October 2003

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 80 -- November 3, 2003
In this digest:

1. Open Text to acquire German content management firm for US$235M
   
2. Open Text quarter falls short; big jump forecast in current Q
   
3. Dalsa's semiconductors make up for weak digital imaging sales

4. CME goes looking for funds with cash running low
   
5. STOCK REPORT: Virtek leaps; RIM and Com Dev climb even higher
   
6. Miscellaneous tidbits from Communitech, Betacom, Handshake Interactive, Pattern Discovery

Open Text to acquire German content management firm for US$235M
October 21, 2003

A week after it was announced that Open Text competitor Documentum was being acquired by EMC for US$1.7 billion, Open Text announced its own acquisition -- the largest in its history. It will acquire German-based Ixos Software for about US$235 million in a deal where Ixos shareholders can choose either cash or Open Text shares in return for their Ixos stock. The deal is expected to close in the next four months.

Ixos specializes in content management software, including imaging and archiving products that integrate with ERP systems (with a particular strength in SAP integration). It reported sales in the year ended June 30 of €127.1 million (US$148 million) and a net loss of €4.0 million (US$4.6 million). Ixos has 900 employees world-wide.

Even though Ixos sales are equal to about 83% of Open Text's revenue, its valuation was less than one-quarter of Open Text's at the beginning of October. Open Text has shown positive momentum over the last year while Ixos sales have been stagnant.

The deal will give Open Text a stronger presence in Europe, which accounts for 60% of Ixos revenue but only 36% of Open text sales. Open Text will reorganize into two divisions, one based in North America to oversee its traditional collaboration and knowledge management products, and another based in Munich that will be responsible for content management and archiving. Hamburg-based Gauss Interprise, which Open Text announced it was acquiring in August, will be part of the new European division. Open Text quietly disclosed last week that it has also bought the assets of a third German firm, SER eGovernment Deutschland GmbH and its Austrian subsidiary, SER Solutions Software GmbH.

There are about 22.5 million shares in Ixos (fully diluted) and Ixos shareholders will choose between receiving €9 per share -- about US$10.45 -- or receiving 0.522 Open Text shares along with a warrant to purchase an additional 0.1484 of an Open Text share over the next year at a price of US$20.75 a share. Open Text stock closed Friday on Nasdaq at US$19.76, which means that 0.522 Open Text shares are currently trading for €8.90, so the two choices are about equal at current prices.

Shares of Ixos closed at US$9.74 the day before the Open Text announcement was made and they had jumped up in value by more than 35% in the two weeks prior to the announcement.

Ixos' largest shareholder, investment firm General Atlantic Partners, has agreed to tender its stock, which is about 25% of all Ixos shares. The offer is supported by the board and management of Ixos. Ixos CEO Robert Hoog will become head of Open Text's European division.

The "enterprise content management" market has been consolidating recently. Many more acquisitions and mergers are expected over the next few years, leaving only a few big players in the industry.

Open Text quarter falls short; big jump forecast in current Q
October 23, 2003

For the first time in a while, Open Text didn't blow anybody away with its quarterly results. For the period ended September 30 (Q1 04), the company reported revenue of US$44.2 million and net income of US$3.4 million (US$0.16/share). Sales were up 17% from a year ago (there have been some acquisitions over that time) but down 17% from a strong Q4. Open Text had forecast sales of US$46 million for the quarter.

License revenue was weak at US$16.9 million, a 30% drop from the previous quarter and up 9% from a year ago. Net income was down US$6.0 million from the previous quarter and US$2.0 million under last year's number (partly due to increased income tax provisions this year).

The company raised US$6.8 million in cash in the quarter through the sale of shares. Operations, which had provided US$8.1 million in cash in Q4, just broke even in the quarter. They are expected to provide US$10 million in Q2. Acquisition costs consumed US$1.0 million in cash. That left Open Text with US$120.1 million in cash at the end of the quarter, up US$4.2 million from the end of Q4.

For the year, Open Text slightly increased its revenue forecast to US$227 million, up from the US$225 million it projected three months ago. Sales in Q2 are expected to be US$53 million -- a 20% sequential increase.

Dalsa's semiconductors make up for weak digital imaging sales
October 30, 2003

For the quarter ended September 30 (Q3 03), Dalsa reported net income of $2.6 million ($0.16/share) on revenue of $33.0 million. Total sales were essentially flat from the previous quarter -- a 1% increase -- and up 4% from last year.

Sales in Dalsa's digital imaging segment were down 2% from Q2 and earnings from that unit were only $603,000. It's the third straight quarter where digital imaging profits have declined. The company says that product sales in North America were slower than expected and three large customers cancelled previously-scheduled deliveries because they still had Dalsa products in inventory.

Digital imaging engineers also had to spend time to resolve what Dalsa describes as "unexpected yield issues" in the quarter.

Dalsa's semiconductor business picked up some of the slack with a 6% sequential increase in sales and a net income of $2.0 million. The semiconductor segment accounted for 77% of Dalsa's profits in the quarter, up from 58% in Q2.

Operating activities provided $7.2 million in the quarter -- a significant improvement from recent quarters when the company was spending money to expand its capabilities. Dalsa reduced its bank indebtedness by $6.3 million, bringing its net cash deficiency down to $1.7 million from $7.0 million at the beginning of the quarter.

Dalsa is now forecasting revenue growth this year of 16-19% to $130-134 million. It began the year projecting 38% growth, which was reduced to a forecast of at least 25% growth three months ago. The stronger Canadian dollar is one of the reasons for the reductions. Net income for the year is now expected to be about $11 million, down from the forecast at the beginning of the year of $17 million and the $14 million forecast at the beginning of the quarter. It is forecasting growth of 18-20% in 2004.

The company actually pre-announced its Q3 results two weeks before the full announcement was made. It was a weak quarter, but nothing so severe that a warning was required. If anything, the pre-announcement made the results seem worse than they actually were.

Dalsa's digital imaging sales seminar for external salespeople -- held in September -- attracted 72 reps from 30 companies representing 21 countries.

It expects to begin selling its digital movie camera in the spring of 2004.

The company also announced that it has acquired majority interest in Rad-icon Imaging Corp. of Santa Clara, Calif. For the last few years, Dalsa had owned 38.5% of Rad-icon and it increased its stake in September by exercising convertible debentures and acquiring an additional 6.7% interest for $411,000 cash. Dalsa now owns 58.7% of Rad-icon. Two weeks worth of Rad-icon results were included in the Q3 results.

CME goes looking for funds with cash running low
October 22, 2003

With only about another two months of cash left, CME Telemetrix has asked Vancouver-based Wolverton Securities to try to raise funds through a best-efforts private placement. CME is trying to sell up to 8.3 million shares at 30 cents each for gross proceeds of up to $2.5 million.

CME only has 8.8 million shares outstanding, so this would be a huge dilution for existing shareholders ... if buyers for the shares can be found. But that may be a real challenge for Wolverton. Over the last three years, CME's shares have lost 95% of their value, leaving them battling with Descartes as the worst performers among locally-based tech stocks.

The company has been working on its non-invasive glucose monitor for over a decade and is still years away from having the product on the market.

CME also said it had signed a cross-licensing agreement with a company called Spectromedical in Cambridge. I'd never heard of it, it's not mentioned on the Web, it's not in the phone book, and no one has registered either spectromedical.com or spectromendical.ca, but a search of the patent database shows the inventor associated with it is James Samsoondar who used to work with CME (and whose name is on some of CME's patents).

STOCK REPORT: Virtek leaps; RIM and Com Dev climb even higher
October 2003

Virtek didn't make any announcements in October, but its stock had its best month in over a year, jumping 29% and even trading briefly above $1 for the first time since June. It finished the month at 93 cents -- tied for its highest month-end this year.

Shares of Com Dev and RIM continued their ascent. It was just last month that Com Dev passed MKS in market value, and now it's neck-and-neck with Descartes with a market value around $150 million. In the spring Com Dev was valued at under $40 million. It's now trading at over one-and-a-half times its run-rate revenue from its most recent quarter. October was the seventh month in a row that Com Dev shares have gone up. Even with their gains this year, Com Dev shares are trading exactly where they were two years ago and over the last three years they've lost 85% of their value. Only Descartes stock has done worse among the local TSX-listed companies tracked here.

RIM shares had their eighth consecutive month of gains -- just one month short of its record set in 1999. RIM shares have tripled in value since the end of February and ended June at $58.24, their highest monthly close since February 2001. The company's market value is now $4.5 billion.

For the month of October:

CME Telemetrix [TSXV: YME] +40%
Virtek [TSX: VRK] +29%
Turbosonic [OTCBB: TSTA] +17%
Open Text [TSX: OTC] +14%
RIM [TSX: RIM] +13%
--S&P TSX VENTURE INDEX +12%
RDM [TSX: RC] +12%
Com Dev [TSX: CDV] +10%
Descartes [TSX: DSG] +6%
--S&P TSX COMPOSITE INDEX +5%
===============================
MKS [TSX: MKX] -4%
Dalsa [TSX: DSA] -7%
ARISE [TSXV: APV] -12%
Navtech [OTCBB: NAVH] -20%

The CME gains are a bit of an illusion (as was the big drop last month). The stock's trading range in October was identical to its September range, and just slightly below its range in August.

Open Text shares went to heights not seen since (or before) their huge run-up in February and March 2000. The company implemented a 2-for-1 stock split during the month, which takes it up to about 40 million shares outstanding.

June was the best month so far in 2003 for the S&P indices for both the TSX and the Venture Exchange. The Venture Exchange index is up almost 50% this year. The senior exchange is up 18%.

With two months left in the year, RIM and Com Dev are both well ahead of the pack for top stock performance of 2003. Descartes and Dalsa are at the other end of the list. Dalsa shares still top the charts for three-year performance, despite a rough 2003.

Companies with headquarters outside the area:

Blue Coat [Nasdaq: BCSI] +52%
CheckFree [Nasdaq: CKFR] +37%
Siebel [Nasdaq: SEBL] +28%
SBS Technologies [Nasdaq: SBSE] +26%
Knexa [TSXV: KNX] +23%
Adobe [Nasdaq: ADBE] +11%
Sybase [NYSE: SY] +5%
Agfa-Gevaert [Brussels: AGFA] +3%
Bio-Rad [Amex: BIO] +2%
LSI Logic [NYSE: LSI] +2%
Senesco [Amex: SNT] +1%
Network Assoc [NYSE: NET] +1%
Ansys [Nasdaq: ANSS] +1%
==================================
Eiger Technology [TSX: AXA] -2%
Betacom [TSXV: YCA] -4% HALTED
CVF Technologies [Amex: CNV] -15%

Miscellaneous Tidbits

• Greg Barratt is leaving Communitech, where he has been president since April 2000. He'll join insurance brokerage Cowan-Dalton in December.

• I mentioned last month that the CEO and CFO of Mississauga's Betacom, which has an office in Waterloo (and which went public through what ended up being a reverse takeover of Kitchener's Control Advancements), had both resigned. Well, this month the company announced that it had discovered irregularities in its reported financial statements and would be restating its results for fiscal 2003 and the first quarter of fiscal 2004. The net loss for the five quarters is expected to be increased by $2.1 million. Betacom then announced that its entire board of directors had resigned. Its directors included Mike Stork, formerly with Unitron and now the chairman of Dspfactory, and Graham Strong, director of UW's Centre for Sight Enhancement. Trading in the company's stock was halted before the announcements were made.

• Ottawa's National Capital Institute of Telecommunications (NCIT) announced that technology from Handshake Interactive was being used in a real-time demonstration of "fully interactive haptics" -- virtual touch -- over a broadband connection between Canada and Switzerland. It organized a similar demonstration last year between Canada and Australia. According to NCIT, this year's demo consisted of someone in Geneva feeling the contours of a mannequin in Ottawa. Handshake has developed the technology that compensates for time-delay across the network.

• Pattern Discovery Software Systems got a new website recently. There's a company I haven't heard from in a long time. It hadn't updated its site in two years.