May 2003

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 75 -- June 2, 2003
In this digest:

1. Descartes cuts 130 jobs; will buy back stock, debentures
2. Dspfactory revenue climbs 40% in fiscal 2003
3. CME Telemetrix settles lawsuit as cash set to evaporate
4. NTP vs RIM: Judge increases damages by 50%

5. Com Dev sees markets improving after hitting "low water mark"
6. RDM quarter falls below expectations
7. STOCK REPORT: RIM shares jump 39% over the last three months
8. Miscellaneous tidbits from IMS, Sirific, Sandvine, RSS Solutions, Web Pearls, CFX, ARISE, Maplesoft, Global Beverage, Turbosonic, Dalsa, SlipStream, Covarity.

Descartes cuts 130 jobs; will buy back stock, debentures
May 6, 12 & 15, 2003

In what has become an annual tradition, Descartes announced a round of layoffs following another disappointing quarter. The full details of the quarter ended April 30 (Q1 04) will be announced this week, but company has said that sales will be in the US$14.0-14.4 million range. That would be about 20% below the previous quarter and 15% under last year's numbers. License revenue plummeted by more than 50% sequentially. In March, Descartes predicted that its Q1 sales would be up 3-8% from last year and that target will be missed by about US$3.5 million.

The company tried to blame the poor quarter on external causes, including the war in Iraq and even SARS. "The difficulties we faced in the quarter were beyond our control," said CEO Manuel Pietra. Unless half of its salesforce caught the virus, it sounded like the company was grasping at SARS.

Descartes is chopping another 130 jobs -- almost a quarter of its employees -- and expects to use US$8-9 million in cash for severance and other downsizing expenses. It had previously announced major rounds of layoffs in June 2002 and July 2001.

Peter Schwartz is no longer part of the management team but remains chairman. Pietra is now the full CEO after sharing the title with Schwartz since February 2002. VP Paul Laufert, who joined Descartes from MKS nearly six years ago, has left the company, as has former COO and vice-chairman Willem Galle.

No bottom-line range was provided, but with the weak Q1 and the charges in Q2, it looks like Descartes' string of profitless quarters will be extended to 30. That's 7.5 years of consistent quarterly losses. It has never been profitable as a public company.

Descartes also announced its plan to spend up to US$75 million to buy back its shares and its convertible debentures. It expects to purchase and cancel up to 11.6 million shares at a price of CDN$3.00-3.85 (price to be determined by an auction). In 2000, Descartes sold 3 million shares for CDN$192 million, and now, three years later, it will use about one-fifth of that money to buy back almost four times as many shares. Descartes' executives have shown a keen understanding of principle of "buy low, sell high" when it comes to the company's stock.

The company will also offer to buy up to US$45 million of its convertible debentures for $950 for each $1,000 principal amount. That's a much better price for debenture holders than the $700 Descartes had offered last year in an offering that was a colossal flop. There shouldn't be any shortage of takers this time around. Circulars for the proposed transactions have not yet been filed with SEDAR.

Descartes says it ended Q1 with about US$163 million in cash and investments.

Dspfactory revenue climbs 40% in fiscal 2003
May 21, 2003

Dspfactory announced that its sales grew to $22.8 million in the year ended February 28, 2003. That's a 40% jump from 2002. It finished the year with 68 employees in Waterloo and Switzerland, up 17 from the previous year. The company continues to work toward its goal of a public offering of its shares.

Also in May, Dspfactory won the Swiss Economic Award, Switzerland's top national prize for emerging companies. In 2001, Dspfactory acquired a Swiss-based ASIC design centre that had been spun out of the University of Neuchatel's Institute of Microtechnology and its operations in Switzerland qualified the company for the award.

One other Dspfactory-related note: Burlington's Gennum, which last year announced that it would use Dspfactory's technology, has just launched a competing low-power DSP platform.

CME Telemetrix settles lawsuit as cash set to evaporate
May 9, 2003

Facing the prospect of running out of cash in a few weeks, CME Telemetrix settled its three-year-old dispute with the former Neurosoft and its parent company, the Marmon Group. CME says it will receive about $900,000 through the settlement.

Neurosoft bought CME's Advantage Medical division in 1999 for $4.5 million. It paid $2.5 million up front and the balance was to be paid over the next two years. It quickly became unhappy with the deal and less than a year later said it would not be making any additional payments. CME filed suit against Neurosoft in September 2000 and was countersued two months later. A court decision was expected later this year. Neurosoft no longer exists as an operating company. In 1999, CME CEO Duncan MacIntyre received a $100,000 bonus which was to be paid if the selling price of Advantage Medical was $5 million or more.

Even though the $900,000 is well below the $2.0 million receivable CME has been carrying on its balance sheet, the company badly needed the money, as it was down to $832,000 in cash and investments at the end of March ($321,000 net of bank indebtedness) and would have run out of cash this summer, barring an infusion of capital.

CME says that the pilot trials of its hemoglobin device began at two Toronto hospitals in March but were delayed by the SARS outbreak. The company had told investors in November that preliminary results from trials were expected by March, but that's now been pushed back to the end of the year.

In fiscal 2002, ended December 31, CME had a net loss of $3.3 million ($0.37/share), bringing its accumulated deficit to $17.0 million. Operations used $2.6 million in cash over the year. In the first quarter of 2003, net loss was $659,000 ($0.07/share) with operations using $560,000 in cash.

NTP vs RIM: Judge increases damages by 50%
May 26, 2003

The judge presiding over the Virginia court battle between RIM and NTP has increased the amount of compensatory damages to be paid by RIM by 50%. In November, a jury awarded NTP US$23.1 million after finding that RIM had infringed on patents held by NTP. Because the infringement was found to be willful, the judge had the option to increase the damages by as much as 200%. RIM has also been ordered to pay 80% of NTP's legal bills.

RIM will record an additional US$13.75-14.25 million provision in fiscal 2003 to cover the increased damages plus another US$5 million for NTP's attorney's fees. That will bring its total provision for the year to about US$58.5 million. It expects to record an additional provision of US$8-9 million in the first quarter of 2004 (which just ended).

The judge didn't have much good to say about RIM's behaviour in the dispute. He said there was no compelling evidence that RIM ever bothered to examine NTP's claims and accused the company of attempting "to confuse and mislead the jury" and of engaging "in a variety of questionable litigation tactics" to delay the proceedings. He is expected to rule later this month on NTP's request for an injunction barring RIM from selling BlackBerry in the U.S.

RIM plans to appeal the decision, but it will have to put aside 8.55% of its revenue from BlackBerry sales in the U.S. until the matter is resolved.

Com Dev sees markets improving after hitting "low water mark"
May 29, 2003

Com Dev CEO John Keating called the quarter ended April 30 (Q2 03) the "low water mark" for the company, after revenue declined 15% from the previous quarter and 34% from last year to just $18.9 million.

The company booked $22.6 million in new business in the quarter, down only slightly from $23.2 million in Q1. Com Dev is forecasting that Q3 revenue will be "slightly above" Q1's $22.2 million level and revenue for the final half of 2003 is expected to outpace last year's results.

Loss in the quarter was $705,000 ($0.02/share), which consisted of $445,000 in interest on the company's convertible debentures and an operating loss of $260,000, attributed to the decline in value of the U.S. dollar.

According to Com Dev, the "vast majority" of its employees who had been on a reduced workweek returned to a full-time schedule at the end of May. The company now has 634 employees company-wide, down 19 since the beginning of February.

Cash at quarter-end was just $854,000, down $2.2 million over the period. An additional $2.1 million in cash continues to be held in escrow pending the resolution of the dispute with Mitec (see January Digest). The discontinued wireless business contributed a net $434,000 in cash in Q2 after most of remaining assets were sold for about $1.1 million.

The company has gone through $10.4 million in cash over the first half of the year, but expects to be cash-neutral over the remaining six months. It plans to pay the annual interest on its convertible debentures in cash. Last year, the interest was paid in shares. Com Dev has a $15 million operating line of credit with CIBC and an additional $5 million term facility.

Inventory levels again went up significantly, jumping $4.1 million to $26.6 million. The company says it's work-in-progress that will soon be shipped.

No real update on the THL situation (see October Digest), other than that a decision is expected sometime this summer.

RDM quarter falls below expectations
May 5, 2003

For the quarter ended March 31 (Q2 03), RDM reported a net loss of $402,000 ($0.02/share) on revenue of $2.7 million. Although sales were up 60% from a weak Q1, they fell below the $3.4 million the company had targetted. Net loss a little better than Q1's $496,000 shortfall, but the company had hoped for a break-even quarter.

Halfway through the year, sales are down 20% from 2002, but RDM still expects that its sales for the full year will be about equal to the $13 million logged last year. To hit that target, RDM will need to average $4.4 million in sales in each of its remaining two quarters.

RDM's traditional cheque quality segment contributed 27% of revenue in Q2, with its newer digital imaging and electronic payments segment providing the remaining 73%.

The net loss in the quarter included $210,000 in legal expenses related to RDM's defence against claims of patent infringement from DataTreasury (see December Digest) and its own claims against Ingenico (see September Digest). The loss also includes nearly $100,000 in costs related to the company's TSX listing, which occurred during the quarter.

RDM ended Q2 with $5.9 million in cash and investments -- which is what it had at the beginning of the quarter. Operations contributed $239,000 in cash.

STOCK REPORT: RIM shares jump 39% over the last three months
May 2003

Despite RIM's legal problems, shares in the company climbed to their highest levels in a year, closing May at $26.00. RIM stock is up 39% over the last three months, and the company once again has a $2 billion market capitalization.

Weeks before CME Telemetrix announced that it had settled its suit against Neurosoft, the Globe & Mail ran a story on the company which triggered a 67% jump in its shares the day the story appeared. The Globe didn't mention that the company was, at that time, about 10 weeks away from running out of cash. CME shares closed May at 50 cents -- within their recent trading range, but at the higher end of the range.

Motorola held warrants to acquire an additional 446,226 shares in CME, but it let them expire on May 15. Their exercise price was $7.00 a share, a level CME stock hasn't seen in two years.

MKS shares also had a good month, even in the absence of any significant news from the company. The shares traded above $2 during May, the first time that's happened since January of last year.

For the month of May:

Turbosonic [OTCBB: TSTA] +79%
CME Telemetrix [TSXV: YME] +47%
MKS [TSX: MKX] +41%
Virtek [TSX: VRK] +17%
RIM [TSX: RIM] +16%
Com Dev [TSX: CDV] +8%
Open Text [TSX: OTC] +4%
--S&P TSX COMPOSITE +4%
Finline [TSXV: FIN] 0%
===============================
EMJ [TSX: EMJ] -1%
Dalsa [TSX: DSA] -3%
Navtech [OTCBB: NAVH] -6%
Descartes [TSX: DSG] -14%
RDM [TSX: RC] -28%

Descartes shares fell to a new all-time low of $2.88 early in the month and finished May at $3.17 -- their lowest monthly close ever. It was the first time that Descartes stock fell below $3 and the first month where it never traded above $4.00. With the company saying that it will buy back shares for over $3.00, the price shouldn't set any new lows in the short-term.

RDM shares had their largest calendar month decline in two years after announcing disappointing results for the second consecutive quarter.

Companies with headquarters outside the area:

CVF Technologies [Amex: CNV] +124%
Knexa [TSXV: KNX] +72%
Bio-Rad [Amex: BIO] +26%
LSI Logic [NYSE: LSI] +19%
Siebel [Nasdaq: SEBL] +9%
Ansys [Nasdaq: ANSS] +8%
Network Assoc [NYSE: NET] +6%
Agfa-Gevaert [Brussels: AGFA] +6%
Adobe [Nasdaq: ADBE] +2%
=================================
Senesco [Amex: SNT] -1%
Sybase [NYSE: SY] -1%
Betacom [TSXV: YCA] -7%
Blue Coat [Nasdaq: BCSI] -8%
CheckFree [Nasdaq: CKFR] -11%
Eiger Technology [TSX: AXA] -19%
Engineering.com [TSXV: EGN] -26%

Miscellaneous Tidbits

• Earlier this year, Toronto's TriNorth Capital invested an additional $300,000 in Intelligent Mechatronic Systems. It now owns 13.5% of the company. TriNorth invested $500,000 in IMS in December 2001 and put in another $125,000 in 2002 to give it 10% of the company at that time. It also lent IMS an additional $100,000 last September.

• Sirific, Sandvine, and RSS Solutions were among the companies making pitches at the Canadian IT Financing Forum in Toronto. RSS says it is looking to raise $5 million this year. Sandvine is looking for another $6 million.

• Al Vilcius has stepped down as CEO of Web Pearls, a position he held for over two years. He says he left because the e-learning sector did not grow as quickly as expected.

• In February, Britain's AEA Technology sold its Waterloo-based CFX business to Ansys Inc. for $31.6 million. Ansys is a Nasdaq-listed company based in Canonsburg, Penn. (near Pittsburgh) with a market cap of US$400 million. CFX evolved out of Waterloo's Advanced Scientific Computing which AEA acquired in 1997 for $15 million. The company develops computation fluid dynamics software and was founded in 1985 by a group of mechanical engineers from UW.

• ARISE's merger with capital pool company Intercedent Ventures (IVL) hasn't happened yet. IVL shareholders will be asked to approve the amalgamation at the company's AGM later this month. For the quarter ended March 31, ARISE reported a net loss of $199,512 on sales of $295,892. It had a $564,000 working capital deficiency at the end of the quarter with $52,000 in cash. For the year ended December 31, 2002, ARISE lost $1.0 million on sales of $1.2 million. IVL says it has lent ARISE an additional $75,000.

• Maplesoft, the former Waterloo Maple, has finally concluded arrangements to move into Richard Boyer's Waterloo Tech Campus in North Waterloo (not to be confused with Manfred Conrad's Waterloo Technology Campus on Albert Street). The move, which had been in discussions since last year, is expected to happen in September. The Jim Balsillie-backed Centre for International Governance Innovation will move into Maplesoft's current home in the former Seagram Museum.

• Another acquisition for Global Beverage Group (GBG), which is buying Florida-based Entrada Technologies. Entrada develops mobile applications for salesforce automation. It has also acquired the remaining 51% of Colorado's Application Design Associates. It had bought 49% of the company in January 2002. GBG recently held a user conference in New Orleans.

• Turbosonic reported net income of US$10,500 on sales of US$1.5 million in the quarter ended March 31 (Q3 03). Over the first nine months of the fiscal year, sales are up 47% from 2002.

• Dalsa announced that its foundry has received a $9 million order for MEMS-based sensors from a customer in the automotive industry. The order will be shipped over the next 18 months.

• SlipStream Data announced a deal with New Zealand's Quicksilver Internet, its first customer outside of Canada and the U.S. Quicksilver is charging customers NZ$10/month (about CDN$8) to use SlipStream's Web accelerator.

• Mennonite Savings and Credit Union (MSCU) won the first-ever National Credit Union Innovation Award at a ceremony in Halifax. MSCU was recognized for the work it did with Kitchener's Covarity to develop an automated loan review and monitoring system.

• UW may be one of CITO's top sources for fundable research projects, but that didn't stop the organization from referring to it as "Waterloo University" in a May news release.