March 2000

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 37 -- April 4, 2000
In this digest:

1. STOCK REPORT: Turbulent month sends tech stocks reeling
2. Descartes moves toward becoming e-com pure play
3. Descartes forecasts doubling of software revenues this year
4. MKS reports accelerating product sales; CFO resigns
5. MKS warrant sale to raise $11.3 million

6. GUARD announces Nanodesign's first revenues
7. Com Dev growth still being carried by wireless group
8. Virtek targets 50% revenue growth in current year
9. Open Text claims arbitration win over NetSys; makes ASP deal
10. Open Text and RIM team up to make Livelink mobile

11. RIM one of Canada's best-run corporations -- CEO poll
12. RecycleNet CEO resigns as OSC launches second proceeding
13. Nexsys receives $4-5 million investment
14. Miscellaneous Tidbits: Cyberplex, RDM, Finline, BlueGill, Compelis, Able-One, AXIA

It was pretty remarkable to see coverage of GUARD in the Citizen. The company quickly registered the domains magnostech.com and elitedisplays.com as soon as the last digest came out. I mentioned -- and it was quoted in the Citizen -- that it hadn't yet snapped up the domains.

--Gary Will

STOCK REPORT: Turbulent month sends tech stocks reeling
March 2000

It was a rough month for tech stocks, and the global trends were reflected locally, with five companies losing at least a quarter of their market value. But despite the weak month, each of those companies has posted a huge gain over the first quarter of 2000:

Company, March change, (year-to-date change)

Open Text -37% (+64%)
Finline -32% (+833%)
COM DEV -31% (+85%)
Virtek -28% (+110%)
RIM -25% (+128%)
Descartes -17% (+106%)
MKS -5% (+41%)
Gensel Biotech +1% (+164%)
DALSA +13% (-7%)
RDM +26% (+180%)
CME Telemetrix +27% (+216%)
GUARD +46% (-3%)

There were some significant run-ups in stock value over the first third of the month, the most notable of which belonged to Descartes.

In the Ottawa Citizen column about the digest, I speculated that by month-end Descartes might have the highest market cap of any software company in Canada. It did happen, but only briefly. On March 10, Descartes overtook Cognos to become the country's most valuable software company, according to figures on globeinvestor.com. Its share price peaked at $134.95, giving the company a momentary market cap of about $5 billion.

By the end of the month, Descartes shares had fallen to $65.40, and Cognos had again taken back top spot on the software market cap list.

Descartes moves toward becoming e-com pure play
March 7, 2000

Descartes announced this month that it will spin out what remains of its former core business in the enterprise, direct store delivery (DSD) market into a new company called DSD Solutions Inc.

Descartes co-founder Mark Lee will step down as chairman of Descartes to start up the new company. He will own 80% of DSD Solutions and invest up to $20 million in the company. Descartes will own the remaining 20% with an option to acquire an additional 20%. Up to 157 of Descartes' employees will join DSD Solutions. DSD Solutions will pay Descartes about US$7 million to acquire assets related to DSD operations and will also pay a royalty on the software licenses it sells.

The CEO of DSD Solutions will be Ed Diamond, formerly a Descartes reference customer as director of information services at Pepsi bottler Delta Beverage Group (now part of PepsiAmericas Inc.). DSD Solutions will launch a DSD industry portal at DSDPortal.com, which will be built on Descartes' e-Frame infrastructure.

The domain dsdsolutions.com was registered just a day before the announcement of the new company was made. The DSDPortal.com domain was registered on February 19 to Mark Lee.

Descartes CEO Peter Schwartz said the move will be immediately add to Descartes' quarterly bottom line by about US$0.01-0.02/share (about US$400,000 to $700,000). The business that is being spun out accounted for about 20% of Descartes revenue in the most recent quarter, about US$2.4 million, and contributed approximately US$5 million in software license sales and nearly US$11 million in services revenues in FY 00.

The transaction is expected to close in the second quarter of the current fiscal year (between May and July). With the spin-off, Descartes will essentially become a pure business-to-business e-commerce vendor.

Descartes forecasts doubling of software revenues this year
March 7, 2000

For the quarter ended January 31 (Q4 00), Descartes reports revenue of US$12.2 million and a net loss of US$3.5 million (US$0.09/share). Total revenues were up 16% sequentially, with software revenues jumping 37% from the previous quarter.

Year-over-year, revenues declined by 17%, but that comparison can be misleading since Descartes transformed itself over that time into an e-business company. In Q4, e-commerce revenue accounted for 80% of total sales.

The bottom line for the quarter was hit by the payment of a US$1 million refund to a customer of Descartes' traditional enterprise software. The expense was recorded in the G&A expenses line, but excluding that charge, expenses remained in line with the previous quarter.

For fiscal year 2000, Descartes reported a net loss of US$21.8 million (US$0.59/share) on revenue of US$43.7 million.

The company's share offering near the end of the quarter created a healthy balance sheet with US$57.0 in cash and short-term investments and working capital of US$65.8 million.

Descartes is forecasting that its software licensing and transaction & subscription revenues will more than double in the current fiscal year from the US$18.8 million achieved in FY 00, even with the spin out of the DSD business and the US$5 million in software revenue it contributed last year.

Once you subtract the DSD sales, Descartes is actually forecasting almost a tripling of its software revenues this year. By the end of the year, Schwartz forecast that about half of software-related revenues would come from licenses and the other half from transactions and subscriptions.

Further details of the E-Transport acquisition announced last month. E-Transport shareholders received 2.367 million shares of Descartes which had a value of about US$125 million when the deal closed on February 29. The initial news release had put the value of the acquisition at US$80 million. E-Transport's revenues last year (reported in last month's digest) were roughly equal to the US$16 million that Descartes is spinning out to DSD Solutions.

MKS reports accelerating product sales; CFO resigns
March 6 & 29, 2000

For the quarter ended January 31 (Q3 00), MKS reports record revenue of US$10.8 million and a net income, excluding acquisition-related charges, of US$933,000 (US$0.06/share). Revenues were up 16% from the previous quarter and 12% from the same period last year. Product revenues showed strong growth of 19% sequentially.

The company says that over half of its revenues now come from e-business management implementations. New customers announced in March include Advertising.com (formerly TechnoSurf), World2market.com, and Breakaway Solutions. CEO Randall Howard said that sales pipelines are "stronger than they have ever been."

Sales and marketing expenses climbed 11% from the previous quarter to US$5.2 million, and CFO Eric Palmer said we can expect to see these expenses remain high over the next year as the company competes in "a market-share grab."

Over the first three quarters of the fiscal year, MKS revenues have climbed only 7% from last year, but the current quarter is expected to be a significant improvement over a disastrous Q4 last year. Revenue growth for the year could still hit the 20% level.

Average order size is approximately US$20,000, with some initial orders in the US$100,000 to $150,000 range.

MKS had US$9.0 million in cash at the end of the quarter, but that amount will be bumped up by a warrant sale announced this month (see below).

Near the end of the month, MKS announced that Palmer would be leaving the company in April to accept a position as CFO with an unnamed private high-tech firm. MKS will split its finance responsibilities into internal and external roles, with Stephanie Ratza becoming VP finance and overseeing internal financial operations. Ratza joined MKS last year from Open Text, where she was controller. A search is underway to fill the external finance position, with Howard saying that the company is looking for someone with Wall Street and Nasdaq experience.

MKS warrant sale to raise $11.3 million
March 17, 2000

MKS has agreed to sell one million special warrants at a price of $11.30 through an underwriting syndicate led by CIBC World Markets. Each warrant is exchangeable for a common share.

An additional 1.5 million shares are also available through the offering, consisting of one million shares currently owned by "individuals or corporations who became shareholders as a result of acquisitions MKS has made" and 500,000 shares owned by an unidentified "founder."

When the offering was announced, MKS shares last traded at $12.50 -- about 11% above the offer price -- and had closed above $11.30 for 11 consecutive trading days. The shares ended the month at $8.75, or 23% below the offer price.

The offering should add about US$7 million to MKS's cash position.

[This offering was cancelled on April 4. Details next month.]

GUARD announces Nanodesign's first revenues
March 7, 2000

Nanodesign, a majority-owned subsidiary of GUARD, has signed a five-month research contract with an unnamed "North American drug discovery company." The contract will generate Nanodesign's first revenues, which have been expected for well over a year. The value of the contract was not announced.

Nanodesign will use its technology to attempt to create new chemical entities based on data supplied by the customer.

GUARD also announced this month that another of its subsidiaries, Magnos Technologies, received an investment of $585,000 in return for a 25.7% equity stake made through Burgeonvest Securities. That works out to a valuation of $2.3 million for the company. Bill Tait, former general manager of NCR's Waterloo facility and GUARD's VP of technology and business development, is president of Magnos.

Com Dev growth still being carried by wireless group
March 6, 2000

More of the same in Com Dev's latest quarter, as wireless group revenues continue to grow, while space group sales dwindle. For the quarter ended January 31 (Q1 00), the company reports revenue of $42.0 million and a net loss of $3.9 million ($0.12/share).

Wireless group revenues were up 14% sequentially, while space group revenues dropped 11%. Total sales were flat from the same period a year ago and up 3% from the previous quarter. Gross profits for the quarter were down 25% from last year, but up 5% sequentially. (In an industry with much higher margins, MKS had gross profits nearly double that of Com Dev in their latest quarters.)

The space group order backlog at the end of the quarter stood at $44 million, up slightly from $42 million a quarter ago.

Operations were cash flow negative in the quarter, using $2.2 million.

The balance sheet shows net bank indebtedness of $7.2 million, which will be retired through the proceeds of Com Dev's recent rights offering which was fully subscribed and netted the company $36.6 million. Following the offering, Com Dev now has 40.3 million shares issued and outstanding.

Com Dev's annual report shows that the company paid $1.5 million for Lober & Walsh Engineering (see November digest). Although the acquisition wasn't announced until November 22, the transaction actually closed more than three months earlier, on August 12, according to the report.

Despite stepping down as CEO mid-year, chairman and founder Val O'Donovan remained Com Dev's highest paid officer last year with a salary of $324,000, down only slightly from $326,000 the previous year. O'Donovan remains Com Dev's largest shareholder with 6.3 million shares, not including the 3.0 million shares held by Technology Horizons, of which he is one-third owner.

Keith Ainsworth, who succeeded O'Donovan as CEO, was paid $305,000 in 1999 and currently has a base salary of $365,000.

Virtek targets 50% revenue growth in current year
March 27, 2000

For the quarter ended January 31 (Q4 00), Virtek reports revenue of $4.8 million and net income of $854,000 ($0.06/share). Revenues grew by 32% over the previous year and 10% sequentially.

The company closed two acquisitions in the quarter (see August and October digests) which may have accounted for a good chunk of the quarter-over-quarter gains.

Over fiscal year 2000, Virtek revenues grew 54% to $15.6 million with a net income of $1.2 million ($0.08/share). There were several one-time gains and expenses over the year, including the sale of the company's leather nesting business which contributed $1.5 million to the bottom line. The company said there were also about $1 million in non-operating expenses, which included $735,000 paid to cancel an exclusive distribution agreement.

The company is again targeting 50% revenue growth in the current fiscal year and continues to look at possible acquisitions. At year-end, the balance sheet shows a cash position of $921,000 and working capital of $3.1 million.

Virtek held its first analyst conference call in March, and it was going well until the Q&A when the IR rep listed on the company's news release got on the line to ask questions of management. The call became a pitch-to-your-own-team softball game as he opined that the "results look excellent", ended with a similar comment, and in between asked what made Virtek better than its competitors. Completely unnecessary since there were legitimate participants in the Q&A -- one from MacDougall, MacDougall & MacTier, and one from Brant Securities.

Open Text claims arbitration win over NetSys; makes ASP deal
April 3, 2000

Open Text has announced that the arbitration panel hearing its dispute with Sweden's NetSys Technology Group has decided "overwhelmingly in favor of the position of Open Text management."

It says the international arbitral tribunal found that the distribution agreement with NetSys is no longer in effect, ordered NetSys to account for all profits made outside of Scandinavia, and awarded US$130,000 in hosting fees to Open Text, along with costs.

Open Text says it will provide support to NetSys's Scandinavian customers.

In other news from Open Text, the company announced that KPNQwest, a joint venture between Qwest and Dutch telecom company KPN Telecom, will host Livelink software on an ASP basis and make it available through its European fibre network and 12 European CyberCentres. The companies will jointly market the service to KPNQwest's installed base of 100,000 businesses. Open Text had said at its AGM in December that it was looking for an ASP partner to host Livelink applications.

Open Text's b2bscene.com announced that E-Certify will provide authentication and validation services to its e-marketplace and provide free digital certificates to b2bscene.com's first 5,000 customers. b2bscene.com also announced its first of what it plans to be more than 1,800 industry-specific e-marketplaces. It will partner with Base4 to create an online biotech marketplace.

Open Text and RIM team up to make Livelink mobile
March 22, 2000

Open Text and RIM have announced what they call "the beginning of an important relationship" between the neighbours. The companies plan to integrate Livelink and BlackBerry to make Open Text's collaboration tools available to mobile users.

RIM one of Canada's best-run corporations -- CEO poll
April 1, 2000

RIM was named the 22nd most-respected corporation in the country in a poll conducted by Angus Reid for the Globe & Mail's Report on Business Magazine. It received the same score as Noranda, and was just a point below Loblaw Cos. and the Alberta Energy Co.

The only other home-grown Canadian high-tech company on the list was Nortel, in first place. Microsoft Canada (#8) and IBM Canada (#13) were also listed.

RecycleNet CEO resigns as OSC launches second proceeding
March 23, 2000

Mikael Prydz resigned as president, CEO, and director of Guelph's RecycleNet Corp. as the Ontario Securities Commission launched a second proceeding against him. Paul Roszel, the company's founder and chairman, has become interim CEO.

The charges made by the OSC against Prydz were not related to his work with RecycleNet, but involved what the OSC said were unlawful sales of securities in a company identified only as 1149932 Ontario Inc. The OSC alleges that Prydz sold securities in the company and continued to maintain the firm's viability after he knew or ought to have known that the business was a flop and all money invested was lost.

The OSC thought it had negotiated a settlement agreement with Prydz in January. The settlement required Prydz to send a letter to everyone who invested in 1149932 through him, but the OSC now says Prydz secretly sent a second letter contradicting his admissions under the settlement agreement and which continued to maintain that investors' money had not been lost.

Prydz remained president and CEO of RecycleNet through the OSC's initial allegations in January and the settlement agreement approved in February. His resignation was announced on March 20, just before the OSC launched its second proceeding.

Nexsys receives $4-5 million investment
February 18, 2000

This news is from February, but I missed it at the time. Waterloo's Nexsys Commtech International, which has developed a wireless metering system to be used by municipalities to monitor hydro, water, and gas usage, among other things, will receive between $3.4 million and $4.5 million from Ztest Electronics of Mississauga, as well as an additional $600,000 from C.I. Covington Fund.

Ztest had owned 44% of Nexsys and could now end up holding a 74% stake if it converts various debentures and warrants into common shares. One of Ztest's directors is the optics department manager at CME Telemetrix.

Three years ago, Nexsys announced a pilot project with the City of Waterloo. It has completed a test in Fort Wayne, Indiana and is also in test in Cornwall.

Miscellaneous Tidbits

• Cyberplex will be MKS' neighbour in the new "Waterloo Technology Campus" on Phillip Street. Cyberplex currently has offices in Waterloo's old post office, formerly owned by MKS.

• RDM is one of 31 companies whose shares have been included in the newly created CDNX technology index.

• Forgot to mention last month that Finline announced on February 24 that it closed a $3 million private placement at $1.52 per unit. It announced this month that it closed the acquisition of Impress Compression (see January digest).

• BlueGill's i-Series software will be bundled with BroadVision's One-to-One Billing application.

• Compelis intends to build an e-marketplace for the machine tool industry at machinetoolco-op.com.

• Kitchener's Able-One Systems and Waterloo's AXIA Solutions have partnered to offer what they describe as "comprehensive e-business deployment solutions."

• CVF Technologies -- which has investments in several Waterloo companies, including RDM -- says that it preparing for three of its portfolio companies to go public. "With favorable market conditions, all three companies could be public in the current year." Waterloo's SRE Controls, which reported revenue growth of 193% last year, is one of the likely candidates for an IPO.