August 2000

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 42 -- September 4, 2000
In this digest:

1. Cisco to acquire PixStream for $550 million
2. ...and AOL acquires Quack.com
3. Ardesic raises $10 million -- led by Celtic House
4. Sirific Wireless receives $1 million seed financing
5. MKS shares tank after warnings of weak quarter, writedown

6. Quarterlies for Descartes, Com Dev, Open Text, CME, and more
7. Arrivals and departures of note
8. STOCK REPORT: Descartes & RIM soar; MKS & CME sputter
9. Miscellaneous Tidbits from RIM, RDM

Cisco to acquire PixStream for $550 million
August 31, 2000

Everyone who was planning on sucking up to PixStream executives to get in on the company's IPO had their schemes dashed last week when Cisco announced it will acquire PixStream in an all-stock deal valued at US$369 million or about CDN$550 million. PixStream had been preparing to go public in the fall.

Cashing in, in addition to the founders and employee-shareholders, are the VCs who had invested about $60 million in the company. According to the National Post, Celtic House International -- which provided PixStream's seed financing and participated in subsequent financing -- will see its $4.3 million investment valued at around $58 million with the acquisition by Cisco.

PixStream was scheduled to move to the corner of Phillip and Columbia, and so far there's been no word on whether Cisco will want to remain a RIM tenant at that site. Within Silicon Valley, Cisco is known for RIM-like land grabs.

...and AOL acquires Quack.com
August 31, 2000

Just hours after the Cisco announcement was made, another high-tech giant bought its way into Waterloo when AOL acquired Quack.com. Terms were not disclosed, but the figures provided by one of Quack's investors in a release boasting of the high return it received on its investment suggest that the price tag was between $250 and $300 million (Canadian).

Quack was founded in Pittsburgh and is based in California, but has its research office on Phillip Street in Waterloo and was founded by two UW grads (along with a third partner with no Waterloo ties). Its investors were also Canadian: Bid.com, Jefferson Partners, Torstar, Sofinov, and eLab Technology Ventures.

Bid.com, which invested $735,400 in Quack a year ago and about $273,000 more in January, says it will receive $24 million for its combined $1 million investment.

Ardesic raises $10 million -- led by Celtic House
August 28, 2000

Some of Celtic House's windfall with PixStream has already found its way back to Waterloo as it was the lead investor in a $10 million first-round of financing for Ardesic. Andrew Waitman, Celtic's CEO, has joined Ardesic's board (which also includes PixStream CFO Tim Jackson).

The other major investor in this round was U.S.-based TL Ventures, which is affiliated with the Internet Capital Group and has a deep B2B portfolio. TL's managing partner has also joined Ardesic's board.

Waterloo Ventures, which provided Ardesic's seed financing in December, says it has seen a significant jump in the value of its initial investment. It also participated in this round, as did its shareholder, Working Ventures Canadian Fund.

Ardesic and PixStream were both profiled by RedHerring.com in the last week.

Sirific Wireless receives $1 million seed financing
August 8, 2000

Along with participating in Ardesic's first round, Waterloo Ventures also announced in August that it had provided half of Sirific Wireless' $1 million seed funding.

The other half came from Richard Boyer, the founder of Backyard Products (initially of Kitchener), and president of SoloWave Investments. Boyer has become Sirific's interim CEO while a search is conducted for a permanent chief executive.

Sirific was founded by UW associate professor of electrical engineering Taj Manku and is developing chip technology that will simplify the design of multi-mode, multi-standard wireless devices, including cellular phones.

MKS shares tank after warnings of weak quarter, writedown
August 23, 2000

Full results for MKS' first quarter of fiscal 2001 won't be released for a few more days, but the company has warned that they will fall millions of dollars short of revenue expectations. In addition, MKS will be taking a "significant writedown" in the quarter related to its SDM business. Combined, the net loss is expected to be about US$12 million and even after excluding charges, the loss will be around US$3 million.

MKS shares plunged 37% in August to close the month at $3.49 -- their second-lowest monthly close ever, and their steepest one-month decline ever. MKS shares have declined in value by 62% over the last six months. According to the company, the average exercise price of its outstanding options is $5.65.

While the interoperability business was weak over the quarter, MKS' information circular for its upcoming AGM shows that the company's two highest-paid executive officers in fiscal 2000 were the GM and "chief evangelist" for interoperability, who each received $378,450 in salary and bonuses. CEO Randall Howard was actually the lowest paid among the senior officers listed with total compensation of $253,000, a 35% rise from 1999. He continues to own 3.8 million shares in the company, which is now a 22% stake. Co-founder Alex White disposed of about 5% of his shares over the year but still holds 3.4 million shares or 19%. White is not standing for re-election to the board of directors, which will be reduced from six people to five.

The circular reports that former COO Mike Hubbert has received, "in lieu of any termination payments," $52,500, the right until January to exercise any vested options, and a performance bonus of up to $50,000.

MKS's proposed reorganization is laid out in the circular, and shows that the bulk of the company's current assets will be transferred to Vertical Sky Canada Inc., a subsidiary of US-based Vertical Sky Inc. which is an indirect subsidiary of MKS (with a Barbados layer in between). As proposed, Vertical Sky Canada will receive about $4.5 million in cash, 165 employees, and property and equipment with a book value of $4.2 million. In return, MKS will receive non-voting preferred shares of Vertical Sky Canada Inc. with a redemption price of about $9.6 million. An MKS release says that 250 employees worldwide will be transferred to Vertical Sky.

The company's other operating subsidiary, MKS Software Inc., will be the renamed DataFocus Inc.

MKS and Vertical Sky announced their executive appointments in August, and between that announcement and the new annual report, there are five corporate officers from a year ago who are no longer listed. In addition to CFO Eric Palmer and COO Mike Hubbert, whose departures were announced, there is also no mention of marketing VP Tobi Moriarty, general counsel Stewart McCuaig, and e-business strategy VP Lori Ellsworth.

The company also announced that David Thonn is its new VP of North American sales. Neither of his two predecessors lasted six months in the job. Vertical Sky has also hired Lee Fryer-Davis as VP of R&D and says in a release that he was previously head of development at Descartes.

Quarterlies for Descartes, Com Dev, Open Text, CME, INM, and more
August 2000

Too many to go through in depth, but briefly:

• A strong quarter for Descartes, as it saw revenues climb to US$14.6 million for the period ended July 31 (Q2 01). License and network revenues were up 25% sequentially -- or 34% if you exclude the now-spun-off DSD component -- to US$11.0 million or 75% of all revenues. Excluding acquisition-related expenses, net loss was US$961,000. Barring something unforeseen, Descartes expects to be profitable in the current quarter. At quarter-end, the company had more than 25,000 "participants" on its global logistics network (GLN). The balance sheet shows US$132.2 million in cash and short-term investments. Descartes now has 470 employees, up 10 over the quarter.

• Continuing improvements at Com Dev, where for the quarter ended July 31 (Q3 00) the company reported an operating profit of $226,000 -- its first profit in two years. Including a gain on the company's investment in SpaceBridge Networks and a $780,000 "finance charge," net income for the quarter was $1.6 million. Com Dev Space revenues climbed 19% sequentially to $25.5 million while order backlog fell to $81 million from $90 million. Com Dev Wireless revenues were in the median range over the first three quarters of the year, but are expected to grow in the current quarter. The balance sheet shows that Com Dev's cash position fell from $20.5 million to $0.9 million over the quarter, while bank indebtedness fell by $11.6 million.

• For fiscal year 2000, Open Text reports revenues of US$112.9 million, up 22% from 1999 with nearly all of the gains coming from service revenues. Licensing revenues were up only up 7% for the year with Q4 licensing revenues of US$17.9 million being only a 5.5% jump from the same period last year. Total revenue in Q4 was US$32.3 million. Net income for the year was US$25.1 million, but that includes US$49.0 million gained from investment in About.com. The company says that, excluding investment gains, restructuring charges, and amortization, its pre-tax net income for the year was US$1.2 million.

• CME Telemetrix lost $857,000 on revenues of $53,000 for the quarter ended June 30 (Q2 00). The balance sheet shows working capital of $6.4 million and $2.8 million in cash, but that deserves an asterisk as $2.0 million of the reported working capital is a receivable for CME's former Advantage Medical division -- a payment which the purchaser (Neurosoft) is refusing to make.

• In Q2 00, ended June 30, GUARD reports net earnings of $12.9 million on revenue of $270,000. Included in the numbers this quarter are proceeds from the sale of Nanodesign to SignalGene. At the end of the quarter, GUARD had $2.0 million in cash and equivalents.

• In the quarter ended July 31, INM lost $13,000 on revenue of $317,000. Of that revenue, $300,000 came from BCB Voice Systems, a major shareholder in INM that is looking at acquiring the company outright. The deadline for INM to receive "significant equity financing" in order for a merger with BCB to occur has been extended from September 1 to October 15 (see previous digest). INM also had to adjust its results for fiscal 2000 downward (summarized in the previous digest) after one customer terminated its contract and refused to pay $104,000 that had been invoiced. As adjusted, for the year ended April 30, INM lost $681,000 on sales of $634,000.

• For the quarter ended June 30 (Q2 00), Finline lost $716,000 on revenues of only $99,000. After its recent financing, the company was spending money at much higher levels in every area during the quarter, reducing its cash holdings by $806,000 to $1.3 million.

Arrivals and departures of note
August 2000

• David Marcus has become Descartes' senior VP of retail and consumer packaged goods. Just a few months ago, Marcus was CEO of uCorporation at its unveiling. uCorporation is a joint venture between Brightspark and the RioCan Real Estate Investment Fund that was created to help retailers integrate the Web with their "brick & mortar" operations. One of uCorporation's directors just happens to be Descartes CEO Peter Schwartz. Prior to joining uCorporation, Marcus was with IBM as manager of its retail consulting practice. At Descartes, he will report to president Aivars Lode.

• Tom Sutherland is Kaparel's new marketing director. He was previously sales & marketing VP with Waterloo's Electra Supply and previously worked with Electrohome in Kitchener for 11 years.

• UWO professor Xiaolin Wu has become an advisor to Finline's board and will stand for election as a director at the next shareholders' meeting. Wu's research specialty is image compression.

• David Minnett, who had been COO of Pattern Discovery Systems, has left the company to become VP of marketing communications with Rogers AT&T Wireless in Toronto. Before joining Pattern Discovery, Minnett was marketing VP for Molson's Ontario and Atlantic division.

STOCK REPORT: Descartes & RIM soar; MKS & CME sputter
August 2000

In August, Descartes shares had their strongest performance in six months and, while still down significantly from their March peak, have now more than doubled in value in 2000.

RIM stock has also bounced back, closing above the $100 level for the first time since March and now up 66% for the calendar year.

Price changes in August:

Descartes [TSE: DSG] +46%
RIM [TSE: RIM] +38%
Open Text [TSE: OTC] +28%
Com Dev [TSE: CDV] +27%
Virtek [TSE: VRK] +13%
Gensel Biotech [CDNX: GSB] +7%
RDM [CDNX: RC] +5%
Dalsa [TSE: DSA] +1%
GUARD [CDNX: GUA] 0%
Finline [CDNX: FIN] -13%
CME Telemetrix [CDN: CMET] -22%
MKS [TSE: MKX] -37%

Com Dev shares are now up 65% over the last two months.

At the other end, we've already talked about MKS, whose market cap was down to about $60 million at month-end, but CME shares has also been showing continuing weakness, despite the Motorola investment, down 48% over the last three months.

One other note: When Janna acquired LivePage last November, LivePage shareholders received $1.1 million in cash and 3.058 million Janna shares. At that time, those shares had a value of $17.6 million. Now, as the last of the shares are set to be paid to LivePage owners next month, they have climbed to a value of $140.8 million. LivePage had revenues of $159,000 in the last two quarters before it was acquired.

Miscellaneous Tidbits

• Compaq is rolling out co-branded versions of RIM's handhelds. Compaq is calling its product the iPAQ BlackBerry Wireless Email Solution. Merrill Lynch reported this month that RIM is developing a version of its 957 handheld for Europe that will be able to handle voice phone calls. It also said that talks with Dell have gone nowhere and they no longer expect Dell to contribute much to RIM sales. AOL is expected to release its version of the BlackBerry service within the next two months.

• RDM plans to raise at least $5 million through a private placement of warrants at $3.75 each. Each warrant can be exchanged for a common share and a half common share warrant exercisable at $4.25 per whole common share over the next two years.