July 2003

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 77 -- August 5, 2003
In this digest:

1. Strong loonie cuts into Dalsa's top line
   
2. RDM rebounds from weak winter

3. STOCK REPORT: RIM shares up 100% in four months
   
4. Miscellaneous tidbits from Engineering.com, RSS Solutions, Onlinetel, Kaparel

I agree with those who wrote to say that previous VC fairs here have been disappointing and of questionable benefit. It looks like the people who have organized events in the past are planning to do something again this fall, and while I wish them luck, I'm skeptical that much value will come from it. A seminar on valuation might be worth attending, but VCs aren't going around thinking, "Gee, if only there was a better understanding of valuation in this community, then we'd be able to close more deals." With almost all of the business plans I've read this year, there was a lot of work that needed to be done before worrying about valuation and term sheet clauses. (In a few cases, just being able to say what their technology or product actually does would be a nice first step; identifying an addressable market and not quoting breathless big-picture statistics from Gartner Group or IDC would be another positive change.) If you want a quick course in valuation, just get a list of the top 100 software companies in Canada along with their current market value and the year they were founded. If, after doing that, you still tell me that your start-up will be worth $100 million in four years, then that tells me something.

Anyway, if you do plan to look for investors, I am frequently asked by VCs and investors about opportunities in the area and if you want to send me a summary, that would be helpful to let me know what's out there. And I'll keep you up-to-date if there is some kind of a get-together organized.

--Gary Will

Strong loonie cuts into Dalsa's top line
July 31, 2003

For the quarter ended June 30 (Q2 03), Dalsa reported net income of $2.3 million ($0.14/share) on revenue of $32.7 million. Sales were up 2% from a year ago, but down 2% from the previous quarter. The company attributes the sequential drop to the strengthening of the Canadian dollar and says that its unit sales were actually up from Q1, but with most of its sales in U.S. dollars, that translated into lower revenue in Canadian dollars.

The majority of the profits for the quarter came from Dalsa's semiconductor segment, which reported a 2% increase in sales from Q1 to $13.2 million. Sales from Dalsa traditional digital imaging segment were down 5% from the previous quarter to $19.4 million, but Dalsa says that in U.S. dollars, standard product sales in the segment were up US$500,000 or 4% from Q1.

Operating activities consumed $2.5 million in cash during the quarter. Dalsa borrowed an additional $3.7 million dollars in Q2 and ended the quarter with a net cash deficiency of $7.0 million. It says it has now completed its expansion phase and that operations will return to generating cash in the current quarter.

With the stronger dollar, Dalsa lowered its revenue growth forecast for the year to "at least 25%" from its previous target of 38%. That works out to about a $15 million reduction for the year. Profits for the year are now expected to be $2.8-3.7 million below original forecasts. Dalsa expects sales in the second half of the year to be at least 12% greater than in the first half.

RDM rebounds from weak winter
July 30, 2003

RDM reported its first profitable quarter of the fiscal year, with net income of $254,000 ($0.01/share) on sales of $4.6 million in the period ended June 30 (Q3 03).

Sales were up 69% from a weak Q1 and 22% from the same period last year. The numbers were significantly boosted by the recognition of $750,000 in previously deferred revenues, which was partly offset by a $200,000 write-down of obsolete inventory. All of the profits in the period were generated by that deferred revenue recognition.

Sales from RDM's digital imaging and electronic payments segments doubled from Q2 to $4.0 million or 87% of all sales. The company's traditional quality assurance segment contributed just $598,000 in revenue, down 19% from Q2 and 28% from last year.

Almost two months after settling a patent infringement suit brought against it by DataTreasury (see previous digest), RDM told shareholders the terms of the agreement. It will pay DataTreasury a 3.25% royalty on its digital imaging scanner sales and a 50% royalty on digital imaging archiving revenues. RDM says the total amount will be about $60,000 a quarter, and that this is less than what it was spending on legal expenses to defend against the suit. The agreement is cancellable if the patents are found to be invalid or unenforceable in DataTreasury's remaining suits against other companies (which RDM says it "fully expects" will happen) or upon 90 days written notice.

RDM ended the quarter with $5.3 million in cash, down $561,000. Almost all of the drop was caused by the purchase of capital assets. Operations used $11,000 in cash.

RDM's quarterly conference call achieved what I believe is a first in the years I've been doing the digest -- no analysts or shareholders (or anyone else) turned up to participate in the call. Scheduling a call on the Friday before a long weekend in the middle of summer is a good way to ensure there will be almost nobody listening. Dalsa's conference call the previous day went on for well over an hour.

STOCK REPORT: RIM shares up 100% in four months

July 2003

RIM's stock has doubled in value since the end of March. The shares had another strong month in July, registering a 16% gain, and then went into overdrive on Friday, when rumours of a take-over bid from Hewlett-Packard fuelled a one-day jump of 13%.

And break out the six-figure bonuses, Com Dev shares have worked their way off life support and have increased in value by 76% over the last four months. Com Dev stock closed July at $1.41, its highest month-end in a year. It was the first time since last August that Com Dev shares traded above $1 for an entire calendar month.

One other local company whose stock is on a roll, although I don't follow it here, is ATS. Its shares have jumped 49% over the last four months, following a big tumble in January and February. That edges out MKS' 47% gain in its stock price over the same period.

For the month of July:

Turbosonic [OTCBB: TSTA] +72%
RIM [TSX: RIM] +16%
Com Dev [TSX: CDV] +11%
--S&P TSX VENTURE INDEX +10%
MKS [TSX: MKX] +9%
--S&P TSX COMPOSITE INDEX +4%
Navtech [OTCBB: NAVH] 0%
RDM [TSX: RC] 0%
===============================
Descartes [TSX: DSG] -0%
CME Telemetrix [TSXV: YME] -2%
Open Text [TSX: OTC] -6%
Dalsa [TSX: DSA] -7%
ARISE [TSXV: APV] -9% (from its IPO price)
Virtek [TSX: VRK] -13%

Shares of ARISE began trading on the TSX Venture Exchange on July 22. The final tally on its IPO was gross proceeds of $1.06 million, as it was able to add another $151,859 before the final close on July 10 (see previous digest). After deducting the 10% commission for its agent, that left $953,000 for ARISE.

Descartes paid $3.20 a share through an auction process to repurchase 11.578 million shares, which it then cancelled (see May digest). After its share buyback offer ended, Descartes stock sank to a new all-time low in July and also set -- by one penny -- a new low for a month-end, finishing July at $3.02. Following the cancellation of the purchased shares, Descartes has a market value just under $125 million. That's half of Dalsa's current value. A year ago, the two companies had the same market capitalization.

Virtek stock also set an all-time low for a month-end price, finishing July at 75 cents.

I've taken Finline off the list for now. On July 24, the TSX Venture Exchange issued a temporary cease trade order on Finline's stock and it has said that it will consider demoting the company to its new "inactive" board. That's where it sends companies that are essentially non-operational. The stock can still trade there, but it's not included in the S&P TSX Venture Exchange Index. The money that Finline said it was receiving in June never turned up and the company still hasn't filed its 2002 financial statements.

Companies with headquarters outside the area:

LSI Logic [NYSE: LSI] +32%
Sybase [NYSE: SY] +13%
Ansys [Nasdaq: ANSS] +8%
Betacom [TSXV: YCA] +6%
Knexa [TSXV: KNX] +6%
Agfa-Gevaert [Brussels: AGFA] +4
Senesco [Amex: SNT] +4%
CVF Technologies [Amex: CNV] +3%
Adobe [Nasdaq: ADBE] +2%
Bio-Rad [Amex: BIO] +1%
=================================
Siebel [Nasdaq: SEBL] -1%
Eiger Technology [TSX: AXA] -2%
CheckFree [Nasdaq: CKFR] -4%
Blue Coat [Nasdaq: BCSI] -4%
Network Assoc [NYSE: NET] -11%

LSI Logic -- the company that acquired VideoLocus -- joins RIM on the list of companies whose stock has doubled in value over the last four months.

Miscellaneous Tidbits

• Engineering.com shut down its Waterloo office at the end of the month. It came to town in 2001 when it acquired Waterloo Maple's IQtraders.com subsidiary. At the time of the deal, Maple received 1.4 million shares in Engineering.com, but that was chopped in half last year after Maple didn't achieve the sales volumes hoped for as an Engineering.com reseller.

• RSS Solutions issued a corporate update that was light on substance. It says it has doubled the number of its employees, but doesn't say over what time period. It mentions hiring a director of marketing and a director of sales, but beyond giving their names doesn't say anything about them -- other than that they are "seasoned professionals, with considerable domain knowledge." And now it has now launched "an aggressive go-to-market strategy." Pretty impressive stuff. :-) RSS has a new Web site where it identifies itself as "RSS Solutions, Toronto Canada" in meta tags on every page.

• The notice from the Institute of Chartered Accountants of Ontario about its expulsion of Onlinetel president Joe Vos (see previous digest) appeared in the Globe and The Record on July 17. Just before that happened, his name was deleted from the management list on the Web site of Eiger Technology, Onlinetel's parent company.

• Rittal announced that it is consolidating its Ohio-based Ripac operations and Waterloo's Kaparel into a single business unit. Kaparel GM Tom Sutherland will oversee the combined business. The company says there are "no imminent plans" to relocate the businesses into a combined facility.