Just got this Stockwatch Streetwire in my email. It features Lentils (RIP), McDo, and Totally Hip....
Date:Sun, 13 Dec 1998 01:21:28 -0800
From:list@canada-stockwatch.comAdd to Address Book
Subject: Stockwatch: Street Wire: Totally Hip Software
To: pure_thing@yahoo.com (RIP)
Totally Hip Software Inc
Taking the corporate battle to the chat sites
Totally Hip Software Inc
THW
Shares issued 14,109,857 Dec 4 close
$0.80
Fri 4 Dec 98
CEO GOES ON LINE TO COUNTER 'BULL' ABOUT COMPANY
One of the better known - and in some quarters, one of the least
liked -posters on Internet financial discussion forums is a persistently skeptical participant called "lentils."
If lentils's purpose is to gain a reaction from the companies in
question, then he or she has found great success with his statements about Vancouver-based Totally Hip Software. Totally Hip's response was scathing. Chief executive officer Randall McCallum calls lentils a "malicious and self-righteous individual who shows no regard for what is right and wrong." Mr. McCallum has not taken the ultimate step of going to court. He has,however, contacted both StockHouse and Stockwatch to complain that lentils is upsetting a number of shareholders. These shareholders apparently call
Mr. McCallum frequently to complain about lentils's attacks.
While at StockHouse's office, which is located in the same office building as Totally Hip's, Mr. McCallum was told by an employee that StockHouse doesnot give out poster identities unless compelled by authorities.
Clearly, senior management at Totally Hip has spent a lot of time
agonizing about lentils and another on-line critic, Susan Varga, whom Mr.McCallum suspects is lentils using other handle.
Mr. McCallum complains that lentils has called a former officer of
the company a child molester, that he or she has referred to Totally Hip as the latest Canadian" scam," that the company pays for complimentary editorial coverage, that Totally Hip was named in the StockDetective's "stinky stock" site, and that the company is involved in such dubious practices as paying for newsletter buy recommendations without disclosing the nature of the relationship.
LIBEL UNCLEAR
In spite of Mr. McCallum's contention that lentils's posting history
would reveal him as someone who lies, misinforms and libels, it is unclear what it is about the postings of lentils and Ms. Varga that has Totally Hip's management in such a frazzle. For instance, Mr. McCallum did not produce evidence that a former officer was referred to as a child molester, nor was any reference cited indicating he or she said the company was a scam.
A read of these discussion sites indicates Totally Hip should probably be more concerned about flagrant touting and hyping. Mr. McCallum says he does not like the unsubstantiated hype, either, but it is clear that he and his company are far more concerned with negative comments.
On Oct. 5, lentils posted on StockHouse that two newsletters that
covered Totally Hip in a favourable fashion formed part of a list in theStockDetective website as letters that accept compensation for coverage.These are Data News Group and the "McDo" letter by Mitch McDougherty of something called Mitch McDougherty and Associates Stock Investments. During the summer Data News gave the stock, then trading in the 80-cent range, a six-month target price of $15.
While it is true that neither McDo nor Data News appears in
the StockDetective site of newsletters to be wary of, there is no evidence that lentils said Totally Hip had been named to the "stinky stock" list.
Mr. McCallum denies the company has ever paid any group for
favourable
coverage, but concedes he has met with representatives of Data
News. "A
bunch of people came in here," he says. "They don't really tell you
who
they are and they want to do some due diligence on the company and
then
about a week later what happens, you go out there and all of a sudden
(the
coverage is posted on the Internet), so people ask us to respond to
these
things."
Data News does not have a website, nor does it appear to give out
its
physical address or phone number, but a posting of its e-mail
address
indicates it is or was in British Columbia (datanews@intergate.bc.ca).
In
spite of an outright denial by Totally Hip of payment for
recommendation,
the mystery surrounding the organization provided Ms. Varga with fodder
for
suggesting there may indeed be a mutually beneficial arrangement
between
Totally Hip and Data News. "Randy, maybe when you are able to post
you
could comment on why you think this Data News Group, who sends out a
free
newsletter and has no relationship with Totally Hip, is making such
efforts
to promote the company? I don't think I've ever seen such a thing
before,"
she commented on Aug. 10. "It is obvious to anyone who has received
these
letters that all other picks . . . were pump-and-dump plays."
Totally Hip was also given a gushing recommendation by Internet
tout-sheet
author Danny Deadlock. After interviewing president Brian Leeners,
Mr.
Deadlock writes that the company spends far too much of its time with
the
business of software and not enough time promoting its shares. "I
honestly
believe these guys will not only do well in the Internet market but
the
odds of a buyout in the future is quite high," he advises in a
"private
communication" on the Internet, mentioning Corel Corp. several times.
APOLOGY DEMANDED
In a lengthy and rambling post the next day, Mr. McCallum distanced
his
company from Data News, and insisted Ms. Varga owed him an apology
for
misquoting him. "Perhaps she would like to directly challenge me about
my
integrity and character?" he posted. "I am one tough SOB and I don't
take
bullshit comments lightly from anybody, period. No, I don't endorse
any
news group."
Earlier this month Mr. McCallum was enraged by a suggestion from
lentils
that favourable coverage on a Nova Scotia-based Macintosh information
site
called MacCentral was an editorial-for-advertising arrangement. "How
much
does Totally Hip 'pay' to be featured on MacCentral?" asked lentils
in a
posting on BOBz on Oct. 31, pointing out that the company was listed
as a
MacCentral advertising sponsor in the site.
Both Mr. McCallum and officials at MacCentral vehemently deny
such a
practice takes place. Mr. McCallum says he is a strong supporter of
the
service provided by MacCentral and that Totally Hip simply
advertises,
modestly, on the site.
Mr. McCallum was also upset about a Silicon Investor post by Ms. Varga
in
mid-August that included the company's 1998 first-quarter financial
results
which ended Dec. 31, 1997. The CEO said he was angered because when
the
financials were lifted from the official SEDAR site, the formatting
was
lost and that the numbers wrongly arranged in the resulting post.
Mr.
McCallum conceded he had no reason to believe the numbers were
tampered
with, however.
"This stuff was a mess," Mr. McCallum says of the resulting post.
"Her
objective was to start a fight."
The offending post has been removed, according to Mr. McCallum at
the
request of Ms. Varga who knew it was incorrect. In the post Ms. Varga
was
apparently making the point that Totally Hip's stated net income
of
$1.77-million was more realistically a loss of $122,461 that was
mitigated
by the company's other income - a gain on sale of software of
$1.9-million
- stemming from a $10-million tax-driven software sales agreement
with
Columbia Diversified Software Fund Ltd. That deal was announced on Nov.
25,
1997.
FORWARD SALES
The financing is a means of freeing up equity held in Totally
Hip's
software products by forward selling 80 per cent of the revenue from
four
of its products - WebPainter SE, WebPainter 2.0, CastPainter 1.0, and
Hip
Clips - and is divided into two distinct parts. The first
part is
Columbia's $3-million payment to Totally Hip, less $1.1-million
in
financing costs (what the notes to its 1997 annual report refer
to as
"issue costs and financing fees"), for a total gain of
$1.9-million.
Totally Hip was to receive this $1.9-million in staged payments
beginning
in December 1997, when $300,000 was paid, and ending in September 1998.
The
$300,000 was applied to general operating costs; Totally Hip says the
full
$1.9-million now has been paid by Columbia.
Part 2 of the Columbia deal involves a $7-million promissory note at
four
per cent. According to the 1997 annual report, this was to be
paid by
Columbia from "approximately 45 per cent of Columbia's software
revenue,
after interest, fees and expenses."
The overall tax-structured agreement calls for Totally Hip to retain
the
worldwide rights to develop, market, distribute and resell the
products in
question for 50 years and the company will receive a fee equal to 20
per
cent of the revenues derived from the sale of the products. After
full
payment of the acquisition price, Totally Hip will be entitled to a
fee
equal to 90 per cent of the revenue derived from the sale of the
products.
A Vancouver accountant with no ties to either Totally Hip or Columbia
says
a number of questions arise about the $7-million portion of the
deal.
Primary among these is the stipulation that the amount be paid to
Totally
Hip from just under half of Columbia's software revenue.
Officials at Totally Hip say the revenue stream is from Totally
Hip's
products now owned by Columbia and is currently being paid from sales.
The accountant says if this is the case then repayment could be a
slow
process if past performance is any indication. Totally Hip's annual
revenue
for 1997 was $269,870; subsequent, cumulative quarterly revenues (on
sales
only) were as follows: for the quarter ended Dec. 31, 1997, $127,023;
for
the quarter ended March 31, 1998, $202,870; for the quarter ended June
30,
1998, $259,305. These figures cover all members of Totally Hip's
family of
software products, including the streaming technology Sizzler.
Mr. McCallum estimates the life of a software product such as
WebPainter at
around six or seven years.
Stipulations on this deal such as time limits or other provisos and
caveats
will be outlined in the private contract between Totally Hip and
Columbia.
These will provide a much better idea about the degree to which Totally
Hip
expects to collect the $7-million, which is entered for accounting
purposes
as a receivable that boosts the company's total assets to over
$8-million.
Should Totally Hip not collect all or much of the $7-million, that
would
leave Totally Hip with only $1.9-million from its software deal, for
which
it would have paid $1.1-million.
Mr. McCallum says should revenues dry up for the Totally Hip products
in
question, the note would not be paid off, and that would be the end
of it
for all practical purposes. He says, however, that in Revenue
Canada's
eyes, if only 35 per cent of the payments were made then Columbia
would
take titular ownership of only 35 per cent of the software. The fact
that
Totally Hip has an exclusive 50-year licencing deal on the software
means
that in reality Totally Hip will always have real ownership, Mr.
McCallum
argues.
"What did Totally Hip gain for its shareholders?," Mr. McCallum
asks
rhetorically. "How much equity would we have had to give up to
do a
$2-million financing at 60 cents? Quite a bit. This way, we give up
zero
equity and we move the company forward."
A footnote to the Columbia deal is that as a reporting issuer in
Alberta,
Totally Hip may have been required to seek shareholder approval
before
proceeding with the transaction. According to Section 183(1), "A
sale,
lease or exchange of all or substantially all the property of a
corporation
other than in the ordinary course of business of the corporation
requires
the approval of the shareholders . . . "
EARLY SUCCESS
Mr. McCallum's first public company was the interactive CD-ROM
developer
Motion Works Corp., which was listed on Oct. 23, 1991. It reached its
peak
at $6.50 on June 7, 1993, but by 1994 it was in financial trouble and
by
February this year had undergone a 1:10 rollback. It now trades
at a
nickel.
Along the way, Mr. McCallum suffered the ignominy of being fired from
the
company he cofounded. After lawsuits and counter-lawsuits were filed
and
dropped, Mr. McCallum lost control to controversial U.S.-based
financier
John Hickman, who was appointed director and non-executive chairman of
the
board on Aug. 22, 1994.
Mr. Hickman resigned in April 1996 after some troubling legal issues in
the
U.S. became public. The Hickman story came to a tragic end when he
was
found dead in his wife's Rolls-Royce at his Vancouver home in an
apparent
suicide in February 1997.
After his resignation from the Motion Works board in late 1994,
Mr.
McCallum then set about establishing Totally Hip, which opened for
trading
a year later, on Dec. 5, 1995.
Its first and much-hyped flagship product in its first year was
Sizzler, a
multimedia streaming technology that helps users create and
embed
animations with sound on web pages. That was replaced in March 1996
by
WebPainter, a web animation and graphics system. This shift was
made
necessary because much bigger software companies were beginning to
dominate
the same niche that Sizzler occupied. Sizzler is still available, but
is no
longer promoted.
NO HYPE HERE
Mr. McCallum is on record as saying he does not condone the hype
that
infects so many discussion sites. His anti-hype stance, however,
sits
uneasily with on-line statements that indicate he believes the
company's
stock may be worth more than $15. Mr. McCallum has been here before.
In an
April 1996 article in Vancouver-based Equity magazine, now defunct, he
told
reporter David Thomas that several takeover feelers had been
extended to
the young company, and that at least one of the big U.S. Internet
service
providers has indicated it may want a piece of Totally Hip. In the
next
sentence, Mr. McCallum says he took the company public on the Alberta
Stock
Exchange to avoid the hype of Howe Street.
Mr. McCallum's on-line tussle with Ms. Varga brought out some
unusual
comments for a chief executive, illustrating the danger of
taking a
company's fight to Internet chat sites. "What is Susan's agenda,
anyways?"
the CEO asked in his Aug. 11 posting. "Doesn't sound like that
of an
investor to me. Sounds like something my ex-wife would say. Doubt!
Doubt!
Doubt! Do you hear me laughing, Susan?"
While Mr. McCallum and others at Totally Hip may view lentils and
his
alleged alter ego Ms. Varga as libellers and troublemakers, others
view
them as friends of small shareholders by puncturing the
overblown
statements of those who would hype a stock.
A look at lentils's posting history in fact indicates someone who
spends
time raising legitimate but unsettling questions about sources of hype
and
what companies may or may not be telling their shareholders.
lentils's comments about the McDo recommendation is one such example.
On
July 12, he posted: "If I can jump in here on the topic of the
McDo
investment 'club,' it is anything but a club, just a slightly
different
twist on an Internet tout sheet," lentils charged, concluding with
the
suggestion that investors short stocks recommended by McDo.
On July 1, Mr. McDougherty found much to hype a week ahead of the
scheduled
release of WebPainter 3. "All media streams from television to MacWeek
and
MacCentral to a full line of computer magazines and analysis will be
coming
out with very positive reviews within the next week to 10 days," the
McDo
e-mail said. "I have already had the benefit of looking over a few and
let
me say the preliminary write-ups are very positive and encouraging. I
will
be buying in the morning, as I do not see any downside from these
levels."
lentils's advice to short McDo recommendations would not have resulted
in a
gain, however. There was no trading on July 1, but on July 2 the
stock
closed at 70 cents, up 15 cents from the June 30 close of 55 cents.
(The
investor who provided this McDo e-mail message says he received this
and
dozens more similar Totally Hip toutings, both from McDo and later
from
Data News, after he registered with StockHouse.)
For his efforts, lentils was for the most part blasted by other
posters,
including Gypsy, who said: "lentils, why don't you take your garbage
back
to StockHouse? What has this got to do with Totally Hip?"
KNOWLEDGEABLE LENTILS
Because of this apparent knowledge of the markets, Mr. McCallum says
many
on the forums believe lentils is a journalist stirring things up
instead of
writing factual stories. A number of posters have suggested that
lentils is
Stockwatch reporter Brent Mudry, who wrote about an embarrassing
lawsuit
involving Totally Hip and former president Rajiv Aggarwal in July
1998.
Other names have been raised, such as freelance Howe Street
investigator
Adrian du Plessis, and Vancouver Sun columnist and reporter David
Baines.
"There was another guy, I forget his name," Mr. McCallum recalls,
trying to
remember the name of the journalist raised in the discussions.
"David
Baines, or some guy named Baines."
Mr. McCallum, however, also believes lentils may be a
disgruntled
shareholder from a company that Mr. McCallum helped found - Motion
Works
Group Ltd., which was listed in October 1991 - and whose share price
has
declined dramatically in recent years. "Personally, I think it was
somebody
who bought Motion Works stock at $5 . . . and now he's after my ass."
Totally Hip's experience with these forums illustrates how companies
may
make matters worse for themselves when they attempt to counter hype of
both
the up and down varieties by addressing their concerns directly.
The
controversy provides valuable lessons highlighted in a Toronto
Stock
Exchange policy paper released in August 1998 called "Proposed
electronic
communications disclosure guidelines", in which suggestions were made
about
how to deal with Internet rumours and misinformation.
The TSE's major point is that officers of companies should not engage
in
discussion on the Internet. Instead, it counsels, companies should
issue
press releases to counter rumours or misinformation. The policy paper
was
issued shortly after Mr. McCallum went on-line. "A company is not
expected
to monitor chat rooms or news groups for rumours about itself," the
paper
states. "Nevertheless, the TSE recommends that the company's
standard
policy for addressing rumours apply to those on the Internet."
Mr. McCallum now acknowledges it was probably a mistake to engage
critics
on the Internet, but he insists he does not regret going on-line.
The CEO further states, curiously, that the reason he never issued a
press
release about what was taking place on the forums was because he did
not
want to cause a majority of shareholders any undue concern.
"It's
percentages, okay?" he says. "You've basically got 12 people that
post on
there and when you take a thousand shareholders in the company that
don't
go onto BOBz or Silicon Investor, why would I cause undue
concern to
basically 985 investors for the purpose of telling 12 investors
that
(somebody is) posting and spreading misinformation."
Totally Hip's CEO acknowledges that whatever took place on the Internet
had
little or no effect on the company's share price, which has been
trending
up from the 30-cent range of January to its current position in the
80-cent
range.
Still, Mr. McCallum, who grew up in the mining town of Trail,
British
Columbia, is cautious about what effect a news story could have on
Totally
Hip. "If you want to skew a story, remember one thing, okay?" the CEO
tells
a reporter. "Jack Hickman thought he was dealing with a country hick,
okay?
Where's Jack Hickman today?"
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