March 2004

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 85 -- April 5, 2004
In this digest:

1. ARISE fundraising falls short; acquisition plan scuttled
   
2. Descartes ends year with earnings miss
   
3. CME tries to raise funds ... again

4. Onlinetel achieves absurd market value after merger
   
5. STOCK REPORT: RIM has losing month, then sets 3-year high
   
6. Miscellaneous tidbits from Handshake, Pattern Discovery, Navtech, Biorem, SRE Controls, ClearFrame, GBG, Dalsa, Com Dev, Ignis, Dspfactory, Brock Solutions, RIM, Sandvine

ARISE fundraising falls short; acquisition plan scuttled
April 1, 2004

ARISE began the month announcing an agreement to acquire New Mexico-based Dankoff Solar Products, but the deal fell apart a few weeks later when ARISE was unable to close a planned private placement.

ARISE was hoping to sell just over 7 million units at a price of 70 cents each for gross proceeds of $5 million. Each unit would have consisted of one common share and a warrant to purchase an additional share for $1. The deal would have given ARISE's new investors (in aggregate) over 40% of the company's outstanding shares with the option to acquire a majority stake through the exercise of the warrants.

The money was going to be used to acquire 11-year-old Dankoff Solar, which describes itself as "a wholesale distributor of components for solar electric power, solar heating, and wind electric systems." According to a story published in 2003, it is the fifth largest solar energy products supplier in the U.S. Sales in fiscal 2003 were US$11.75 million. ARISE said it would pay US$4.5 million -- about CDN$6 million -- for Dankoff, to be paid through an undisclosed mix of cash, debt, shares, and a performance-based earn out.

But it wasn't to be. There weren't enough buyers for ARISE's offering -- led by Research Capital -- and the placement was cancelled. Without the funds from the placement, ARISE and Dankoff terminated their agreement, although ARISE says it still hopes to raise funds and has what it calls "an informal 90 day right of first refusal to match any offer to acquire Dankoff."

It's not surprising that the offering didn't attract more buyers. Potential investors were being asked to buy about half of ARISE without ever seeing Dankoff's financial statements -- and Dankoff would have been the source of more than 85% of the combined company's revenue (and all of its profits). On top of that, the most recent financial statements available from ARISE are now more than half-a-year old (the company was supposed to release its full 2003 numbers in March, so they should be out soon). While there seem to be plenty of "leap before you look" investors, it's hard to close a deal of that size -- relative to the value of the company -- with such little information available.

When we last saw a balance sheet from ARISE, which was back on September 30, the company only had $96,000 in cash. It has completed two quarters of operations since then, and with the failure of its private placement, cash is probably getting pretty tight. In November, the company said it would likely have to make "significant operational adjustments" if no money was raised.

Descartes ends year with earnings miss
March 10, 2004

For the quarter ended January 31 (Q4 04), Descartes reported a loss of US$4.2 million (US$0.10/share) on revenue of US$16.3 million. Sales were within the US$16-17 range the company had forecast, but the bottom line was light by about a million dollars.

Sales were up slightly from the previous quarter, and down 10% from a year ago. A big drop in license margins -- from 96% in Q3 to 70% in Q4 -- led to a 4% sequential decline in gross profits. Descartes said the lower margins were the result of its new focus on selling through resellers, particularly to small and medium-sized businesses, while its direct sales force concentrates on larger enterprise deals. Expenses were in line with Q3.

Operations, including restructuring expenses, consumed US$2.6 million in cash and an additional US$1.9 million was spent on capital assets. Descartes ended the quarter with US$65.1 million in cash, down US$4.4 million from the end of Q3.

For the 2004 fiscal year, Descartes lost US$32.2 million on sales of US$61.7 million. Revenue was down 12% from 2003 -- and fell about US$14 million below the company's forecast of 7-10% growth at the beginning of the year. Descartes has missed badly on its start-of-year revenue forecasts for the last three years.

Looking to fiscal 2005, the company is expecting 10-15% revenue growth, which would almost take it back to where it was in 2003. For Q1, it is looking for revenue of US$15.5-16.5 million and a net loss in the US$4.5-5.3 million range.

In 2004, Descartes lowered its R&D expenses by US$6 million from 2003, and it's now looking to cut similar amounts in 2005 from both its sales & marketing and its general & administrative expenses.

Accumulated deficit is now US$349.1 million. Descartes' last profitable quarter was in 1996 when it was privately held.

Descartes also announced that CFO Colley Clarke has left the company. He joined Descartes four years ago. His replacement is Brandon Nussey, who has been with the company for nearly four years and was previously with Inscriber in Waterloo. Before being appointed CFO, Nussey was senior VP of regional operations.

With Clarke gone, the only executive officer from fiscal 2002 who is still with the company is corporate strategy EVP Art Mesher (which is ironic -- in its quarterly results news release, Descartes happily quoted an analyst who recently wrote that "Descartes has finally established a strategic direction."). Mesher has been in charge of strategy at Descartes since 1998.

In Descartes' latest strategy, license fees and "hybrid" license/subscription pricing models are back in (all new customers are required to pay a license fee and all existing customers will be "migrated" to the new system) and the company is focused on .NET-based "enterprise suites" targetted at four broad industries -- transportation, retail, consumer packaged goods, and manufacturing (including high tech). It turns out that Descartes is a software company after all. For the last five years, it had been de-emphasizing license fees and focusing on network-based transaction revenue.

Joining Descartes' board of directors is Ian Giffen, who has also been a director of MKS (1996-99; 2001 to present) and Open Text (1997), as well as several other Canadian tech companies. He has worked with Helix Investments and XDL Capital and before that was CFO of Alias Research.

CME tries to raise funds ... again
March 19, 2004

CME Telemetrix has once again hired Vancouver's Wolverton Securities to try to raise some desperately-needed funds.

Last fall, CME and Wolverton unsuccessfully tried to close a private placement of up to 8.3 million units, priced at 30 cents each. They've now cut that price in half and are hoping to sell between 6.7 and 10 million units at 15 cents a piece for gross proceeds of $1-1.5 million. Each unit consists of a common share and a warrant to purchase an additional share for 25 cents over the next year or 45 cents in the following year.

CME also wants to sell an additional 6.7 million units through a non-brokered private placement under the same terms. That would raise another $1 million.

If both placements are fully subscribed -- which is unlikely -- and all warrants taken up, that would add 35.7 million new shares to the 8.8 million shares of CME currently outstanding.

CME says it will use the funds, if it can raise any, on its HemoNIR hemoglobin measurement technology. CEM unveiled that technology almost two years ago and has really pushed it to the forefront ever since as a potential near-term revenue generator, while its glucose monitor has taken a back seat. HemoNIR would still need regulatory approval before it can be commercialized.

In February, CME announced that it will be laying off nearly all its staff (see last month's digest).

Onlinetel achieves absurd market value after merger
March 19, 2004

Onlinetel completed its merger with a public shell (see November digest) and is now essentially a public company as the only operating subsidiary of Newlook Industries. Newlook was a majority-owned subsidiary of Toronto's Eiger Technology, which previously owned all of Onlinetel.

The new Onlinetel-Newlook immediately became what is probably the most overvalued company I've ever followed here. As of Friday's close, the company's market capitalization is $85 million -- more than Virtek, RDM, Navtech, and ARISE combined. Onlinetel had $5 million in sales in fiscal 2003, with most of that money going in the front door and straight out the back. Gross profits were under $900,000 and the company had an operational loss of $246,000 for the year.

Newlook is now trading at about 100 times Onlinetel's 2003 gross profits. A factor of 10x is generally a high number -- that's where Com Dev shares are right now. Only RIM and ARISE are trading above that level. Navtech, Virtek, and MKS currently trade below two times their run-rate gross profits. It'll be interesting to see who's caught holding the bag when this lunacy ends.

Eiger, which owns 92% of Newlook, is currently valued at about $32 million, so the hare-brained value being given to Newlook hasn't been reflected in the price of Eiger's stock, which actually fell 9% in March.

Eiger received 20 million Newlook shares for Onlinetel, and also holds a note-payable from Onlinetel for about $1.8 million.

Newlook raised $1 million in March through a private placement at $1 a share (Newlook stock closed Friday at $3.15), and because of its high stock price, it now has the option to require the investors who bought those shares to redeem 1 million warrants at a price of $1.25 a share. That would give the company an additional $1.25 million.

(The only other contender here for the all-time "most overvalued" title is Internet bubble artifact Compelis/Treasury International, which very briefly -- as in intra-day trading on one day in March 2000 -- was valued at over $200 million. Its share price fell 98% from that point through the rest of the year. Compelis, which created online and print catalogs, is now long-gone and Treasury, the public entity, has moved on to other things.)

STOCK REPORT: RIM has a losing month, then sets 3-year high
March 2004

After 12 straight months of gains, RIM shares finally finished a month with a loss. But the stock has already bounced back in the first two trading days of April. On Friday it reached its highest levels since December 2000 after RIM announced that its BlackBerry service would be offered on Siemens phones. Siemens plans to introduce a BlackBerry-enabled phone later this year. As of Friday's close, RIM's market value was $12.5 billion.

For the month of March:

CME Telemetrix [TSXV: CEM] +100%
Navtech [OTCBB: NAVH] +32%
Virtek [TSX: VRK] +5%
MKS [TSX: MKX] +4%
RDM [TSX: RC] +4%
ARISE [TSXV: APV] +3%
===============================
Dalsa [TSX: DSA] -1%
--S&P TSX VENTURE INDEX -1%
Open Text [TSX: OTC] -2%
--S&P TSX COMPOSITE INDEX -2%
RIM [TSX: RIM] -7%
Turbosonic [OTCBB: TSTA] -7%
Com Dev [TSX: CDV] -8%
ClearFrame [TSXV: CLF] -21%
Descartes [TSX: DSG] -24%

Descartes shares were hit hard when its quarterly results and forecasts failed to impress investors.

CME went from 15 cents to 30, which takes it back to the levels it had been trading at before its layoff announcement in February.

Over the fist quarter of 2004, Navtech stock is up 132% while Virtek shares have gained 76%. The two biggest decliners have been MKS and Descartes.

Companies with headquarters outside the area:

Blue Coat [Nasdaq: BCSI] +31%
Bio-Rad [Amex: BIO] +8%
Adobe [Nasdaq: ADBE] +6%
Network Assoc [NYSE: NET] +3%
CheckFree [Nasdaq: CKFR] +1%
Senesco [Amex: SNT] 0%
==================================
Ansys [Nasdaq: ANSS] -1%
SBS Technologies [Nasdaq: SBSE] -1%
Sybase [NYSE: SY] -2%
LSI Logic [NYSE: LSI] -8%
Eiger Technology [TSX: AXA] -9%
Siebel [Nasdaq: SEBL] -11%
CVF Technologies [Amex: CNV] -14%
Agfa-Gevaert [Brussels: AGFA] -14%

BlueCoat shares are up 162% this year -- and that's on top of their 468% jump in 2003.

Miscellaneous Tidbits

• Handshake Interactive's new CEO is Dieter Hensler, who was president of Waterloo Maple from 1994-98. He actually joined Handshake a few months ago, but his appointment was just announced on the Handshake website. Steve Currie, formerly with NDI and KPMG and some other local organizations, became Handshake's marketing VP earlier this year. Handshake's former CEO, David Wang, stepped down to focus on his work as a UW professor. Wang is still Handshake's largest shareholder and sits on the company's board. PixStream co-founder Stephen Bacso is no longer listed on the company's board of directors webpage, although he is mentioned elsewhere on the company's site. Handshake is hoping to close a $2 million round of funding later this year.

• At the end of February, Pattern Discovery Software Systems announced that Paul Sheremeto is its new CEO. He succeeds Wade DesRoches, who is still listed as a director of the company on its website. From 1999 to 2002, Sheremeto was a sales VP with Toronto's Sitraka Software (a company founded by two UW grads), which was acquired in 2002 by Quest Software. At the same time Pattern Discovery made this announcement, Mississauga's Kasten Chase announced that it had re-hired Dave de la Plante -- DesRoches's predecessor as Pattern Discovery CEO -- to head its new assurancy business services unit.

• In the quarter ended January 31 (Q1 04), Navtech earned US$46,000 (US$0.01/share) on sales of US$1.85 million. Sales were about where they've been the previous two quarters -- top and bottom lines were almost identical to Q3 -- and up 16% from last year. R&D spending was up to 11% of revenue, which is a significant jump from previous quarters. Operations generated US$80,000 in cash.

• In 2003, Biorem earned US$1.3 million on sales of US$6.2 million. Sales more than doubled from 2002. The company says its current backlog and commitments for 2004 are over US$9 million. Biorem is being sued by an unnamed shareholder over a restructuring of convertible debt instruments held by CVF, its majority shareholder.

• According to CVF financial statements, SRE Controls lost US$1.0 million on sales of US$1.5 million in 2003. The company recently received a CDN$500,000 investment from an undisclosed source. SRE is projecting a 93% increase in sales this year.

• ClearFrame Solutions, the former Knexa, reported a loss of $215,000 on sales of $139,000 in the quarter ended December 31. The company had just $917 in cash and a working capital deficiency of $936,000. When Knexa acquired the Waterloo-based SuiteResponse business in July 2002, it said the unit was generating revenue of $1.5 million a year, but it's never come close to that level of sales in the last two years. In March, ClearFrame sold its old Knexa business (and the Knexa name) back to its original owners and managers for $335,000. The company is hoping to raise $312,500 through a private placement of 6.25 million shares at 5 cents each. Management says it expects the company will continue to lose money at current revenue levels.

• Global Beverage Group, which now just calls itself GBG, is acquiring the assets of Dallas-based Extended Technologies Corp. (Xtek) and transforming it into Global Food Group (GFG), a GBG subsidiary. Xtek CEO Bill Hampton becomes the president of GFG and all Xtek employees will be offered similar jobs with GFG. Xtek acquired GBG's perishable products software line and customer contracts in February 2001 and GBG founder and majority owner Mark Lee is an Xtek shareholder.

• Dalsa is closing its facility in Tucson, Arizona, acquired in 1999 with the purchase of MedOptics Corp. Some employees will be offered jobs at Dalsa's site in Colorado Springs. It expects to record charges of about $850,000 to cover severance, relocation, and facility closure costs, but Dalsa says the move will save the company about $4 million over the next three years. Hugh Garvey, who been GM in Tucson, has been appointed business development VP for Dalsa's image sensor products. Jim Roberts, previously GM of Dalsa's "vision for machines" unit, has been promoted to EVP and will oversee all imaging operations in Waterloo and Colorado Springs.

• Com Dev CEO John Keating received a $147,000 bonus for fiscal 2003, a year in which the company's stock rose 172%. The company says that's 72% of the maximum bonus he could have received. An initial SEDI insider trading report for Keating was filed in March -- among the companies followed here, he was the last CEO to be listed on SEDI. Only one of Com Dev's seven directors has filed a SEDI report. The circular for Com Dev's AGM, which will be held later this month, shows that chairman Val O'Donovan acquired an additional 547,000 shares over the last year and holds a 12.3% stake in the company. New to Com Dev's board this year will be UW physics lecturer Chris O'Donovan. The company says it expects to complete "a documented code of business conduct" by the end of the month.

• Ignis Innovation issued its first-ever news release, announcing the introduction of "the most stable amorphous silicon multi-thin film transistor (TFT) pixel circuit created to date for use in active matrix organic light emitting diode (AMOLED) display technology." Sounds like a first news release. On its new website, Ignis lists a 4-person management team, but three of them actually work for Montreal-based venture consulting firm Versentech. Founder and UW prof Arokia Nathan is listed as CTO.

• Dspfactory and Brock Solutions received top prizes at the regional Ontario Global Traders Awards, presented by Ontario's export development agency.

• RIM settled its patent infringement claims against California's Good Technology. RIM says it will receive a lump-sum settlement in the current quarter and ongoing quarterly royalties. March marked RIM's 20th anniversary.

• Sandvine has opened sales offices in France and Germany and hired new sales managers for those sites as well as for its UK office.