September 2000

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 43 -- October 9, 2000
In this digest:

1. Former PixStream customer sues, says tech was all its idea
2. Com Dev receives technology, small investment from Qualcomm
3. Com Dev to raise up to $31.3 million through bought deal
4. RIM quarter shows strong sales for BlackBerry, handheld device
5. RIM hires former AT&T executive as COO

6. Virtek hits record revenues; biotech set to become largest unit
7. MKS loses millions as product sales crumble
8. RDM raises $15 million through warrant offering
9. CME Telemetrix sues Neurosoft over Advantage Medical payments
10. TurboSonic receives largest order in company history

11. STOCK REPORT: Local tech companies averaging 118% gain in 2000
12. Miscellaneous tidbits from Kaparel, Navtech, EMJ

Former PixStream customer sues, says tech was all its idea
September 20, 2000

Within three weeks of PixStream's announced acquisition by Cisco Systems, one of its original customers filed a suit claiming the company built its business around technology and information that had been revealed to it in confidence.

Concord-based Unique Broadband Systems (UBS) is asking the courts for $550 million, claiming that PixStream "wrongfully misappropriated [UBS'] business opportunity" by misusing confidential information and breaching its fiduciary duty to UBS.

It's a story that goes back to 1996 when UBS, then known as Unique Systems, was working with a Waterloo company called ObjectSoft, headed by Stephen Bacso. Brad Siim and Marc Morin worked with Bacso at ObjectSoft, and the three formed Pixel Scientific later in 1996. Pixel became PixStream in 1998.

According to the statement of claim, UBS paid ObjectSoft and Pixel about $500,000 between May 1996 and July 1997 to develop an MPEG-II encoding and delivery system. It says that Pixel took confidential information it learned through its dealings with UBS to create a similar product for itself with UBS' technology at its core.

PixStream is expected to file a statement of defence and possibly a counterclaim later this month.

Parts of this tale had been heard around town before the statement of claim was filed -- particularly an incident in July 1997 when a group of UBS employees including its CEO Alex Dolgonos (described to me as "a van load of Russians," although Dolgonos is actually Ukrainian) showed up at Pixel's offices with a list of equipment it had paid for and demanded that they be handed over immediately. The police were called in, and later in the day the UBS group did get most of what it came for.

That was three years ago. The issue didn't resurface when PixStream raised about $60 million over three rounds of financing from some major VCs who would all have performed due diligence before making their investments. But with the acquisition by Cisco for an announced $540 million, UBS apparently decided that set a convenient price on the loss it's claiming. It also wants an additional $10 million in punitive/exemplary damages.

UBS is represented by well-known lawyer Alan Lenczner. Although he is best-known today for representing Conrad Black (in his complaint that Jean Chretien unjustly blocked his appointment to the British House of Lords), former premier David Peterson (in the YBM Magnex mess), and Wallace McCain (in his battles with his family over the McCain food business), one of Lenczner's early high-profile cases 14 years ago involved a claim of breach of confidential information and the misappropriation of a business opportunity. He successfully argued that Lac Minerals had misused information it received from then-junior mining company International Corona Resources to acquire a stake in the multi-billion dollar Page-Williams mine in northern Ontario. The case went all the way to the Supreme Court with Corona being awarded the mine. I believe it was the largest award in Canadian legal history.

Lenczner successfully argued another "breach of fiduciary duty" case against the CIBC, so UBS has brought in a heavy-hitter with plenty of related experience to take on PixStream.

UBS claims that PixStream's technology is based on the MPEG-II delivery system it introduced to ObjectSoft/Pixel in 1996 and that such "reuse" is prohibited under the agreement between the companies.

From reading the statement of claim, one of the challenges facing Lenczner appears to be that UBS, by its own admission, never had a functional technology. In its version of events -- details of which PixStream will no doubt dispute in its statement of defence -- UBS had an idea for an MPEG-II delivery system but couldn't attract any engineers to the company to develop it. It then agreed to outsource development to ObjectSoft, but it claims that all work was done under its close "direction and supervision" including weekly (at least) meetings weekly between UBS and ObjectSoft/Pixel employees. The work went over budget and fell behind schedule -- which would presumably be in part the responsibility of UBS since it claims the Pixel team "in all material respects ... functioned as employees." After 14 months of this work UBS says it was closely directing, there was still no functioning product, which led it to use similar technology from Lucent.

UBS doesn't claim that Pixel gave less than its best efforts in developing the system, but it does accuse Pixel of refusing to turn over everything it had developed under the agreement and then developing its own system based on what it learned from UBS.

UBS is publicly traded on CDNX and has a market cap of about $300 million -- 45% below the price Cisco agreed to pay for PixStream. Its shares have fallen in value by more than 20% since the suit was announced. Former prime minister John Turner is expected to be elected to UBS' board of directors next month.

There hasn't been any significant comment from Cisco since this began, but it did have PixStream employees sign a waiver to convert their PixStream options to Cisco options and it gave them their job packages, so the acquisition seems to be proceeding.

Com Dev receives technology, small investment from Qualcomm
September 25, 2000

Com Dev and California-based Qualcomm have entered into an agreement that will see Com Dev use Qualcomm's High Data Rate high-bandwidth wireless transmission technology in its forthcoming high-speed wireless Internet systems.

Qualcomm also agreed to invest an undisclosed amount in Com Dev. The stake is reported to be less than 1% which would be less than $5 million.

Com Dev says it will launch its broadband Internet product, called M/ERGY, "within the next few months." It will provide wireless Internet access at speeds comparable to cable and DSL services. The first prototypes are slated to be complete by the end of this year with customer trials scheduled over the winter.

Com Dev to raise up to $31.3 million through bought deal
September 28, 2000

To finance further development of M/ERGY, Com Dev has arranged to sell at least 2.22 million special warrants at $12.25 each through a syndicate led by Sprott Securities. Including the over-allotment option, a total of 2.553 million warrants are available which would generate gross proceeds of $31.3 million if they are all sold. Com Dev shares closed Friday at $16.00 -- 31% above the warrant price.

Each warrant can be converted into a single common share. The transaction is expected to close this week.

Com Dev also announced in September that it has officially made its Richardson, Texas office the headquarters for Com Dev Wireless. Wireless president Roger Boivin has been based in Texas for several months.

RIM quarter shows strong sales for BlackBerry, handheld device
September 28, 2000

For the quarter ended August 31 (Q2 01), RIM reports sales of US$42.5 million -- up 57% from the previous quarter and 121% year-over-year. BlackBerry sales accounted for 57% of revenue, or US$24.2 million, up 79% sequentially.

The biggest gains were in sales of handheld devices for non-BlackBerry uses, particularly through BellSouth, which climbed 126% from the previous quarter and contributed 36% of revenue.

Demand for the PDA-sized 957 device was particularly strong in the quarter, with Merrill Lynch analyst William Crawford estimating a 2-3 week backorder.

OEM sales fell by 21% sequentially to US$3.0 million or 7% of revenue.

Operating loss of US$4.2 million was partly offset by investment income of US$3.1 million, resulting in a net loss of US$1.6 million (US$0.02/share). Sales and marketing expenses jumped 51% from the previous quarter to US$15.7 million or 37% of sales.

Cash and marketable securities stood at US$183.8 million, down US$15.0 million over the quarter. RIM made investments in two California-based companies in Q2: Neomar and Bridge2Market.

Co-CEO Jim Balsillie says the company expects to have a new 180,000 square-foot manufacturing facility in operation by next spring. The Waterloo facility will be on the property RIM has been acquiring in the University-Phillip area. RIM has grown to 810 employees.

AOL is expected to launch its teen-focused service using the RIM 950 this fall. Balsillie says RIM will ship devices to AOL in the current quarter.

Customer trials of RIM's European GPRS devices are scheduled to begin by the end of the year with shipments to begin by the spring. RIM's UK office is expected to grow from about 12 people to 30-40 by December.

Balsillie also says the company is working to solve problems with network congestion in some major U.S. centres. RIM is increasing the number of connection points into the BellSouth network and BellSouth is adding base stations to provide the required network capacity.

RIM hires former AT&T executive as COO
September 8 & 19, 2000

To go along with its two CEOs, RIM now has a chief operating officer -- Don Morrison, most recently senior VP of external affairs for AT&T Canada until leaving the company in July. He had previously been CEO of ACC TelEnterprises, which became part of AT&T Canada at the beginning of 1999. Prior to joining ACC in 1998, Morrison was a group VP at Bell Canada.

According to the release, Morrison's mandate is to strengthen RIM's international operations and build a service organization to support BlackBerry.

RIM also announced in September that Bell Mobility is now selling the BlackBerry service. Bell Mobility has been offering services using RIM devices for some time.

Virtek hits record revenues; biotech set to become largest unit
September 11, 2000

For the quarter ended July 31 (Q2 01), Virtek Vision reported record revenue of $6.9 million, up 127% from a year ago and 25% sequentially. Net income was $652,000 ($0.03/share).

The company forecasts that biotech will become its largest business unit this quarter, replacing its traditional leader, prefabricated construction.

Virtek's biotech unit consists of its DNA ChipReader and the products acquired from Engineering Services Inc. in July. The ESI products are initially expected to add $8-10 million in revenue annually.

Virtek says it shipped 11 ChipReaders over the quarter and expects to sell another 25 over the remainder of the year. It is currently pursuing distribution deals with "large multinational companies" but is not looking for an OEM arrangement.

CFO Phil Nafekh says that, as a late entrant into the chip reader market, Virtek misses out on some RFPs and it is investing time and money to educate the market on the benefits of its technology.

Imaging, which includes the biotech segment, accounted for 38% of sales in the quarter, with revenues climbing 31% sequentially to $2.6 million. Templating contributed the remaining 62% and its revenues grew by 22% from the previous quarter to $4.2 million.

CEO Jim Crocker says Virtek will change its reporting segments from templating and imaging to biotech and precision manufacturing, and the company is looking for additional market segments where it can apply its expertise in lasers and complementary technologies.

Sales & marketing expenses jumped 42% from the previous quarter to $1.6 million or 23% of sales, and that number is expected to rise as the salesforce is expanded. An additional four salespeople were added over the quarter in the biotech unit, which is fewer than anticipated.

Over the quarter, Virtek raised $22.7 million from the sale of stock -- including $18.8 million from its share offering in June -- and the cashflow statement shows that $8.6 million was spent on the ESI acquisition (see July digest).

The balance sheet shows $15.9 million in working capital -- up from $3.7 million at the beginning of the quarter. Virtek has $11.1 million in cash remaining from its share offering and has wiped out about $3 million in short and long-term debt.

MKS loses millions as product sales crumble
September 19, 2000

After the warning in August, the magnitude of MKS' collapse in the quarter ended July 31 (Q1 01) became clear this month when the company released its full results. Revenues plummeted 46% from the previous quarter and 21% from a year ago to US$6.5 million. Product sales fell 62% sequentially to US$3.1 million or 48% of sales.

Net loss was US$4.4 million (US$0.25/share), and MKS tacked on an additional US$8.1 million after writing down the remaining intangible assets from its SDM product line, acquired for US$24.3 million in 1998. MKS says the SDM line has suffered a permanent deterioration in its financial performance. Including the writedown, net loss was US$12.5 million.

Excluding reorganization expenses of US$668,000, the Vertical Sky segment lost US$4.0 million on revenues of only US$2.9 million or 44% of total sales. The other segment, primarily MKS' interoperability business, lost US$292,000 -- excluding the write down -- on revenues of US$3.7 million.

The company went through US$2.1 million in cash over the quarter, with US$6.1 remaining at the end of the quarter. Following the writedown, 73% of MKS' remaining balance sheet assets are held by Vertical Sky. Accumulated deficit now stands at US$19.1 million.

RDM raises $15 million through warrant offering
September 28, 2000

A special warrant financing has grossed $15 million for RDM. The company sold 4 million warrants at $3.75 each.

Each warrant is exercisable into one common share and half a warrant to purchase an additional common share for $4.25 over the next two years. The lead agent for the offering was Loewen, Ondaatje, McCutcheon.

CME Telemetrix sues Neurosoft over Advantage Medical payments
September 21, 2000

CME Telemetrix has named both Neurosoft and its parent company, the Marmon Group, as defendants in a lawsuit to secure the remaining payments it believes it is owed from Neurosoft's 1999 acquisition of CME's Advantage Medical division.

Neurosoft was to pay about $4.5 million for Advantage over two years, but has refused to give CME more than the $2.5 million it has already paid.

CME also announced that it has applied to list its shares on the new tier 3 of the CDNX. CME previously traded on the Canadian Dealing Network and had said it wanted to remain on the CDN because of the tax advantages provided by its classification as a "Canadian-controlled private corporation." But the CDN has been abolished, forcing the move to the CDNX.

TurboSonic receives largest order in company history
October 2, 2000

TurboSonic Technologies, a UW spinoff from the 1970s that was originally known as Turbotak, received a $9.6 million order from Fletcher Challenge Canada for a SonicKleen Wet Electrostatic Precipitator. The technology will be installed at a paper mill in Campbell River, BC.

With this single sale, TurboSonic has exceeded its entire sales from fiscal 2000 (ended June 30) where it reported revenues of $9.2 million -- up 60% from 1999.

STOCK REPORT: Local tech companies averaging 118% gain in 2000
September 2000

Virtek shares hit an all-time high on the strength of its quarterly results, while MKS' numbers sent its shares to an all-time low ($2.01), before coming back and actually ending up with its lowest monthly price change in over a year (it finished September at $3.35 -- down only 14 cents).

Price changes in September (the number in parentheses shows the change over the first three quarters of calendar 2000):

Virtek [TSE: VRK] +41% (+221%)
RIM [TSE: RIM] +35% (+123%)
Com Dev [TSE: CDV] +24% (+185%)
CME Telemetrix [CDN: CMET -- moving to CDNX] +18% (+68%)
RDM [CDNX: RC] +16% (+275%)
GUARD [CDNX: GUA] +10% (+23%)
Finline [CDNX: FIN] +9% (+391%)
Descartes [TSE: DSG] +9% (+135%)
Dalsa [TSE: DSA] -1% (-5%)
MKS [TSE: MKX] -4% (-46%)
Gensel Biotech [CDNX: GSB] -16% (+43%)
Open Text [TSE: OTC] -21% (+11%)

The year-to-date numbers show that this has been a very strong year for local tech stocks, despite the market collapse in the spring. The average gain between these 12 companies is 118%.

MKS is the only company whose stock is down significantly, but its new neighbour, Toronto-based Cyberplex, edges it out for weak stock performance so far this year. As of Thanksgiving weekend, Cyberplex shares are down 48% for the year, compared to MKS' 45% decline. If you see Robert Ballard's crew pulling into 410 Albert, they're just searching for the stock options of employees hired in the spring.

A couple of other companies -- both involved in creating e-marketplaces -- have also seen their shares slide. Entrade, based in Illinois but with all development work performed in Kitchener, and Treasury International, parent company of Kitchener's Compelis, both saw their stock set new 52-week lows last week.

Last month I mentioned that the 3.058 Janna shares that LivePage's shareholders received when it was acquired by Janna last November had climbed in value from $17.6 million to $140.8 million. One month later, they're worth $253.8 million -- up 1,356% in less than a year -- following the announcement that Janna is being acquired by U.S. CRM giant Siebel.

Miscellaneous Tidbits

• Kaparel is taking a 20,000 square-foot building at the Pressworks Technology Park on Randall Drive. The building is scheduled to be built for spring occupancy. Kaparel can add an additional 15,000 square feet as needed.

• Navtech says it is spending about $115,000 on an expansion of its Waterloo facility. In the quarter ended July 31 (Q3 00) the company reported revenues of US$1.7 million -- the same as in the previous quarter. Net income was US$71,484 (US$0.02/share). The company's working capital deficiency remains steady at US$644,000.

• For the year ended July 31, EMJ Data Systems reported revenues of $166.4 million, gross profits of $15.1 million, and income from operations of $5.2 million. Those numbers are all nearly identical to the company's 1999 results, but this year EMJ had an additional $1.3 million net gain on the sale of investments -- primarily from the sale of shares in New Brunswick-based ASG Technologies. EMJ holds a stake in several small technology companies. With the investment gains, EMJ's net income in 2000 was $5.7 million ($0.75/share), up 71% from the previous year.

  EMJ CEO Jim Estill, who is a director of RIM, has also joined the advisory board of Ottawa's Zim Technologies, along with ex-Corel CEO Michael Cowpland.