June 2003

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 76 -- July 7, 2003
In this digest:

1. ARISE closes IPO, amalgamation; expects exchange listing
2. Avvida Systems acquired for US$5.5M
3. Fred Systems assets bought by Seattle company
4. RIM beats sales forecasts, revenue jumps 46%

5. Virtek sales soar with FOBA acquisition
6. MKS sprints to the finish of fiscal 2003
7. Descartes' weak quarter in line with warning
8. Onlinetel president expelled, fined by accounting body

9. RDM settles DataTreasury suit
10. Finline in cash crunch, faces delisting
11. STOCK REPORT: Military contract sends Com Dev shares higher
12. Miscellaneous tidbits from LogiSense, Navtech, MKS, Dspfactory, Sybase, UW, Dalsa, Sandvine, Reqwireless, SpectraDigital, Knexa, Com Dev, Bioinformatics Solutions

ARISE closes IPO, amalgamation; expects listing
July 4, 2003

It took longer than expected, and just barely made the minimum offering size, but ARISE has successfully closed its IPO. The offering raised gross proceeds of $907,329 and the company was still looking for additional investors and hopes to close a second tranche this week.

By itself, that offering would have been too small to meet the TSX Venture Exchange's conditions for a listing, but ARISE also completed its amalgamation with capital pool company Intercedent Ventures (IVL), and that should be enough for ARISE to begin trading on the exchange this month.

ARISE isn't coming out of the IPO with a pot of cash. Its agent, Northern Securities, took 10% of the gross and ARISE expected to have about $200,000 in expenses related to the offering. ARISE also had to repay bridge financing of $361,000. But it does now get IVL's cash through the merger -- IVL had $375,000 on March 31. And whatever amount is left might seem like a lot to ARISE, which had a working capital deficiency of $564,000 as of March 31. The company plans to spend $300,000 on R&D and $60,000 on sales and marketing.

Excluding options and warrants (of which there are many), ARISE's pre-IPO/pre-merger shareholders still own about 77% of the company. ARISE owes money to two companies that have the option to accept repayment in shares, so between that and the warrants, there could still be some significant additional dilution of the original shareholders.

I think the last IPO by a locally-based tech company was Descartes' -- five and a half years ago.

Avvida Systems acquired for US$5.5M
June 30, 2003

Avvida Systems has been acquired by SBS Technologies, a Nasdaq-listed company based in Albuquerque, New Mexico with a market value of about US$140 million. Purchase price was US$5.5 million -- about CDN$7.4 million -- paid in cash and stock. No specific details have been disclosed. The company will continue to operate out of Waterloo under the name SBS Canada.

Avvida was founded last year, but evolved out of what had been Focus Automation in the 1990s. Over the last two years, the core business of the company has gone from Focus Automation Systems Inc. to V Technology North America Inc. to Avvida Systems Inc. and now to SBS Technologies (Canada) Inc.

SBS says it doesn't expect Avvida to contribute much in revenue, but it wants to integrate Avvida's FPGA-based image processing capabilities into various SBS products.

Ron Strauss, the co-founder of Focus and Avvida, has become VP of SBS Canada.

Fred Systems assets bought by Seattle company
June 30, 2003

Mercury Online Solutions, based near Seattle, has acquired the products and other assets of Waterloo's Fred Systems. Both companies are privately held and financial details were not disclosed.

Fred and Mercury Online are both providers of Web-based digital signage products used at retail stores, entertainment facilities, and other sites. Mercury CEO John Eisenhauer called the deal "a logical merging of two industry leaders."

The release did not say what will happen to Fred's Waterloo employees, but Fred's building on Lodge Street has been put up for sale. Ian Forbes, Fred's marketing VP and co-founder, had run several businesses from that site going back to the 1980s. Fred was launched in 1993. It was a venture-backed company in the last 1990s -- Capital Alliance Ventures (CAVI) put $3.6 million into the company -- but after a few years the founders bought out their investors.

In 2000-2001, Fred was listed on the PROFIT 100 and on the Deloitte & Touche Canadian Technology Fast 50, with reported revenue of $3.3 million in 2000, but it's had a much lower profile over the last couple of years.

RIM beats sales forecasts, revenue jumps 46%
June 25, 2003

RIM got out of the blocks strongly in its 2004 fiscal year, posting sales of US$104.5 million in the quarter ended May 31 (Q1 04). That's up 46% from a year ago and 19% from the previous quarter, and beat RIM's forecast of US$90-100 million (which had already been bumped up from a previous forecast of US$95-95 million).

Sales of RIM handheld devices accounted for half of all revenue and was up 28% from the previous quarter, even with a 9% drop in the average selling price for the devices. RIM shipped 126,000 devices in the quarter, up from 89,000 in Q4.

At the end of the quarter, there were 615,000 BlackBerry subscribers, a net gain of 81,000. The BlackBerry server is now installed at 11,000 companies.

RIM's other three business segments: service, software, and OEM & other, all showed strong sequential increases in sales.

Net loss for the quarter was US$8.2 million (US$0.11/share), which includes US$7.5 million in expenses related to the NTP lawsuit and other litigation costs. RIM had to put US$6.9 million in escrow -- money that would be paid to NTP if the verdict against RIM holds up. It ended the quarter with US$509.7 million in cash and investments. Operations (before the NTP allotment) provided US$12.7 million in cash.

RIM raised its forecasts to revenue of US$105-115 million in the current quarter and US$115-125 million in Q3. Net loss is expected to be 10-14 cents a share in both quarters, with an additional US$16-17 million being put into escrow over those six months.

RIM's annual meeting is later this month. Mike Lazaridis remains the company's largest shareholder, with 8.2 million shares, or 10.6% of the company. He sold a net 570,523 shares during the year, including 200,000 shares in April for $4.5 million.

RIM reported that its highest paid officer in fiscal 2003 was again engineering & manufacturing COO Larry Conlee, who was paid $586,600. That included $182,000 in payments related to his relocation expenses.

RIM also expanded its board to seven directors with the appointment of John Richardson, a retired senior executive from the insurance industry who also spent 20 years with Ernst & Young.

Mike Lazaridis has begun his term as chancellor of UW. Andrew Telegdi read a congratulatory message in Parliament and kept referring to "Dr. Lazaridis." It makes me wince to hear recipients of honorary degrees being called "doctor" (except in jest), but it's really the universities that are to blame for handing those things out. UW itself called him "Dr. Mike Lazaridis" in its news release. He succeeds Val O'Donovan, who also has an honorary doctorate from UW.

Virtek sales soar with FOBA acquisition
June 11, 2003

The quarter ended April 30 (Q1 04) was Virtek's first to include sales from its newly acquired FOBA operations. That helped push total revenue to $11.6 million, an increase of $3.2 million or 39% from the previous quarter. All of those gains came from FOBA, which contributed $3.4 million in revenue.

FOBA's margins are currently below the levels of Virtek's traditional operations, and that brought overall margins in down to 51.7% from 55.7% in the previous quarter. The FOBA acquisition also added significantly to G&A expenses. R&D declined sequentially by 15% to $1.2 million or about 10% of revenue.

Net loss for the quarter was $2.5 million ($0.11/share), which included a $1.7 million provision for expenses related to shutting down the operations of Virtek's FONA Technologies subsidiary. Virtek also incurred a $742,000 foreign exchange loss due to the stronger Canadian dollar.

Net cash at quarter-end was $3.8 million, consisting of $5.7 million in cash and $1.9 million in bank debt. Net cash was down $6.1 million over the quarter, as the company spent $2.7 million on FOBA and an additional $2.7 million was used in operations. Discontinued operations consumed $509,000 in cash.

Virtek says the FOBA revenue in the quarter was stronger than expected, but it is still forecasting that the business will contribute $20 million in revenue over the fiscal year.

Operations of FONA Technologies were discontinued in the quarter and all 12 FONA employees were laid off. "Virtek will not invest any more dollars in biotech, period," said CEO Bob Sandness in the conference call. The company is willing to license the FONA technology if a suitable offer comes along.

Virtek also announced that most of the old guard on its board -- other than chairman Bob Nally and co-founder Mohamed Kamel -- have stepped down. Chuck Greb, Tom Beynon, and co-founder Andrew Wong have all left the board. The new directors are Sarnia resident Richard Grogan, the retired former CFO of London, Ontario-based Emco, and Joe Verderber of Ohio, a retired former executive with Virtek competitor General Scanning (now part of GSI Lumonics).

MKS sprints to the finish of fiscal 2003
June 4, 2003

MKS finished the fiscal year strongly, earning US$583,000 (US$0.01/share) on sales of US$9.4 million in the quarter ended April 30 (Q4 03). Sales in the quarter were up 10% sequentially and 23% from the same period last year. License revenue was up 15% from Q3. Results were in-line with the company's forecast of US$8.5-10.5 million. Software change management accounted for 68% of sales, with interoperability contributing the remaining 32%.

MKS ended the quarter with US$7.7 million in cash, up US$1.5 million over the period. Operations provided US$768,000 in cash and US$870,000 was raised through the sale of shares.

The company says it will no longer provide revenue or profitability guidance, other than it expects a small loss in the current quarter. A year ago, MKS had forecast a 30% increase in sales in fiscal 2003, and the actual results were a 13% gain to US$31.9 million. That's the highest levels for the company since 2000. Net loss for the year was US$1.2 million.

MKS also announced that it has hired a new North American sales VP, Charlie Janes. He previously spent eight years with Rational, MKS' largest competitor (now part of IBM). Janes' three predecessors at MKS lasted a combined three years in the position. MKS says it now has 15 sales reps in North America and 10 more in Europe. About one-third of them have just been hired in the last two quarters, and the company expects to hire several more this year.

MKS has become the first local company covered here to adopt a poison pill to discourage any hostile takeover bids. The plan has been approved by the board and is now in effect, although shareholders won't get a chance to vote on it until September. The MKS plan sets a minimum two-month time period for any takeover bids (unless waived by the board) and also forces would-be acquirers to offer to buy all outstanding shares and not just a majority of shares.

Descartes' weak quarter in line with warning
June 4, 2003

The revenue drop in Descartes' Q1, ended April 30, was in line with the company's warning from last month (see May digest). Sales were US$14.2 million, down 16% from a year ago and 21% from the previous quarter, and below the company's forecast at the beginning of the quarter of US$17-18 million. Net loss was US$9.0 million (US$0.17/share).

License revenue fell 53% from Q4 to US$2.0 million. Network revenue fell 15% sequentially to US$9.2 million.

The company continued to boast of its sign-ups -- 177 in the quarter -- but a growing number of analysts in the conference call were wondering why all these new customers over the last year haven't translated into more revenue.

As was announced last month, Descartes has reduced its global workforce by 25%, including 22 quota-carrying sales reps. When asked in the conference call how much revenue those reps accounted for, the answer was "very little." The company expects to save US$13 million in annual costs through the layoffs and consolidations.

Cash at quarter-end was US$163.4 million -- down US$10.7 million over the quarter. The company used US$4.1 million in restructuring activities. About US$75 million is expected to be spent this quarter to buy back shares and debentures (see previous digest).

Descartes is forecasting revenue of US$15-16 million in Q2, which would be 11-17% below the same period last year. Net loss is expected to be US$16-17 million.

Descartes' annual meeting is later this month (RIM and Descartes are having their meetings at the same time -- RIM in Waterloo, Descartes in Toronto -- which means that RIM co-CEO and Descartes director Jim Balsillie will have to skip the Descartes AGM). The information circular discloses that Paul Laufert received a severance payment of $420,475 when he left the company last month. It also lists former CEO Peter Schwartz as a director of Waterloo's Covarity.

Onlinetel president expelled, fined by accounting body
May 1, 2003

Joe Vos, president of Onlinetel, has been expelled from the Institute of Chartered Accountants of Ontario and fined $50,000 plus $15,000 in costs. The written decision from the Institute's discipline committee was dated May 1.

Vos was the co-founder of Metafore, and was previously a director of Intellitactics and Software Metrics. He was charged with failing "to conduct himself in a manner that will maintain the good reputation of the profession" by misappropriating over $8 million from Metafore while serving as an officer of the corporation. He was also charged with "directing the falsification and manipulation of the books and records of the company" and with failing to cooperate with the Institute in its investigation.

Vos had the opportunity to respond to the charges at a hearing in December, but chose not to. Speaking through his lawyer, he said that he hadn't practiced accounting in years and would voluntarily give up membership in the Institute. He then left without entering a plea and the hearing continued in his absence. Testimony heard by the panel included the accusation that Vos presented fictitious invoices to Metafore, including some purportedly from Onlinetel. A member of the forensic team that investigated the matter said that Vos took $10.6 million and repaid $2.1 million, for a net misappropriation of $8.56 million.

The representative from the Institute's professional conduct committee (essentially acting as prosecutor) called Vos's behaviour the most egregious type of professional misconduct and asked for a fine of $25,000-30,000. The panel came back with a $50,000 fine plus costs.

It also ordered that a notice be placed in the Globe and The Record because it was "considered to be important that Mr. Vos' expulsion be drawn to the attention of people in the city where he lived." The notice has not yet been published. (When I asked the Institute why it didn't place a notice on its own Web site, a spokesman said that the notices are there ... in a section of the site that you have to pay to access. Apparently you can only take serving the public interest so far.)

Two other chartered accountants were called before the Institute's discipline committee for "knowingly participating" in Vos's actions. One was expelled from the Institute and fined $5,000 plus $4,000 in costs, the other was suspended for one year and fined $5,000 plus $2,000 in costs.

Onlinetel recently reported sales of $1.2 million and an operational loss of $80,000 in the quarter ended March 31 (Q3 03). Gross profits were $236,000, up 17% from the previous quarter.

RDM settles DataTreasury suit
June 4, 2003

RDM has settled the patent infringement lawsuit that was filed against it by New York-based DataTreasury in December. RDM had responded with a countersuit.

RDM didn't disclose anything about the settlement, but DataTreasury wasn't quite as reticent. It said in a release that RDM will pay it for each cheque imaging terminal and will pay a per-click royalty for storage of electronic documents and check information, which it said was "calculated at around a 50% royalty rate." What impact this will have is unclear, since RDM chose not to provide any information.

DataTreasury has filed similar suits against other companies, including RDM competitor Ingenico (which is also being sued by RDM -- see September digest).

Finline in cash crunch, faces delisting
June 2, 2003

Finline has run out of money. As of March 31, the company had $971 in cash and a working capital deficiency of $1.6 million. It told the OSC that it couldn't afford to have its financial statements audited for the year ended December 31, 2002. The company said it expected that funds would become available soon and it hopes to file its financial statements this month.

The TSX Venture Exchange has told Finline that it has until July 14 to meet its continued listing requirements for net tangible assets and working capital.

A notice published in The Record said that furniture owned by Finline which had been placed at a local storage company was to be auctioned off under the Warehouseman's Lien Act on July 15.

Finline's notice of default includes reference to creditors, some of whom are said to have "performed a search to satisfy itself that [Finline] cannot pay its debt."

Of the five employees who received stock options last year, only one was still with the company at the end of March.

In its unaudited financial statements, the company says it had sales of $111,315 in the quarter ended March 31 (Q1 03) and a net loss of $63,000. Accumulated deficit is now $10.3 million and the company's market cap is down to $360,000.

STOCK REPORT: Military contract sends Com Dev shares higher
June 2003

Com Dev shares made a big jump after the company announced it had received a US$3.5 million "authority to proceed" on a military satellite contract that has the potential to be worth up to US$26 million (CDN$35 million). That's not a lot of detail (the release doesn't even say whose military), but it was enough to send the company's shares up by 83% at their intra-month peak, before they settled back to close the month up 38%.

For the month of June:

Com Dev [TSX: CDV] +38%
RIM [TSX: RIM] +12%
Navtech [OTCBB: NAVH] +6%
--S&P TSX COMPOSITE +2%
===============================
MKS [TSX: MKX] -3%
Dalsa [TSX: DSA] -4%
Descartes [TSX: DSG] -4%
RDM [TSX: RC] -5%
Virtek [TSX: VRK] -5%
Open Text [TSX: OTC] -12%
CME Telemetrix [TSXV: YME] -18%
Turbosonic [OTCBB: TSTA] -32%
Finline [TSXV: FIN] -37%

Descartes' share purchase offer did stop the company's stock from falling below the $3 mark, but just barely. It finished June at $3.03 -- another all-time low for a monthly close, passing the mark set the previous month.

For the first time since December, RDM shares traded below a dollar for the entire month. RIM shares, on the other hand, had their highest monthly close since March 2002.

Companies with headquarters outside the area:

CheckFree [Nasdaq: CKFR] +14%
LSI Logic [NYSE: LSI] +11%
Sybase [NYSE: SY] +10%
Ansys [Nasdaq: ANSS] +10%
Eiger Technology [TSX: AXA] +9%
Senesco [Amex: SNT] +7%
Network Assoc [NYSE: NET] +4%
Siebel [Nasdaq: SEBL] +1%
=================================
Agfa-Gevaert [Brussels: AGFA] -4
Blue Coat [Nasdaq: BCSI] -6%
Bio-Rad [Amex: BIO] -6%
Adobe [Nasdaq: ADBE] -9%
Betacom [TSXV: YCA] -19%
CVF Technologies [Amex: CNV] -24%
Engineering.com [TSXV: EGN] -30%
Knexa [TSXV: KNX] -45%

At the half-way mark for 2003, here's how the locally-based companies have fared on the market so far this year:

MKS +65%
RIM +41%
Com Dev +28%
Navtech +20%
Virtek +5%
Open Text +4%
===============================
Turbosonic -1%
CME Telemetrix -5%
RDM -6%
Dalsa -12%
Descartes -38%
Finline -64%

Here's the market value in millions of dollars for the local tech companies at the close on June 30. I used the current number of issued outstanding shares and not the fully diluted figure. The number in parentheses is the change (again in millions of dollars) since I did this list 14 months ago.

RIM	$2,258 (+$236)
Open Text	788 (+97)
Dalsa	270 (+115)
Descartes	158 (-118)
MKS	76 (+10)
Com Dev	62 (-36)
Virtek	20 (-6)
RDM	14 (-4)
Turbosonic	3.7 (-1.9)
CME Telemetrix	3.6 (-2.4)
Navtech	2.0 (+0.6)
Finline	0.4 (-1.8)

RIM is currently worth about $850 million more than the other 11 listed companies combined. Over the last 14 months, Dalsa jumped past Descartes, MKS leapfrogged Com Dev, and Navtech hopped over the near-dormant Finline.

And while the last two years have proven that executive pay has little to do with stock performance, I'll attach this here anyway. It's the combined salaries and bonuses paid to CEOs of locally-based public high-tech companies in the most recently reported year. For salaries reported in U.S. dollars, I used the conversion figure provided by the company if there was one, or 1.55 otherwise (which was the average exchange rate in the period covered here).

Tom Jenkins, Open Text -- $751,570 + 150,000 options
Manuel Pietra, Descartes -- $503,750 + 200,000 options
Peter Schwartz, Descartes -- $468,500
Savvas Chamberlain, Dalsa -- $467,075 + 7,000 options
John Keating, Com Dev -- $447,860
Keith Ainsworth, Com Dev -- $428,990
Jim Balsillie, RIM -- $413,800 + 100,000 options
Mike Lazaridis, RIM -- $413,800 + 100,000 options
Duncan MacIntyre, CME -- $267,745
Bob Sandness, Virtek -- $239,750 + 125,000 options
Doug Newman, RDM -- $212,500 + 355,000 options
David Strucke, Navtech -- $175,740 + 100,000 options
Ed Spink, Turbosonic -- $115,350 + 10,000 options
Phil Deck, MKS -- $99,000**

**Deck took a low salary in the year ended April 30, 2002. For this past year, his take-home pay was considerably higher, but it won't be disclosed for another couple of months.

Miscellaneous Tidbits

• In a news release from April that seems to have received almost no distribution, Cambridge's LogiSense announced that former Virtek CEO Jim Crocker has become its new president. Founder Flavio Gomes remains CEO.

• Navtech reported earnings of US$203,035 (US$0.04/share) on sales of US$1.7 million for the quarter ended April 30 (Q2 03). Sales were up 3% from the previous quarter, but a drop in gross margins led to a 18% sequential decline in gross profits. The bulk of the earnings came from a recovered bad debt of US$159,361, which also created a positive cash flow from operations of US$136,665. The company's working capital deficiency has been reduced to US$217,563, down from US$385,322 at the beginning of the quarter. Navtech expects to eliminate the deficiency this year. It ended the quarter with $142,424 in cash while its accounts payable crossed back over the million-dollar mark to US$1.1 million.

• MKS flacks successfully pitched a CEO-as-superhero story to the National Post and the Toronto Star, even if the truth had to be squeezed a little to make all the pieces fit. The theme of the stories was that Deck worked miracles at Certicom, left that company at its peak in 1999 and is now (as the Post headline gushed) working his magic at MKS. There's no question that we're now seeing, in Deck's third year as MKS CEO, some impressive improvements in the company's performance -- top and bottom line. But while a cape-and-tights version of history has long been a favourite of the business media, it dumbs down the real-world ups-and-downs that challenge mere mortals. First, Deck didn't leave Certicom in its glory days of 1999. MKS' Web site says that "from April 1993 to November 1999, Mr. Deck was chairman and/or CEO of Certicom Corp.," and it's understandable that some might take this to mean that he left both of those positions in 1999 -- "Phil Deck got out as chairman of Certicom in time to escape the carnage in the stock market," said the Star's subhead. He didn't. He remained chairman until 2001 (under an employment agreement that was to run to May 2003). By then, Certicom was well into its decline and Deck got to experience the good and the bad. Second, MKS' ride under Deck has been bumpier than the "magic" gloss placed on it by the media. It wasn't a matter of chanting abracadabra and ... poof!, but a two-year struggle during which some things have worked and others haven't. The low point for MKS shares actually came more than halfway into Deck's second year as CEO, but that interferes with a good superhero story, so it's never mentioned. I would have hoped that a thousand-word story (the Star's was 1,100, the Post's 800) could present something deeper than a fairy tale.

• Dspfactory announced that its second generation technology is being used by Starkey Labs, North America's largest hearing aid manufacturer.

• Sybase's iAnywhere operations reported operating income of US$3.4 million on total revenue of US$19.4 million in the quarter ended March 31. Sybase announced in June that it will be launching a Wi-Fi "competency centre" at its facility in UW's Research and Technology Park. The company is spending US$25 million on its newly-unveiled Wi-Fi initiative.

• Dave Boswell, who used to work at Sybase in Waterloo, was this year's recipient of UW's J.W. Graham Medal. The award is presented to a UW math grad who "embodies the qualities shown by the late Wes Graham." Boswell worked with Graham at UW and at Watcom, which became part of Sybase after two acquisitions, and again at LivePage, which became part of Siebel -- again after two acquisitions.

• Starting today, Paul Van Bakel is Dalsa's new CFO. He had worked at Dalsa from 1995-99 and is a Laurier grad. Before returning to Dalsa, he was with Ledco in Kitchener as its controller.

• Sandvine announced that Golden Triangle Online, this area's largest locally-based ISP, is using its platform technology to offer anti-virus, firewall, and parental control services to its customers. It also announced that Hamilton's Mountain Cablevision is using its peer-to-peer traffic management technology.

• Australia's Optus Mobile is using the Reqwireless WebViewer to enable customers to browse the Internet on Java-capable mobile phones.

• Guelph's SpectraDigital announced in April that it had closed a round of funding. It didn't provide details. EMJ founder and CEO Jim Estill is a director of SpectraDigital. Former CME Telemetrix CEO Aidan Furlong is listed as an advisor. SpectraDigital develops optical spectroscopy technology.

• For the quarter ended March 31, Knexa reported a net loss of $203,300 on sales of $174,618 from its Waterloo-based SuiteResponse business segment.

• Com Dev has settled Mitec's $11.9 million claim (see January digest). Com Dev will pay Mitec $1.0 million, but this settlement allows payment to Com Dev of the $2.1 million that was in escrow, so it comes out of the arrangement with a net $1.1 million in cash.

• The June issue of Scientific American included a report co-written by Ming Li and Bin Ma, the founders of Bioinformatics Solutions (BSI).