September 2002

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 67 -- October 7, 2002
In this digest:

1. Open Text offers to buy Centrinity in $30M deal
2. RIM ready for "major breakout" this fall; lowers forecasts
3. MKS sues customer, claims US$10M in damages
4. RDM files copyright infringement suit against large competitor
5. Dalsa receives $1.7 million TPC investment for digital cinema

6. STOCK REPORT: Record lows for Com Dev, Virtek, CME, Finline
7. Virtek records cash windfall in weak quarter
8. Navtech chips away at working capital shortfall
9. Miscellaneous tidbits from Meikle Automation, Com Dev, Dspfactory

Open Text offers to buy Centrinity in $30M deal
September 19, 2002

Open Text has made an offer to buy TSX-listed Centrinity Inc. of Richmond Hill. It's an all-cash offer for $1.26 a share, a 91% premium over the 66 cents Centrinity shares were trading at when the offer was announced. To that point, Centrinity shares had fallen 75% in value this year. They peaked at a price of $40 two years ago.

At last report, Centrinity had 24.2 million shares outstanding, which would make the value of this offer about $30.5 million. Unlike Open Text's previous efforts to acquire a TSX-listed company, this one has the blessing of Centrinity's board of directors.

Further details will be provided in a management circular that Centrinity will be filing soon.

Centrinity's First Class product unites e-mail, voice-mail, and faxes into a single mailbox. It has 8 million users worldwide. Over the most recently reported 12 months, Centrinity had sales of $17.7 million, including $4.2 million in the quarter ended June 30. At that time, it had $14.4 million in cash and working capital of $6.7 million. Book value at June 30 was $9.5 million.

Centrinity's accumulated deficit stood at $78.2 million at June 30, including a loss of $3.3 million in the most recent quarter, but Open Text expects the acquisition will immediately add to its earnings. No layoffs have been announced yet. The deal is expected to close during the current quarter, which ends December 31.

Open Text provided financial guidance for the next two years. For the quarter that just ended on September 30 (which will not include any results from Centrinity), it expects sales of US$36-37 million. For the year ending June 30, 2003, Open Text is forecasting sales of US$167 million and profits of US$1.20/share. For fiscal 2004, it is projecting US$200 million in sales and earnings of US$1.50/share.

The company also unveiled its new Web content management product that has been integrated with Livelink, adding content management to Livelink's existing collaboration and knowledge management capabilities.

CEO Tom Jenkins, who was lamenting this area's branding efforts at an event during the month, said on the Centrinity conference call that "most of [Open Text's] operations are out of Chicago and the Toronto area, so we're very much a mid-west company." Maybe we could rebrand this region the "Toronto-Area Tech Triangle" or the "Mid-West Tech Triangle."

RIM ready for "major breakout" this fall; lowers forecasts
October 3, 2002

RIM's sales fell short of expectations in the latest quarter, but in the company's quarterly conference call, co-CEO Jim Balsillie was very excited about the coming weeks, referring to the October to December period as RIM's "major breakout season" and calling it "game time."

For the quarter ended August 31 (Q2 03), RIM reported a net loss of US$14.3 million (US$0.18/share) on revenue of US$73.4 million. Sales were below the company's already-lowered forecast of US$75-80 million. RIM blamed the shortfall on a drop in interest in its initial voice-enabled device following the unveiling of its newest devices with improved functionality, scheduled to be launched this quarter.

Sales were up 2.5% from the previous quarter but down 8% from last year. A significant improvement in gross margins, however, boosted gross profits 8% both sequentially and year-over-year.

There were a net 48,000 new BlackBerry subscribers over the quarter -- up from 34,000 and 32,000 in the previous two quarters. That brings the total number of subscribers to 403,000. RIM added 79,000 new subscribers in the quarter but lost 31,000 (or almost 9% of its subscribers at the end of Q1), creating the net gain of 48,000. It expects 45,000-55,000 net new subscribers in the current quarter.

RIM put a leash on its costs in the quarter. Expenses were up 5% from the previous quarter, but that was well below the 20% jump the company had been forecasting. It expects expenses to climb by about 15% in the current quarter.

Along with its regular expenses, RIM also recorded a US$4.9 million charge for defending itself against a charge of patent infringement. It didn't specify who had brought the complaint or how much of that figure was a provision and how much had actually been spent. The only active suit against RIM for patent infringement that has been disclosed was filed by Virginia-based NTP Inc. last November. Whoever the complainant is, it's apparently a serious case to warrant that level of spending. Including these legal costs, total expenses before amortization climbed 17% from Q1.

Loss from operations was US$20.8 million, up from US$16.6 million in the previous two quarters.

RIM ended the quarter with US$549.9 million in cash and investments, down US$66.1 million over the three months. Operations consumed US$7.0 million in cash and US$14.4 million was spent to repurchase and cancel 1.25 million common shares on the open market.

An additional US$20 million was spent on three acquisitions: Atlanta-based Arizan Corp. was acquired in July, TeamOn Systems based outside of Seattle was acquired in August, and in June, RIM acquired the assets of Slangsoft Inc. of Boston and Jerusalem (which was the subject of a scathing story last year in the Jerusalem Post, with management accused of abusive employee relations and financial irregularities). RIM hasn't yet disclosed the individual purchase prices.

RIM also paid a substantial but unspecified amount of cash to Ericsson as part of a patent licence agreement between the companies.

RIM's forecasts haven't been very accurate, but it is now projecting that sales will be flat in Q3 and climb to US$85-95 million in Q4. That would add up to annual revenue of US$300-315 million, well below the company's forecast of US$350-375 million made three months ago (which itself was reduced from previous forecasts). This was blamed on a delay in new product launches from early in Q3 to late in the quarter.

RIM's litigation-mania continued in September with the announcement of another suit -- this on in California -- against Good Technology and Mark Johnson, a sales VP at Good. RIM alleges a laundry list of misdeeds, including charges that Johnson was told confidential information by RIM while he was at Cingular Wireless and that he has since disclosed that information to Good. (RIM seems to be making a PR blunder with Good; by all rights, RIM should be the good guy (so to speak) in the dispute. Good is in Silicon Valley, it's backed by John Doerr, it's called "Good Technology." And everyone knows who invented the category, so at best Good should be playing the Pepsi copycat to RIM's Coca-Cola innovator. But RIM appears intent on making itself out to be the "we've got $600 million in the bank and you don't" bully.) It also filed a complaint in Delaware against Handspring claiming that keyboard features used in some Treo devices infringe on a RIM patent.

One more item from RIM in September: according to OSC insider trading reports, co-CEO Mike Lazaridis spent about $3.2 million to purchase 200,000 RIM shares on the open market between August 8-12. That gives him control over 9.0 million shares, split between numbered companies, direct ownership, and a family trust.

MKS sues customer, claims US$10M in damages
September 11, 2002

MKS disclosed in September that it began legal proceedings six months earlier against a customer for breach of contract, claming damages of US$10 million. The unidentified customer has filed a counterclaim. It says it expects the suit will proceed to trial before the end of this month.

The company didn't mention anything about the suit in its 2002 annual report, even though the proceedings began during that fiscal year.

US$10 million would be more than a third of MKS' total sales in fiscal 2002, so it would be interesting to see how that level of damages from a single customer was calculated. MKS expects to spend about US$500,000 on the suit in the current quarter.

MKS held its AGM in September, and while base salaries for its four highest-paid executives remained largely unchanged in fiscal 2002, their total compensation grew by an average 40%. The COO and CTO of MKS' interoperability unit (formerly "MKS Software") each received 52% raises in their total compensation to $424,328. The unit's North American sales VP is listed as MKS' highest-paid executive officer with total compensation (excluding options) of $494,738, a 26% increase. His counterpart in the SCM unit was paid $488,286, up 35%. That gave MKS at least four executive officers with annual compensation over $400,000, which is at least four more than RIM had last year.

CEO Phil Deck was paid just $99,000 for 2002 and his base salary has since been raised to $250,000. I hadn't noticed until a couple months ago, and MKS never said anything about it at the time, but Deck quietly became the company's chairman a year ago. He replaced Robert Gibb who remains on the board.

In June, the company's new COO, Michael Harris, was granted 1.2 million options priced at $1.35, expiring in 2009. That's more than the 871,000 options granted to Deck when he became CEO in fiscal 2001.

RDM files copyright infringement suit against large competitor
September 18, 2002

One more entry in this month's Waterloo Legal Digest: RDM has filed suit in Minnesota against Ingenico, one of its largest competitors. RDM alleges that Ingenico is violating copyrights related to its software and has breached an agreement between the two companies on the use of RDM's intellectual property.

In its response, Ingenico denied that it "owes any contractual or other obligations to RDM that would prevent Ingenico from making or selling" its competing cheque reader.

Ingenico is based in France with a U.S. subsidiary headquartered near Atlanta. It's this subsidiary that RDM named in its complaint. Last year, Ingenico acquired IVI Checkmate which was based in Atlanta and Toronto. Ingenico reported sales of about $335 million over the first half of this year.

Dalsa receives $1.7 million TPC investment for digital cinema
September 20, 2002

Industry Canada's Technology Partnerships Canada (TPC) program has provided a $1.7 million repayable investment to DALSA that will go toward the development of its digital camera for the motion picture industry. The camera is scheduled to be unveiled early next year. Dalsa is also developing a film digitizer that will convert movies from film to a digital format.

According to the government, the investment will create or maintain 15 jobs.

Dalsa has also acquired full ownership of its DALSA Semiconductor subsidiary. It paid troubled Zarlink Semiconductor what it described as $6.5 million in "aggregate consideration" for the remaining 14.5% of the company, which operates a semiconductor foundry in Bromont, Quebec.

Of the companies that survived the latest round of cuts to the S&P TSX composite index, Ottawa-based Zarlink ranks 242nd out of 246 for stock performance in 2002, with an 84% decline in the value of its shares. Nortel is at the bottom of the list with a 93% plunge.

STOCK REPORT: Record lows for Com Dev, Virtek, CME, Finline
September 2002

Another rough month on the markets saw the shares of several companies set or approach all-time lows.

Com Dev fell to penny stock levels for the first time, due in part to its removal from the S&P TSX composite index. Its shares closed the month at 96 cents. Descartes shares fell to within 3 cents of their all-time low from August 1999, but came back to post only a small decline in the month.

RIM shares are now at their lowest price since early 1999. In January 2000, Mike Lazaridis had become Waterloo's first high-tech billionaire, and today that's what the entire company is worth. That's 1,000 times Finline's $1.0 million market cap. Finline is the lowest-valued company on the list after its shares fell to a record low in August.

Virtek's shares also fell to an all-time low in August and have surpassed that already in October, closing on Friday at 65 cents. Virtek and RDM are now about even in market value at around $15 million.

MKS shares closed Friday at 60 cents, their lowest daily close outside of the 10 trading days between December 20, 2000 and January 5, 2001 when the company was on the verge of going under.

Shares of CME Telemetrix also fell to an all-time low of 38 cents in September and closed the month at 45 cents.

For the month of September:

Turbosonic [OTCBB: TSTA] +39%
Navtech [OTCBB: NAVH] +25%
Dalsa [TSX: DSA] +2%
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Descartes [TSX: DSG] -2%
EMJ [TSX: EMJ] -4%
MKS [TSX: MKX] -5%
--S&P TSX COMPOSITE -7%
CME Telemetrix [TSXV: YME] -10%
RIM [TSX: RIM] -10%
Open Text [TSX: OTC] -12%
RDM [TSXV: RC] -14%
Virtek [TSX: VRK] -23%
Com Dev [TSX: CDV] -29%
Finline [TSXV: FIN] -50%

RIM's $1.07 billion market cap is still close to matching the $1.1 billion value of all the other 11 companies on the list combined.

There were few takers for Descartes' offer to buy back its 5.5% debentures for 70 cents on the dollar. Descartes had offered to spend US$36 million to buy back US$51.4 million principal amount of the debentures it sold in June 2000. The company reported in September that only a "nominal" amount of debentures were tendered through the offer. The debentures become due in just under three years, at which time Descartes is on the hook to pay back US$72 million (about CDN$114 million at today's rates) in cash or shares, minus whatever debentures are repurchased before then.

Companies with headquarters outside the area:

Eiger Technology [TSX: AXA] +34%
Blue Coat [Nasdaq: BCSI] +20%
Senesco [Amex: SNT] +19%
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Agfa-Gevaert [Brussels: Agfa] -4%
Adobe [Nasdaq: ADBE] -5%
CheckFree [Nasdaq: CKFR] -8%
Bio-Rad [Amex: BIO] -10%
CVF Technologies [Amex: CNV] -11%
Sybase [NYSE: SY] -17%
Network Assoc [NYSE: NET] -18%
Knexa.com [TSXV: KNX] -25%
Siebel [Nasdaq: SEBL] -32%
Engineering.com [TSXV: EGN] -33%

Eiger, which in its last quarterly results said that Kitchener's Onlinetel had a poor quarter and was facing restructuring, issued a news release with the headline "Onlinetel revenue up 200% to $3.6 million." Sounds good, except it turned out actually to be announcing that Onlinetel had revenue of $69,000 during one week in September. Multiply that by 52, and you get the annualized "$3.6 million" of the headline.

Blue Coat completed a 1-for-5 reverse stock split which should keep it in Nasdaq's good books. The company's shares are up 68% over the last two months, but still down 71% so far this year.

Still no update on the proposed acquisition of Waterloo's EVER America (formerly JPH International) by Knexa.com (see July digest).

Virtek records cash windfall in weak quarter
September 5, 2002

A disappointing quarter for Virtek, even as it added millions of dollars to its balance sheet from the sale of its biotech instruments business (see June digest). Details of the sale were disclosed in September, and showed that Virtek negotiated a total price of $10.5 million in cash, of which $9.4 million has already been received with the balance to be paid in two equal installments over the next two years. Considering that the company's entire market value was just over $20 million at the time of the sale, getting $10 million for products that it was no longer developing and couldn't afford to bring to market looks like a good deal under the circumstances.

For the quarter ended July 31 (Q2 03), Virtek reported revenue of $5.5 million -- a drop of 19% from the previous quarter and 13% from a year ago, even after deducting now-discontinued biotech sales in the prior periods.

A tumble in gross margins from Q1 led to a 30% sequential decline in gross profits and even though expenses held steady, this created a loss from operations of $321,314 compared to income from operations of $764,744 in the previous quarter.

A loss of $3.6 million from the final operations and disposal of the biotech instruments business resulted in an overall net loss for the quarter of $4.1 million ($0.17/share).

Laser systems provided all revenue and reported a net loss of $219,304. The FONA biosensor business unit, which is in a pre-revenue stage, lost $309,139.

Virtek had $10.3 million in cash at the end of the quarter, up $7.6 million from the end of Q1. The money came from the sale of the biotech instruments business to Bio-Rad, for which Virtek received $9.4 million in cash in the quarter with an additional $1.1 million (US$700,000) being held in escrow -- US$350,000 until the end of June 2003 and the other US$350,000 until June 2004.

The company used $2.4 million to repay bank debt. Operations contributed $667,000 in cash.

Navtech chips away at working capital shortfall
September 16, 2002

For the quarter ended July 31 (Q3 02), Navtech reported sales of US$1.5 million and net income of US$85,000 (US$0.02/share). Sales were flat from the previous quarter and down 12% from a year ago. A decline in gross margins led to a 12% sequential drop in gross profits, but the company continued to keep tight control over its expenses, which declined 6% from Q2.

Working capital deficiency declined to US$673,000 from US$718,000 at the beginning of the quarter. Operations provided US$160,000 in cash, of which US$72,000 was used to repay loans with another US$31,000 spent on capital assets, leaving a net increase of US$57,000 in cash.

R&D spending grew from just 1.8% of sales in Q2 to 5.6% in Q3, which is still very low and Navtech says it will increase R&D spending in future quarters. It also plans to increase its marketing activities.

Miscellaneous Tidbits

• Kitchener's Meikle Automation, which was selected as the top presenter at venture capital fairs in both Kitchener and Toronto earlier this year, has raised $10 million in funding. The investor is an affiliate of Toronto's Trilwood Investment (which had been the largest shareholder of MDR Switchview when it left town last year).

• Keith Ainsworth, now in his final month as Com Dev CEO, bought 100,000 Com Dev shares for $136,061 between August 29 and September 4.

• Dspfactory announced that its technology is being used by Starkey Laboratories, the largest manufacturer of hearing aids in the U.S. and one of the largest in the world.