August 2003

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 78 -- September 2, 2003
In this digest:

1. Com Dev loses THL dispute; announces $20M contract
2. Com Dev hopes for strong finish to 2003, 20% growth in 2004
3. Open Text value tops $1B after another strong quarter
4. Open Text to acquire German software firm for US$11M
5. Sandvine receives $9.5M TPC investment

6. RIM can keep selling BlackBerry while appeal heard
7. STOCK REPORT: Open Text jumps, Com Dev & RIM continue to climb
8. Eiger plans Onlinetel spin-out
9. CME Telemetrix needs to raise money by year-end
10. Miscellaneous tidbits from ARISE, IMS, EMJ, PrinterOn, Reqwireless, Sirific, Engineering.com, Thinkage

Com Dev loses THL dispute; announces $20M contract
August 22, 2003

An arbitrator has decided that Com Dev cannot pay its financial obligation to Technology Horizons Ltd. (THL) in shares valued at $10 each. Unless a settlement is negotiated, or Com Dev successfully appeals the decision, this means the company will have to pay THL $20.3 million in some combination of shares, cash, and a promissory note on October 1.

Com Dev had tried to use a miswording in the contract to pay off its obligation to THL with just 1.9 million shares, which had an average value last month of about $3 million. A literal reading of the agreement between Com Dev and THL would have allowed it to do so, but it was clear that this was not what either party had intended when the contract was signed in 1999. (See October 2002 digest for details.)

With the arbitrator's decision, Com Dev will have to pay THL the amount it was always expecting it would have to pay before the potential loophole was discovered last year. In a release, Com Dev CEO John Keating said, "it is now time for us to deal with it and move on," so an appeal sounds unlikely.

THL was the corporation formed in 1996 by Com Dev shareholders before Com Dev's IPO. Its major shareholders include Keating's two predecessors as CEO -- Val O'Donovan and Keith Ainsworth. THL's most significant asset was shares in RIM, and many of Com Dev's pre-IPO shareholders ended up making more money from RIM than they ever did from Com Dev.

THL spent US$10 million of its own money -- raised by selling RIM shares -- to pay for Com Dev's partnership in Alcatel's SkyBridge consortium. SkyBridge was one of the many satellite mega-projects that were planned in the late 1990s but never really went anywhere. Under the agreement, THL will be repaid the principal plus 5.5% annual interest.

It will also get 40% of the proceeds if Com Dev sells the SkyBridge partnership units, but those units are worth very little today. Com Dev plans to write-down their entire value in the current quarter. That will create a $20.5 million hit in Q4, unless Com Dev can negotiate a reduced payment to THL.

Barring a renegotiation, Com Dev will pay THL 3.4 million shares on October 1, and the balance of the money owed -- about $14.5 million -- can be repaid over the next two years, although the company has said that it hopes to complete payment sooner than that. Once that's been taken care of, Com Dev has another $18 million in convertible debentures that it will have to repay in 2006.

To take the sting off its arbitration loss, Com Dev announced a few days later that it has started work on a contract that it anticipates will be worth more than $20 million over the next year. The customer wasn't identified, other than it's for a large commercial satellite program.

Com Dev hopes for strong finish to 2003, 20% growth in 2004
August 28, 2003

In the quarter ended July 31 (Q3 03), Com Dev lost $2.0 million ($0.04/share) on revenue of $23.5 million. The loss included a $1.0 million payment to Mitec to settle a lawsuit and a $0.8 million provincial tax reassessment, which the company is challenging. It also established a $0.2 million allowance to cover amounts billed to a customer that has filed for bankruptcy protection. Com Dev reported income from operations of $1.1 million.

Revenue was up 24% from a very weak previous quarter, but down 17% from a year ago. Even with a drop in gross margins, gross profit was still up 15% sequentially. Expenses were flat from the previous quarter.

Com Dev ran out of cash at the end of the quarter, but received $2.4 million from a customer shortly after quarter-end and said it had about $1.5 million in cash at the end of August. It used $3.0 million in cash over the quarter, including $1.0 million paid to Mitec and $0.6 million in interest on its debentures that was paid in cash. Com Dev says it expects to generate enough cash from operations to pay its debt to THL and run the business.

In its guidance for fiscal 2004, Com Dev says it is expecting an increase in revenue of at least 20% as the commercial satellite market continues to recover. Over the first nine months of 2003, sales are down 22% from a year ago, but Com Dev is anticipating a strong end to the year -- at least on the top line. The SkyBridge write-down is expected to be $20.5 million in Q4 (see previous item).

In July, Com Dev confirmed that its R&D VP and CTO, Wai-Cheung Tang, had left the company. He has been succeeded by Tony Stajcer, a long-time Com Dev employee and -- like Tang -- a UW grad.

Open Text value tops $1B after another strong quarter
August 14, 2003

Open Text has gone back over a billion dollars in market value after reporting record revenue and profits in the final quarter of its 2003 fiscal year. In the quarter ended June 30 (Q4 03), Open Text reported net income of US$9.4 million (US$0.45/share) on sales of US$53.1 million.

Revenue was up 21% from the previous quarter and 28% from a year ago. License revenue was the driver of the sequential growth, climbing 27% from Q3 and 21% from last year, with only one-fifth of that growth due to acquisitions.

The company closed the biggest transaction in its history during the quarter. Its size wasn't disclosed, but Open Text recognized US$2 million in revenue from the deal in the quarter and the majority of the revenue will be recognized in fiscal 2004. The company said that 74% of all license revenue was from new accounts. A year ago, it was a 50/50 split between new and existing customers and before then, the mix was heavily weighted toward selling to existing customers. At that time, winning new customers was considered to be one of the company's weaknesses.

Gross margins improved across the board from the previous quarter. Expenses were up 12% from Q3, with the biggest increase coming in sales and marketing.

Net income in the quarter almost equalled what the company achieved over the first three quarters of fiscal 2002. It was up US$2.1 million from a record quarter a year ago and up US$2.6 million from last quarter.

For the year, sales were US$177.7 million, up 15% from 2002 and well above the company's forecast of US$167 million at the start of the year. Net income for the year was US$27.8 million (US$1.34/share). For fiscal 2004, it is forecasting revenue of US$225 million (with the acquisition of Gauss Interprise -- see next item). Because of an increase in tax provisions, the bottom line is expected to decline slightly to adjusted earnings of US$1.32/share.

Open Text finished the year with US$116.6 million in cash, up US$8.3 million over Q4. Operations provided US$8.1 million in cash and the company raised an additional US$2.4 million through the sale of shares.

Open Text currently has about 1,200 employees company-wide.

Open Text to acquire German software firm for US$11M
August 27, 2003

Open Text has agreed to acquire Gauss Interprise of Hamburg, Germany in an all-cash deal. It will spend about US$11 million to acquire Gauss, a publicly-traded company on the Deutsche Börse Xetra exchange.

Gauss develops enterprise content management software, particularly for the management of Web content. Process automation is another core use of Gauss software. It has an office in Irvine, Calif. that was acquired through a merger with Magellan Software in 2000. The company's CEO is the co-founder of Magellan.

Gauss revenues were down sharply over the first half of 2003. It reported sales of EURO 10.3 million or about US$11.3 million in the six months ended June 30, 2003. Sales in most recent quarter were down 40% from the same period last year. Net loss for the six months was about US$6.7 million, but Open Text says the deal will be accretive to earnings in the current year.

Gauss has 180 employees world-wide and 1,100 customers. The deal is expected to close before the end of Q2 on December 31.

Sandvine receives $9.5M TPC investment
August 28, 2003

Sandvine has become the latest local company to receive an investment from the federal government's Technology Partnerships Canada (TPC) program. Sandvine will get $9.5 million to help further the development of its technologies for Internet service providers.

Sandvine joins RIM, Dspfactory, IMS, Com Dev, Dalsa, ATS, Raytheon, TeleflexGFI, and GMA Cover (a Guelph company that just received $4.8 million to develop military camouflage) as the companies in this area to receive conditionally repayable investments under the TPC program.

RIM can keep selling BlackBerry while appeal heard
August 5, 2003

The judge that presided over NTP's patent infringement lawsuit against RIM has decided against issuing an immediate injunction against the sale of BlackBerry in the U.S. This generated a ton of ink, but it was the expected outcome.

The judge decided that the injunction would be stayed pending RIM's appeal. Some people thought RIM was putting the spinmeisters to good use in trying to present this in a positive light, but it really was good news for RIM. The real issue being decided wasn't whether there would be an injunction, but whether the injunction would take effect before the appeal is heard. It won't.

Of course, if the decision is upheld on appeal and if the NTP patents aren't found to be invalid on reexamination and if no agreement is reached between NTP and RIM, then RIM would have to stop selling its infringing products -- that's really the whole point of IP law. But that's three ifs in there, and the chances of all three occuring are slim. That means there's little chance that the injunction will ever go into effect.

Some newspapers opted for drama over accuracy in their reports. The lead sentence in the Globe's story on the decision -- "Research In Motion Ltd. has been banned from selling its popular BlackBerry handheld organizer in the United States" -- is about as misleading a statement as could be made on the situation. It got around to mentioning the stay in the next paragraph.

STOCK REPORT: Open Text jumps, Com Dev & RIM continue to climb
August 2003

For only the third time in company history, Open Text stock ended a month over $50. The last time was February 2000. Open Text shares jumped 43% in August, ending the month at $51.35. It was the biggest monthly jump in the company's stock in over two-and-a-half years.

Even with the unfavourable arbitration decision, Com Dev shares were up for the fifth straight month and have more than doubled in value in that time. They finished August at $1.70 -- their highest monthly close since May 2002.

RIM shares are now up 106% over the last five months. In the first week of the month, it looked like it was going to be the big stock story for August. Speculation that Hewlett-Packard was planning to acquire the company sent RIM shares above $40 for the first time since March 2002. And even when those rumours died off, the stock remained strong and actually hit its intra-month peak on the 22nd.

Over a dozen of RIM's senior executives and directors used the opportunity presented by the HP-fueled run-up to sell some of their shares in the company. Co-CEO Mike Lazaridis sold about $3 million worth of RIM shares on Aug. 5, while CFO Dennis Kavelman netted $1.14 million by exercising 35,000 options and selling off the shares on Aug. 6. RIM shares closed August trading above the prices that Lazaridis and Kavelman received for their shares.

For the month of August:

Open Text [TSX: OTC] +43%
Com Dev [TSX: CDV] +21%
RIM [TSX: RIM] +16%
Descartes [TSX: DSG] +12%
--S&P TSX VENTURE INDEX +8%
MKS [TSX: MKX] +5%
Dalsa [TSX: DSA] +4%
--S&P TSX COMPOSITE INDEX +3%
Navtech [OTCBB: NAVH] +3%
Virtek [TSX: VRK] 0%
Turbosonic [OTCBB: TSTA] 0%
===============================
CME Telemetrix [TSXV: YME] -2%
ARISE [TSXV: APV] -4%
RDM [TSX: RC] -5%

Descartes shares had their first positive month since April, but are still at the bottom of the list for performance in 2003 -- logging a 31% decline over the last eight months.

Shares of MKS and RIM are both up more than 130% over the last 12 months. Dalsa and Open Text are the only companies with a share price is higher today than at the beginning of September 2000. Descartes is at the bottom of that list too, with its shares losing 95% of their value over the last three years.

Companies with headquarters outside the area:

Blue Coat [Nasdaq: BCSI] +42%
LSI Logic [NYSE: LSI] +24%
Network Assoc [NYSE: NET] +23%
Adobe [Nasdaq: ADBE] +19%
CVF Technologies [Amex: CNV] +17%
Senesco [Amex: SNT] +9%
Siebel [Nasdaq: SEBL] +8%
Agfa-Gevaert [Brussels: AGFA] +8
Sybase [NYSE: SY] +8%
Ansys [Nasdaq: ANSS] +5%
=================================
Eiger Technology [TSX: AXA] -3%
Bio-Rad [Amex: BIO] -9%
CheckFree [Nasdaq: CKFR] -15%
Betacom [TSXV: YCA] -18%
Knexa [TSXV: KNX] -22%

Eiger plans Onlinetel spin-out
August 7, 2003

Toronto's Eiger Technology plans to spin out its Kitchener-based Onlinetel subsidiary and merge it with Globalive Communications, also of Toronto. The new Globalive-Onlinetel would become a public company through a merger with a shell. Globalive shareholders would own 83% of the merged company.

Eiger has not said if Onlinetel will continue to operate under that name and if it will remain in Kitchener.

Eiger also disclosed that Joe Vos resigned as Onlinetel president just days before the publication of the notice that he had been expelled from the Institute of Chartered Accountants of Ontario (see June digest).

For the quarter ended June 30, Onlinetel reported a net loss of $30,000 on sales of $1.3 million. Revenue was up only 3% from the previous quarter, following several quarters of significant sequential growth.

CME Telemetrix needs to raise money by year-end
August 19, 2003

CME Telemetrix netted a desperately-needed $893,000 in cash by settling its lawsuit against the purchasers of its Advantage Medical division (see May digest). That was $1.1 million less than the company had been carrying on its books, and that led to a net loss of $1.75 million ($0.20/share) in the quarter ended June 30 (Q2 03). Operational loss for the quarter was $0.7 million.

CME used the money to pay down $361,000 in bank debt and ended the quarter with net cash of $1.1 million. Total expenses in the quarter, net of tax credits, were $740,000. It says it has lost access to its line of credit and has enough money to fund operations for about another 17 weeks.

Preliminary results from pilot trials of the company's new hemoglobin device are expected to be available before the end of the year. Even if the results are positive, the device would still have to go through a further round of tests before it could begin what is usually a lengthy approval process with regulatory agencies.

Miscellaneous Tidbits

• In its final quarter as a private company, ARISE lost $248,500 ($0.03/share) on sales of $623,726 in the quarter ended June 30 (Q2 03). The company ended the quarter with $522,000 in cash and working capital of $93,000. Following quarter-end, it raised an additional $137,000 (net) through its IPO. ARISE says it is looking for additional investors. It has opened a sales office in Calgary to pursue the oil and gas market.

• In the quarter ended June 30, Waterloo's Intelligent Mechatronic Systems (IMS) received an additional $423,000 investment from Toronto-based TriNorth Capital. TriNorth has now invested $1.3 million in IMS and owns a 15% stake in the company.

• EMJ has doubled its top line with the acquisition of Markham-based computer supplies distributor Daisytek. The merged companies will have annual revenue of about $400 million. EMJ's stock has gained 26% over the last three months and was up 15% in August.

• PrinterOn announced that its mobile printing technology will be installed at all 171 Hilton Garden Inn locations in North America by early next year. It is currently in use at about 40% of the Hilton Garden Inn sites. The hotel chain says it will offer free high-sped Internet access to all guestrooms by the end of the year.

• I don't usually cover product releases, but since there are more digest subscribers at hotmail.com than at any domain other than rogers.com, you might be interested in the new Hotmail e-mail client for Java-enabled mobile devices from Waterloo's Reqwireless. It's called HotViewer.

• I just noticed that Sirific moved its California office earlier this year to Santa Rosa from San Jose. CEO Mike Hogan is based out of that site.

• I'm told that by the time it closed its Waterloo office in July, Engineering.com was down to just seven people here -- about half of what it started with. Only three stayed with the company after the site shut down.

• Thinkage laid off four people -- a third of its staff -- in July.