December 2002

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 70 -- January 6, 2003
In this digest:

1. 2002: The year Dalsa broke through
2. Virtek looks for acquisitions, FONA partner
3. RDM reports first annual profit in years
4. ADexact shuffles management team
5. MKS expects first profit in three years this quarter

6. Com Dev puts staff on reduced workweek to wait out slump
7. RIM's BlackBerry poised to surpass 500K users this quarter
8. Lazaridis disputes Globe's suggestion that donation is in jeopardy
9. Agile closes $2M follow-on round
10. STOCK REPORT: Two stocks rise from the dead
11. Miscellaneous tidbits from Sybase, Intellitactics, Sandvine, Descartes, IMS

--Gary Will

2002: The year Dalsa broke through

From wire-to-wire, 2002 was Dalsa's year. The traditionally sedate company jumped quickly out of the blocks in January with the announcement that it was acquiring a semiconductor foundry in Quebec and buying the CCD image sensor business of Philips. It also raised $23 million through a warrant sale and $18 million though a share offering during the year.

Not only did Dalsa's stock price climb 131% -- hands down the best performer among the companies followed here -- but its total market value almost tripled during the year (it more than quadrupled over the last 14 months). Dalsa shares hit their low for the year and January and their high in December and registered gains in eight months of the year.

The stock market results for 2002 shows just how dominant Dalsa was among public companies headquartered in this area:

Dalsa [TSX: DSA] +131%
EMJ [TSX: EMJ] +4%
================================
Navtech [OTCBB: NAVH] -3%
--S&P TSX COMPOSITE -14%
Open Text [TSX: OTC] -23%
ATS [TSE: ATA] -29%
---NASDAQ COMPOSITE -32%
RDM [TSXV: RC] -36%
RIM [TSX: RIM] -45%
Turbosonic [OTCBB: TSTA] -47%
MKS [TSX: MKX] -47%
CME Telemetrix [TSXV: YME] -55%
Descartes [TSX: DSG] -59%
Virtek [TSX: VRK] -61%
Com Dev [TSX: CDV] -68%
Finline [TSXV: FIN] -70%

The median result in last year's list was a 68% decline. This year, that improved to a 46% drop.

Among private companies, the shareholders of Mitra had good reason to celebrate in January when the company was acquired by Agfa at a valuation of $300 million. That's slightly more than Dalsa's current market capitalization.

RIM remained the flag bearer for the area throughout the year, and ended the year with a market value of about $1.6 billion (using the basic number of outstanding shares), more than double that of Open Text and about $200 million more than Open Text, Dalsa, Descartes, Com Dev, MKS, Virtek, RDM, TurboSonic, CME Telemetrix, Navtech, and Finline combined.

For the second year in a row, Com Dev disposed of one of its divisions. It announced in 2001 that it was selling its wireless division to Quebec's Mitec Telecom. The deal closed in January 2002 for about $20 million in cash -- money that Mitec would no doubt like to have back now that its total market value is down to $10 million and it scrambles to find $5 million to stay afloat.

Com Dev didn't have as much luck in finding a buyer for its wireless broadband M/ERGY division, and ended up paying to have the division's managers haul it away. It had spent over $50 million in developing M/ERGY but found no customers for the technology.

Com Dev CEO Keith Ainsworth seemed to be genuinely disgusted that some shareholders couldn't see why the company's performance under his leadership warranted the payment of a $347,000 bonus. At a security-laden AGM, he told complaining shareholders to do more homework. At the end of August Com Dev announced Ainsworth would be retiring in 60 days.

Virtek's two most senior managers bet their jobs on biotech and lost. Sirific, ADexact, and Intellitactics all got new CEOs. Descartes got a new half-a-one.

VideoLocus was acquired by LSI Logic, creating a good return for its seed investors. Open Text failed in its bid to acquire Accelio, but made millions of dollars selling its Accelio shares to successful bidder Adobe. It later acquired Centrinity. RIM acquired three companies over the summer, while the former JPH International -- acquired last year by France's EVER -- was spun-out and became part of Knexa.

NDI acquired its Swiss partner, Mednetix. Aprisma Management Technologies didn't acquire Intellitactics, although it planned to. Descartes spin-off Global Beverage Group acquired several companies through the year.

Virtek put an end to its cash-draining three-year involvement with biotech instruments and sold the business to Bio-Rad Laboratories. It also abandoned its proteomics subsidiary.

There were layoffs at a long list of companies, although the numbers weren't usually very high (there can't be huge layoffs at Waterloo tech companies because there aren't any that have enough staff to be able to lay off thousands of people). Many of the layoffs at private companies went unreported, but when Intellitactics employees were given the chop, some of them walked down the hall to the office of radio station NewsTalk 570 which quickly broadcast the news.

Cyberplex left town, but its K-W site had already shrunk to the point that few noticed when it did. The former Waterloo Scientific/Philips Analytical was sold and shut down after 17 years in town.

VoiceIQ closed its Waterloo office, the remnants of what had been International Neural Machines (INM). INM founder Oleg Feldgajer was fired, sued the company, and then helped to oust the board and the management team at the company's AGM.

QJunction, revived late in 2001 after an ugly battle with its own CEO and majority shareholder, was shut down and liquidated. We lost Urbana, if that's really a loss. BlueNexus and WirelessMoney also closed their offices.

Waterloo continued to be one notch above non-entity on the Canadian venture capital scene, at least as far as closing new deals goes. It's not from a lack of effort of the part of the VCs to find deals in the area, there just weren't many fundable deals being offered. But there was some good news, as both Sirific and Meikle Automation completed notable rounds of financing and SlipStream Data closed a significant seed round. Intellitactics and Agile Systems announced follow-on rounds from existing investors. Ignis Innovation completed an unannounced angel round of financing.

Dspfactory announced in February that it had raised $5 million through the sale of convertible debentures, bringing the total funds it raised over a two-year period to $21 million. Its revenue growth in fiscal 2002 was good for second place on Profit magazine's list of "Canada's hottest start-ups."

Dspfactory also received funding from Technology Partnerships Canada (TPC) during the year, as did ATS for its Spheral Solar Power subsidiary and Dalsa for the development of its digital cinema technology.

RDM almost doubled its sales and became profitable for the first time in years, even if its share price didn't reflect the improvements.

For Descartes, 2002 was the sixth year in a row where it didn't have one profitable quarter. It expects to put an end to that streak in 2003. The Globe & Mail named the company one of six "Dogs of the Year" in its year-end Stars & Dogs column.

ARISE announced in February that it was going public and arranged both an IPO and a merger with a public capital pool company, but neither closed in 2002.

After more than 20 years of talk, the UW North Campus research park got the green light, with Sybase signed on as the lead tenant.

And could this be a year in review without mentioning that Finline announced a bunch of deals that never happened?

Virtek looks for acquisitions, FONA partner
December 4, 2002

Virtek bounced back from a weak Q2 to report revenue of $7.0 million in the quarter ended October 31 (Q3 03). Sales were up 27% from the previous quarter (and 3% above Q1 sales), and 47% higher than in last year's disastrous third quarter, which marked the beginning of the end of the management team of the time. Bob Sandness, who became president in March, has now added the CEO title, succeeding Chuck Greb, who remains chairman. Sandness has also been added to Virtek's board of directors.

Net loss for the quarter was $337,300 ($0.014/share), with all of that loss coming from the pre-revenue FONA biosensor unit. Virtek's laser systems segments recorded a profit of $97,100, an improvement from a $219,300 loss in the previous quarter but below its Q1 net income of $637,000. The company anticipates that in the current quarter laser systems profits will more than offset biosensor losses, created a net profit company-wide.

The company finished the quarter with $9.5 million in cash -- down $858,000 from the end of Q2. Virtek is looking to spend some of that money on acquisitions. "Organic growth alone is not going to get us where we ultimately want to get to," said Sandness in the conference call.

Enthusiasm for FONA seemed to be more muted than in the past. The biosensor's sensitivity is not yet at the point where it will deliver significant benefits to the broad market Virtek is hoping to address. Sandness said the company is trying to determine what FONA's limits are and hopes to have some results in the next three months. "Is this a single hit to first base, or has this got true home run potential?," asked Sandness. "And even if this has home run potential, it's going to take a significant amount of resources -- more than what Virtek alone can handle." Virtek hopes to have a funding partner in place for FONA by the summer.

RDM reports first annual profit in years
December 11, 2002

For the first time in what could be called the modern history of RDM, the company reported an annual profit. In the year ended September 30, RDM earned $434,000 on sales of $13.1 million. Sales were up 91% over the $6.8 million reported in 2001.

RDM Corp. used to be called Mindflight Corp. and it has never reported an annual profit since it acquired majority ownership of Waterloo's Research Development and Manufacturing Corp. (R.D.M.) in 1993. R.D.M. itself was profitable at that time, but Mindflight's other operations -- later discontinued -- were money losers.

In the fourth quarter, RDM reported net income of $134,000 ($0.007/share) on sales of $3.8 million. Overall sales were flat sequentially, but the company's digital imaging segment saw its sales jump 14% from Q3 to $2.2 million. It's the second year in a row where digital imaging sales spiked in the fourth quarter.

Sales from RDM's traditional quality assurance segment fell 20% quarter-over-quarter to $667,000. The electronic payments segment also reported a sequential drop in sales, falling 10% to $905,000.

RDM ended the year with $6.0 million in cash and investments, up $602,000 from the end of Q3.

As mentioned in the last digest, the company is expecting sales in the current quarter to fall from the Q4 levels and is forecasting a net loss. It expects to be profitable again in Q2 and for the rest of the year. The company is targetting $100 million in annual sales in 3-5 years. It is hoping for a TSX listing sometime this year.

RDM was one of three companies to be accused of patent infringement by DataTreasury Corp. in separate lawsuits filed in December. DataTreasury is based on Long Island in New York and in 2000 received a patent called "Remote image capture with centralized processing and storage" which it claims RDM is infringing. RDM is disputing DataTreasury's claims. On its Web site, DataTreasury offers various cheque imaging and archiving services called eCheckVault that are similar to those provided by RDM. DataTreasury filed a similar suit against EDS and Viewpointe Archive Services, a cheque imaging service formed by IBM, J.P. Morgan Chase, and Bank of America.

UW president emeritus Doug Wright is one of three new directors of RDM. The other newcomers to the board are Ken Kivenko, former CEO of NBS Technologies, and Jean Noelting, who was CEO of Internet gambling company Cryptologic for about a year-and-a-half until resigning in July. Stepping down from RDM's board are Milton Fereiro and Fred Militello.

RDM's highest-paid executive officer in fiscal 2002 was sales VP John Mamalakis, whose total compensation, excluding options, was $394,745. CEO Doug Newman received $212,500.

ADexact shuffles management team
December 2002

ADexact finally acknowledged its new CEO, Brad Anderson (see October digest) on its Web site. Anderson was previously an executive VP at Exodus Communications and had earlier been with several cable companies in the U.S. Anderson has also taken a seat on ADexact's board.

With Anderson's appointment, founder and interim CEO Steve Bacso has re-taken the title of VP of business development. Bacso took over as CEO following the departure of David Roussain a year ago.

Mat Wolf, ADexact's CFO for over two years, has left the company, as has Peter Moran, its Colorado-based senior VP of sales and marketing, hired one year ago. Anderson is now listed as both the company's investor relations contact (replacing Wolf) and its sales contact (replacing Moran).

MKS expects first profit in three years this quarter
December 4, 2002

For the quarter ended October 31 (Q2 03), MKS reported a net loss of US$636,000 on revenue of US$7.5 million. Sales were up 16% from the previous quarter and 11% from the same period last year. Both of the company's operating segments -- SCM and interoperability -- posted strong sequential revenue gains (15.5% and 18%, respectively).

The company confirmed the rumoured layoffs (see October digest) that occurred during the quarter. MKS chopped 9% of its workforce, leaving it with 247 employees at the end of Q2. It incurred severance charges of about US$300,000 in the quarter.

With the reduction in headcount, MKS expects to be profitable in the current quarter. It would be the company's first profitable quarter in almost three years.

MKS ended Q2 with US$4.2 million in cash, down US$1.5 million over the quarter.

The company again lowered its revenue forecasts for the year, and is now expecting sales of US$31-33 million over the fiscal year. That would be good for a 10-17% increase from fiscal 2002. MKS originally forecast a 30% jump in sales this year.

MKS settled the US$10 million lawsuit it filed against an unidentified customer in March (see September digest). It says it has received US$1.8 million in cash and will support the customer's use of its software for nine months. Most of the money will go toward MKS' legal costs, which were US$1.3 million at the end of Q2 with some additional costs to be added to that total.

Com Dev puts staff on reduced workweek to wait out slump
December 18, 2002

"This chapter of our history is now behind us," said Com Dev CEO John Keating in reviewing another year of poor results. For fiscal 2002, ended October 31, Com Dev lost $34.9 million ($0.75/share) on revenue from continuing operations (i.e. space) of $107.5 million -- a 13% drop from 2001 when the company lost $103.9 million. The company's accumulated deficit now stands at $234.4 million.

With everything now out of the picture except for the company's traditional space business, Com Dev was able to report a fourth quarter profit of $748,000 ($0.013/share) on sales of $25.2 million. Revenue was down 11% from the previous quarter and 23% from the same period a year ago. Com Dev was working away at its order backlog, as new bookings in the quarter were only $8.5 million. The backlog fell $16 million to $42 million.

With the sluggishness of the commercial satellite market, the company is forecasting a 10-15% drop in revenue over the first half of this year. To cut costs, Com Dev is putting 80% of its staff on a reduced workweek. It is also reducing its headcount, trimming about 15 jobs here and five at its UK facility. Following the layoffs, Com Dev will have 560 employees in Cambridge.

Keating, who became CEO on the first day of fiscal 2003, expects the satellite market will rebound to more normal levels in the last half of the year, leading to a strong 2004. "I'm very confident we are going to see some sterling results [in 2004]," he said in the conference call.

At the end of October, Com Dev had $13.7 million in cash, down only $154,000 in Q4. Both accounts receivable and deferred revenue were down significantly in the period.

About the THL situation (see October digest), CFO Gary Calhoun said that the crux of THL's dispute is over the timing of Com Dev's decision to exercise its option to buy the SkyBridge units. If that's correct, there are certainly more compelling arguments that THL could make.

In addition to the $20.2 million that Com Dev might have to pay THL, the company still has $18 million in convertible debentures due in 2006, so depending on judicial decisions and market swings, existing shareholders could be facing some hefty dilution down the road, considering that Com Dev's market cap at year-end was only $48 million.

RIM's BlackBerry poised to surpass 500K users this quarter
December 19, 2002

For the quarter ended November 30 (Q3 03), RIM reported a loss of US$92.3 million on revenue of US$74.2 million. The loss included a US$27.8 provision to cover the jury award and legal costs related to the NTP lawsuit (see previous digest) that RIM is planning to appeal, if necessary. There was also a US$40.1 million write-off of the income tax assets RIM had been carrying on its balance sheet, but the tax benefits will be available to improve the reported bottom line once the company is profitable.

There was also a US$6.55 million restructuring charge related to the layoffs and site closures announced last month. That was less than the US$8-9 million charge RIM had forecast.

Excluding the extraordinary charges, the quarter was in-line with RIM's most recent targets. Sales were flat from the previous quarter, as forecast (and up 5% from a year ago), with the company's two largest revenue segments -- handhelds and services -- both showing small sequential gains.

BlackBerry subscribers increased by a net 60,000 in the quarter, more than the 45-55,000 RIM had forecast and well above the 48,000 adds in Q2. The total number of BlackBerry subscribers will pass the half-million mark this quarter.

As usual, RIM lowered its forecast for the current quarter, shaving off US$5 million from its previous target to US$80-90 million. The low end of that range would be an 8% quarter-over-quarter increase.

RIM ended the quarter with US$531.1 million in cash and investments, down US$18.8 million over the period. That cash burn was well below the US$30 million the company had forecast. For the second straight quarter, R&D expenses (excluding the tax write-off) were well below what the company had forecast, but its government funding runs out in the current quarter and that could add a couple million dollars in quarterly R&D expenses beginning in Q1. RIM expects to use US$20 million in cash in Q4.

Lazaridis disputes Globe's suggestion that donation is in jeopardy
December 16 & 17, 2002

I don't usually cover what local tech executives do with their money (how they extract it from public companies, yes, but not what they do with it after that point), but a story printed in the Globe & Mail in December ties into an issue that's relevant in a business context.

The Globe story, headlined "RIM head's huge gift not all it seemed," charged that "everyone involved has been willing to pretend" that RIM co-CEO Mike Lazaridis has completed his much-publicized $100 million donation to the Perimeter Institute, when, in fact, he has provided just $20 million so far.

I was looking forward to seeing this "pretending" from "everyone" but you had to read down to the 19th paragraph to find anyone "involved" being cited at all, and that was institute executive director Howard Burton saying that Lazaridis is now scheduled to provide the remaining $80 million in 2004 and 2005. Not quite the "pretending" that was promised, although it is a noteworthy change from the original announcement that the full donation would be made by the fall of 2001.

The Globe story suggested that with RIM's shares now worth one-ninth what they were when the donation was announced, the balance of the donation may be in jeopardy. "The fate of the Lazaridis donation may ride partly on RIM's fortunes over the next three years," wrote Showwei Chu and John Saunders. Lazaridis told The Record that the donation isn't in jeopardy.

As of Friday, the 8.98 million RIM shares that Lazaridis is listed as controlling had a market value of $190 million, and that might reasonably lead someone to think that at today's prices, he would have to sell over 40% of his stake in the company to make good on his donation.

That may not actually be the case, though, and the reason relates to a more substantial story that appeared in The Record last month. Ron DeRuyter took a look at the practice of "equity monetization" -- a legal if dubious technique that allows company insiders to lock in the value of their shares and receive cash from them, without technically selling them -- and without filing an insider trading report disclosing what they have done.

The topic of monetization has come up in many conversations I've had over the last two years -- with CEOs and other senior executives, with VCs, and with people in the financial services industry -- and it is widely believed that RIM's top executives have participated in a monetization arrangement.

The RIM guys declined to say whether they had used equity monetization when asked by DeRuyter (silence was better than the response from a Descartes spokesperson, who said that asking what insiders of public companies do with their shares is invasion of privacy).

So, other than Lazaridis and his inner circle, no one really knows what arrangements he'll have to make with his RIM shares to make good on his Perimeter donation. He says the remaining $80 million will be provided by 2005, and there's no reason to believe that's not the case -- or that it is contingent on the vagaries of the stock market, as the Globe writers assumed.

I hope we hear more about equity monetization in 2003. There have been rumours for years that the practice might be outlawed, but nothing's happened. It's a more interesting issue than the bugaboo of 2002 -- expensing stock options.

Agile closes $2M follow-on round
December 13, 2002

Agile Systems has just closed a financing round in excess of $2 million. It's a follow-on from the company's existing investors. According to company management, they have now raised more than $6 million over the last year in three installments, with each installment contingent on the company achieving certain milestones.

One of Agile's long-term investors has been Working Ventures Canadian Fund, which has made several investments in Waterloo companies over the years. There was an upheaval with the management of the fund in December and the former management team is out of the picture. The fund is now managed by Vancouver's GrowthWorks.

Working Ventures is currently a shareholder in Sirific, Agile Systems, and CME Telemetrix and in the past invested in INM, Virtek, and Ardesic. In 1999 it created and is the sole shareholder of Waterloo Ventures.

STOCK REPORT: Two stocks rise from the dead
December 2002

Two stocks that had been vying for worst performer of 2002 jumped back to life in December. MKS ended the year with its best monthly closing price since May, while for CME Telemetrix it was only the second time in the last 17 months that its stock has registered a monthly gain.

For the month of December:

CME Telemetrix [TSXV: YME] +72%
MKS [TSX: MKX] +69%
--S&P TSX COMPOSITE +1%
Finline [TSXV: FIN] 0%
Navtech [OTCBB: NAVH] 0%
================================
EMJ [TSX: EMJ] -0%
Virtek [TSX: VRK] -1%
Dalsa [TSX: DSA] -3%
Turbosonic [OTCBB: TSTA] -4%
Descartes [TSX: DSG] -12%
Open Text [TSX: OTC] -13%
RIM [TSX: RIM] -14%
RDM [TSXV: RC] -15%
Com Dev [TSX: CDV] -23%

The stocks at the top and bottom of the list both experienced 180-degree turns during the month. CME shares actually began December by setting an all-time low of 19 cents before coming back and closing December at 43 cents -- their highest monthly close since September. Com Dev stock hit an intra-month high of $1.64, its highest price since August, but the gains were short-lived.

Dalsa shares set a new all-time high of $19.90 before slipping back to close the month at $18.24. On the first trading day of the month, Descartes shares hit levels not seen since June, but those gains proved to be fleeting.

Companies with headquarters outside the area:

Agfa-Gevaert [Brussels: AGFA] +4%
Blue Coat [Nasdaq: BCSI] +3%
Sybase [NYSE: SY] +1%
CVF Technologies [Amex: CNV] 0%
=================================
Bio-Rad [Amex: BIO] -2%
Knexa.com [TSXV: KNX] -8%
Network Assoc [NYSE: NET] -12%
Eiger Technology [TSX: AXA] -13%
Siebel [Nasdaq: SEBL] -13%
Engineering.com [TSXV: EGN] -14%
Adobe [Nasdaq: ADBE] -16%
Senesco [Amex: SNT] -16%
CheckFree [Nasdaq: CKFR] -18%
LSI Logic [NYSE: LSI] -32%

Miscellaneous Tidbits

• Sybase plans to acquire California-based AvantGo for US$38 million and will place the company's operations under its iAnywhere Solutions subsidiary. Waterloo is iAnywhere's largest site and the subsidiary is led by Waterloo's Terry Stepien. AvantGo is a Nasdaq-listed company and the deal is contingent on the approval of the company's shareholders. Sybase's offer is about double the price AvantGo was trading at when the proposal was announced. Over the last four quarters, AvantGo lost US$23.8 million on sales of US$19.9 million.

• The new CEO of Intellitactics is Randall Davis, previously a divisional president with Sterling Software, which was acquired by Computer Associates in 2000. Davis left the company shortly thereafter. According to a story in Newsday, Davis then became an investment banker. As was mentioned in the October digest, Intellitactics now lists Bethesda, Maryland as its corporate headquarters.

• There were a handful of layoffs at Sandvine in December. Three employees and two contractors were let go.

• Descartes reached a undisclosed settlement with BAX Global over the US$4 million suit BAX filed in August (see previous two digests). The new complaint filed against Descartes by Concentrek in November (see last digest) relates to the arbitration loss Descartes disclosed in August. In its complaint, Concentrek said it was "concerned that Descartes will seek to avoid enforcement of the arbitration award."

• Fakhri Karray and Otman Basir, the professors behind IMS and the defunct QJunction, have a patent application for a laser-powered bone drilling device that is now working its way through the U.S. patent process.