April 2000

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 38 -- May 8, 2000
In this digest:

1. STOCK REPORT: RIM stock collapse brings national media to Waterloo
2. BlackBerry sales double, but RIM's top line plateaus, costs rise
3. RIM introduces new palm-sized device; will support WAP and Notes
4. RIM receives $34 million investment from federal government
5. Open Text reports revenue growth, first b2bscene.com customer

6. DALSA scores solid earnings in weak quarter; plans stock split
7. MKS withdraws equity offering
8. RDM's new product segments show strong revenue growth
9. BCB Voice Systems acquires stake in International Neural Machines
10. Virtek files preliminary prospectus for share offering

11. GUARD borrows, cuts project spending to finish 1999
12. Treasury International spins off retail tech to Retailport.com
13. GeneFocus to establish biochip facility with NRC institutes
14. Navtech reports profitable quarter; needs to raise funds
15. Miscellaneous Tidbits from Ardesic, Waterloo Ventures, eBiz Ventures, Com Dev, Finline, Descartes, CME Telemetrix

STOCK REPORT: RIM stock collapse brings national media to Waterloo
April 2000

The biggest Waterloo-related stock story in some time was the crumbling value of RIM shares in April. The stock began the month at $152.00, plummeted $41.00 in the first two trading days of the month, made it all back over the next four trading days, and then went into a free-fall that peaked with a staggering $52.65 decline on April 12 -- a one-day erasure of $4 billion in RIM's market cap. The shares closed the month at $62.90.

Even with the brutal month, RIM shares have fallen only 5.7% since the beginning of the year, and are still up 256% from a year ago. That's not much comfort to the people who paid more than $200 per share as recently as March 28, but not as apocalyptic as some reports have sounded.

RIM's misfortunes briefly focused the attention of the national and international media on Waterloo, including articles by the Globe & Mail, New York Times, and Reuters.

The best of the three was Mark Evans's article in the Globe, headlined "Tech community rolls with the punches; despite RIM's recent stock dive, many in Kitchener-Waterloo keep it in perspective." That sums it up nicely, and the article featured a great quote from Descartes CEO Peter Schwartz, who said, "We only have two or three subdivisions with big houses in them and we only have two or three nice restaurants. This is not a community obsessed with fame and fashion. It is one focused on creating world-class technology and creating big things with that technology." That was selected as "quote of the week" in the Globe.

A financial reporter for the Times phoned several people around town from her office in New York and decided that the city had been suffering from "RIM envy" with locals "moaning" about missing out on the "Big Move" when the stock went up. (RIM's biggest move -- the three month period where its stock jumped the most in value -- was actually between November 1998 and January 1999 when it went up 186%. The Times writer wouldn't know this since she wrote that the company went public in February 1999.)

The reporter was apparently hoping to hear about depressed RIM employees, and when one local business owner said the RIMers he saw had taken it all in stride, she concluded that they were "putting on a brave face."

One interesting tidbit was that the highest price paid for a home in Waterloo this year was $960,000 by a RIM employee.

In an article that seems to have been inspired by the Times piece, a reporter for Reuters who spent the summer of 1991 working for The Record apparently forgot everything she knew about the area and described Waterloo as a long-established "bedroom" region in Toronto's commuting area. The rest of the article, headlined "Canadian city focus of high-tech hype" wasn't as odious, with comments from RIM co-CEO Jim Balsillie about Waterloo's relatively simple lifestyle.

From worst to best, here's how local high-tech companies fared in April, with the changes in stock prices over the last 12 months shown in parentheses:

RIM -59% (+256%)
Finline -44% (+553%)
Descartes -22% (+448%)
MKS -22% (+2%)
Gensel Biotech -20% (+337%)
CME Telemetrix -19% (+247%)
COM DEV -15% (+22%)
Open Text -14% (-36%)
Virtek -11% (+165%)
RDM -8% (+94%)
DALSA +4% (+77.5%)
GUARD +20% (-53%)

BlackBerry sales double, but RIM's top line plateaus, costs rise
April 11, 2000

For fiscal year 2000, ended February 29, RIM reported net income of US$10.5 million (US$0.15/share) on revenues of US$85.0 million. Revenues were up 79% from 1999.

In the fourth quarter, RIM earned US$3.2 million (US$0.05/share) on revenues of US$25.8 million. Sales were up 42% from last year and 9% from the previous quarter. BlackBerry revenues more than doubled sequentially, climbing to about US$10.6 million -- or 41% of revenues -- from US$5.0 million in the previous quarter. RIM says there are now 2,900 companies using BlackBerry, including 60 companies using more than 50 units.

Sales of RIM's OEM wireless modems also showed a strong increase of 21% quarter-over-quarter to US$5.7 million.

Offsetting those gains were a slowdown in the sales of RIM's handheld devices (outside of those which come with the BlackBerry service), which declined by about 17% sequentially. Also hurting the top line (as well as gross margins) was the absence of any non-recurring engineering revenue this quarter. That segment had contributed an unusually high US$2.4 million in Q3. Operating income in Q4 fell 42% from the previous quarter to US$1.9 million.

CFO Dennis Kavelman said in the conference call that he expects revenue to remain fairly flat in Q1 and doesn't foresee significant revenue growth until the second half of the year. Shipments to BellSouth are expected to resume in Q1 but AMSC, now known as Motient Corp., is not expected to receive more devices until later in the year.

At the same time, the company is beefing up its expenditures in sales & marketing and R&D, although the latter will be partly offset by the investment RIM will receive through Technology Partnerships Canada (see below). RIM has begun a 6-month, US$8 million advertising campaign that has included ads in the Wall Street Journal and USA Today. The company continues to hire additional salespeople and support reps and is now up to 550 employees, up by 100 over the quarter.

At the end of the quarter, RIM had US$218.2 million in cash and securities and working capital of US$275.1 million. Co-CEO Jim Balsillie said that he expects the company will make several acquisitions to expand its technical resources.

DSO and inventory levels both increased substantially over the quarter, with Kavelman attributing the DSO jump from 81 to 55 to a single customer which has received extended payment terms and is not expected to miss any payments.

The balance sheet also shows a jump of US$17.0 million in capital assets, reflecting, in part, RIM's purchase of the University Business Park in Waterloo for C$20 million on January 28. Balsillie mentioned that RIM had acquired the property during the conference call, although no other announcement was ever made (the Web site for the property showed was changed on February 7 to mark it as sold).

RIM has also purchased the Technology Business Park across the street on Columbia (where PixStream and Switchview are located, among other tenants, although the expectation is that many others will have to move out as RIM uses more space).

Balsillie said the company is contemplating outsourcing some of its manufacturing and is also looking at offshore manufacturing sites as RIM expands into international markets.

Although RIM's earnings in Q4 met analysts' expectations, the rapid increase in sales & marketing spending as well as the forecast of flat sales in Q1 led to reductions across the board in analysts' forecasts for fiscal year 2001.

RIM introduces new palm-sized device; will support WAP and Notes
April 11, 2000

The long-awaited palm-sized (or Palm-sized) version of the RIM handheld device was unveiled in April. Code named "Proton," the RIM 957 Wireless Handheld has similar capabilities to the 950 pager-sized device (and the same QWERTY keyboard), but includes more memory (5MB vs 2MB) and a larger display screen. The 957 measures 4.6" in height, 3.1" wide and 0.70" thick, compared to the 950's dimensions of 2.0" x 3.5" x 0.93". It operates on a rechargeable lithium battery rather than the single AA used by the 950, and weighs 5.3 ounces. The 957 will begin shipping soon.

Balsillie says the company expects the device will appeal to users who have become accustomed to the larger display screens or organizers and that it will not significantly cannibalize sales of the smaller 950.

RIM also announced a new version of the 950 handheld with 4MB of memory, and new release of the BlackBerry software.

In another major announcement, RIM has decided to make its devices work with both the WAP wireless protocol and with Lotus Notes. At the last AGM, RIM's CEOs were asked about providing support for Notes but said that they were very happy working exclusively with Microsoft Exchange and had no plans to support Notes. Co-CEO Mike Lazaridis had nothing good to say about WAP in an infraNET talk at UW earlier this year, but RIM has partnered with San Francisco's Neomar to provide a WAP microbrowser and portal for RIM devices that will work with Neomar's WAP gateway.

The RIM handheld with WAP microbrowser is undergoing beta testing and announcements of initial customers are expected this summer. BlackBerry Notes Edition is scheduled to have its first customer trials in the summer.

RIM also announced (in a news release that doesn't seem to have been distributed in Canada) a significant partnership with wireless ASP Aether Systems of Maryland. Aether will host BlackBerry services, keep a portion of the monthly user fees, and pay RIM a one-time fee of US$4.9 million.

Balsillie said the three-year deal "could result in well over 100,000" RIM handhelds being shipped to Aether's BlackBerry customers. RIM and Aether will jointly develop and market the Aether-hosted BlackBerry service. Aether will provide billing and customer support services, which have apparently been a bit of a struggle for RIM. When Balsillie was asked during the conference call if one of RIM's acquisitions might be a wireless ASP, he replied that it was "quite improbable" because the company has learned where its strengths are and plans to focus on those areas.

RIM receives $34 million investment from federal government
April 7, 2000

Technology Partnerships Canada (TPC) will provide RIM with $33.9 million to go towards what is being described as a $113 million R&D project to "develop next-generation wireless technologies."

Industry Canada, which runs the TPC program (and whose new deputy minister is a UW grad), said this project will create or maintain more than 800 jobs in science, engineering, and technology over the next seven years, including "more than 20 researchers with PhDs and over 80 with Masters degrees." RIM said nothing about this in its release.

The money provided by TPC is supposed to be repaid if the funded project is converted into a profit-making product. RIM received $5.7 million from TPC two years ago that was said to be going towards the development of its next generation two-way pager. TPC was supposed to receive its investment back plus royalties on product sales, but there haven't been any reports of money being repaid.

As was the case last year when TPC invested $33 million in IBM Canada, the government program, managed by Industry Canada, came under fire for giving money to a company that could have raised the funds through the markets or other sources. The Record, RIM's home-town paper, ran a column and an editorial criticizing the deal, while Monte Solberg, finance critic for not-Reform-not-CCRAP was quoted in the National Post saying there is "no possible justification in the world" for the investment.

It was also announced this month that RIM was one of several investors in a US$31 million round of financing for AvantGo Inc. of San Mateo, California. The amount of RIM's investment wasn't specified in the release. AvantGo describes itself as the company that puts "the Internet on your handheld." Microsoft and 3Com have also invested in the company.

Open Text reports revenue growth, first b2bscene.com customer
April 28, 2000

For the quarter ended March 31 (Q3 00), Open Text reports revenue of US$28.5 million, up 14% from last year and 7% quarter-over-quarter. License revenues grew 9% sequentially, while service revenues rose 4%.

Net income for the quarter was US$4.4 million (US$0.19/share), all of which was generated through the sale of About.com shares. Open Text reported income of US$12.5 million from the sale of investments in Q3. It retained only a very small position in About.com, with the balance sheet showing US$788,000 in available for sale securities, down from nearly US$16 million last quarter.

Open Text's cash position is US$108.9 million (nearly US$5/share), down US$58.3 million over the quarter.

The company says that excluding one-time charges and gains, it earned US$140,000 in the quarter, or nearly US$0.01/share, but it did not break down how this figure was arrived at.

Over the quarter, the company made investments in its ASP initiatives and in its b2bscene.com division that added US$1 million in expenses. Those expenses are expected to rise in future quarters, but will now be partially offset by revenues. Agilent Technologies has been announced as the first customer for b2bscene.com and will begin making payments to Open Text this quarter.

Of Open Text's 750 employees, about 25 have been assigned to b2bscene.com, while another 20 are focused on the ASP market. Bill Forquer, who was president of Information Dimensions when it was acquired by Open Text in 1998, will head what was described in the conference call as Open Text's ASP "SWAT team."

The company also expensed about US$500,000 in costs related to its dispute with NetSys, an amount it says it is actively attempting to recover from the Swedish company. New CFO Alan Hoverd said he expects G&A expenses to fall by about $1 million in the next quarter.

About a quarter-million new Livelink users were added over the quarter, bringing the total to 3.8 million.

DALSA scores solid earnings in weak quarter; plans stock split
April 27, 2000

DALSA always refers to Q1 as its traditional weak quarter, and that remained the case this year, with revenues for the three months ended March 31 (Q1 00) declining 17% sequentially to $10.1 million. Excluding acquisition-related charges, the company reported earnings of $1.4 million ($0.26/share). With those charges added in, DALSA lost $2.3 million ($0.43/share).

R&D spending was cut by 42% from the previous quarter to $1.7 million.

Operations were slightly cash flow negative over the quarter, after contributing $4.8 million in Q4. At the end of the quarter, DALSA's cash position was $5.3 million, down $3.7 million over the quarter.

Having seen only slight gains in its share price completing despite stock repurchases and running a profitable company, DALSA has decided to try a 2-for-1 stock split to put some life in its shares. Currently, the company only has about 5.5 million shares outstanding.

MKS withdraws equity offering
April 4, 2000

MKS will not proceed with the equity offering described in last month's digest. The offering -- which was a mix of a million special warrants convertible to shares from treasury along with a secondary offering of 1.5 million shares from existing shareholders -- was backed by an underwriting syndicate led by CIBC World Markets and priced at $11.30. In April, MKS shares traded between $9.00 and $5.50.

RDM's new product segments show strong revenue growth
May 4, 2000

For the quarter ended March 31 (Q2 00), RDM reports a net loss of $342,000 ($0.028/share) on revenue of $1.3 million. Overall, sales were up 11% sequentially, but down 3% from the same period last year.

The decline in revenues came solely from RDM's traditional cheque quality control product segment, which showed a 44% decline in sales from last year and a 13% drop from the previous quarter. For the quarter, cheque quality products contributed just 51% of revenues, down from 88% last year and 65% in Q1.

Revenues for RDM's point-of-sale products were up 36% from the previous quarter to $576,000 while the e-commerce segment contributed the remaining $86,000 in quarterly revenues.

With the company's traditional products making up a smaller percentage of sales, gross margins fell from 75% a year ago to 61% this quarter, resulting in a 21% drop in gross profits. G&A expenses jumped 26% from the previous quarter and 37% from last year, which the company partially attributed to unspecified "restructuring activities."

Private placements during the quarter netted RDM $1.4 million in cash, which was immediately put to use as cash used in operations climbed 44% sequentially to $542,000 -- nearly a million-dollar difference from the $429,000 provided by operations last year. The balance sheet shows $1.5 million in cash and working capital of $2.4 million. Inventory jumped by 40% over the quarter to $972,000, while DSO climbed from 75 to 85.

BCB Voice Systems acquires stake in International Neural Machines
April 12, 2000

Markham's BCB Voice Systems has acquired the equity interest in International Neural Machines (INM) that was previously held by Working Ventures Canadian Fund.

BCB paid $1.25 million plus 400,000 BCB shares (currently worth about $800,000) in return for the unspecified equity interest in INM and a debenture issued by INM for $625,000 at 10% annual interest.

Working Ventures invested $1.25 million in INM in 1997.

According to BCB, it will incorporate various INM technologies, including speaker verification, text-to-speech conversion, and natural language data mining, into its products.

Virtek files preliminary prospectus for share offering
April 7, 2000

Virtek intends to raise an as-yet unspecified amount through a share offering. A preliminary prospectus has been filed with the securities commissions in all provinces. The underwriting syndicate is led by HSBC Securities, and includes Yorkton Securities and Brant Securities.

Some notes from the prospectus:

• Last October, Virtek said it was paying "approximately $1.2 million" in cash and shares for Belgian firm LaserTechniek. In the prospectus, the purchase price is listed as $988,221, consisting of $784,422 in cash and 117,939 common shares. The prospectus also lists the cash paid as EU520,346 but that would be a bit more than $784,422, so perhaps there is a typo.

• Jim Crocker has a base salary of $225,000 and receives a $600 monthly car allowance and "lodging expenses" of up to $1,000 per month.

• Distributor Mitek Industries accounted for 40% of Virtek revenues in fiscal year 2000.

• Virtek's largest shareholder is Andrew Wong with 1.8 million shares, or 12.1% (pre-offering).

GUARD borrows, cuts project spending to finish 1999
April 25, 2000

For the quarter ended December 31 (Q4 99), GUARD lost $858,000 ($0.13/share) on interest income of $19,000. It was GUARD's lowest quarterly net loss over the last two years as the company cut project spending by 30% from the previous quarter.

While project costs were slashed, corporate costs in Q4 jumped to their highest levels in 1999, although they remain well below 1998 levels.

Over the full year, GUARD lost $4.5 million and now has an accumulated deficit of $12.1 million.

GUARD's balance sheet shows the addition of a $661,000 loan in Q4 and a cash position of $588,000. Working capital is $398,000.

The private placement for subsidiary Magnos Technologies that was announced in March was apparently completed at least three months earlier, since it is shown in the 1999 financial statements. The placement added a net $437,000 to GUARD's balance sheet in the quarter.

GUARD also issued a $47,500 convertible debenture during Q4, and in February issued a $300,000 promissory note due in September and bearing interest at 10% annually.

Objectives for this year listed in the annual report include receiving financing for all four active projects, including $3-5 million for Nanodesign.

The management information circular shows that GUARD's lack of revenue in 1999 didn't lead entirely to a tightwad management style. Two of the company's senior managers took home about 20% more in salary and bonuses in 1999 than in the previous year, while the new CEO for Nanodesign is being paid $4,500 a week. He has also been promised a 20% "success bonus" if Nanodesign receives financing to keep it running for at least one to two years.

GUARD's former chairman, John Yarnell, will retire from the company's board of directors at the AGM on May 25.

Treasury International spins off retail tech to Retailport.com
March 22, 2000

Treasury International, the Kitchener-based parent company of Compelis, has spun off Compelis' retail management software into a new company called Retailport.com Inc. Retailport.com will be a wholly-owned subsidiary of Treasury.

In its last two news releases, Treasury has used Seattle and Wixom, MI (home of Virtual Systems Solutions, the company that developed much of the retail technology via developers in India) in the datelines.

GeneFocus to establish biochip facility with NRC institutes
April 26, 2000

GeneFocus, a division of Biomedical Photometrics, has signed a letter of intent to set up a biochip fabrication facility in Ottawa in partnership with the Institute for Biological Sciences and the Steacie Institute for Molecular Sciences. The NRC will establish a biochip technology research group to support the facility.

GeneFocus is a UW spinoff was formed in 1998 to develop imaging instruments for genetic microarrays.

Navtech reports profitable quarter; needs to raise funds
April 1, 2000

I haven't written about Navtech here before, but for the quarter ended January 31 (Q1 00), the company earned US$120,000 (US$0.06/share) on revenue of US$2.0 million. The balance sheet shows the company's working capital at more than a million dollars (US) in the red, with cash of US$48,000.

Navtech says it has renegotiated payment terms with some of its trade suppliers and also renegotiated the interest rates and payment dates of two of its demand loans. The company is trying to raise additional funds, possibly through debt or equity offerings, and hopes to expand its product line to get more revenues from its existing customers.

Navtech provides flight operations management software and services for the aviation industry. The company was formed in Elmira in 1981 by the then-husband-and-wife team of Ray English and Dorothy English. Technically, the company that is publicly traded is the former Compuflight Inc. of California, which changed its name to Navtech in January with Waterloo's Navtech Systems Support Inc. as a subsidiary. The Waterloo site is Navtech's head office and R&D centre.

According to the 1999 annual report, Dorothy English owns 50.3% of the outstanding shares of Navtech Inc., with the bulk of those shares pledged to Ray English as collateral for money owed to him by Navtech's parent company, Navtech Applied Research Inc., which is wholly owned by Ms. English. Mr. English is owed monthly payments of $6,000 for 10 years and can sell Navtech shares to get the money if payments are in default.

Miscellaneous Tidbits

• Ardesic was the only Waterloo company to make a presentation at the Spring edition of the Canadian IT Financing Forum, held last week. It was one of 11 companies scheduled for the "first look" segment of the event. Andrew Abouchar from Waterloo Ventures, which provided Ardesic's seed financing, was also present at the forum.

• Kim Hanson in The National Post wrote a profile of a new Kitchener-based VC fund called eBiz Ventures, headed by ex-CTTAN president Lindsay Worden and Caldwell Capital's Stewart Campbell. The article said the fund expects to provide between $500,000 to $1 million to local "Internet firms that have not yet made it out of the basement." It did not say if any money has yet been raised by the fund.

• Com Dev has received contracts from Telsat Canada, the Canadian Space Agency, and Hughes Space & Communications totalling more than $40 million. Com Dev will develop and manufacture an on-board communications processor system for Telesat Canada's Anik F2 satellite, expected to launch late next year.

• Investors in Finline's $3 million private placement from February include YMG Capital and its new YMG Ventures fund, Newcrest Capital, Patrick Forde, president of Turbosonic, Mike Kanellis, owner of Golf's Restaurant, and real estate broker Roger Roedding. The largest two investors were Roland Kelper and something called the Harris-Noronha Partnership.

• Paul Bagnell reported in the National Post that three Descartes senior managers sold thousands of shares in the company on March 10, the day Descartes' shares peaked in value. Bagnell says that CEO Peter Schwartz sold 110,000 shares for $102.83 each, while senior VP finance Ron Duncombe sold 60,000 shares and executive VP corporate development Paul Laufert sold 5,000 shares, all at the same $102.83 price. According to the story, Duncombe made a gain of $5.7 million in one day through exercising options and selling shares, while Laufert made a gain of $2 million over two days. Descartes shares closed April at $50.95.

• CME Telemetrix reported a net loss of $463,000 ($0.06/share) on revenues of $683,000 in fiscal year 1999, ended December 31. The news release was pretty vague about Q4, so we'll look at the quarter in more detail when the annual report comes out. The company's AGM is scheduled for June 19.