November 2003

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 81 -- December 1, 2003
In this digest:

1. Covarity, SlipStream close funding deals
   
2. Local Knexa operations to become standalone public company
   
3. Onlinetel expected to become public company
   
4. Betacom bankrupt; company's books investigated

5. ARISE facing "significant operational adjustments"
   
6. RDM predicts big 2004 after slow end to 2003
   
7. MKS quarter falls short
   
8. CME terminates pilot trials after seeing preliminary results

9. STOCK REPORT: Com Dev and RIM continue their streaks
   
10. Miscellaneous tidbits from RSS Solutions, Biorem, Christie, Agfa, PrinterOn, Turbosonic, Sandvine, IMS, Vestec, RIM, Porchlight.ca, Data Perceptions

Covarity, SlipStream close funding deals
November 3 & 27, 2003

Two companies announced in November that they've raised additional venture capital.

Covarity has received $1 million from the VentureLink Diversified Balanced Fund, managed by Skylon Advisors. Skylon managing director Jim Whitaker was on the board of Waterloo Ventures, which is probably an existing investor in Covarity through Tech Capital Partners. Covarity announced in March that it had received $2 million from Tech Capital. No word yet on customers for the two-year-old company, but CEO Ron Shuttleworth told The Record that customers "are coming on board as we speak."

In the second deal, Web accelerator SlipStream received a $1.9 million round of funding from EdgeStone Capital and EMJ founder Jim Estill, who is on SlipStream's board. A year-and-a-half ago, EdgeStone invested $1.5 million in SlipStream. I'm told that this round was done at $1.16/share, a 33% increase from the $0.87/share price of the previous round.

SlipStream says it expects to have a million paying users of its technology by the spring. It is still talking about expanding into corporate wireless applications. Snuck into one of the paragraphs of the oddly-organized news release was mention that the company is now profitable.

SlipStream also announced that its accelerator is now being used by AOL Canada as part of its new Netscape Online service, priced at $18.95 a month.

Local Knexa operations to become standalone public company
November 27, 2003

The convoluted history of the company that used to be JPH International took another twist in November. The SuiteResponse business, which began at JPH and was acquired by France's EVER in 2000, and then spun out and merged into Knexa in 2002, is now being split from Knexa's legacy knowledge management business and will operate as a standalone company.

The move -- instigated by EVER, Knexa's largest shareholder -- essentially undoes the 2002 merger. The knowledge management business (including the Knexa name) is being sold back to the old Knexa's directors, executives, and employees. Graeme Somerville, who was JPH's marketing VP and kept that role through the various changes in the company, has become COO and director of the publicly-traded company, which will be given a new name. Greg Whitnell, who was software development manager at JPH and Knexa's CTO, has also been appointed to the board. Raymond Jefferd has been appointed interim CEO while a permanent chief executive is sought.

The changes have to be formally approved by the company's shareholders, who will vote at the AGM on December 31.

Onlinetel expected to become public company
November 12, 2003

Kitchener's Onlinetel is also expected to become a standalone public company after its owner, Toronto-based Eiger Technology, said that it will not be proceeding with the announced acquisition of Onlinetel by Toronto's Globalive Communications (see August digest).

Instead, ownership of Onlinetel will be transferred to Newlook Industries, a public shell that is majority-owned by Eiger. Following the sale, Eiger would own 95.2% of Onlinetel/Newlook. Trading in Newlook shares on the TSX Venture Exchange was halted in August when it was announced that it was going to be part of the Globalive-Onlinetel merger.

Eiger did not announce any timeline for the transfer of Onlinetel to the shell.

Eiger hasn't yet released its results for the year ended September 30, but it says that Onlinetel revenue in Q4 was $1.4 million, which would be up 11% from the previous quarter and 68% from the same period a year ago (Eiger says 35%, so there's an error in the company's numbers somewhere). For the last two years, Eiger hasn't filed its audited year-end results until February.

Betacom bankrupt; company's books investigated
November 1, 2003

Betacom is no more. I mentioned last month that the entire board of Mississauga-based Betacom (which did R&D in Waterloo) had resigned and that the company had discovered "irregularities" in its financial statements. This came shortly after the resignation of the company's CFO and its CEO.

The company has since been forced into receivership by one of its lenders. I'm told that the receiver -- KPMG -- found fewer assets on hand than were being shown on Betacom's balance sheet. The company's assets were sold off, but didn't come close to covering even its secured debt. On Friday, it was announced that it would likely be formally assigned into bankruptcy.

Dspfactory chairman Mike Stork made a significant investment in Betacom earlier this year (and joined Betacom's board in May), which may turn out to have been based on misleading financial statements.

Betacom's auditor was the Kitchener office of Deloitte & Touche. Another interesting aspect of this is that Betacom's CFO was elected this summer as the new chairman of the York Technology Association -- the Communitech-like association for Markham and surrounding area.

Before it was shut down, Betacom said that millions of dollars of revenue and expenses were "inappropriately recorded" in its financial statements.

Betacom, the corporate entity, used to be UW spinoff Control Advancements. In 1998, Control Advancements made an investment in what was then Caledon-based Betacom Systems for the Disabled Inc. When it all played out, the Betacom guys ended up in control of Control Advancements in 1999, which was then renamed Betacom. The Control Advancements operations were shut down, although part of it was later revived in a revised format as Handshake Interactive.

ARISE facing "significant operational adjustments"
November 6, 2003

ARISE is trying to raise funds to avoid having to make what it calls "significant operational adjustments" before the end of this month. The company completed its IPO in July, but by the end of September it was already back to a working capital deficiency and was down to just $96,331 in cash.

In the quarter ended September 30 (Q3 03), ARISE reported sales of $827,000 -- double what was achieved a year ago and up 33% from the previous quarter. That sounds impressive, but the company notes in its MD&A that it achieved this, in part, through discounting and the sale of low-margin "slower moving inventory." As a result, gross profits were flat from Q2 despite the jump in sales. A 29% sequential increase in expenses created a net loss of $355,000 ($0.04/share) compared to losses of $249,000 in Q2 and $193,000 last year.

The current quarter is expected to show a lower top line since the fall months are not traditionally strong revenue generators for ARISE's solar technology.

Working capital deficiency at the end of the quarter was $166,000. DSO at quarter-end was just 38. Operations consumed $463,000 in cash in Q3 and the company also repaid the $30,000 loan it had received from the wife of its CFO. ARISE says it is "actively pursuing various corporate development activities" to raise funds, and that without additional funding it "will likely be forced to make significant operational adjustments before the calendar year end."

The company also announced that in September it received a U.S. patent for its "solar power management system."

RDM predicts big 2004 after slow end to 2003
November 25, 2003

RDM ended its fiscal year with sales of $3.6 million in the quarter ended September 30 (Q4 03). Sales were down 22% from the previous quarter and 6% from a year ago. CEO Doug Newman described this as "an extremely successful" quarter in the conference call. Net income was $165,000 ($0.01/share), down from $254,000 in Q3.

As usual, RDM only issued a sketchy year-end news release, which was almost useless for analysis (the management team read from the full results in the conference call, but the company has never included the relevant details in its year-end news release; for the last two years it hasn't even provided Q4 financial statements).

In the call, RDM disclosed that its digital imaging sales fell well short of targets in the quarter, with revenue of just under $2.1 million. That's down more than a third from Q3 and about 6% below last year's sales. The shortfall was attributed to a delay in ramping up production of the EC6000 scanners, which didn't go into full production until just after the mid-point of the quarter. CFO Jim Kopperson said that if it hadn't been for the production delays, the company would have hit its targets in the quarter and that the sales that would have gone into Q4 were pushed into the current quarter.

The company's other two segments both reported sequential revenue increases. Cheque quality assurance sales were up 5% from Q3 to $626,000 while electronic payment solutions contributed $865,000 -- an 89% increase from the previous quarter.

RDM says its pay-per-transaction ITMS system is now processing more than 150,000 transactions per week, up from 120,000 in Q3.

The company ended the quarter with $5.5 million in cash and equivalents, up $169,000 from the end of Q3.

Revenue for the year was $12.5 million, down 4% from 2002. At the beginning of the year, the company was hoping for revenue growth of at least 10%. Net loss for the year was $479,000 ($0.03/share), down from a profit of $434,000 last year.

The company is forecasting sales growth of 30% in 2004, which would take it to over $16 million in revenue. It expects to report small losses in Q1 and Q2, but to be profitable in the second half of the year and over the year as a whole.

After RDM's question-free Q3 conference call, there was one participant in the year-end call -- from Wolverton Securities.

MKS quarter falls short
November 26, 2003

For the first time in at least eight years, MKS' Q2 revenue showed a quarter-over-quarter decline from Q1, which is traditionally the company's weakest quarter. For the period ended October 31 (Q2 04), MKS reported sales of US$7.6 million, down 5% from the previous quarter and just slightly up from the same period last year.

Analysts had been expecting revenue to be around US$9 million -- levels the company was achieving in its top-line glory days of 1998 and 1999. License revenue was off 9% from Q1 and up 2% from last year. CEO Phil Deck said the company wasn't satisfied with its revenue performance and the company issued a warning to investors almost immediately after the end of the quarter that the numbers were going to fall short of projections.

MKS' SCM business unit contributed US$5.5 million in revenue, down 5% from Q1 but up 7% from a year ago. Interoperability accounted for the remaining US$2.1 million, which was a 7% drop sequentially.

The company closed 22 deals with a value over US$50,000 (according to the conference call; the financial statements say 20). Those deals accounted for just over a third of all revenue in the period.

Net loss for the quarter was US$607,000 (US$0.01/share), compared to a loss of US$89,000 in the previous quarter. The SCM segment reported a loss of US$1.1 million, with interoperability contributing a profit of US$538,000. The company is still forecasting a profit over the full fiscal year.

MKS ended the quarter with US$6.9 million in cash, down US$313,000 over the quarter. The company raised US$375,000 in Q2 through the sale of shares (exercised employee options) while operations used US$279,000 in cash and an additional US$257,000 was used to purchase fixed assets. The company accelerated its collections in the quarter and brought its DSO down to just 48. That brought in an extra US$1.1 million in the quarter.

The company added a net 13 employees over the quarter and now has 261 people world-wide. Of the company's 15 sales reps in North America, 60% have been with MKS for six months or less. Additional sales and sales support people are expected to be hired in upcoming quarters.

CME terminates pilot trials after seeing preliminary results
November 26, 2003

CME Telemetrix had been ballyhooing the pilot trials it was running at two Toronto hospitals for its hemoglobin device. Preliminary results were initially going to be ready for March and that ended up being pushed back to the end of the year because of SARS-related delays. Now, after seeing some preliminary data, CME has decided to cancel the tests. The only comment offered by the company was that the delays had "diminished the study's integrity."

CME is set to run out of cash in a few weeks. As mentioned in last month's digest, it has hired Vancouver's Wolverton Securities to sell up to 8.3 million units in a private placement at $0.30 a unit. Each unit includes one common share and a half purchase warrant exercisable for two years at $0.60 a share. Wolverton will receive warrants equal to 10% of the units sold. When you add it all up, the placement could result in 13.75 million new shares being issued (if the offering is fully subscribed and all warrants are exercised), which is equal to 156% of the shares currently outstanding.

In June, CME shareholders approved the issuance of shares or warrants of up to 50% of the number of outstanding shares. Since this is potentially more than three times that amount, the company has called a special shareholders meeting for this Friday to ask that the private placement resolution passed five months ago be rescinded. Management is also asking for what is essentially a blank cheque from shareholders -- the ability to issue even more shares at prices even lower than those proposed in the deal with Wolverton.

At the end of Q3 on September 30, CME had net cash of $454,000. Operations consumed $656,000 in the quarter. The company had $910,000 in cash and bank indebtedness of $456,000, up $306,000 from the end of Q2. Net loss for the quarter was $731,000. Accumulated deficit is $20.1 million.

STOCK REPORT: Com Dev and RIM continue their streaks
November 2003

With one month left in the year, shares in Com Dev are on pace to match their performance in 2000 when they increased in value by 230%. Com Dev stock had its eight consecutive month of gains in November and is now up 233% for the year.

The streak for RIM shares is up to nine straight months of gains, tying the company record set in 1999. Over the nine months, RIM stock has gone from $18.73 a share to $60. The company ended November with a market value of $4.7 billion. Com Dev is now just under $200 million.

For the month of November:

CME Telemetrix [TSXV: YME] +43%
RDM [TSX: RC] +33%
Com Dev [TSX: CDV] +30%
Descartes [TSX: DSG] +14%
ARISE [TSXV: APV] +14%
Navtech [OTCBB: NAVH] +13%
--S&P TSX VENTURE INDEX +8%
Dalsa [TSX: DSA] +5%
RIM [TSX: RIM] +3%
--S&P TSX COMPOSITE INDEX +1%
===============================
Turbosonic [OTCBB: TSTA] -5%
Open Text [TSX: OTC] -8%
Virtek [TSX: VRK] -14%
MKS [TSX: MKX] -18%

The signing into law of the Check Clearing for the 21st Century Act ("Check 21") in the U.S. boosted RDM stock over $1 for the first time since May. The act is expected to accelerate the use of electronic cheques in the U.S.

CME Telemetrix, which is quickly running out of cash, has seen its stock double in price over the last two months. CME shares climbed to 50 cents on the TSX Venture Exchange at a time when Wolverton Securities is trying to sell as many shares as it can for 30 cents.

MKS shares had their worst month of the year after the company released disappointing quarterly results. They closed November at $1.74, their lowest month-end since April.

Virtek's inexplicable October jump was short-lived. It gave back most of the gains in November. Open Text has slipped back under a billion-dollar market value.

Companies with headquarters outside the area:

Eiger Technology [TSX: AXA] +80%
Blue Coat [Nasdaq: BCSI] +25%
CVF Technologies [Amex: CNV] +21%
Sybase [NYSE: SY] +15%
Ansys [Nasdaq: ANSS] +8%
SBS Technologies [Nasdaq: SBSE] +7%
Siebel [Nasdaq: SEBL] +5%
LSI Logic [NYSE: LSI] +2%
CheckFree [Nasdaq: CKFR] +0%
==================================
Bio-Rad [Amex: BIO] -2%
Agfa-Gevaert [Brussels: AGFA] -3%
Network Assoc [NYSE: NET] -4%
Adobe [Nasdaq: ADBE] -6%
Senesco [Amex: SNT] -9%
Knexa [TSXV: KNX] -19%

Shares in BlueCoat -- the former CacheFlow -- are having a year that blows away the performance of Com Dev and RIM. BlueCoat stock is up 431% in 2003, climbing from US$3.93 a share to US$20.87 in 11 months.

Miscellaneous Tidbits

• Rob Lamka has left RSS Solutions, where he was CFO and the only senior executive who was not a member of the founding Cox family. He joined RSS in the summer of 2002.

• Guelph's Biorem is having a strong year. The company had sales of US$1.6 million in the quarter ended September 30 -- a 135% increase from last year. Over the first nine months of the year it had revenue of US$4.7 million and net income of US$730,000.

• Christie Digital Systems is purchasing the former Electrohome building on Wellington Street. The 292,000 square-foot facility is home to Christie's local operations, which was Electrohome Projection Systems until acquired by Christie four years ago. Christie, which has 160 employees in Kitchener, will pay about $10 million for the building. The Kitchener office of Iowa-based Fakespace Systems will remain at the site.

• A few employees of the former Mitra have mentioned that there has been a distinct change in management style lately under Agfa's ownership. Agfa has replaced some of the senior executives overseeing its healthcare informatics division over the last few months.

• PrinterOn announced a co-marketing deal with RIM competitor Good Technology. It also said that it is seeing significant growth in the use of its technology for in-room printing by business travellers in hotels. It says its service is available at 150 hotels in North America.

• Some people who went on this year's Orion Tour (formerly the Yorkton Tour) have said they were underwhelmed by the experience. I've heard that before from people who still came back the following year, but it's been at least a couple of years since there were enough exciting new companies in the area looking for funding to justify a tour.

• Turbosonic reported a loss of US$189,000 on sales of US$1.1 million in the quarter ended September 30 (Q1 04). Revenue was half that of the same period last year.

• Some of the U.S. patent applications that were added to USPTO website in November include Sandvine's "Path optimizer for peer to peer networks," RDM's "Apparatus and method for obtaining data from a document" and IMS' "Load cell." That's the 10th U.S. patent application added this year from IMS researchers. There was also an application from Ignis Innovation founder Arokia Nathan titled "Method and system for fabricating electronics." Laurier professor Shaowen Song, who tried to get a start-up company funded a couple of years ago, received a U.S. patent in November for his "Optical memory apparatus and method."

• Speaking of IMS ... one of its founders, Prof. Fakhri Karray, is now heading up Vestec (Voice Enabling Systems Technology Inc.) which is commercializing voice technology. Karray and fellow UW prof Otman Basir (CEO of IMS) had also been the founders of QJunction, which was developing various voice recognition technologies before it was wound down a couple of years ago. Vestec was launched about a year ago and is now looking for funding. Karray has stepped down from his position on IMS' board.

• InPro II, a Luxembourg-based patent holding company, has filed a patent infringement suit against RIM in Delaware.

• Kitchener ISP Porchlight.ca says it has grown 20% over the last year.

• Data Perceptions celebrated its 10th anniversary with a shindig at Brick Brewing.