November 2000

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 45 -- December 4, 2000
In this digest:

1. MKS hits penny stock status after another weak quarter
2. MKS shuffle reunites Telular Canada team
3. German firm acquires stake in Kaparel
4. Cisco acquisition of PixStream expected to close this month
5. Entrade development office acquired by New York firm

6. Descartes achieves quarterly profit on growing network revenues
7. Virtek biotech sales account for a quarter of revenues
8. Open Text acquires products and staff for US$5 million
9. Xign receives US$14.3 million in venture capital by e-mail
10. STOCK REPORT: Only one-quarter of stocks in decline this year

11. CME countersued in claim against Neurosoft
12. Miscellaneous tidbits from RIM, GUARD, Finline, Dalsa, PrinterOn, Intrinity, Agile Systems

MKS hits penny stock status after another weak quarter
November 30, 2000

A second consecutive weak quarter for MKS saw the company's shares lose 67% of their value in November, closing the month at 89 cents. At month-end, its market capitalization had withered to just $16 million -- lower than the valuation of some start-up companies in town.

Of more immediate concern is the company's dwindling cash reserves. The balance sheet at October 31 shows US$2.7 million in cash -- down US$3.5 million over the quarter -- with current assets of US$10.1 million just slightly below current liabilities (excluding deferred revenue). The company has said it expects to be cash flow negative again this quarter, which has raised concerns about where the cash is going to come from. It cannot draw funds from its existing line of credit because the company's financials do not meet the thresholds of the current agreement with CIBC. MKS says it "anticipates pursuing various sources of financing, including the negotiation of a new operating line of credit." In the conference call, the company said it hopes to be cash flow positive in Q4.

Several staff have been let go, and that list apparently includes the former "VP of People." His profile was removed from the Vertical Sky Web site this month, as was that of the company's general counsel.

There are 125 people working in MKS' new 75,000 square foot Waterloo facility, which means you could give each employee a 20'x20' space and still have 25,000 square feet left over. The balance sheet shows US$1.1 million in "property and equipment" added over the quarter.

For the quarter ended October 31 (Q2 01), MKS reported revenues of US$7.7 million -- up 19% from a weak Q1, but down 17% from a year ago. The one bright spot was the 44% sequential growth in product sales, which contributed 58% of sales. Services revenue was off 4% from Q1. Overall, net loss was US$5.5 million ($0.31/share).

Sequential revenue growth in the Vertical Sky segment was 8% -- well below the numbers the company has targetted for this year. On its own, Vertical Sky lost US$4.5 million on sales of US$3.1 million. It contributed 40% of total sales, down from 44% in the previous quarter.

MKS wrote off US$2.5 million in receivables in the quarter, saying that some customers had returned or cancelled orders because of dissatisfaction either with the product or with their relationship with MKS, which the company says was caused by turnover among account managers. Poor business conditions for some MKS customers was also cited as a reason for the write-down.

Sales VP David Thonn, hired at the beginning of the quarter, says he has eliminated split commissions and team sales and will now delay compensation of sales reps until the customer has paid for the product, rather than paying upon the receipt of a purchase order as had been the practice.

Even before the dismal results, one of MKS' biggest boosters had already thrown in the towel. Over the last couple years, Duncan Stewart of Tera Capital had often spoken publicly about how much he liked the company's prospects, and the fund he managed owned several hundred thousand MKS shares. At the end of October, however, he reported that he had sold them all. "[MKS] had good technology and the right value," he wrote, "but management's continued failure to execute suggests that we should no longer own the stock."

Canaccord Capital has dropped coverage of MKS, according to the Globe. The shrinking interest in the company was reflected in the quarterly conference call which attracted participation by only a single analyst -- Tom Liston from Yorkton.

MKS now consists of two operating divisions: Vertical Sky and MKS Software. One of MKS' few recent successes has been getting just about everyone to describe MKS Software as its "traditional product line," but this characterization is more PR spin than reality.

MKS' core products from the last several years -- MKS Source Integrity and Web Integrity -- are now part of Vertical Sky. The company's preliminary prospectus from September 1997 described its business as "comprehensive solutions to improve an organization's software and content development and maintenance processes," which is essentially how Vertical Sky is described today.

As more software and Web development became e-business focused over the last three years, it was a logical evolution for the company that went public in 1997 to become what is now Vertical Sky. MKS Software is largely the DataFocus business that MKS acquired in 1999. It does include MKS Toolkit -- the company's first significant success -- but Toolkit had almost been reduced to a historical footnote by the time MKS went public (it's a much larger product group today, and now includes the former DataFocus NuTcracker; in 1997 it was essentially a suite of utilities).

Toolkit's footnote status changed in May 1998 when MKS announced that Microsoft had licensed some of the Toolkit utilities for its NT Add-On Pack. That news caused MKS shares to spike to $11.95 in intra-day trading, which would remain their high point for almost the next two years.

The news release announcing the Microsoft deal was the first time the word "interoperability" appeared in an MKS release and the company immediately began to describe itself as "a leading provider of interoperability solutions." The DataFocus acquisition was made about nine months later.

Although MKS has long been surpassed locally as either a success story or an inspiration, it was not long ago that it was both to the Waterloo high-tech community. It was perhaps the first of the 1980s cohort of local technology companies to distinguish itself and help draw attention to Waterloo as a nascent software development centre (I think of Watcom as from an earlier generation, although technically it was formed just four years before MKS.) Ruth Songhurst, then MKS president, and Randall Howard were both key figures in forming a community among area technology companies.

Today, MKS has fewer employees in Waterloo than it had three years ago, and it's the company's peers -- RIM, Descartes and Open Text -- that are cited as exemplars of local high-tech success. It may be too early for a eulogy, but it's been sad to see the decline of a company that was once an important symbol of Waterloo high-tech.

MKS shuffle reunites Telular Canada team
November 8, 2000

Robert Gibb, a director of MKS for more than six years, has become chairman of the company, succeeding Randall Howard, Howard remains on the board and continues to be CEO of Vertical Sky, officer of MKS, and MKS' largest shareholder.

One of Gibb's first moves as chairman was to bring in Don Harkness as interim CFO. MKS has been without a CFO since Eric Palmer left to become CFO of Richmond Hill-based Syndesis in March.

Gibb and Harkness have experience working together at a troubled company. They were the CEO and CFO of Telular Canada (now Global Data) in 1997 as the company's shares fell into penny stock levels. Gibb and Harkness negotiated a deal that would have seen Lava Systems of Toronto acquire Telular, but the deal was rejected by Telular's shareholders despite a recommendation from the company's board and management. Lava went into receivership in 1998 and its assets were acquired by Open Text in January 1999.

Gibb (who was also a director of Telular), Harkness, and four other directors all resigned shortly after the shareholders' rebuff. One of Gibb's successors on Telular's board was Jim Crocker, CEO of Virtek.

Gibb, Harkness, and Thonn were the only three MKS representatives on the company's conference call as the company makes an effort to present a new management team to the investment community.

German firm acquires stake in Kaparel
November 16, 2000

Germany's Rittal has acquired the 40% stake in Kaparel formerly owned by PixStream and it is expected to end up owning the entire company. Rittal, which manufactures products complementary to Kaparel's, is a major distributor of Kaparel products and was considered to be the most likely purchaser for the Kaparel shares that became available when Cisco agreed to acquire PixStream.

Financial details were not disclosed, but $12 million is the amount that has been rumoured. There has been talk -- unconfirmed by the company -- that Rittal may acquire about half of the remaining shares in the near-term, and the balance in two years at a significantly higher price.

Cisco acquisition of PixStream expected to close this month
November 10, 2000

Cisco's acquisition of PixStream is expected to close later this month, following a shareholders meeting to approve the transaction. Information circulars may already have been sent to PixStream shareholders.

PixStream CFO Tim Jackson tells me that the dollar value was fixed -- and in U.S. dollars, which is quite a bonus given the direction of Cisco shares and the Canadian dollar since the deal was negotiated. I'm sure most high-tech companies (other than Com Dev, locally) would love to have their valuations fixed at August levels. The exact number of Cisco shares to be received by PixStream shareholders will be set three days before the close of the transaction, using a 10-day average price. Cisco shares have lost 30% of their value over the last three months.

Details expected to be in the information circular include a one-year escrow of nearly 12% of the Cisco shares received by PixStream shareholders. Net proceeds are expected to be $7.50-$8/share, which would be double the price of PixStream's warrant offering in February. It was priced at $8/warrant but there has since been a 2-for-1 stock split.

Entrade development office acquired by New York firm
November 22, 2000

New York-based Metiom has acquired what remains of Entrade's Kitchener development office. Marc Gingras, formerly Entrade's CTO, has joined Metiom, along with Fang Yang, previously director of R&D for Entrade, and about 10 other developers.

Like Entrade, Metiom is in the e-procurement and online exchange market. It is a private company with 130 developers in centres in the U.S., Canada, and Australia. It was known as Intelisys Electronic Commerce until changing its name in September.

Metiom has taken over Entrade's lease and will continue to operate out of the Victoria Street office. The company is holding a formal launch this Thursday, with its CEO and COO making the trip to Kitchener from New York.

At its peak, Entrade's Kitchener office had about three dozen employees. It closed last month after the company ran out of cash.

Descartes achieves quarterly profit on growing network revenues
November 21, 2000

For the quarter ended October 31 (Q3 01), Descartes reported revenue of US$17.4 million, up 67% from a year ago and 19% from the previous quarter. The key license and network revenue was up 188% from 1999 and 26% sequentially and accounted for 79% of sales. Excluding acquisition-related amortization costs, the company had net income of US$733,000 ($0.00/share). Loss from operations, again excluding amortization, was just US$30,000. Descartes reported that it generated positive cash flow of US$1.1 million. Barring anything unexpected, the company is forecasting a profit of more than US$2.5 million (US$0.06/share) in the current quarter.

Traffic over the company's Global Logistics Network increased 80% sequentially and there are now over 300 customers on the network.

Next quarter, Descartes will report its network and licensing revenues separately. CEO Peter Schwartz said that networking revenues may not quite equal licensing revenues as was targetted in March, but he expects everyone will still be pleased by the level of network revenue.

In the conference call, Schwartz took pains to emphasize Descartes' "brick & mortar" customer base and poked fun at floundering online exchanges that he said brought a lot of "noise and fluff" to the market and are now "desperately giving away technology and even board seats" to try to stay alive.

Schwartz said that some of these companies with good but incomplete technology may now be acquisition targets for Descartes, which had US$258.4 million in cash and short-term investments at the end of the quarter. He said the company is in a position to be a consolidator in its market, particularly as the IPO market has dried up and potential targets are more likely to look at the possibility of a merger or acquisition. Schwartz also said that Descartes isn't looking to buy money-losing companies and expects any acquisition to be neutral or accretive to company earnings.

I forgot to mention last month that Endgame Solutions -- the DSD business that used to be at the heart of Descartes before being spun out in March -- has laid off many of its employees. There was a flood of resumes from ex-Endgamers in late September, and I'm told there had been another round of layoffs in June. The company's Dallas office was closed at the end of September. The DSD portal that was to have been at DSDPortal.com (see March digest) was never launched.

Virtek biotech sales account for a quarter of revenues
November 28, 2000

Virtek reported sales of $8.0 million for the quarter ended October 31 (Q3 01), up 84% from a year ago and 17% quarter-over-quarter. Expenses were up sharply across the board, with R&D jumping 70% sequentially to 11.6% of revenue. With the added expenses, income from operations fell to $340,000 from $1.2 million in Q2. Net income was $371,000 ($0.02/share).

The company has $8.8 million in cash, down $2.3 million over the quarter. Cash used by operating activities was $1.6 million. Working capital is $16.4 million.

The biotech segment accounted for 26% of sales, with the balance provided by precision manufacturing, which includes all of Virtek's traditional segments: prefab construction, aerospace, and industrial imaging. A new glass-marking product has also been developed which the company expects will become a significant market segment next year.

The entire $1.5 million order backlog for the ESI arrayer acquired in July (now called ChipWriter) was shipped during the quarter, and CEO Jim Crocker says the company has been surprised that the demand for ChipWriter has been stronger than that for ChipReader.

Seven ChipReaders were shipped over the quarter, fewer than forecast, but Crocker says the company expects to catch up in Q4. It had previously targetted sales of 25 ChipReaders over the last half of the fiscal year after selling 11 in Q2.

Early in November, following the end of the quarter, Virtek shipped its first two DNA colony pickers, another product acquired from ESI.

Talks are still underway to find distributors for the biotech products. Crocker said the company is being cautious in negotiations over giving away too large a cut or providing exclusivity.

After moving to its new site in Waterloo just last year, the company has already run out of space with the ESI products now being manufactured here. Crocker says the operations group will probably move to a new facility. Virtek now has 104 employees with 23 in biotech.

Open Text acquires products and staff for US$5 million
November 22, 2000

Open Text has paid $3 million in cash and assumed $2 million in liabilities for search and retrieval products from Massachusetts based LeadingSide Inc.

Until two months ago, LeadingSide was known as Dataware Technologies and is a Nasdaq-listed company (for now, anyway; it's envious of MKS' market cap).

In addition to the products, Open Text will also get about 40 of LeadingSide's employees related to the products. The company says its expects the acquisition will be immediately accretive to earnings.

Xign receives US$14.3 million in venture capital by e-mail
November 15, 2000

Xign, the RDM e-cheque spin-off, received US$14.3 million from Matrix Partners and Charles River Ventures, both of Waltham, Mass., and Charles Schwab (the person, not the company). Using its technology, it received the payment in an electronic cheque delivered by e-mail.

RDM's stake in Xign has now been reduced to just 36%.

STOCK REPORT: Only one-quarter of stocks in decline so far in 2000
November 2000

Monthly stock movement for November, with year-to-date changes in parentheses:

Gensel Biotech [CDNX: GSB] +53% (+79%)
Com Dev [TSE: CDV] +4% (+282%)
Finline [CDNX: FIN] -3% (+222%)
Dalsa [TSE: DSA] -11% (-27%)
CME Telemetrix [CDNX: YME] -13% (+21%)
GUARD [CDNX: GUA] -13% (-29%)
Virtek [TSE: VRK] -19% (+148%)
Open Text [TSE: OTC] -30% (+1%)
RIM [TSE: RIM] -35% (+48%)
RDM [CDNX: RC] -38% (+146%)
Descartes [TSE: DSG] -40% (+17%)
MKS [TSE: MKX] -67% (-86%)

It's been a poor year for the stock market, but only MKS, GUARD, and Dalsa have seen their share prices decrease so far in 2000. To this point, Com Dev is the clear success story while Finline is still among the big gainers, even though its share price has declined by 77% over the last nine months.

Gensel stock jumped after the company announced that it has identified several proteins which may be sex-specific. It is the next major step in the company's efforts to develop a technology to separate male-producing sperm from female-producing sperm for livestock production.

MKS' 67% decline in November was the worst one month drop in the three years I've been tracking local tech stocks. The previous record was Com Dev's 62% fall in June 1998. Com Dev's recent comeback might give some comfort to MKS shareholders, but nearly 2 1/2 years later, and despite having a banner year this year, Com Dev shares are still trading nearly 30% below their May 1998 levels. RIM shares fell by 59% in March and made all that loss back six months later.

The curse of 410 Albert continued in November, as MKS' co-tenant, Cyberplex, saw its shares drop 54% for a total 77% decline this year.

CME countersued in claim against Neurosoft
November 22, 2000

CME Telemetrix -- which is suing Neurosoft for $2.2 million to receive the balance of payments it believes it is owed from the sale of its Advantage Medical division to Neurosoft in 1999 -- reported this month that it has served with a counterclaim for $9.5 million.

CME has received $2.5 million of the $4.5 million it was expecting to receive for Advantage. Neurosoft has refused to pay the balance.

For the quarter ended September 30 (Q3 00), CME reported a loss of $1.1 million on revenue of $100,000. Its cash position at the end of the quarter remained nearly unchanged at $2.8 million.

Miscellaneous Tidbits

• RIM and BellSouth Wireless announced a new agreement that will see RIM supply 75,000 units of each of its pager-sized and PDA-sized devices. BellSouth will also offer the BlackBerry service to its corporate customers.

• AOL's service using RIM devices was finally unveiled at the end of November. AOL has priced the device at US$330 with monthly service charges of US$20.

• For the quarter ended September 30 (Q3 00), GUARD lost $570,000 ($0.08/share) on interest income of $19,000. The company had $1.0 million in cash and short-term deposits at the end of the quarter, and another $11.1 million -- from the sale of Nanodesign -- in long-term investments. Excluding a short-term deposit, the company's cash position decreased by $924,000 over the quarter.

• Finline lost $667,000 on sales of just $23,000 for the quarter ended September 30 (Q3 00). At quarter-end it had $768,000 in cash, down $573,000 over the quarter. Working capital is $792,000. Finline says it has reached "fundamental agreement" with Cuba's Grupo de la Electronica and is awaiting approval by the Cuban Council of Ministers for the deal it announced back in July.

• Jim Hill, Dalsa's CFO, has left the company. Peter Voss has been promoted from director of finance to VP of finance.

• Linda Gregorio, formerly sales VP at Waterloo Maple, has joined PrinterOn in the same capacity. She rejoins Ian Suttie, Maple's former CEO and now executive VP at PrinterOn. Stephen Hearn has been hired as PrinterOn's VP of strategic alliances.

• Intrinity announced that it has received "cash and software valued at $125,000" from Sentricity, a division of Sentex.

• Agile Systems has received ISO 9001 certification. The company opened an office in California in May and now had 56 employees in Waterloo.