June 2001

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 52 -- July 3, 2001
In this digest:

1. PixStream spinoff launched with backing from Waterloo VC
2. RIM hits quarterly targets, maintains guidance
3. Descartes acquires two Atlanta firms
4. STOCK REPORT: From last legs to first place for Treasury Int'l
5. MKS projects sales growth of 10-30% following disastrous 2001

6. Dalsa cuts sales growth estimates to 0-13%
7. MDR Switchview receives $5M investment from Manulife
8. Miscellaneous tidbits from iAnywhere, Ardesic, Com Dev, CME Telemetrix, RDM, Inscriber

PixStream spinoff launched with backing from Waterloo VC
June 19, 2001

VideoLocus Inc., formed by four engineers after they were laid off by Cisco/PixStream, has received $600,000 in seed financing from Tech Capital Partners, the Waterloo-based VC firm launched in January.

It is the first deal for Tech Capital Partners, and the first venture-backed company to emerge from Cisco's decision in April to abandon the former PixStream.

VideoLocus is developing next-generation video compression and processing technologies.

Mate Prgin is president of the new company, with Lowell Winger, Guy Cote, and Michael Gallant rounding out the rest of the team. The four had been PixStream's advanced engineering team and began talking about starting their own company almost immediately after the layoff notices came down.

VideoLocus will receive money from Tech Capital Partners' Waterloo Tech Capital fund, as well as from Waterloo Ventures. Former PixStream CFO Tim Jackson is the co-manager of both funds.

At least one other significant Cisco spinoff is expected to surface over the next 2-9 months. It would be headed by former members of PixStream's senior management team and include other laid-off employees -- and possibly some former PixStream assets no longer needed by Cisco.

RIM hits quarterly targets, maintains guidance
June 21, 2001

For the quarter ended June 2 (Q1 02), RIM reported sales of US$77.0 million -- right in line with the company's forecast in April.

Loss from operations grew to US$3.2 million, offset by US$9.2 million in interest earned on RIM's large pool of cash. Overall net income was US$3.8 million (US$0.05/share).

Total revenue was down 15% from the previous quarter, which had been inflated by a large sale of handheld devices to AOL. Sales jumped 184% from the same period last year. BlackBerry revenue was up 15% sequentially to US$49.8 million, or 65% of all sales, up from 48% in the previous quarter. Sales of the device itself (67,000 units shipped) accounted for US$29 million in sales, with services and software providing the remaining US$21 million.

Over the quarter, RIM added 46,000 BlackBerry subscribers, bringing the total to over 210,000. The company is forecasting an additional 50-55,000 subscribers in the current quarter. There are now 9,700 companies using BlackBerry, including 2,700 that have installed RIM's BlackBerry server.

Initial sales of BlackBerry for Lotus Notes have been slower than hoped due to what co-CEO Jim Balsillie described as "installation issues." Many large Notes users had customized implementations that conflicted with the standard BlackBerry installation. Balsillie said the problems have mostly been solved, but that they will present a significant barrier to competitors trying to implement Notes-based services. There were 240 companies using RIM's Notes server at the end of the quarter.

The big drop in quarterly sales came in handhelds (excluding those sold as part of the BlackBerry service), which were cut almost in half to US$21 million or 17% of sales. RIM shipped 52,000 handheld devices over the quarter, for a total of 119,000 devices when combined with the BlackBerry numbers.

Some of RIM's resellers have excess inventory -- particularly of the smaller pager-sized devices, but Balsillie said the overstocks have already been factored into the company's revenue guidance for this year.

Maryland's Aether Systems, one of RIM's distributors, announced a round of cutbacks and layoffs at the end of June, blaming the economic slowdown. In May, Aether had written off the value of excess RIM devices it had in its inventory. Balsillie said that RIM's most significant resellers are still making sales and that SkyTel in particular should pick up some of the slack in other channels this quarter.

Balsillie is not counting on any re-order from AOL this year, but denied reports of a dispute between RIM and AOL over the cost of the handhelds.

CFO Dennis Kavelman said he continues to be comfortable with revenue forecasts in the low US$80 million range for the current quarter and US$370-390 million for the year. Investment income is expected to drop more than US$2 million to US$6.5-7 million this quarter.

RIM had US$698.6 million in cash at the end of Q1, down US$23.3 million over the quarter. Cash was used to purchase property, buildings, production and R&D equipment, and additional inventory. The balance sheet shows US$85.2 million in inventory, or 111% of sales, up US$17.2 million over the quarter. RIM management said this is mostly components for its GPRS devices that were originally scheduled for launch in May and that the inventory levels will decline as the product is rolled out.

Balsillie said RIM is improving its own IT systems, including the imminent implementation of an SAP system. He said that billing has been a weakness for the company.

RIM's new R&D centre in Waterloo is scheduled to open in September, and the new manufacturing facility should be operational this fall. In October, RIM will open a new BlackBerry operations centre in Virginia.

RIM had about 1,400 employees world-wide at the end of the quarter.

* Following last month's story about RIM's suit against Glenayre, claiming -- among other things -- infringement of RIM's "always on, always connected" trademark, I noticed that the Space cable network is running an item featuring someone under a PageNet logo (I missed the ID) who demonstrates a Handspring Visor with Glenayre's @ctivelink wireless e-mail product. He says that "one of the advantages is that it is always on, always connected." Oops.

Descartes acquires two Atlanta firms
June 20, 2001

Descartes has acquired Centricity Inc. and TranSettlements Inc., both of Atlanta, in separate all-stock deals.

Shareholders of Centricity, a provider of ground transportation optimization software, will receive 1.3 million Descartes shares, currently valued at US$23 million. Descartes will also assume Centricity's stock option plan, which should put the total value of the acquisition at about US$25 million. The deal is expected to close early this month. Centricity was launched last year and has 29 employees. Descartes said the company does not yet generate revenue, but it did announce its first five users in January.

TranSettlements, a provider of ground transportation messaging services, has been acquired for 1.5 million shares, with a current value of US$27 million. Including stock options, the total acquisition price is about US$30 million. The company was previously owned by the Winship family, which has long ties to the trucking industry in Georgia. TranSettlements employs 53 people and is expected to add US$2-2.5 million to Descartes' quarterly sales.

Both companies will continue to operate in Atlanta.

STOCK REPORT: From last legs to first place for Treasury Int'l
June 2001

How's this as a recipe for resuscitating a dying stock?:

• Take a penalty for not filing your quarterly report on time
• When you do file it, report gross profits of US$235 a month
• Report a working capital deficiency of nearly a half-million dollars U.S. -- about 10 times your quarterly sales
• On your balance sheet, show total shareholders equity as almost a million U.S. dollars in the hole
• Don't announce that you've made even one sale in the last year
• Place a big "for lease" sign on your office

Treasury's shares soared by 738% in June, climbing from US$0.40 to US$3.35. Before the company's 1-for-100 reverse split in February, that would have been a gain of less than three cents, but with or without a split, it's still a 738% gain.

There were no announcements from the company, although it did file its quarterly financial statements after the final trading day of the month. A company listed on a real stock exchange would have some explaining to do, but Treasury is listed on the U.S. over-the- counter bulletin board, which is about as tightly governed as the Wild West.

Treasury is looking like a shell ready for a reverse takeover, but it's a much pricier acquisition now, with a market cap of about CDN$5 million in addition to its working capital deficiency. It does claim a operating loss carryover of US$6.5 million for tax purposes.

The 738% jump was easily a record over the 3.5 years I've been tracking local tech stocks. The top four spots had previously all been held by Finline, which requires no further comment to anyone who read the last digest.

For the month of June (with performance over the first half of 2001 in parentheses):

Treasury Int'l [OTCBB: TREY] +738% (+12%)
RecycleNet [OTC: GARM] +17% (-50%)
GUARD [CDNX: GUA] 0% (-14%)
MKS [TSE: MKX] 0% (+155%)
Navtech [OTCBB: NAVH] 0% (-25%)
=================================
Descartes [TSE: DSG] -1% (-22%)
RIM [TSE: RIM] -2% (-59%)
CME Telemetrix [CDNX: YME] -3% (+6%)
Open Text [TSE: OTC] -4% (+11%)
Dalsa [TSE: DSA] -6% (-10%)
Turbosonic [OTCBB: TSTA] -9% (+46%)
Com Dev [TSE: CDV] -10% (-64%)
Virtek [TSE: VRK] -14% (-28%)
RDM [CDNX: RC] -25% (-80%)
Finline [CDNX: FIN] -32% (-75%)

With Treasury's turnaround, RDM takes the non-prize for worst performing local tech stock (including those listed below) over the first half of the year. RDM shares closed June at 60 cents -- their lowest monthly closing price since September 1997.

Leading the pack locally at mid-year is MKS, and it will almost certainly remain on top at year-end. Among companies that weren't left for dead in December, Turbosonic shares gets top marks so far this year, and if we exclude penny stocks, that honour falls to Open Text. I don't list them here, but EMJ and ATS have also been solid performers over the last six months -- EMJ would be second to MKS if you factor in the dividends it pays.

EMJ tops all stocks here for performance over the last 12 months. Over that period, Open Text is the only other company on these lists whose shares have gone up in price.

Among companies with head offices outside this area:

CVF Technologies [Amex: CNV] +29% (-4%)
Sybase [NYSE: SY] +6% (-17%)
Siebel [Nasdaq: SEBL] +3% (-31%)
VoiceIQ [CDNX: VIQ] 0% (-63%)
=================================
Cisco [Nasdaq: CSCO] -6% (-52%)
CheckFree [Nasdaq: CKFR] -10% (-17%)
Cyberplex [TSE: CX] -13% (-74%)
Network Assoc [Nasdaq: NETA] -14% (+197%)
MDR Switchview [CDNX: MSW] -17% (-58%)
CacheFlow [Nasdaq: CFLO] -23% (-71%)
Gensel Biotech [CDNX: GSB] -43% (-41%)

According to globeinvestor.com, RDM is the 8th-worst stock market performer so far this year among Canadian software companies. At the bottom of the list, losing 93% of its value, is Delano Technology, which long-time digest readers may remember as the company that former Open Text CFO Thomas Hearne joined in 1999. He's still there, as CFO.

Former PixStream partner iMagicTV (-85%) also makes the bottom ten. There was a story in the National Post in June about a Richmond Hill company described as a combination of iMagicTV and PixStream that was looking for venture capital. I'm sure the VCs are lining up to get in on that one.

MKS projects sales growth of 10-30% following disastrous 2001
June 14, 2001

For the quarter ended April 30 (Q4 01), MKS reported a net loss of US$4.7 million (US$0.16/share) on revenue of US$6.7 million. Revenue was up 6% from the previous quarter, but most of that came from the acquisition of Upspring Software during the quarter. While organic sales growth was nearly flat, MKS' software configuration management (SCM) segment reported sequential revenue gains of about 20% (excluding Upspring). Most of that was offset by a 16% decline in interoperability sales. CEO Phil Deck says SCM is the company's primary focus, and it provided 58% of all sales in Q4, up from 47% in Q3.

Net loss included US$3.3 million in interest on the debentures issued in January. Loss from operations was US$1.4 million.

During the quarter, MKS raised US$7.1 million net through a warrant offering (see February digest). Operations consumed almost US$1 million in cash, while the Upspring acquisition used US$836,000. MKS also spent US$1.3 million to repay debentures. At the end of the quarter, MKS had US$9.0 million in cash, up US$3.5 million from the end of Q3.

For fiscal year 2001 -- the worst in company history -- MKS had a net loss of US$26.7 million on sales of US$27.3 million, down 32% from sales of US$40.3 million in fiscal 2000.

In the conference call, Deck forecast sales growth of 10-30% for the current fiscal year. He is expecting revenue between US$30-35 million for 2002, with SCM contributing two-thirds. That's about where the company was in 1999. Deck said that Q1 would show only a modest revenue increase above Q4.

According to Deck, all of the MKS' current sales reps have been hired since September and very few members of Upspring's salesforce are still with the company because most were "not nearly as high quality" as the existing MKS sales team.

Deck threw a rare bone to the company's previous management, praising in particular co-founder Alex White (who's still on the management team) for the decision a few years ago to rebuild MKS' SCM product for enterprise implementations. Deck called it a bold move that today has a greater impact on the company's strategy and ability to grow sales than any other factor.

Tom Liston of Yorkton was again the only analyst to ask questions in the conference call. In the last three calls combined, there has been participation from just two analysts.

Dalsa cuts sales growth estimates to 0-13%
June 19, 2001

Economic conditions have quickly derailed Dalsa's revenue targets that were part of its "Strategy for Growth" announced last year. Dalsa says its sales in 2001 will fall below expectations, and that its revenue growth rate this year will be somewhere between 0% and 13% -- well below the 30% it was targetting ("coupled with our acquisition strategy, I am confident this figure will be much higher," wrote CEO Savvas Chamberlain in the company's annual report four months ago).

It attributed the shortfall to reduced spending by customers and delayed order dates.

In Q1, Dalsa reported sales of $15.7 million -- a 56% jump from the same period in 2000. Annual revenue is now expected to be in the $53-60 million range -- $9-16 million below initial targets. Last year, Dalsa had sales of $53.3 million.

In its annual report, the company said that sales of $1 billion by the end of the decade were "attainable."

I don't think I ever mentioned here that the $8 million Dalsa raised in a private placement last October came from Tera Capital's StrategicNova Canadian Technology Fund. Fund manager Duncan Stewart was a long-time MKS booster before selling off MKS shares just in the nick of time last year -- I see he bought back into MKS in February.

MDR Switchview receives $5M investment from Manulife
June 13, 2001

MDR Switchview has completed a $5 million private placement with Manulife Financial as the sole investor. Manulife purchased 1.6 million warrants -- each exercisable into one common share -- at $3.10/warrant.

MDR Switchview expects to net about $4.3 million. Half of that money will go toward payment of a $9.5 million promissory note that was issued to acquire MDR Technologies Inc.

After exercising the warrants, Manulife will own 10.4% of the outstanding common shares of MDR Switchview, making it the company's third-largest shareholder after Trilwood Investments and Bell Canada.

MDR Switchview is also planning a public offering later this year. Underwriters for both the private placement and the public offering are Yorkton, Raymond James, and BayStreetDirect.

In Switchview's final year as a standalone company -- ended January 31 -- it reported sales of $20.6 million with a net loss of $1.5 million. Over the same period, the combined MDR Switchview had proforma revenue of $38.7 million and a net loss of $7.8 million.

The company had said that no layoffs were expected as a result of the merger, but that very quickly turned out not to be the case. MDR Switchview took a $827,000 restructuring charge in the quarter ended April 30 to cover severance costs. The company didn't say if anyone in Waterloo was affected.

In the quarter ended April 30 (Q1 02), MDR Switchview reported a net loss of $2.1 million ($0.17/share) on sales of $8.0 million.

Miscellaneous Tidbits

• iAnywhere Solutions president Terry Stepien is the 2001 recipient of UW's J.W. Graham Medal in Computing and Innovation. The award is named after the late Wes Graham, who was chairman and CEO of Watcom, which evolved into iAnywhere through two acquisitions and a spinoff. In addition to working together at Watcom, Stepien and Graham both worked with UW's Computer Systems Group.

• In the April digest, I used Ardesic as an example of a company still hiring -- and it is hiring, but it also had a round of layoffs in mid-May following a restructuring. Two of Ardesic's three founders, Shawn Day and Carmen Clow, are no longer with the company. The third founder, Jeff Fedor, remains CTO and director. Ardesic CEO Bob Ford is scheduled to appear on ROBtv's Technology Tuesday VC pitch segment today.

• At the annual JavaOne conference in San Francisco, RIM displayed its new J2ME-based BlackBerry handheld. RIM has ported BlackBerry applications to work on J2ME (Java 2 Micro Edition). At the same conference, iAnywhere Solutions announced it is working with Motorola to develop a prototype of an enterprise application for a new J2ME-enabled phone.

• Michael Pley is the new president of Com Dev Space, succeeding John Keating who was made corporate COO in April. Pley initially joined Com Dev in 1983 and rejoined the company after working at Unitron in Kitchener for two years as vice-president.

• Rick Darnaby is the new chairman of CME Telemetrix. He takes over from George Masters, who remains on the board. Darnaby has been a director of CME since February.

• RDM says its Internet-based image archiving service will be used by Secure Payment Systems of San Diego.

• Inscriber announced that some of its software will be bundled into products from both Adobe and Sony.