledge and skills—who will continue to make decisions based on increasingly obsolete and irrelevant methods, theories, and practices. “The GAAP system has, for all its faults, served business and the public well, like an octogenarian butler. At the same time there’s increasing evidence that the faithful servant isn’t just misplacing a spoon here or there but has lost track of some valuable jewels, paid no attention to the furnace and the water heater, and put the place at risk. Investors simply don’t value what accountants count.”—Thomas Stewart, Fortune

As organizations worldwide adopt intangible management operating standards (intMgtOS®) as the standard method of identifying, classifying, objectively valuing, and financially reporting competitive intangibles, they will ensure that executives, managers, and employees are operating according to the new rules of the Intangible Management Economy, and not shackled to methods and practices that were relevant 300 to 500 years ago but are practically irrelevant today. “There are going to be a lot of problems in the future, as accounting is not tracking investments in knowledge assets.”—Alan Greenspan, Federal Reserve Board Chairman, United States

Conclusion

343

Effectively managing competitive intangibles will result in far greater organizational success, as the financial impact of competitive intangibles will be scientifically managed, financially valued, and reported for the first time. Currently organizations know the “cost of everything and the value of nothing.” With intangible management becoming part of the economic system, organizations will know the “cost of everything and the value of everything.” Using intangible management operating standards (intMgtOS®), executives will gain new skills that facilitate the better management and safeguarding of corporate value and shareholder value. These standards, designed specifically to reflect the realities of the Intangible Management Economy, allow workplaces to become more human (through gold-collar work transformation and emotional leadership) and facilitate work–life balance, thereby reducing absenteeism and turnover, and increasing productivity. Today, employees and executives are demanding more of each other; by using intMgtOS®, each party will be more satisfied and more effective. Using intMgtOS®, investors can analyze financial performance from numerous new perspectives, thereby gaining an advantage that less knowledgeable investors do not possess. This advantage translates into a profitable edge that can be exploited. In the Intangible Management Economy, nothing is more important to investors, managers, executives, and customers than scientifically and systematically managing intangible value. For more information regarding intangible management, please visit www.StandardsInstitute.org.

INDEX

Note: Italicized page numbers refer to illustrations and tables

A Abbot Laboratories, 2, 70, 143 absenteeism, 85 absolute return, 155, 275 absolute return on sector investment analysis, 290, 299 accessible latent productivity, 24 accident insurance, 180 accountable firm, 270 accounting, 67 crisis in, 67–68 vs. intangible management, 76–77 problems in, 71–72 accounting value, see book value advertising services, 248, 250 aerospace and defense, 170 aggregate non-productive time, 66 airlines, 180 alcoholic (beverages), 248 Allianz AG, 144 Altair Technologies Inc., 259, 263 Altria Group Inc., 2, 70, 143 Amcor Ltd., 149 America Movil S.A. de C.V., 2, 69, 143 American Express Co., 3, 70, 144 American International Group Inc., 2, 69, 143 AMEX exchange intMgtOS® Stanfield Statement, 231–35 smart money, 265–67 strongest performing industries, 225, 230

Amgen Inc., 2, 70, 143 Anheuser-Busch Companies, 144 ANSI® standards, 138 benefits, 139–40 costs, 139 ANZ Banking, 147 apparel/accessories, 180, 189 appliance and tool industry, 179, 189 Applied Materials Inc., 145 Aracruz Celulose S.A., 148 artificial employment, 91–94 Asia Pulp & Paper, 148 assets, intangible, 42 amortization, 35–36 analysis of, 99 and intangible finance, 59–60 nanotime in, 79 quality of, 61–62 Assurant Inc., 147 AstraZeneca PLC, 2, 70, 143 attainable productivity, 112 audio and video equipment, 170 audited data, 82 AU Optronics Corp., 148 auto and truck manufacturers, 171, 180, 187, 248, 250 Aventis, 3, 70, 144 average return on investment analysis, 287

345

346 B Banco Santander Central, 145 Bank of America Corp., 2, 70, 143 Bank of Ireland, 149 Barclays Plc, 147 basic materials, 152–53 aggregated return, 277–80 large caps, 154 cross-sectional analysis, 338 negative intangible value (-IV), 172 pattern return analysis, 274 value factor, 166, 181, 272 medium caps, 156 negative intangible value (-IV), 180 positive intangible value (+IV), 179 micro caps, 161, 316, 319 revenues, 27 sector return, 283 small caps, 159 positive intangible value (+IV), 188 return report, 308 value factor, 190, 200, 305 Stanfield statement, 218 AMEX exchange, 231 NASDAQ exchange, 226 NYSE exchange, 241 OTC exchange, 236 wage costs, 11 BellSouth Corp., 144 benchmarked data, 81 Berkshire Hathaway Inc., 2, 70, 143 beverages (alcoholic), 248, 250–51 beverages (nonalcoholic), 168, 180, 188, 248, 253 BG Group Plc, 148 biotechnology and drugs, 170 Boeing Co., 145 book value, 68–69 of 50 well-known firms, 2–4 vs. market value, 1 negative, 164 positive, 164 Boston Beer Company Inc., 252, 258 Boston Scientific Corp., 144 BP Plc, 146 brand, 18–19 daily value of, 26 definition, 25 displeasure, 25 and employee motivation, 25–26

Index equity, 25 perception, 25 pleasure, 25 power, 25 quality, 52 valuation of, 21–30 comparability in, 22 competitive advantage, 26 components changes in, 22 daily value in, 26 employee motivation in, 25–26 expense productivity in, 24 incorrect formation in, 21–22 intangibles in, 29–30 limited scope, 23 ownership-based, 23 productivity in, 24 revenue potential in, 24–25 strategies in, 21–23 wage costs as proxy in, 23–24 value destruction, 52 value enhancement, 52 weight, 25 breakup value, 329 Brilliance China Automotive, 147 Bristol-Myers Squibb Co., 3, 70, 144 British Airways Plc, 147 broadcasting, 179 Brooke Corp., 267 BT Group Plc, 147 burst time, 51, 66, 93 business services, 168, 189 -BV (negative book value), 164 +BV (positive book value), 164 BV:MV gearing, 210–11

C Cadbury Schweppes Plc, 149 calendar, 85 Canon Inc., 145 capital, intangible, 42, 79 capital creation analysis, 270–71 capital goods, 152–53 aggregated return, 277–80 large caps, 154 cross-sectional analysis, 338 negative intangible value (-IV), 172 pattern return analysis, 274

Index security management, 178 value factor, 166, 181, 272 medium caps, 156 negative intangible value (-IV), 180 micro caps, 161, 316, 319 relative return on investments, 157, 160, 162 revenues, 27 sector return, 283 small caps, 159 positive intangible value (+IV), 187 return report, 308 value factor, 190, 200, 305 Stanfield statement, 218 AMEX exchange, 231 NASDAQ exchange, 226 NYSE exchange, 241 OTC exchange, 236 wage costs, 11 CEMEX S.A. de C.V., 148 Certified intMgtOS® Executive, 133 Certified intMgtOS® Intangible Analyst, 82–83, 134 Certified intMgtOS® Management Consultant, 134 Certified intMgtOS® Practitioner, 133 Chartered Semiconductor, 148 chemicals, 180, 189, 248, 253–54 Cheniere Energy Inc., 267 Chevron Texaco Corp., 3, 70, 144 China Convergent Corp., 146 China Eastern Airlines, 147 China Mobile, 147 China Southern Airlines, 147 China Telecom Corp., 146 Chung Hwa Telecom Co., 147 Cisco Systems Inc., 2, 69, 143 Citigroup Inc., 2, 69, 143 CNOOC Ltd., 146 coal industry, 180 Coca-Cola Bottling Co., 259, 261 Coca-Cola Co., 2, 69, 143 Coles Meyer Ltd., 148 Colgate-Palmolive Co., 145 Comcast Corp., 144 communications equipment, 168, 170, 179, 187 communications services, 170, 179, 187 Companhia Paranaense, 146 Companhia Siderurgica, 146

347 competitive advantage, 26–28 costs, 8–9 stock prices, 7 sustainable, 8, 112 valuation of, 28–29 competitive attractor, 53–54 competitive barrier, 53–54 competitive effectiveness, 113 competitive intangibles, 9 definition of, 60 as source of competitive advantage, 15 as source of value creation, 72 completely balanced population portfolio, 290 computer networks, 168, 187 computer peripherals, 187 computer services, 170, 180 computer storage devices, 168 conglomerates, 152–53 aggregated return, 277–80 large caps, 154 cross-sectional analysis, 338 negative intangible value (-IV), 172 value factor, 166, 181, 272 medium caps, 156 micro caps, 161, 316, 319 revenues, 27 sector return, 283 small caps, 159 return report, 308 value factor, 190, 200, 305 Stanfield statement, 218 AMEX exchange, 231 NYSE exchange, 241 OTC exchange, 236 wage costs, 11 construction and agricultural machinery, 187 construction services, 168 consumer financial services, 179 consumer sector, 152–53 aggregated return, 277–80 large caps, 154 cross-sectional analysis, 338 negative intangible value (-IV), 173 pattern return analysis, 274 value factor, 166, 182, 272 medium caps, 156 negative intangible value (-IV), 180 positive intangible value (+IV), 179 micro caps, 161, 316, 319

348 relative return on investments, 158, 161, 163 revenues, 27 sector return, 283 small caps, 159 positive intangible value (+IV), 187–88 return report, 308 value factor, 191, 201, 305 Stanfield statement, 219 AMEX exchange, 231–32 NASDAQ exchange, 226–27 NYSE exchange, 241–42 OTC exchange, 236–37 wage costs, 11–12 containers and packaging, 168, 179, 180, 188 continuity levels, 50–51 contractual performance, 52–53 Controladora Comercial, 148 Corus Group Plc, 147 costs, 8–10 competitive advantage, 8–9 intangible, 9, 50 of poor quality, 116–17 wage, 10–13 create/apply, 79 cross-sectional IV analysis, 330 cultural impacts, 81 customer contact, 80 customer service, 30 contractual performance, 52–53 post-contractual performance, 54 pre-contractual performance, 51 cyclical sector, 152–53 aggregated return, 277–80 large caps, 154 cross-sectional analysis, 338 negative intangible value (-IV), 173 pattern return analysis, 274 value factor, 166, 182, 272 medium caps, 156 negative intangible value (-IV), 180 positive intangible value (+IV), 179 micro caps, 161, 316, 319 revenues, 27 sector return, 283 small caps, 159 positive intangible value (+IV), 187 return report, 308 value factor, 191, 201, 305

Index Stanfield statement, 219 AMEX exchange, 231–32 NASDAQ exchange, 226–27 NYSE exchange, 241–42 OTC exchange, 236–37 wage costs, 11

D Dell Inc., 2, 70, 143 demand, 36–38 demand-side intangible transactions, 37 destination intangibles, 60 Deutsche Telekom AG, 144 discretionary time, 47 Dow Chemical Co., 145

E eBay Inc., 144 economics, intangible, 36–37 economy time, 45 EDP Electricidade de, 147 EganaGoldpfeil, 147 E.I. DuPont Technologies, 144 electronic instruments and controls, 168, 187, 188, 248 Eli Lilly & Co., 2, 70, 143 email, 79 emotional leadership, 26 employees, 58 gold-collar, 130 motivation, 25–26 networking, 80 optimal number of, 58–59 and revenues, 59–60, 88, 91–94 time, 47 true productivity, 62–63 work year, 85 Empresa Nacional, 147 EMS (environmental management system), 124–26 Enel S.p.A., 147 energy sector, 152–53 aggregated return, 277–80 large caps, 154 cross-sectional analysis, 338 negative intangible value (-IV), 173 pattern return analysis, 274 value factor, 166, 183, 272

349

Index medium caps, 156 negative intangible value (-IV), 180 positive intangible value (+IV), 179 micro caps, 161, 316 revenues, 27 sector return, 283 small caps, 159 positive intangible value (+IV), 188 return report, 308 value factor, 192, 201, 305 Stanfield statement, 219 AMEX exchange, 232 NASDAQ exchange, 227 NYSE exchange, 242 OTC exchange, 237 wage costs, 10, 12 Enron Corp., 148 entities, 48 environmental management system (EMS), 124–26 expenses, 24 intangible, 43, 79, 106 and intangible demand, 38–39 and intangible finance statements, 65 external benchmarking, law of, 32 Exxon Mobil Corp., 2, 69, 143

F fabricated plastic and rubber, 188 failures, 341–42 faxing, 79 Fifth Third Bancorp., 145 finance, intangible, 59–60 and accounting, 4 measures, 165 valuation laws, 30–33 financial ownership, 16 financial presentation, law of, 31 financial sector, 152–53 aggregated return, 277–80 large caps, 154 cross-sectional analysis, 338 negative intangible value (-IV), 174 pattern return analysis, 274 value factor, 166, 183, 272 medium caps, 156 negative intangible value (-IV), 180 positive intangible value (+IV), 179 micro caps, 161, 316, 319

revenues, 27 sector return, 283 small caps, 159 positive intangible value (+IV), 188 return report, 308 value factor, 192, 202, 305 Stanfield statement, 220 AMEX exchange, 232 NASDAQ exchange, 227 NYSE exchange, 242–43 OTC exchange, 237 wage costs, 12 financial statements, intangible, 65–66 intangible accounting standards, 41 level 1 time analysis, 45–46 level 2 time analysis, 46–47 level 3 time analysis, 47–48 propositions, 57–65 employees and revenues, 58–60 expenses, 65 intangible value, 61–64 financial transactions, 15, 61 find/retrieve, 79 First Data Corp., 145 First Law of Intangibles (intMgtOS® 2002.L1), 37 fish/livestock, 187, 188 Fomento Economico, 146 food processing, 168, 171, 180, 188 Forest Laboratories Inc., 145 France Telecom, 3, 70, 143 Fujitsu Ltd., 148 Furukawa Electric Co., 148

G GAAP (generally accepted accounting principles), 4 Genentech Inc., 144 General Electric Co., 2, 69, 143 generally accepted accounting principles (GAAP), 4 Gillette Co., 144 GlaxoSmithKline PLC, 2, 69, 143 gold-collar workers, 130 Goldman Sachs Group, 145 goodwill, 16 Gregorian year, 85 gross revenue, 88 gross time capital (GTC), 207–8

350 gross time capital percentage (GTC%), 208 Grupo Aeroportuario Del, 148 Grupo Financiero, 146 Grupo IMSA S.A. de C.V., 147 Grupo Industrial Maseca, 149 Grupo Televisa S.A., 146 GTC (gross time capital), 207–8 GTC% (gross time capital percentage), 208 Guangshen Railway Co. Ltd., 147

H Hanson Plc, 148 hard intangibles, 14–15 healthcare sector, 152–53 aggregated return, 277–80 large caps, 154 cross-sectional analysis, 338 negative intangible value (-IV), 174 pattern return analysis, 274 value factor, 166, 183, 272 medium caps, 156, 180 micro caps, 161, 316, 319 revenues, 27 sector return, 283 small caps, 159 return report, 308 value factor, 192, 202, 305 Stanfield statement, 220 AMEX exchange, 233 NASDAQ exchange, 228 NYSE exchange, 243 OTC exchange, 238 wage costs, 12 health insurance, 180 Hewlett-Packard Co., 144 Hitachi Ltd., 146 holistic management, law of, 31 holistic value reporting, law of, 32 Home Depot Inc., 2, 70, 143 Honda Motor Co. Ltd., 145 HSBC Holdings Plc, 146 Huaneng Power, 146 human capital, 113–14

I IAT%, 213 IAT% (income after tax percentage), 213

Index IIS (international intangible standards), see intMgtOS® Imperial Oil Ltd., 267 income after tax percentage (IAT%), 213 indices, 21 Indonesian Satellite Corp., 148 industrial accidents, 85 industry time, 46 ING Groep N.V,, 145 insurance, 179, 248, 265 intangible accounting equation, 42 Intangible Accounting Standard (intMgtOS® 4001), 42–43 intangible analysis, 269 intangible assets, 42 amortization, 35–36 analysis of, 99 and intangible finance, 59–60 nanotime in, 79 quality of, 61–62 intangible capital, 42, 79 Intangible Classification System, 41–43 intangible conservatism, law of, 32 intangible costs, 9, 50 intangible demand, 36–37 vs. conventional demand, 37–38 and expenses, 38–39 intangible economics, 36–37 Intangible Economics Standard (intMgtOS® 7001), 36–37 intangible expenses, 43, 79 intangible finance, 59–60 and accounting, 4 measures, 165 valuation laws, 30–33 Intangible Finance Standard, 30–33 intangible financial reports, 5 intangible financial statements, 65–66 intangible accounting standards, 41 level 1 time analysis, 45–46 level 2 time analysis, 46–47 level 3 time analysis, 47–48 propositions, 57–65 employees and revenues, 58–60 expenses, 65 intangible value, 61–64 intangible FOP measurement, law of, 33 intangible liabilities, 42, 79, 100 intangible loss, 43, 79

Index intangible management, 4 vs. accounting, 76–77 evaluation of, 74–76 vs. normal management, 19 reports, 4 Intangible Management® Reporting Excellence Framework, 128–30 intangible management operating standards, see intMgtOS® Intangible Management Standards Institute, 133–34 Intangible Management: Tools for Solving the Accounting and Management Crisis (book), 71–72 intangible profits, 43 analysis of, 106–7 equation, 43 and intangible asset amortization, 35–36 and intangible economics, 36–37 nanotime in, 79 intangible revenues, 42, 79, 105–6 intangibles, 14 brand as, 18–19 characteristics of, 20 competitive, 9 definition of, 60 as source of competitive advantage, 15 as source of value creation, 15 definition of, 29–30 and financial performance, 30, 35 hard vs. soft, 14–15 laws of, 34 ownership of, 16 resource levels, 15 resource types, 15 valuation systems, 17–18 and wealth creation, 17 intangible transactions, 25 and competitive rights, 112 definition of, 47–48 demand-side, 37 vs. financial transactions, 61 supply-side, 36–37 intangible valuation, 81–82 intangible value, see IV intangible value (IV), 164 of 50 well-known firms, 1–4 changes in, 64 cross-sectional analysis, 330 market composition indicators, 330–35

351 negative, see negative intangible value (-IV) positive, see positive intangible value (+IV) relative performance indicators, 334–36 return composition indicators, 336–37, 339 as sentiment indicator, 63–64 Intel Corp., 2, 69, 143 Intelli-Check Inc., 267 internal politics, 81 internal reporting, law of, 32 internal support, 80 International Business Machines Corp., 2, 69, 143 International Intangible Management Standards Institute, 68 international intangible standards (IIS), see intMgtOS® intMgtOS® (intangible management operating standards), 122–24 application of, 77–78 intangible standards, 123 vs. ISO® standards, 127–28 membership, 136–38 client, 137–38 corporate, 137 professional, 136 profit equation, 39–41 revenue multiples statement, 27–28 role of, 68–69 statements, 43 true and fair value certification, 82–83 uses of, 342–43 wage cost multiple statement, 11–13 intMgtOS® 5003 Certification, 82 intMgtOS® Apportionment Statement, 88 intMgtOS® Artificial Employment Statement, 115–16 intMgtOS® Availability Statement, 84, 86 intMgtOS® Cross-Sectional Analysis, 338 intMgtOS® Cross-Sectional Report, 333 intMgtOS® Daily Real Revenue Report, 88 intMgtOS® Daily Time Report, 87–88 intMgtOS® Daily Value Statement, 117–18 intMgtOS® eLearning Certification, 133, 135 intMgtOS® Enterprise Certification, 128–30 intMgtOS® Intangible Balance Sheet, 98–101 intMgtOS® Invest Ratio Report, 339 intMgtOS® Market Value Statement, 118–19 intMgtOS® Nanotime Productivity, 101–4 intMgtOS® Physical Availability Report, 83–85

352 intMgtOS® Real Revenue Report, 88 intMgtOS® Real Time Reporting, 130–32 intMgtOS® ROI Statement, 116–17 intMgtOS® Smart Money Statement, 247–48 AMEX exchange, 265–67 NASDAQ exchange, 253–55, 259 NYSE exchange, 250–54 intMgtOS® Stanfield Statement, 217–23 exchange analysis, 224–25 AMEX, 225, 231–35 NASDAQ, 225, 226–30 NYSE, 230, 241–45 OTC, 225, 236–40 stages, 223–24 intMgtOS® Sustainability Statement, 114 intMgtOS® Value Factors, 164–65 intMgtOS® vCreation, 165 intMgtOS® vDestruction, 165 intMgtOS® vUnaccountable, 165 invention/innovation, 79 investment services, 171, 189 investor attention, 143 investor disgust, 143, 146 investor value, 4 iron and steel, 170, 179, 180, 188 ISO® standards, 124 accreditation, 126–27 conformity assessment, 126 costs, 128 vs. intangible management operating standards (intMgtOS®), 127–28 ISO14000 (EMS), 124–26 ISO9000 (QMS), 124–26 registration, 126–27 -IV, see negative intangible value +IV, see positive intangible value Ivanhoe Mines Ltd., 259, 260 -IV firm%, 306, 315, 334 -IV to NA ratio, 336

J Jilin Chemical Industrial, 147 Johnson & Johnson, 2, 69, 143 J Sainsbury Plc, 147

K key performance indicators (KPIs), 21–22 KFX Inc., 267

Index Kimberley-Clark Corp., 145 knowledge assets, 60; see also relationship assets classifications, 79–80 competitive intangibles, 9 occurrence of, 61 potential analysis of, 110 productivity of, 18 time allocation, 8 knowledge worker syndrome, 102 Kobe Steel Ltd., 148 Koninklijke Philips Electronics, 145 KPIs (key performance indicators), 21–22 Kraft Foods Inc., 145 Kubota Corp., 148

L large caps, 151–55; see also medium caps; micro caps; small caps absolute returns, 275 aggregate return report, 277–81 average return on investments, 286, 289 capitalization, 152 cumulative frequency distribution of relative returns, 276 highest absolute return, 155 highest relative return, 155 lowest relative return, 155 vs. medium caps, 160–61 negative intangible value (-IV), 164 absolute return on sector investments, 291, 303 average return on investment, 288, 298 bottom 10 returns, 169, 170–76 by industry, 165–67 market return analysis, 332 relative pattern return analysis, 285, 288, 295 relative return on investments, 289, 301 by sector, 165 top 10 returns, 169–70 net capital change in investments, 282 pattern return analysis, 271–73 positive intangible value (+IV), 164 absolute return on sector investments, 285, 291, 302 average return on investment, 297 average return on investments, 282 bottom 10 returns, 168

Index cumulative frequency distribution of relative returns, 295 by industry, 165–67 market return analysis, 329 pattern return analysis, 273–75 relative pattern return analysis, 287 relative return on investments, 284, 286, 290, 299, 300 by sector, 165 top 10 returns, 167–68 relative pattern return analysis, 276 relative return on investments, 284 sector return report, 281, 283 legal intangibles, 15, 60 Legend Group Ltd., 149 legislated ownership, 16 level 1 time analysis, 45–46 level 2 time analysis, 46–47 level 3 time analysis, 47–48 liabilities, intangible, 42, 79, 100 Lihir Group Ltd., 149 Lloyds TSB Group Plc, 148 LM Ericsson, 147 loss, intangible, 43, 79 Lowe’s Companies Inc., 144 LVMH Moet Hennessy L.V., 147

M Madeco S.A., 147 management, intangible, 4 vs. accounting, 76–77 evaluation of, 74–76 vs. normal management, 19 manufacturing, 48 market capitalization, 2–3, 69–70, 143–45 market return analysis, 326 negative intangible value (-IV), 329–30 large caps, 332 medium caps, 332 micro caps, 331 small caps, 331 positive intangible value (+IV), 326 large caps, 329 medium caps, 328 micro caps, 327 small caps, 328 market time, 46 market value, 68 of 50 well-known firms, 2–4

353 vs. accounting value, 121 vs. book value, 1 negative, 164 positive, 164 market value per employee (MV:Emp), 211–13 Masisa S.A., 148 MATAV, 149 mathematical consistency, law of, 21–22 Mayne Group Ltd., 148, 163 medical equipment and supplies, 248 medium caps, 155–58; see also large caps; micro caps; small caps absolute return on sector investments, 299 average return on investment analysis, 294 capitalization, 152 highest relative return, 157 lowest relative return, 157 negative intangible value (-IV) absolute return on sector investments, 304 average return on investment, 298 bottom 10 returns, 180 cumulative frequency distribution of relative returns, 296 market return analysis, 332 relative pattern return analysis, 296 relative return on investments, 302 top 10 returns, 177, 180 positive intangible value (+IV) absolute return on sector investments, 303 average return on investment, 297 bottom 10 returns, 177 cumulative frequency distribution of relative returns, 294 market return analysis, 328 relative pattern return analysis, 294 relative return on investments, 300, 301 top 10 returns, 177, 179 relative pattern return analysis, 292–93 relative return on sector investments, 299 vs. strongest large caps, 157 value factor report, 181–86 vs. weakest large caps, 158 Medtronic Inc., 3, 70, 144 meetings, 80 Merck & Co., Inc., 2, 69, 143 Merrill Lynch & Co., 145 metal mining, 168, 179, 248, 254

354 metric balance, law of, 31 metrics, 21 micro caps, 161–62; see also large caps; medium caps; small caps capitalization, 152 intangible finance measures for, 314–18 intMgtOS® Return Report, 316–17, 319–20 negative intangible value (-IV) average return on investment, 326 bottom 10 returns, 197, 199 by industry, 189 market return analysis, 331 relative pattern return analysis, 325 relative return on investments, 324 top 10 returns, 197 positive intangible value (+IV), 318 absolute pattern return analysis, 320 bottom 10 returns, 197, 198 cumulative frequency distribution of relative returns, 321, 323 market return analysis, 327 relative pattern return analysis, 321, 323 relative return on investments, 322 top 10 returns, 195, 196 return by sector analysis, 318 sector return on investment analysis, 318 strongest relative returns, 162 value factor report, 190–95 weakest relative returns, 162–63 Microsoft Corp., 2 book value, 69, 143 employee growth, 93 intangible analyst information, 95 intangible value, 69, 143 intMgtOS® Apportionment Statement, 96 intMgtOS® Availability Statement, 84, 86 intMgtOS® Daily Time Statement, 87 intMgtOS® Income Statement, 105–7, 118 intMgtOS® Intangible Balance Sheet, 98–101 intMgtOS® Productivity Report, 104 intMgtOS® Revenue Statement, 89 market capitalization, 69, 143 revenue and employment data, 92 revenues, 115 Mitsubishi Tokyo Financial Group, 1, 68, 70, 144 accounting value, 122 market capitalization, 3 Mitsui & Co. Ltd., 146

Index mmO2 Plc, 146 Mobile TeleSystems OJSC, 148 money center banks, 248 Morgan Stanley, 144 motion pictures, 168 motivation assets, 78 Motorola Inc., 145 -MV (negative market value), 164 +MV (positive market value), 164 MV:Emp (market value per employee), 211–13

N NA firm%, 306, 315, 334 nanotechnology, 48 nanotime, 8 and brand value, 53 classification process, 90 demand, 113 manufacturing, 48–50 contractual performance, 52–53 post-contractual performance, 53–55 pre-contractual performance, 51 value transactions, 50 potential analysis, 108–9 knowledge assets, 110 organizational assets, 109–10 relationship assets, 110 structural potential, 111 productivity, 101–4 strategy, 56, 112 and value, 55–56 value transactions, 54–55 NASDAQ exchange intMgtOS® Stanfield Statement, 226–30 smart money, 253–55, 259 strongest performing industries, 225 National Australia Bank Ltd., 147 natural gas utilities, 171, 180, 188 negative book value (-BV), 164 negative intangible value (-IV), 142; see also positive intangible value (+IV) large caps, 164 absolute return on sector investments, 291, 303 average return on investment, 288, 298 bottom 10 returns, 169, 170–76 by industry, 165–67 market return analysis, 332

355

Index relative pattern return analysis, 285, 288, 295, 301 relative return on investments, 289 by sector, 165 top 10 returns, 169–70 medium caps absolute return on sector investments, 304 average return on investment, 298 bottom 10 returns, 180 cumulative frequency distribution of relative returns, 296 market return analysis, 332 relative pattern return analysis, 296 relative return on investments, 302 top 10 returns, 177, 180 micro caps average return on investment, 326 bottom 10 returns, 197, 199 by industry, 189 market return analysis, 331 relative pattern return analysis, 325 relative return on investments, 324 top 10 returns, 197 role of, 163 small caps, 307 average return on investment, 315 bottom 10 returns, 189 by industry, 186–87 market return analysis, 331 relative pattern return analysis, 314 relative return on investments, 313 negative market value (-MV), 164 negative share price movements, 270–71 NetEase.com Inc., 149 networking, 80 News Corp., 147 Nextel Communications, 145 Ninth Law of Intangibles (intMgtOS® 2002.L9), 38 Nokia Corp., 2, 70, 143 non-accounting value, see intangible value (IV) non-cyclical sector, 152–53 aggregated return, 277–80 large caps, 154 cross-sectional analysis, 338 negative intangible value (-IV), 173 pattern return analysis, 274 value factor, 166, 182, 272

medium caps, 156 negative intangible value (-IV), 180 micro caps, 161, 316, 319 relative return on investments, 158, 161, 163 revenues, 27 sector return, 283 small caps, 159 positive intangible value (+IV), 187–88 return report, 308 value factor, 191, 201, 305 Stanfield statement, 219 AMEX exchange, 231–32 NASDAQ exchange, 227 NYSE exchange, 242 OTC exchange, 237 wage costs, 12 non-financial transactions, 25, 48, 61 non-productive time, 47, 66, 111 Nortel Networks Corp., 145 Novartis AG, 2, 70, 143 NYSE exchange intMgtOS® Stanfield Statement, 241–45 smart money, 250–52 strongest performing industries, 230

O OAO Tatneft, 146 office equipment, 171 office supplies, 188 oil and gas -integrated, 171, 179, 248, 265 oil and gas operations, 170, 180, 188, 248, 265–66 oil well services and equipment, 179, 188 OMV Aktiengesellschaft, 148 opInc%, 213 opportunity cost, 25 optimal employment level, 58–59 optimal sustainability threshold, 108 Oracle Corp., 1 accounting value, 69, 121 book value, 2, 70, 143 intangible value of, 2, 70, 143 market capitalization, 2, 70, 143 market value, 69 organizational assets, 81, 109–10 organizational days, 85 organizational sustainability, law of, 31 organization type independence, law of, 32

356 OTC exchange, 225, 236–40 ownership, 16

P paper and paper products, 188 pattern-based analysis, 270 pattern return analysis, 269–70 PepsiCo Inc., 2, 70, 143 performance, law of, 33 personal and household products, 168, 189 personal services, 188 PetroChina Company Ltd., 3, 70, 144 Petroleo Brasileiro S.A., 145 Pfizer Inc., 2, 69, 143 phone calls, 80 photography, 168, 179, 248 point measures, 21 positive book value (+BV), 164 positive intangible value (+IV), 142; see also negative intangible value (-IV) +IV firm%, 306, 315, 333 +IV to -IV invest ratio, 336–37 +IV to -IV profit ratio, 337 +IV to -IV ratio, 306–7, 317, 335–36 +IV to -IV return ratio, 337 +IV to NA ratio, 306–7, 317, 336 large caps, 164 absolute return on sector investments, 285, 291, 302 average return on investment, 282, 297 bottom 10 returns, 168 cumulative frequency distribution of relative returns, 295 by industry, 165–67 market return analysis, 329 pattern return analysis, 273–75 relative pattern return analysis, 287 relative return on investments, 284, 286, 290, 299, 300 by sector, 165 top 10 returns, 167–68 medium caps absolute return on sector investments, 303 average return on investment, 297 bottom 10 returns, 177 cumulative frequency distribution of relative returns, 294 market return analysis, 328

Index relative pattern return analysis, 294 relative return on investments, 300–301 top 10 returns, 177, 179 micro caps, 318 absolute pattern return analysis, 320 bottom 10 returns, 197, 198 cumulative frequency distribution of relative returns, 321, 323 market return analysis, 327 relative pattern return analysis, 321, 323 relative return on investments, 322 top 10 returns, 195, 196 role of, 163–64 small caps, 307 absolute pattern return analysis, 309 average return on investment, 312 bottom 10 returns, 187–88 cumulative frequency distribution of relative returns, 310 by industry, 186–87 market return analysis, 328 relative pattern return analysis, 310, 312 relative return on investments, 311 top 10 returns, 187 positive market value (+MV), 164 positive share price movements, 271 positive volatility, 248 post-contractual performance, 53–55 pre-contractual performance, 51 printing and publishing, 168 printing services, 179 process impacts, 81 Procter & Gamble Co., 2, 69, 143 productive time, 47, 59 productivity, 18–19 attainable, 112 and brand value, 24 expenses, 24 in nanotime manufacturing, 48 potential, 111 profit equation, 35, 39–41 profits, intangible, 43 analysis of, 106–7 and intangible asset amortization, 35–36 and intangible economics, 36–37 nanotime in, 79 property and casualty insurance, 171, 188–89 PT Telekomunikasi, 147 public data, 81 PYR Energy, 267

357

Index

Q

S

QMS (quality management system), 124–26 QUALCOMM Inc., 144 quality management, 63 quality management system (QMS), 124–26 Quinenco S.A., 148

Sadia S.A., 148 sampled data, 82 Sanofi-Synthelabo, 3, 70, 144 Sanyo Electric Co. Ltd., 148 SAP AG, 1 12-month analysis of, 255 book value, 3, 70, 121 intangible value, 3, 70 market capitalization, 3, 70 smart money in, 252 value creation in, 144 saving banks, 171 SBC Communications Inc., 3, 70, 144 Schlumberger Ltd., 145 schools, 168, 248 scientific and technical instruments, 187 Scottish Power UK Plc, 148 sector analysis, 151 sector intangible value per share (SIV/S), 215 sector share price (SSP), 214–15 sector time, 46 semiconductors, 168, 179, 180, 189 services sector, 152–53 aggregated return, 277–80 large caps, 154 cross-sectional analysis, 338 negative intangible value (-IV), 174–75 pattern return analysis, 274 value factor, 166, 184, 272 medium caps, 156 negative intangible value (-IV), 180 positive intangible value (+IV), 179 micro caps, 161, 316, 319 revenues, 27 sector return, 283 small caps, 159 positive intangible value (+IV), 187–88 return report, 308 value factor, 193, 202–3, 305 Stanfield statement, 220–21 AMEX exchange, 233 NASDAQ exchange, 228–29 NYSE exchange, 243–44 OTC exchange, 238–39 wage costs, 13 Sharp Corp., 147 Shell Transport & Trading, 146 sick leaves, 85 Siemens AG, 144

R read/learn, 79 real estate operations, 180 recreational activities, 168, 179 recreational products, 168 red-tape impacts, 81 referred business, 54 regional banks, 180, 188 relationship assets, 60, 78; see also knowledge assets classifications, 80 competitive intangibles, 9 occurrence of, 61 potential analysis of, 110 productivity of, 18 time allocation, 8 relative pattern return analysis, 287 relative return, 155 relative return on sector investment analysis, 287, 299 repeat business, 54 responsiveness assets, 78 retail (department and discount), 170 retail (drugs), 168, 179 retail (grocery), 180 retail (specialty), 188 retail (technology), 168 returns, 149–50 return velocity, 337 revenues, 88 and employees, 59–60, 88, 91–94 growth rates, 114 intangible, 42, 79, 105–6 potential, 24–25 Rev:MV gearing, 208–10 Ricoh Company Ltd., 148 risks, 149–50 Roche Holding AG, 2, 70, 143 Rolls-Royce Group Plc, 148 Roman year, 85 Royal Dutch Petroleum, 3, 70, 144

358 Signet Group Plc, 147 Singapore Telecom, 146 Sinopec Beijing Yanhua, 147 Sinopec Shanghai Petro, 146 SIV/S (sector intangible value per share), 215 size independence, law of, 32 small caps, 158–61; see also large caps; medium caps; micro caps capitalization, 152 intangible finance measures for, 306–7 intMgtOS® Return Report, 308–9 intMgtOS® Value Report, 305 negative intangible value (-IV), 307 average return on investment, 315 bottom 10 returns, 189 by industry, 186–87 market return analysis, 331 relative pattern return analysis, 314 relative return on investments, 313 pattern return analysis, 304–7 positive intangible value (+IV), 307 absolute pattern return analysis, 309 average return on investment, 312 bottom 10 returns, 187–88 cumulative frequency distribution of relative returns, 310 by industry, 186–87 market return analysis, 328 relative pattern return analysis, 310, 312 relative return on investments, 311 top 10 returns, 187 sector return on investment analysis, 307 value factor report, 200–205 smart money, 247–48 social capital, 113 Societe Generale Group, 144 soft intangibles, 14–15, 62 software and programming, 248, 251, 266 source intangibles, 60, 62 SSP (sector share price), 214–15 Stanfield factor, 215–16 analysis of, 223–24 calculation of, 213–14 Star Scientific Inc., 259, 262 statutory time, 47 stock prices as competitive advantage, 7 flawed valuation of, 10 fluctuations in, 8

Index negative movements, 270–71 positive movements, 271 store/file, 80 strategic security, law of, 32 strategy independence, law of, 31 stress impacts, 81 SUNDAY Communications, 149 Supermercados Unimarc, 148 supplemental reporting, law of, 32 supply, 36–37 supply-side intangible transactions, 36–37 Suprema Specialties, 148 sustainability, 91 margin, 90 time, 66 sustainable competitive advantage, 8, 112 switching costs, 51

T Taiwan Semiconductor Manufacturing, 144 Target Corp., 145 technical analysis, 141 negative intangible value (-IV), 142, 146 positive intangible value (+IV), 142 returns and risk, 149–50 value types, 142 technological impacts, 81 technology sector, 152–53 aggregated return, 277–80 large caps, 154 cross-sectional analysis, 338 negative intangible value (-IV), 175–76 pattern return analysis, 274 sector analysis, 178 value factor, 166, 185, 272 medium caps, 156 negative intangible value (-IV), 180 positive intangible value (+IV), 179 micro caps, 161, 316, 319 relative return on investments, 157, 160, 162 revenues, 27 sector return, 283 small caps, 159 positive intangible value (+IV), 187 return report, 308 value factor, 194, 203–4, 305 Stanfield statement, 221–22 AMEX exchange, 233–34

359

Index NASDAQ exchange, 229 NYSE exchange, 244 OTC exchange, 239 wage costs, 13 Telecom Italia S.p.A., 146 Telefonica del Peru, 149 Telefonica de Mexico S.A., 146 Telefonica Moviles S.A., 3, 70, 144 TeliaSonera AB, 147 Telstra Corp., 148 Tenaris S.A., 148 Texas Instruments, 144 3M Co., 3, 58, 70, 144 time allocation activities, 8 time analysis, 45–48 time dimension, 78 tires, 248 tobacco, 188, 254 Total S.A., 2, 69, 143 Toyota Motor Corp., 147 transactions, intangible, 25 and competitive rights, 112 definition of, 47–48 demand-side, 37 vs. financial transactions, 61 supply-side, 36–37 transportation sector, 152–53 aggregated return, 277–80 large caps, 154 cross-sectional analysis, 338 negative intangible value (-IV), 176 pattern return analysis, 274 value factor, 166, 272 medium caps, 156 negative intangible value (-IV), 180 positive intangible value (+IV), 179 micro caps, 161, 316, 319 relative return on investments, 158, 161, 163 revenues, 27 sector return, 283 small caps, 159 return report, 308 value factor, 194, 204, 305 Stanfield statement, 222 AMEX exchange, 234 NASDAQ exchange, 229 NYSE exchange, 244 OTC exchange, 239 wage costs, 13 travel overheads, 81

Tri-Valley Corp., 267 trucking, 179 true non-productive time, 66 true productivity, 62–63 TV Azteca S.A. de C.V., 148 Tyco International Ltd., 145

U UBS AG, 3, 70, 144 Ultra Petroleum Corp., 267 unaccountable firm, 270 Unibanco-Uniao de Banco, 146 Unilever N.V., 145 UnitedHealth Group Inc., 145 United Parcel Service, 2, 70, 143 United Technologies, 144 universal comparability, law of, 31 universal consistency, law of, 31 universal solidity, law of, 31 U.S. Bancorp, 144 utilities sector, 152–53 aggregated return, 277–80 large caps, 154 cross-sectional analysis, 338 negative intangible value (-IV), 176 pattern return analysis, 274 value factor, 166, 185, 272 medium caps, 156 micro caps, 161, 316, 319 revenues, 28 sector return, 283 small caps, 159 positive intangible value (+IV), 188 return report, 308 value factor, 194, 204, 305 Stanfield statement, 222 AMEX exchange, 234 NASDAQ exchange, 229 NYSE exchange, 244 OTC exchange, 239 wage costs, 13

V Valassis Communications, 252, 256 valuation, 81–82 approaches to, 81–82 audited data, 82 benchmarked data, 81

360 public data only, 81 sampled data, 82 comparability of, 22 and competitive advantage, 26–28 competitive advantage, 28–29 component changes, 22 daily value of brand, 26 definition of intangibles, 29–30 employee motivation, 25–26 expense productivity in, 24 incorrect formation in, 21–22 laws, 30–33 limited scope, 23 ownership-based, 23 productivity, 24 revenue potential, 24–25 strategy-based, 21 strategy-linked, 22–23 wage costs as proxy, 23–24 value, 142 creating, 142 destroying, 142 and nanotime, 55–56 unaccountable, 142 value creating firms, 142, 143–45 value creation factor, 165 value destroying firms, 142, 146–49 value destruction factor, 165 value dimension, 78

Index value stocks, 329 value unaccountable firms, 142 Verizon Communications, 2, 70, 143 Vina Concha y Toro S.A., 148 Vodafone Group Plc, 147

W Wabash National Corp., 252, 257 Wachovia Corp., 145 wage costs, 10–13 as proxy, 23–24 Walgreen Co., 145 Wal-Mart Stores Inc., 2, 69, 143 Walt Disney Co., 145 water utilities, 188 weak hands, 248 wealth generation, 17 Wells Fargo & Co., 2, 70, 143 Westpac Banking, 147 work year, 85 WorldCom Group, 146, 163 WPP Group Plc, 148 Wyeth, 3, 70, 144

Y Yahoo Inc., 145 Yanzhou Coal Mining Co., 147