October 2002

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 68 -- November 4, 2002
In this digest:

1. Com Dev seeks court approval to pay $19M debt with $2M in shares
2. Dalsa records another strong quarter with profits of $3.7M
3. Open Text reports earnings of US$5.4 million in Q1

4. New CEOs for Sirific, ADexact
5. STOCK REPORT: Big month for big caps
6. Miscellaneous tidbits from Medicalis, MKS, Intellitactics, Onlinetel, Descartes, Global Beverage Group, Dspfactory, RIM, ARISE, Virtek

Com Dev seeks court approval to pay $19M debt with $2M in shares
October 21, 2002

Com Dev says it is trying to pay a $19.3 million debt to Technology Horizons Ltd. (THL) by giving THL 1.93 million Com Dev shares. Those shares had a market value of just $1.8 million as of Friday's close.

According to Com Dev, THL is disputing Com Dev's interpretation of the agreement between the companies and the matter is going to court.

THL was created by Com Dev shareholders in 1996, just before Com Dev went public, to hold assets owned by Com Dev that were not going to included as part of the public company. What would turn out to be its largest asset was 10 million shares in RIM. At the time, Com Dev was RIM's largest shareholder, and its RIM shares were transferred to THL before the IPO.

In September 1998, THL agreed to pay US$10 million to acquire, for Com Dev's benefit, 40 partnership units in Alcatel's SkyBridge LP. It caused a stir at the time because THL raised the money by selling off about 3 million RIM shares. RIM stock plummeted to under $5 in September 1998 and set what is still its all-time low shortly thereafter, prompting RIM co-CEO Jim Balsillie to say on live TV across Ontario that the company had been blindsided by the sell-off (others have very different recollections of what actually occured between RIM and THL -- but, unlike Balsillie, they've never made their side of the story public). Val O'Donovan, then Com Dev's CEO and THL's largest shareholder, resigned from RIM's board that month.

Six months later, Com Dev signed an agreement with THL that laid out how ownership of the SkyBridge units would be transferred to Com Dev. O'Donovan, THL's largest shareholder, signed the deal on behalf of Com Dev, while David Belbeck, then Com Dev's CFO, signed on behalf of THL, for which he also acted as CFO.

Under the deal, Com Dev would have to pay THL by October 1, 2003 the original price of the units (CDN$15.55 million) plus 5.5% interest per year. For the year ended September 30, 2002, the total price was up to $19.3 million.

Com Dev has filed with SEDAR a copy of the agreement it signed with THL, dated March 11, 1999. The relevant portion of the agreement reads that "If at any time, the market value of [Com Dev's] common shares with reference to any 60 consecutive day period is $12 or more ... Com Dev may, at its option ... require [THL through a subsidiary] to sell to Com Dev all of [its] units [in SkyBridge] for the purchase price then in effect."

Com Dev points out that its shares traded above $12 two years ago for much more than 60 days. That satisfies the "any 60 consecutive day period" requirement that entitles it to exercise its option to buy the SkyBridge units from THL now.

Exercising that option before the end of September established a purchase price of $19.3 million, but here's the fun part of the agreement: "If the market value of [Com Dev's] shares is less than $10, the purchase price shall be satisfied, at Com Dev's option, in cash, common shares valued at $10 per share or a combination thereof".

Com Dev's shares are trading below $1, let alone $10, but the agreement as written says that Com Dev's shares will be valued at $10 a share for the purposes of satisfying the purchase price of $19.3 million. So at a deemed value of $10 a share, that's 1.93 million shares to be paid to THL.

When Com Dev filed its management information circular with SEDAR on March 19, 1999 -- a week after the agreement with THL had been finalized -- it told its shareholders that according to the memorandum of understanding with THL, it would have to pay in common shares "valued at the market value" if its shares were trading below $10 a share. Somehow, between the MoU and the final agreement, "valued at market value" was changed to "valued at $10 per share" and that small change could deliver a big benefit to Com Dev shareholders. At market value (using the September 30, 2002 closing price), Com Dev would have to pay THL 20.1 million shares for the SkyBridge units -- a huge dilution for holders of Com Dev's 48 million outstanding shares.

So, the agreement filed by Com Dev clearly states that Com Dev can value its stock at $10 a share when the market value is below that price. It includes the usual boilerplate about how it is the entire agreement and supersedes any prior understandings and agreements. Did THL know what it was signing? It would require a startling act of carelessness for it not to know.

According to Com Dev, "a special committee comprised only of non- conflicted members of Com Dev's board [that would exclude at least O'Donovan and Keith Ainsworth, who is also one of THL's largest shareholders] was delegated responsibility to review and determine Com Dev's position in this matter."

It seems unlikely that the remaining members of Com Dev's board would get together and decide to pull a fast one on O'Donovan that would cost him millions of dollars, so maybe this all has his backing. Com Dev's financial health certainly benefits O'Donovan and other THL shareholders, who remain large stakeholders in Com Dev. There has been no comment from any THL representative on the matter.

In other ambiguous news from Com Dev, it has closed its investor relations and communications unit, with those responsibilities now being shared by new CEO John Keating and CFO Gary Calhoun. On Com Dev's Web site, Ron Holdway, who had been corporate communications VP, has been erased from the company's management page and his Gatineau-based office has also been deleted (along with a sales office in Rosemere, Quebec). That doesn't necessarily mean that he's left the company -- although Com Dev said there would be savings in executive salaries from the closure -- it could also be that Com Dev wants to present a new face to investors to coincide with Keating taking the reins as CEO [ADDENDUM: That turned out to be the case. Holdway is still with Com Dev but is no longer the IR contact.]

Dalsa records another strong quarter with profits of $3.7M
October 31, 2002

Another solid quarter for Dalsa, which reported net income of $3.7 million ($0.25/share) on sales of $31.7 million in the three months ended September 30 (Q3 02). The results were very similar to what the company reported in the previous quarter.

The digital imaging segment accounted for two-thirds of revenue and almost three-quarters of total profits. Revenue from Dalsa's semiconductor foundry was down slightly sequentially, and that was attributed to a two-week summertime shutdown of the facility.

The company used $5.3 million in cash during the quarter, with $3.8 million spent on equipment additions, primarily at the foundry. It finished Q3 with $10.7 million in cash on the balance sheet and working capital of $33.6 million.

In March, Dalsa provided a revenue forecast of $114-126 million for this fiscal year. Revenue over the first three quarters was $78.4 million, so it looks like the final number will be near the lower end of the forecast, but CEO Savvas Chamberlain said in the conference call that Dalsa will "definitely" hit its forecast. That means the sequential sales growth in Q4 will be at least 12%.

Net income for fiscal year 2002 should be around $11-12 million, and Dalsa has forecast an increase in earnings of more than 30% in 2003.

Open Text reports earnings of US$5.4 million in Q1
October 24, 2002

Open Text also continued its string of strong quarters, reporting earnings of US$5.4 million (US$0.26/share) on revenue of US$37.7 million in the three months ended September 30 (Q1 03).

Sales were up 5% from a year ago and down 9% from the previous quarter, which was attributed to the seasonal slowdown in sales during the summer. The company closed five million-dollar (US) deals in the quarter (6 in Q4) and reported an average deal size of just over US$300,000. New customers accounted for 72% of licensing revenue, which is the highest level in a long time.

Operating activities provided US$9.6 million in cash and US$16.2 million was used to buy back 712,200 shares for cancellation. Another US$1.2 million was used to purchase a patent. Net cash used in the quarter was US$6.9 million, which still leaves the company with US$103.0 million in cash. This was before the Centrinity acquisition (see previous digest), which will cost Open Text about US$20 million. Over the last two years, Open Text says it has generated US$53 million in cash flow.

In the PowerPoint presentation accompanying Open Text's results, the company said it had its "world operations HQ in Chicago" and said that of its 1,000 employees world-wide, 50 are in Asia, 300 in Europe, and 650 in the United States.

Open Text also announced on November 1 that it had closed its acquisition of Centrinity. In the circular prepared by Centrinity's management, the company said that if the Open Text offer had not been made, it was going to reduce staff by about 10% (which may happen anyway) and implement an "involuntary salary reduction program." It called 27 companies to try to find a better deal than what Open Text proposed but received "no meaningful expressions of interest."

New CEOs for Sirific, ADexact
October 24, 2002

What are the odds that two different Waterloo tech companies would have their appointments of new CEOs disclosed publicly for the first time in separate ads placed by their VCs in the same publication?

It happened in The Record's Technology Spotlight, where Tech Capital Partners disclosed that Sirific has hired Michael Hogan as its new CEO, and RBC Capital Partners mentioned that ADexact has made Brad Anderson its top executive.

Sirific has since updated its Web site to include Hogan in its executive profiles. He joined Sirific in September after spending 16 years with Texas Instruments, becoming GM of TI's broadband services unit in 1999.

ADexact has not yet made an announcement about Anderson. The RBC ad also said that ADexact had received a $7.5 million investment in July, which could mean that the company got $2 million more than the $5.5 million it announced in September 2001.

Sirific and ADexact had both been led by interim CEOs after hiring and quickly parting ways with new chief executives in 2001.

David Brennan, who was Sirific's finance VP, has become a partner at Solowave Investments, one of Sirific's seed round VCs. Solowave founder Richard Boyer had been interim CEO of Sirific until this summer. Charles Yu, who had been Sirific's California-based marketing VP, has been erased from the company's new Web site.

STOCK REPORT: Big month for big caps
October 2002

Waterloo's four public tech companies with market values over $100 million all logged a strong month in October. RIM shares finished the month at $19.50 -- their highest monthly close since May. Open Text stock had its highest month-ending price since March, while Dalsa shares set a record high for the third month in a row.

At the same time, Descartes, Com Dev, MKS, CME Telemetrix, and Finline set all-time record lows during the month, and all bounced back by varying degrees before month-end. Descartes actually went from an all-time low of $3.21 a share to an intra-month high of $4.85 -- a 51% gain in two weeks -- before settling back to close October at $4.13.

For the month of October:

RIM [TSX: RIM] +31%
Open Text [TSX: OTC] +22%
Navtech [OTCBB: NAVH] +20%
Dalsa [TSX: DSA] +19%
Descartes [TSX: DSG] +12%
Virtek [TSX: VRK] +4%
EMJ [TSX: EMJ] +1%
--S&P TSX COMPOSITE +1%
Finline [TSXV: FIN] 0%
================================
Com Dev [TSX: CDV] -3%
RDM [TSXV: RC] -5%
MKS [TSX: MKX] -28%
CME Telemetrix [TSXV: YME] -36%
Turbosonic [OTCBB: TSTA] -39%

RIM is once again comfortably worth more than all the other companies in the list combined, closing October with a $1.5 billion market cap.

For MKS, it was the first time in its history that its shares traded below a dollar for an entire month. Two days after its shares hit an all-time low of 40 cents on the 9th, MKS' trading volume spiked to 1.2 million shares -- its busiest trading day ever.

With two months left in 2002, Dalsa is walking away with the best performing stock award, with a 122% gain so far this year. Nothing else is remotely close. At the other end of the list, Finline (- 74%) is currently edging out MKS (-70%) and Com Dev (-69%). Other than its SEDAR filings, there's been no sign of life at Finline for months. Its Web site hasn't been updated in over a year.

Companies with headquarters outside the area:

Network Assoc [NYSE: NET] +49%
CheckFree [Nasdaq: CKFR] +43%
Siebel [Nasdaq: SEBL] +31%
Adobe [Nasdaq: ADBE] +24%
Engineering.com [TSXV: EGN] +17%
Bio-Rad [Amex: BIO] +13%
Knexa.com [TSXV: KNX] +11%
Sybase [NYSE: SY] +10%
CVF Technologies [Amex: CNV] +4%
Senesco [Amex: SNT] +2%
Agfa-Gevaert [Brussels: Agfa] +1%
=================================
Blue Coat [Nasdaq: BCSI] -10%
Eiger Technology [TSX: AXA] -31%

Knexa's shareholders approved the acquisition of EVER America's Waterloo-based SuiteResponse business at the company's AGM on September 27. It says it is now "proceeding with additional steps necessary to complete the transaction." Knexa also plans to change its name from Knexa.com Enterprises to Knexa Solutions.

Miscellaneous Tidbits

• Medicalis, a 3-year-old joint venture between Boston's Brigham and Women's Hospital and Mitra, has moved into a new head office on Riverbend Drive in Kitchener. The company consists mainly of former Mitra employees and is headed by Ron Kelly, who was Mitra's executive VP of mergers and acquisitions before the company was acquired by Agfa. Another Medicalis executive, marketing & strategy VP Patricia Beretta (who previously had a similar role at Mitra), has just been appointed to Canada's National Research Council (NRC) for a 3-year term.

• I mentioned in the last digest that MKS' highest paid executive in fiscal 2002 was its North American sales VP, David Thonn. Well, Thonn has been given the Web site deletion treatment by MKS and is said to be one of several people that parted ways with the company in August.

• Intellitactics unveiled a new Web site that lists Bethesda, Maryland as its corporate headquarters with Kitchener relegated to customer support and development. Joe Vos has been erased from the list of company directors and both John and Paul Sop have been added to the board (they may always have been on the board, but until now they weren't listed as directors on the Web site).

• Jody Schnarr, who was president of Onlinetel, has also been removed from his company's Web site. Parent company Eiger Technology had hinted that there could be some restructuring within its Onlinetel unit. Schnarr had been one of the founders of both Onlinetel and its predecessor, Stratford Telecom.

• LexisNexis' CourtLink reported that Descartes is being sued for fraud by California's BAX Global Inc. The suit was filed in August and the claims have not yet been tested in court. BAX Global is a subsidiary of the NYSE-listed Pittston Company, which also owns Brinks among many other things. In April 2000, Descartes announced that BAX Global was building a Web-based logistics network using its DeliveryNet product.

• Descartes acquired the 30% of Swedish e-logistics company Tradevision AB that it didn't already own. It will now fully integrate Tradevision into its own operations.

• Descartes spin-off Global Beverage Group (GBG) has again applied what it calls its "merge and operate philosophy" and acquired Informed Beverage Management Inc. of Charlotte, North Carolina.

• Dspfactory unveiled the second generation of its core technology, integrating what had previously been done on two chips into just a single tiny chip.

• RIM launched its "world band" GSM/GPRS BlackBerry voice/data handheld that will operate in North America, Europe, and Asia. It includes a speaker, which enables the device to be held to the ear like a traditional cell phone. It still has a headset jack for people who would prefer to be able to use other features of the handheld while talking on the phone. Rogers AT&T is offering the service in Canada.

• RIM made its first public comments on the Credit Suisse First Boston affair when co-CEO Jim Balsillie forcefully denied to the Globe and Mail that RIM CFO Dennis Kavelman is a much better golfer than he is. The Globe quoted a CSFB e-mail that described Kavelman as a "scratch golfer" and Balsillie as "very enthusiastic."

• There's been no update from ARISE about its IPO. The deal it announced in August with capital pool company Intercedent Ventures included a small penalty if ARISE's IPO didn't close by November 1. It's almost been five months since ARISE filed its final prospectus.

• Virtek has hired a North American sales director who will be based in Minnesota. The company's Boston-based business development VP, hired a few months ago, is now also heading sales and customer support.