August 2001

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 54 -- September 4, 2001
In this digest:

1. Com Dev looks to sell slumping wireless business unit
2. Virtek lays off 15% as sales fall below forecasts
3. Open Text reports continued sales growth and profits
4. STOCK REPORT: Descartes, Com Dev lose half their market value
5. Descartes weak quarter in line with warning

6. Sunshine Capital completes IPO; abandons ARISE plans
7. Randall Howard steps down from MKS board
8. RDM sales drop; new markets sought for imaging tech
9. Finline shares slide as management predicts exponential growth
10. GUARD continues to fund operations through asset sales

11. Miscellaneous tidbits from Sandvine, QJunction, PrinterOn, RIM, Fakespace, Treasury International, TurboSonic, CME Telemetrix, Onlinetel.

Com Dev looks to sell slumping wireless business unit
August 29, 2001

Com Dev plans to sell its wireless subsystems business -- the largest part of its wireless division. The business has been hit hard by the downturn in the telecom and networking industries. Over the last nine months, Com Dev Wireless has seen its quarterly sales shrink from a strong $32.1 million to $22.4 million to a disastrous $10.3 million in the quarter ended July 31 (Q3 01). Com Dev will keep its base station business, which it says typically has revenue of about $5-6 million a quarter (although it generated almost no revenue in Q3, which was attributed to a customer's delay in receiving financing for a purchase).

In a conference call, the company said the book value of its wireless subsystems business was over $50 million. It didn't say how many people work in the subsystems area. but it's probably around 400. Com Dev Wireless has 600 employees.

Cambridge-based Com Dev Space, in contrast, has bounced back from its slump in 1999-2000 and has now achieved quarterly sales of over $30 million in three of the last four quarters. In Q3, it has revenue of $30.4 million, down 6% sequentially but up 19% from a year ago. Gross profit was $11 million, compared to a negative gross profit of $2.4 million for Com Dev Wireless.

Com Dev reported revenue of $40.7 million in Q3, down 25% from the previous quarter and 19% from a year ago. Gross profits were down 40% sequentially, as margins fell from 26% to 21%.

Expenses were also cut by 25% from Q2, but net loss grew to $10.4 million ($0.22/share), up from $4.0 million in the previous quarter.

Operations used $6.0 million in cash and the company paid off $2 million in debt in the quarter, reducing its cash position by a net $8.4 million to $13.1 million at quarter-end.

Com Dev says its wireless Internet product, M/ERGY, remains on schedule for launch by March.

Virtek lays off 15% as sales fall below forecasts
August 30, 2001

Virtek has laid off twenty employees in a quarter where the company's expenses grew substantially while sales and gross profits declined. It also announced that it is looking at various ways of splitting its biotech business into a true stand-alone company.

In the quarter ended July 31 (Q2 02), Virtek reported sales of $7.7 million, up 13% from a year ago (slightly understated in the company's news release -- not the first time they've done that), but down 3% from the previous quarter. Both Virtek's biotech and laser systems segments showed a decline in margins, leaving gross profit down 12% from Q1.

At the same time, expenses -- excluding $345,000 in restructuring charges -- jumped 21% from Q1. The increases were across the board, with G&A expenses climbing 47%, R&D up 31%, and sales & marketing up 10%. Including restructuring, expenses were 30% above the previous quarter.

Bottom line was a net loss of $1.3 million. Operational losses were $1.7 million, compared to operational income of $334,000 in the previous quarter. CEO Jim Crocker described the quarter as "too much spending for too little sales," and said that all budgets are being reevaluated.

Biotech sales fell 34% sequentially to $1.4 million or just 18% of revenue. Net loss for the segment was $1.3 million. The ChipReader, Virtek's original biotech product, brought in only about $350,000 in sales in the quarter -- about four units. The colony arraying and picking system (CAPS) generated another $350,000, while the ChipWriter brought in the remaining $700,000. Production of the ChipWriter has been moved from Toronto to Waterloo, although customization work is still performed in Toronto.

"We're taking a hard look at the effectiveness of our distribution partners," said Crocker. "Results to date have been disappointing." The company has been frustrated by the lack of results from its biotech distributors despite the allocation of significant resources to provide them with training and ongoing assistance through the sales process. More emphasis will now be placed on direct sales.

The selling environment has changed very quickly for Virtek, which began the year predicting that its biotech sales would at least double the $6 million brought in last year. At the mid-point of fiscal 2002, biotech revenue is only $3.5 million. The company said it hopes sales will grow quickly now that its key academic market has returned from summer vacations.

Laser systems (formerly "precision manufacturing"), the company's other segment, showed an 8% increase in sales over the previous quarter, with aerospace being the source of most of the gains. Aerospace accounted for about $2.7 million in revenue in Q2, or 35% of all sales. Even with the increases sales, however, profits were substantially lower than in the previous quarter.

Virtek had $4.5 million in cash at the end of the quarter, and used $1.1 million over the three months. Virtek raised $442,000 through the sale of common shares in the quarter. Inventory grew by $1.0 million, bringing it to $7.8 million or half of the company's working capital. Much of this was in anticipation of sales that never materialized and Virtek says steps have been taken to lower those levels. The company also recently purchased a second mobile demonstration unit that can be driven to the sites of potential customers to provide a first-hand look at the biotech products.

The company reorganized into two subsidiaries in August -- Virtek Biotech, headed by former CFO Phil Nafekh, and Virtek Laser Systems, lead by Bob Sandness, previously the company's engineering VP. Rob Lamka, who joined Virtek from Ernst & Young in April, becomes the company's senior finance manager.

Virtek says it wants to have a clearer separation between its two units -- investors and analysts interested in biotech typically have no interest in industrial laser applications -- and has looked at the possibility of selling either the biotech or the laser systems business. Nafekh said that private investment will likely be brought directly into Virtek Biotech from investors specializing in biotech.

The layoffs will save about $450,000 a quarter, the company said. In May, Virtek said it had "approximately 149" employees. In the just-filed Q2 results, that number was reduced to 130, but in a story in Friday's Record, the number was reported as 115.

Open Text reports continued sales growth and profits
August 15, 2001

No bad news in Open Text's quarterly results. For the quarter ended June 30 (Q4 01), the company reported net income of US$3.5 million - - actual profits, not the asterisk kind that other tech companies are fond of reporting -- on sales of US$40.5 million. Sales were up 25% from a year ago and 3% sequentially, with licensing & networking revenues climbing 14% from the previous quarter to US$20.9 million. Expenses were nearly identical to Q3.

Excluding amortization of acquired intangibles (here comes that asterisk), net income was US$5.1 million.

For fiscal 2001, the company had sales of US$147.7 million -- up 31% from 2000, and net income of US$10.8 million

Open Text had US$87.5 million in cash at the end of the year, up by US$1.4 million over the final quarter. The company said that its operating cash flow over the year was US$19.2 million and that operations have been cash flow positive for eight consecutive quarters.

During the quarter, Open Text's flagship Livelink product passed the 5 million user mark, and the company announced that research firm IDC estimated that Livelink had grown to a 47% share of the collaboration market.

STOCK REPORT: Descartes, Com Dev lose half their market value
August 2001

There were strong reactions from the market to disappointing quarters from Descartes and Com Dev. Both companies saw their share prices fall to their lowest levels since November 1999.

Investors slashed more than a half-billion dollars off Descartes' value in August -- dropping it below Open Text to third place among local tech firms. Com Dev saw its market cap reduced by $150 million.

And, while its drop wasn't as high as a percentage, RIM's market value was cut by another $760 million in August.

For the month of August:

RDM [CDNX: RC] +39%
MKS [TSE: MKX] +25%
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Open Text [TSE: OTC] -4%
Dalsa [TSE: DSA] -11%
Treasury Int'l [OTCBB: TREY] -17%
Gensel Biotech [CDNX: GSB] -20%
GUARD [CDNX: GUA] -20%
CME Telemetrix [CDNX: YME] -22%
Turbosonic [OTCBB: TSTA] -23%
RecycleNet [OTC: GARM] -25%
Virtek [TSE: VRK] -25%
RIM [TSE: RIM] -27%
Navtech [OTCBB: NAVH] -33%
Finline [CDNX: FIN] -40%
Com Dev [TSE: CDV] -52%
Descartes [TSE: DSG] -56%

The National Post reported that Descartes CEO Peter Schwartz sold a quarter of his shares in the company at an average price of $28.22 between May 31 and June 6. He received $5.6 million for the shares -- they're worth $1.8 million today. It's the second time Schwartz has sold off shortly before a large drop in Descartes' share value. Last year, the Post reported he sold $11.3 million in Descartes shares on the day they hit what is still (and will likely be for a long time to come) their all-time highest price. At that time, he got $102.83 per share, more than double what the shares were worth just a few weeks later. Those shares are worth $1.0 million today.

Open Text has retained its value over the last 12 months, but every other company on this list and the one below (of companies based outside of the area) is down between 39% (Dalsa) and 98% (CacheFlow). The largest decliner among locally-based firms is Finline, down 94% over the last 12 months. It's also the biggest loser year-to-date, with an 88% drop in calendar 2001.

I don't list it here, but EMJ has delivered the best value to investors over the last year with a steady stock price and a significant dividend.

I haven't done a market cap listing in a long time, and boy do these numbers look a lot different from the last time. This is market capitalization in millions using the most recent numbers for shares outstanding (basic, not fully diluted) that I have. All figures in Canadian dollars:

RIM	$2,024
Open Text	737
Descartes	444
Com Dev	142
Dalsa	65
MKS	48
Virtek	48
CME Telemetrix	31
RDM	14
RecycleNet	13
TurboSonic	11
Gensel	4.9
Treasury Int'l	3.3
GUARD	2.8
Urbana.ca	1.5
Finline	1.4

RIM is still worth more than all the other companies combined. I don't track it, but ATS would be second on the list with a market cap of $1,127 million. EMJ is valued at about $31 million.

You can see why Finline would like to get on the U.S. over-the- counter bulletin board, since it's valued at less than half of Treasury International -- a shell company with no operations and no assets of any significance. RecycleNet, which has its own flaky history, was removed from the OTCBB long ago but still maintains a ridiculously high value on the U.S. pink sheets. It's just a million dollars behind RDM, which has $13 million in cash on the books.

Companies with head offices outside this area all fell back in August:

=================================
Network Assoc [Nasdaq: NETA] -6%
Sybase [NYSE: SY] -7%
MDR Switchview [CDNX: MSW] -9%
Cyberplex [TSE: CX] -10%
CVF Technologies [Amex: CNV] -17%
CacheFlow [Nasdaq: CFLO] -23%
CheckFree [Nasdaq: CKFR] -27%
VoiceIQ [CDNX: VIQ] -30%
Siebel [Nasdaq: SEBL] -37%

I mentioned last month that Dean Hopkins was giving up the president title at Cyberplex -- and he did. But just two weeks later, Cyberplex announced that the guy it had recruited as its new president had already left the company. The very next day, he was introduced as Yahoo!'s new senior VP for business and enterprise services.

Descartes weak quarter in line with warning
August 21, 2001

Descartes' results for the quarter ended July 31 (Q2 02) were just as outlined in the company's warning (see last digest). Revenue was US$19.8 million, up 35% from a year ago, but down 16% sequentially.

Excluding the acquisitions made during the quarter, revenue declined 20% from Q1. Margins also fell, causing a 23% sequential drop in gross profits.

Its key licensing and networking revenue was down 18% from the previous quarter, with licensing sales off 38% -- accounting for all of the decline. Descartes generated no licensing revenue in July. Network revenue grew 14% from Q1 to US$8.9 million.

While revenue was shrinking, expenses were rising, climbing 51% from the previous quarter to US$21.2 million. R&D and G&A costs both increased significantly. A bad debt reserve was charged to sales & marketing, which otherwise had only a small increase in costs above Q1.

Net loss was US$19.6 million (US$0.39/share), but if you follow Descartes' suggestion to exclude a long list of expenses that seems to include everything short of hair gel and Paul Puncher purchases, that loss is magically reduced to US$2.7 million. The net loss includes US$12.6 million in acquisition-related costs and a US$3.5 million reserve for bad debt.

Descartes' cash position declined by US$12.2 million over the quarter, but it still had US$215.7 million in cash at quarter-end.

COO Willem Galle has added the title of president and will oversee day-to-day operations, including field sales. As president he succeeds Aivars Lode, president of Descartes for the last 16 months, who is now listed as president of market and field operations.

Sunshine Capital completes IPO; abandons ARISE plans
August 21, 2001

Sunshine Capital, a new capital pool company, completed its IPO, but then announced that it would not be acquiring ARISE Technologies -- something it said was "a high probability" in its prospectus (see July digest).

Sunshine raised $300,000 through the sale of 1.5 million shares. The money will be used to find a suitable company to merge with and take public. CPCs are only allowed to raise between $200-500,000 in their IPOs and must offer at least a million shares to the public.

It now has 18 months to find another company. Sunshine trades under the ticker SSH on the CDNX. Raymond James Ltd. was the sponsoring broker for the IPO.

Randall Howard steps down from MKS board
August 15, 2001

Randall Howard, co-founder and former CEO of MKS, will not stand for re-election to the company's board of directors at the annual meeting on September 11. His place on the board is being taken by Ian Giffen, a former MKS director who resigned from the board two years ago.

As of July 1, Howard remained MKS' top shareholder, with 3.8 million shares or an 11.7% stake.

In June, Howard was announced as a new director of Mississauga's Necho Systems Corp. which develops software to control and manage employee spending.

MKS may have nearly been run aground and left penniless last year, but that didn't stop corporate officers from accepting significant bonuses -- most in the $38-46,000 range. Even director Robert Gibb, who stepped in as interim CEO for just 10 weeks, took home a $46,000 bonus on top of a salary of $121,000. Among the 575,000 options he was granted were 250,000 priced at 54 cents -- good for a gain of $240,000 at today's prices.

The company's highest paid officer was sales VP David Thonn, who joined the company at the beginning of the fiscal year. He received $361,000. New CEO Phil Deck, who didn't get a bonus and took a relatively low salary, was granted 871,000 options priced at $1.88.

RDM sales drop; new markets sought for imaging tech
August 10, 2001

For the quarter ended June 30 (Q3 01), RDM reported revenue of just $1.1 million -- down 6% from the previous year and 32% from Q2. Expenses climbed 18% sequentially, resulting in a net loss was $1.1 million ($0.08/share), compared to a loss of $713,000 in Q2.

The company's digital imaging segment, which sells point-of-sale cheque scanners and related services, reported a 48% sequential decline in sales after showing some growth in the previous quarter. After providing the majority of company revenue in Q2, digital imaging declined to 41% of sales.

RDM's traditional cheque quality segment accounted for the remaining 59% of revenue, but its sales declined 14% from last quarter and 26% from the same period a year ago.

The company took a restructuring charge in the quarter, but it didn't tell shareholders how much the charge was.

The company used $1.3 million in cash over the quarter, but still has $13.1 million -- just a little less than the company's market value. About a half-million dollars in inventory was added over the quarter.

COO Doug Newman reiterated that the company is exploring new markets for its technology, and mentioned bill payment, payment kiosks, and property management as potential applications. Ex-CEO Mike Carr had previously talked about applications for warranty cards and municipal licenses, but there's been nothing more said about them.

Finline shares slide as management predicts "exponential growth"
August 30, 2001

Finline shares fell to an all-time low near the end of August, despite management's calculations that substantial profits are just around the corner.

The company's forecasts -- which historically have been influenced more by Aesop and the Brothers Grimm than by economic reality -- are now calling for "exponential growth into 2002." It says it will generate quarterly revenue of at least US$13.5 million from its Cuban ventures by next year. It says service in Cuba will commence before the end of this month and that by next year, the joint venture will generate profits of US$450,000 per quarter.

Finline's merger with Tekron (see July digest) didn't happen in August, but the company says the deal will close on September 15.

From SEC filings, it looks like Tekron, an OTCBB company previously based in California, was recently acquired by the people behind Toronto's Green Dolphin Systems, a cleaning products provider. In August, Tekron announced a letter of intent for a "wireless cable" joint venture in the Dominican Republic, which it described as "a dynamic opportunity to access ... [a] market that has an approximate value of US$1 billion per annum." If the merger doesn't close, Finline should sue Tekron for stealing its ... ahem ... business model.

For the quarter ended June 30, Finline reported sales of $144,000 and a net loss of $345,000. Over the first half of the year, sales are down 32% from a year ago.

Operations used $113,000 in cash, most of which was provided through loans from Finline's major shareholders. Even with the loans, the company was down to just $1,505 in cash at quarter-end. Its working capital deficiency grew to $628,000 as its payables topped the million-dollar mark.

CEO Einar Fiskvatn received a raise of more than 60% last year, made retroactive for a full year, according to SEDAR filings. He also exercised 130,000 options for a reported realized value of $201,500. During the year, Fiskvatn was granted an additional 139,000 options, all of which are now far under water.

Only three people are standing for election to Finline's board this year: Fiskvatn, fellow founding director Chris Hadjiyianni, and retired UW prof Jim Leslie, who was president of the compression technology company Finline acquired last year. Lawyer Paul Grespan has stepped down from the board.

GUARD continues to fund operations through asset sales
August 29, 2001

For the quarter ended June 30 (Q2 01), GUARD reported a net loss of $1.3 million ($0.18/share) on interest income of $266. Accumulated deficit now stands at $12.2 million and the company's total assets are down to just $1.65 million. Operations consumed $396,000 in cash, down from $607,000 in Q1. Working capital at quarter-end was $794,000.

The net loss includes an additional $526,000 write-down in the value of the SignalGene shares held by GUARD. The company has now written down the value of those shares by $2.0 million this year, on top of the $7.3 million written off last year. During the quarter, GUARD raised $412,000 through the sale of SignalGene shares, which continue to trade at their 52-week low and very near their all-time low.

Needless to say, GUARD is still looking for financing for its subsidiaries.

In June, three of GUARD's original directors did not stand for re- election to the board, nor did Larry Milligan, who had been UofGuelph's representative.

Miscellaneous Tidbits

• I don't have details beyond what was in the papers, but Sandvine, the son-of-PixStream, formally launched operations on Friday in the former PixStream/Cisco building. The company received $19.5 million in funding from four VCs -- led by Celtic House, and including Waterloo's Tech Capital Partners -- all of which had ties to PixStream. Even though PixStream burned through a boat-load of cash and was a long way from being profitable, its investors still made good money off the company thanks to Cisco's largesse in the waning days of the who-cares-about-the-bottom-line era. In the current environment, Sandvine might have to sail uncharted waters -- like achieving breakeven operations -- before its investors will see a similar return.

• QJunction has parted ways with its CEO, Victor Lee. Apparently, it was not an amicable split. Company co-founder Otman Basir, a professor at the University of Guelph and a member of UW's PAMI research group (that spun off Virtek many years ago), has taken the reigns as interim CEO.

• Ian Suttie, the ex-Maple CEO and SST president who was briefly executive VP of PrinterOn, was formally introduced in August as the new COO of Richmond Hill's PCI Geomatics, a developer of geographic software. I just noticed that PrinterOn removed its management bio page from its Web site and also deleted its news release from November announcing the appointment of two other VPs. Neither VP is still at the phone extension they had when they joined PrinterOn.

• AOL finally dropped the price of the pager-sized RIM device (a modified version of the RIM 950) it sells as part of its AOL Mobile Communicator service. AOL launched the service in November with the device priced at US$330 with another US$20 a month for the service - - too high to be attractive to the broad youth consumer market it was targetting. It was a little cheaper than the BlackBerry service, but BlackBerry comes with much better software. AOL's new price is a below-cost US$100, but at the same time, it raised the monthly cost of the service to US$30. Aether has also just dropped the price for the 950 and is offering the device free to companies that order 500 or more and pay for the monthly service. Another RIM distribution partner, Motient, announced a reverse stock split in an effort to keep its Nasdaq listing. Motient shares are currently trading at 34 cents U.S. It said it needs to raise US$80 million to continue operations, according to a story in the Globe.

• Fakespace Systems won a $7 million contract from the U.S. government to build and install visualization systems at the Los Alamos National Laboratory. The systems will be used in what sounds like an awesome computing facility, even if it's being used for nuclear weapons research.

• Marlin Doner, who had been COO of Treasury International, bought back his old company, Compelis Corp., and resigned from Treasury. Treasury acquired Compelis in 1999 after Marlin's brother, Dale Doner, took control of Treasury. With Compelis gone, Treasury is a shell with no operations. The company tried to launch some Web businesses last year, but they never got off the ground. SEC filings show that all of Compelis' current projects are the production of print catalogs and flyers. Doner resigned from Treasury on May 1, but shareholders weren't told until three months later.

• Hamon Research-Cottrell, part of the Belgium-based Hamon Group, has taken a 4.7% stake in TurboSonic in return for a US$500,000 investment. The holders of a majority of TurboSonic's shares have also agreed to tender their shares and give Hamon Research-Cottrell control of the company if it initiates a tender offer for TurboSonic's common stock (at a price well above current market levels).

• More of the usual at CME Telemetrix for the quarter ended June 30 (Q2 01). Operations used $833,000 over the quarter, down from $1.3 million in Q1. The company took out an additional $194,000 in bank loans to fund development of products other than the GlucoNIR blood glucose monitor. CME had cash and equivalents of $5.6 million at the quarter-end, offset by $716,000 in bank indebtedness. Working capital was $6.2 million. The company says that its accuracy target for the GlucoNIR device is now "within reach."

• Eiger Technology closed its acquisition of Kitchener's Onlinetel (see July digest). It paid Onlinetel's 57 shareholders 1.8 million Eiger shares, currently valued at $1.26 million, with the possibility of an additional 7.2 million shares being paid over the next four years if Onlinetel meets some grandiose sales and profit targets (a full payout would require it to grow to $50.8 million in sales in 2005 with net income of $13.8 million -- not very likely). Onlinetel currently has a run rate of just over $1 million in annual sales, according to Eiger. Joe Vos, the Metafore co-founder who was a director of Onlinetel and its acting CFO, was added to Eiger's board in August.