May 2002

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 63 -- June 3, 2002
In this digest:

1. Com Dev to spin off M/ERGY after another cash-draining quarter
2. SlipStream Data receives $1.5M investment
3. Dspfactory gets $4.6M TPC investment
4. CME Telemetrix CEO gets big bonus despite dismal stock performance
5. NDI acquires Swiss partner

6. Descartes reports lower sales, lower losses
7. Virtek's laser systems business returns to profitability
8. STOCK REPORT: Com Dev shares close month at all-time low
9. Miscellaneous tidbits from Finline, RIM, Open Text, Fakespace, Dantec, Biorem, SRE Controls, TurboSonic

Com Dev to spin off M/ERGY after another cash-draining quarter
May 29, 2002

Following a quarter in which its M/ERGY product delivered no revenue, Com Dev announced plans to spin off its cash-hungry broadband division into a separate company. It's looking for outside investors to carry the cost of developing and marketing the wireless broadband product.

It's almost been three years since Com Dev moved into the wireless Internet business with the acquisition of California-based Lober & Walsh Engineering for $1.5 million in August 1999 (not announced until three months later). The M/ERGY name was unveiled in September 2000. Com Dev has spent $45 million on M/ERGY, including $7.5 million in the most recent quarter. The only revenue M/ERGY has generated is from two trial deployments.

"From a sales and revenue perspective, we missed the mark," said CEO Keith Ainsworth. "We have been unable to effectively capitalize on the lead we established."

Com Dev has hired John O'Connell to head up its broadband division. He's no stranger to struggling wireless broadband companies -- he spent one year as the CEO of Vyyo, based in California and Israel, until "resigning" in October along with the CFO after the company had chopped 75% of its jobs and fallen to penny-stock status. He had previously been with Nortel for 18 years. O'Connell received his engineering degree from a UK university, so he should fit in well with Com Dev's executive team.

O'Connell has been given 12 weeks to sort out the M/ERGY situation and find outside investment. If an investor can be found, Com Dev's stake in the spun-off company would then be significantly reduced (and it's a safe bet that Com Dev's investment in M/ERGY will be valued far below the money it has actually put in). Com Dev says it has cut M/ERGY's spending in half and if no investors step forward in the next 12 weeks, the cutbacks will be even more severe.

Com Dev has now gone 0-for-3 in its efforts to create new divisions and diversify its business from its traditional core in space technology. Last year, it shut down its wireless division (which evolved from its acquisition of UK-based Phase Systems Ltd. in 1996 and from its Com Dev Enterprises division, formed in 1995 and headed by Ainsworth) after selling some of the assets to Mitec. In 1999 it closed its California-based wireless systems division that it had acquired the previous year as 3dbm Inc. for $27.4 million. When Ainsworth became CEO in 1999 (he had been president since 1990), the company noted that since 1995 he "had overall responsibility for developing Com Dev's non-space product business."

For the quarter ended April 30 (Q2 02), Com Dev lost $5.9 million ($0.12/share) on revenue of $28.6 million. All of the revenue came from Com Dev Space, which logged a 12% improvement in sales from Q1, but a 19% drop from the same period last year. The company expects similar sequential gains over the next two quarters from the space division, due in part to sales from its new battery business. Overall, sales were flat with the previous quarter and down 11% from a year ago.

At quarter-end, the company had $16.4 million in cash, down $8.0 million over the quarter. The discontinued wireless division consumed $2.0 million in cash, with the remaining $6.0 million used by continuing operations.

SlipStream Data receives $1.5M investment
May 7, 2002

SlipStream Data -- known as 3C Infotech until a few weeks ago -- has received a $1.5 million investment from Toronto's EdgeStone Capital Partners. The deal had been rumoured for several months, going back to at least the beginning of the year. It's the first VC funding for a Waterloo company that's been announced since the Sandvine and ADexact deals last summer.

SlipStream develops data compression and network optimization technology for Web, e-mail, and other online applications. The technology can be used with any network connection from dial-up to cable and DSL to wireless, and is being tested by Sentex, the Cambridge-based ISP.

The company was founded two years ago by professors En-hui Yang and Ajit Singh, both from UW's electrical and computer engineering department. CITO, which provided $150,000 in funding to Yang, said that the research had resulted in "one of the first truly novel algorithms for data compression in over 20 years." Yang and Singh are both VPs at SlipStream.

The company's CEO is Ron Neumann, who was previously a top executive with a couple of Waterloo tech firms. He was CEO of Waterloo Maple from 1990 until getting the nudge in 1994 in one of those upheavals that Maple became known for (he was succeeded by Dieter Hensler, who was succeeded by a group of senior executives, who were succeeded by Ian Suttie, who was succeeded by current president Jim Cooper -- all between 1994 and 2000). Neumann then became president of Inforium (which later became LivePage) for a couple years and most recently was director of business development for Toronto-based Cebra, the Bank of Montreal's e-commerce subsidiary. He joined 3C Infotech late last year.

SlipStream plans to expand to grow from its current nine employees (including co-ops) to 21 over the next year. At the VC forum in February, the company was projecting sales of $24 million in two years and $58 million in four years.

EdgeStone was known until February as NB Capital Partners and is affiliated with National Bank Financial. It manages over $1 billion, including funds from the Canada Pension Plan. Its venture fund has committed capital of $100 million.

Dspfactory gets $4.6M TPC investment
May 30, 2002

Dspfactory has received $4.6 million from Industry Canada's Technology Partnerships Canada (TPC) program. In announcing the investment, Kitchener-Waterloo MP Andrew Telegdi said the funds are expected to create or maintain 27 jobs in the R&D phase plus another 111 jobs over a longer time horizon. Dspfactory has said that it would like to double in size from its current 53 employees world-wide over the next two years.

Dspfactory joins RIM ($39.6 million), GFI Control Systems ($10.8 million), Raytheon Canada ($3.3 million), IMS ($3.0 million), and Com Dev ($2.5 million) as the local companies that have received TPC money since the program was launched in 1996.

TPC investments are conditionally repayable, usually through royalties on products that emerge from the R&D they fund. It can be years before royalty payments begin and then the repayment period can extend several more years or even decades.

CME Telemetrix CEO gets big bonus despite dismal stock performance
May 16, 2002

If some Com Dev shareholders were outraged over Keith Ainsworth's six-figure bonus in a year when the company's share price fell 80% (see previous two digests), one can only imaging how CME Telemetrix shareholders felt when they saw that their CEO, Duncan MacIntyre, received a $266,420 bonus in a year when the company's shares fell 83%. Other than Gensel, which shut down its operations last year, CME was the only exchange-listed company followed here whose shares underperformed Com Dev in 2001.

MacIntyre's total compensation for 2001 was $529,015. In three years, he has been paid a total of $1.5 million. The company's shares have fallen 77% since he became CEO at the end of October 1998 and, according to GlobeInvestor.com, are down 77% over the last three years, making CME stock the worst performer in that time among the listed companies followed here, edging out MKS (-75%) and Com Dev (-73%).

The big payout comes from MacIntyre's employment contract, which gives him a cut of the money invested in CME. Since becoming CEO, his most significant achievement is that between May 2000 and January 2001 he got Motorola to pay $8.3 million for 1.3 million shares in CME. Today, those shares have a value of $906,000.

But even this success has to be weighed against the $60 million that has been raised over the last two years by Instrumentation Metrics, a competitor which CME says is developing an inferior, copy-cat technology.

The other achievement MacIntyre pointed to in CME's just-released annual report is an improvement over 2001 in the accuracy of the company's glucose monitor from 2.6 mmol/L to 1.3 mmol/L, which would have been more impressive if he hadn't said in November 2000 that he was confident that an accuracy of 1.0 mmol/L would be achieved in the next five weeks. Now he says that the company had only achieved an accuracy of 2.6 mmol/L by the end of 2000 -- hardly any improvement over the 2.66 mmol/L announced at the company's AGM in June 2000. Today, a year and a half later, the accuracy target that MacIntyre said was just weeks away still hasn't been achieved. CME says it expects that its application to the U.S. FDA to approve the instrument will come two years after it has achieved its targets.

The company says it will be about another year before its dispute with Neurosoft comes to trial. CME is trying to collect $2.0 million it says it is owed from the sale of its Advantage Medical division to Neurosoft in 1999. Neurosoft filed a counterclaim against CME in November 2000.

For the quarter ended March 31 (Q1 02), CME lost $745,000 on revenue of $122,000. The company spent $817,000 in cash over the quarter, partly offset by a bank loan of $313,000. CME had $3.8 million in cash and short-term investments at the end of the quarter.

NDI acquires Swiss partner
May 1, 2002

Northern Digital (NDI) has acquired Mednetix AG of Switzerland. Mednetix was founded in 1998 by Stefan Kirsch and Christian Schilling, and began working with NDI almost immediately. Two years ago, the companies jointly announced the launch of the AURORA spatial measurement system that used Mednetix's magnetic technology.

Kirsch and Schilling will join NDI's advanced technology group, and work out of the NDI Europe office in southern Germany (near the Swiss border and not far from Mednetix). Mednetix developed magnetic tracking technology used in surgical applications. Its core technology was invented by the founders at the Paul Scherrer Institut in northern Switzerland.

No financial details were provided. NDI didn't disclose any financial details for the fiscal year ended February 28, 2002, but from the numbers that have been released, it sounds like growth was modest. In fiscal 2001, NDI sales grew 55% to $29.0 million. The company has grown to 140 employees, up from about 100 a year ago.

Descartes reports lower sales, lower losses
May 22, 2002

For the quarter ended April 30 (Q1 03), Descartes lost US$6.1 million (US$0.12/share) on revenue of US$16.8 million. Sales were down 7% from the previous quarter and were below the company's forecast of about US$17.5 million. Network revenue grew 5% sequentially to US$9.9 million, while logistics software licensing revenue fell 18% to US$2.5 million.

Descartes added 42 new customers for network services over the quarter, most for basic connectivity, which the company says will be its largest growth area this year. It also signed up five new customers for its logistics software. The company is still forecasting an adjusted profit in Q4.

At quarter-end, there was US$189.6 million in cash and securities on the balance sheet, down US$11.5 million over the quarter. In Canadian dollars, Descartes has about $290 million in cash, which is nearly $20 million more than the company's current market value. Accumulated deficit has now grown to US$184.8 million -- which is also larger than the company's market capitalization.

No guidance was provided for the current quarter.

Descartes had 651 employees world-wide at the end of the quarter, up 15 from the end of Q4.

Virtek's laser systems business returns to profitability
May 29, 2002

For the quarter ended April 30 (Q1 03), Virtek lost $315,000 ($0.01/share) on revenue of $8.1 million. Total revenue was flat from both last quarter and a year ago, but that hides a wide swing in the company's revenue mix, as laser systems sales jumped 19% from the previous quarter, while biotech sales fell 47%.

The company said that pre-fabricated construction sales had a record quarter, rising slightly from the previous quarter, while the previously-sluggish transportation sales showed some life and doubled from their depressed levels in Q4.

The laser systems segment returned to profitability, reporting net income of $637,000 on sales of $6.8 million. Biotech recorded a $952,000 loss on sales of $1.3 million.

Company-wide, R&D expenses fell 23% from the previous quarter, which was itself a 25% sequential drop from Q3.

Virtek ended the quarter with net cash of $216,000. The company borrowed an additional $1.8 million in Q1 and spent $507,000 over the quarter, bringing its cash to $2.7 million. It now owes the bank $2.5 million.

In the December digest I mentioned that Virtek said its senior managers took a minimum 10% pay cut in the second half of fiscal 2002, so I was a bit surprised to see that all of Virtek's executive officers took home significantly more in salary in 2002 than they had the prior year. The salaries weren't particularly high and there were no outrageous bonuses (in fact, none of the executive officers received a bonus the prior year, even though the company's stock more than doubled in fiscal 2001), but the reality didn't reflect the image painted in Virtek's news release last year. Former CEO Jim Crocker saw his total compensation increase by $43,600 (18%) in 2002 to $281,000. Former CFO and biotech president Phil Nafekh received an extra $17,300 (11%) to $176,000, including a $3,000 increase in his car allowance.

Crocker's replacement on Virtek's board will be Paul Mitchell, the retired CEO of McNeil Consumer Products in Guelph and the former chair of UW's board of governors. He's also a director of Air Canada and Equitable Life and was previously a director of the Conservative Business Association of Kitchener-Waterloo.

Virtek's new CFO is Peter Monsberger, the former CFO of TSE-listed Devtek Corp. before it was acquired in 2000 by Heroux Inc., now Heroux-Devtek (Devtek owned West Heights Manufacturing and Diemaco in Kitchener and had owned half of GFI Control Systems). He was most recently a consultant. John Cira, previously with Panasonic and formerly with NCR in Waterloo, has become Virtek's director of engineering.

A painfully ironic story by Crocker about how Virtek was able to turn things around last year through patience and sticking to a good business plan was put on the Profit magazine Web site in April. Obviously it was written long before it was posted on the site.

"Every time I revisited the business plan I was convinced again that it was sound ... every time we told our story to outsiders, they too seemed convinced our business plan was sound."
--Jim Crocker

"It was simply the wrong plan for the times."
--Bob Sandness, Virtek annual report

STOCK REPORT: Com Dev shares close month at all-time low
May 2002

Com Dev shares ended May at $1.70, an all-time low, surpassing the $1.80 they fell to last September. The stock is down 45% so far in 2002, trailing Descartes (-56%) and Virtek (-55%) on the futility chart.

For the month of May:

Turbosonic [OTCBB: TSTA] +43%
EMJ [TSX: EMJ] +2%
CME Telemetrix [TSXV: YME] 0%
=================================
Open Text [TSX: OTC] -2%
Virtek [TSX: VRK] -5%
Finline [TSXV: FIN] -7%
RDM [TSXV: RC] -9%
MKS [TSX: MKX] -9%
Descartes [TSX: DSG] -10%
Dalsa [TSX: DSA] -13%
RIM [TSX: RIM] -17%
Com Dev [TSX: CDV] -28%
Navtech [OTCBB: NAVH] -60%

(The Toronto Stock Exchange finally got a little more organized on its rebranding -- although the title line on its Web site at tsx.ca still reads "TSE/CDNX" -- so I've switched the exchange tags from TSE to TSX. I also switched from CDNX to TSXV for the TSX Venture Exchange, which wasn't given an official abbreviation.)

As was the case two months ago, the magnitude of Navtech's movement is distorted by a wide bid-ask spread. Its ask price fell 21% over the month, so Com Dev was really the area's biggest decliner for the month. Com Dev is now closer in market value to MKS than it is to Dalsa (even with Dalsa giving back its gains from the last two months in May).

RIM's monthly closing price of $23.00 was its lowest in three years. It's now trading at just 1.3 times its book value (not that book value really means very much -- Descartes has been trading well below its book value for a couple months) and its market cap fell below $2 billion during May.

Virtek's 95-cent closing price matched its close in January 1998 as the lowest since I started keeping records four-and-a-half years ago.

I took GUARD off the stock list last month and the TSXV declared a trading halt on the stock in May. The company announced that it wouldn't be releasing its financial results any time soon and seems to be on the verge of formally calling it quits.

Companies with headquarters outside the area:

CVF Technologies [Amex: CNV] +67%
Cyberplex [TSX: CX] +17%
Network Assoc [Nasdaq: NETA] +9%
CheckFree [Nasdaq: CKFR] +4%
Eiger Technology [TSX: AXA] +1%
CacheFlow [Nasdaq: CFLO] 0%
Engineering.com [TSXV: EGN] 0%
=================================
Agfa-Gevaert [Brussels: Agfa] -2%
Sybase [NYSE: SY] -5%
Siebel [Nasdaq: SEBL] -25%

I've added Eiger Technology to the list. It's the company that acquired Kitchener's Onlinetel last summer. Eiger's stock went from $0.54 at the beginning of the year to a high of $2.24 in mid-May, before settling back to close the month at $1.47. Onlinetel offers VoIP-based long-distance calling services and has been expanding its points-of-presence to major centres across Canada. In the quarter ended March 31, Onlinetel lost $238,000 on revenue of $374,000, but the company says that it will now have monthly revenue of $450,000 and should be cash-flow positive in June.

Miscellaneous Tidbits

• Another year and another long list of announced deals that never happened at Finline. The company lost $1.5 million on revenue of $288,000 in the year ended December 31, 2001. That was almost $15,000 more in revenue than the company reported in 2000, making 2001 its second-worst year for sales since going public in 1997. Over half of the revenue came from a sale to Equatorial Communications Inc. (ECI), half of which is to be paid in shares of ECI. It looks like nearly the full amount of the sale -- announced in February 2001 -- was an outstanding receivable at year-end. In the first quarter of 2002, Finline lost $196,000 on revenue of $21,000. Accumulated deficit has now reached $10.0 million, and the company ended the quarter with a working capital deficiency of $1.3 million, which is equal to four-and-a-half years' worth of sales at recent levels.

• The Wall Street Journal reported that Silicon Valley-based RIM competitor Good Technology is going to court in an attempt to forestall an expected patent infringement complaint from RIM. RIM filed a similar complaint against South Carolina's Glenayre Technologies a year ago, which was settled in February.

• The Globe and, in particular, the Post both ran stories about an analyst at Fulcrum Global Partners who initiated coverage of Open Text with a sell rating, saying that SAP was poised to steal away up to half of Open Text's customers, which doesn't seem very realistic.

• Fakespace Systems lost $580,000 on revenue of $2.8 million in the quarter ended March 31 (Q2 02). Sales were up 8% from the previous quarter and 62% from the same period last year. Over the first half of the year, Fakespace revenue is up 16% from 2001.

• CVF Technologies disclosed that it sold its stake in Waterloo's Dantec Corp. in April for US$515,000 (or net proceeds of US$425,000 according to the company's financial statements; it had been anticipating net proceeds of US$564,000). CVF has continued to sell portions of its holdings in RDM and TurboSonic.

• Another CVF investee, Guelph's Biorem, announced at the end of April that it had received its all-time largest contract, valued at over US$950,000. In the quarter ended March 31, Biorem reported sales of about $1 million (US$636,134) and was profitable. Sales were more than five times that of the same period last year.

• A third CVF investee, SRE Controls of Waterloo, saw its sales in the quarter ended March 31 cut in half from the same period a year ago. Revenue fell to US$1.5 million.

• TurboSonic reported a loss of US$116,000 on sales of US$695,000 in the quarter ended March 31. Sales were down 87% from the same period last year, but following the end of the quarter the company announced it had received new orders totaling US$1.6 million.