April 2004

Compiled and written by
Gary Will

E-mail:
gary@garywill.com

Issue 86 -- May 3, 2004
In this digest:

1. CME stays alive with $2.2M round of funding
2. Virtek receives $3.8M claim from Bio-Rad
3. Virtek ends the year with small quarterly profit
4. Dalsa profits strong in traditionally weakest quarter

5. RIM beats expectations ... as expected
6. STOCK REPORT: Dalsa shares reach new heights
7. Foreign high-tech takeovers from a Waterloo perspective
8. Miscellaneous tidbits from FibreTech, SlipStream, Covarity, ClearFrame, Bannister Lake, Sirific, Reqwireless, J2X, GBG

CME stays alive with $2.2M round of funding
April 29, 2004

CME Telemetrix has risen from its death bed and will be around for some time to come after raising $2.2 million through a private placement. It expects to raise an additional $0.3 million in a second closing.

Wolverton Securities of Vancouver and Standard Securities Capital of Toronto sold a combined 14.4 million units at $0.15 each. Each unit consists of a common share and a share purchase warrant good for two years. The two firms also received warrants to purchase a combined 1.7 million units for the same $0.15 price.

CME's new investors now collectively own 65% of the company and have the opportunity to take that to about 80% if they exercise their warrants.

Raising $2.5 million is no small achievement given the company's disappointing performance over the last four years. CME has been trying to develop a non-invasive near-infrared glucose monitor for over a decade and has run up cumulative losses of over $20 million. Progress have been very slow under CEO Duncan MacIntyre -- the company is more than three years behind the timetable it announced four years ago -- and it will still be years before CME will be able to get a product on the market.

Its stock has fallen 95% over the last three years, making it the worst performer among all companies followed here. The last time it had $2 million in the bank was in the fall of 2002, and CME should now have enough money to maintain operations -- and try to become revenue-generating -- for at least the next year.

Virtek receives $3.8M claim from Bio-Rad
April 8, 2004

Bio-Rad Laboratories, the company that bought Virtek's biotech instrument business in 2002 for $10.5 million (US$7.1 million at the time), is showing buyer's remorse and has sent Virtek a notice of claim asking for US$2.8 million, or about $3.8 million Canadian. According to Virtek, Bio-Rad is alleging undisclosed design and performance problems with the ChipReader technology it acquired.

Virtek says it had never heard any complaints from Bio-Rad until receiving the notice of claim. Bio-Rad is still selling the products under the VersArray brand name.

Virtek negotiated a good price with Bio-Rad for its biotech instruments business. At the time the deal was made, Virtek had said that it had no interest in putting more money into developing the instruments and that it was getting out of the business one way or the other. That's usually a signal for the vultures to swoop down, but it was able to get a price about equal to half of its entire market capitalization at the time. It was still far less than the money Virtek had put into biotech instruments, but it was a strong exit under the circumstances.

As of Friday, Bio-Rad's market value was US$1.5 billion -- almost 60 times Virtek's size -- and at last report the company had about US$150 million in cash. I don't know if Bio-Rad is still leasing space from Virtek in Waterloo.

Virtek ends the year with small quarterly profit
April 15, 2004

Since last summer, Virtek had been forecasting that it would be profitable in its final quarter of fiscal 2004, and that proved to be accurate as the company reported a breakeven net income of $19,000 ($0.00/share) on sales of $14.7 million in the quarter ended January 31 (Q4 04). Income from operations was $533,000, up from $143,000 in Q3, but that was offset by a $518,000 charge from the closure of Virtek's Belgium operations (see February digest).

Sales were up 9% from the previous quarter and 77% from a year ago, which did not include sales from Virtek's FOBA business unit, acquired in Q1. Sales for Virtek's traditional imaging and templating business, which excludes FOBA, were up less than 2% from the same quarter last year.

For the year, Virtek lost $3.4 million ($0.14/share) on sales of $50.3 million. Just over $20 million in sales were provided by FOBA, which is exactly what the company forecast when it made the acquisition in March. It was a bit off on its bottom-line prediction, as it was expecting FOBA to show a small profit and it ended up running in the red after a money-losing fourth quarter.

Imaging and templating sales were up 14% over the year to $29.8 million with net income from continuing operations of $1.2 million, while marking & engraving provided the remaining $20.45 million and reported a loss of $1.6 million.

Virtek completed a private placement during Q4 which generated net proceeds of $3.0 million. Operations in the quarter provided another $1.1 million and the company paid off about a million dollars in bank debt and used $561,000 in cash on discontinued operations. It ended the quarter with $5.8 million in cash and investments, of which $2.1 million is restricted -- $1.8 million to support an operating line of credit and $0.3 million to support a foreign exchange hedging program.

Virtek also announced in April that it is opening an R&D office in Bedford, Mass. that will focus on developing custom hardware and software applications for FOBA customers in North America. It says there will be a "small team of laser system engineers" based in Bedford.

Dalsa profits strong in traditionally weakest quarter
April 29, 2004

For the quarter ended March 31 (Q1 04), Dalsa reported net income of $3.9 million ($0.23/share) on sales of $36.8 million. Sales were up 10% from a year ago and down just 2% from the previous quarter. Q1 has historically been Dalsa's weakest quarter each year.
With an improvement in margins, gross profits actually climbed 9% sequentially.

Both of Dalsa's business segments -- digital imaging and semiconductors -- were profitable, with digital imaging providing $2.6 million in net income on sales of $23.9 million. The semiconductor business reported a $1.4 million profit on sales of $12.9 million. All of Dalsa's year-over-year revenue gains were produced by the digital imaging business.

Operations provided $5.8 million in cash and $2.6 million was spent on capital expenditures. Dalsa ended the quarter with $5.7 million in cash, up $2.6 million from the end of the previous quarter.

For fiscal 2004, Dalsa expects its largest revenue growth in digital imaging will come from the flat panel inspection and semiconductor inspection markets. Revenue in the current quarter is expected to show about 5-10% sequential growth. Dalsa says the quarter provided strong indications of a recovery in the semiconductor and electronics marketplaces it targets.

Dalsa now has 790 employees worldwide, up 15 over the quarter.

It also announced that its digital movie camera -- the Origin -- will be commercially available in November with a target rental price to filmmakers of US$3,000 a day per camera. It is continuing to develop a high-speed film digitizer to convert film archives into a digital format.

RIM beats expectations ... as expected
April 7, 2004

It was widely anticipated that RIM would have some big numbers to announce for the quarter ended February 28 (Q4 04) -- so much so that when it did announce a record quarter, it had almost no impact on the company's stock price.

For the quarter, RIM reported net income of US$41.5 million (US$0.46/share) on revenue of US$210.6 million. Sales were up 37% from the previous quarter and 141% from the same period last year, and were on the high end of the company's forecast of US$195-210 million.

The reported net income is after a charge of US$12.7 million -- 6% of revenue -- that the company has put aside to cover the payment that would be due to NTP if its legal decision over RIM is upheld on appeal. The bottom line was aided by a tax recovery of US$4.2 million.

An improvement in gross margins (which isn't expected to be sustained) led to a 43% sequential increase in gross profits. Expenses climbed by 20% from Q3 with R&D costs in the quarter climbing to US$17.9 million.

Sales of RIM's handheld devices accounted for two-thirds of all revenue in the quarter, up from 56% in Q3. Handheld sales were US$139 million, up 61% from the previous quarter. RIM shipped 380,000 new units in the quarter. A record 204,000 BlackBerry subscribers were added in Q4 (from 154,000 in Q3), bringing the total number to 1.07 million. That means that 19% of all BlackBerry subscribers signed on in Q4 and about one-third of all subscribers have been added in the last six months.

For the year, RIM reported net income of US$50.8 million (US$0.62/share) on sales of US$594.6 million -- up 94% from 2003.

RIM's billion-dollar share offering closed during Q4, and operations provided an additional US$40.0 million, boosting the company's cash position to US$1.49 billion at quarter-end.

RIM boosted its revenue guidance for the current quarter by US$25 million, and is now forecasting sales of US$250-265 million and net income of about US$40-48 million. It expects revenue in Q2 to be in the US$270-290 million range.

The company also announced what is essentially a 2-for-1 stock split, as it will issue one common share through a dividend for each common share currently outstanding. It's expected to happen next month.

It also announced that Motorola will be making BlackBerry-enabled mobile phones. Motorola had just announced a few weeks earlier that it was putting software from RIM competitor Good Technology on its newest PDA. Motorola joins Nokia, Samsung, Siemens, and Sony Ericsson among the phone manufacturers offering BlackBerry-enabled devices.

Both of RIM's CEOs were in the news at the end of the month. Mike Lazaridis and his wife, Ophelia Lazaridis, donated $33.3 million to the University of Waterloo to create a world-class centre for quantum-related research. The money includes the $6 million that Lazaridis gave to UW's Institute for Quantum Computing (IQC) in 2002 and is on top of the $100 million given to launch the Perimeter Institute for Theoretical Physics in Waterloo. UW says a new 120,000 square-foot quantum science research building will be constructed on the east side of campus.

RIM's other CEO, Jim Balsillie, was named by the Hamilton Spectator as the man behind yet another futile bid to bring an NHL team to Hamilton. Balsillie has denied it, and it seems unlikely that he'd have much time for such quixotic activities. Even the paper didn't seem sure of its information, as the journalist unsuccessfully tried to contact Lazaridis to ask if he was the guy behind it -- a suggestion that's even farther out there than the idea that it's Balsillie. The Spectator was looking at Balsillie because it says his wife is originally from Hamilton.

Balsillie's name also came up in four-year-old e-mail from Credit Suisse First Boston that was filed as evidence in New York in the trial of ex-CSFBer Frank Quattrone. According to the e-mail, Balsillie wanted in on AvantGo's IPO and approached CSFB, who had previously cut him in on 724 Solution's IPO. "This guy is a pig," said a California-based CSFB manager about Balsillie, "and if we give him a direct allocation it should be very small as he has nothing whatsoever to do with this deal." CSFB's Toronto-based banker replied, "While his requests may be piggy, thanksgiving is around the corner." A month later, RIM filed a preliminary prospectus for a 6 million-share public offering with CSFB as one of many underwriters. It wasn't mentioned in the e-mails printed in the Globe, but RIM had already invested money in AvantGo (see April 2000 digest), so there was a connection between the companies and Balsillie's interest didn't spring up out of nowhere as the IPO approached. AvantGo is now owned by Sybase as part of its iAnywhere Solutions subsidiary, led by Waterloo's Terry Stepien.

STOCK REPORT: Dalsa shares reach new heights
April 2004

For the third straight month, Dalsa shares climbed to set a new all-time high. They finished April at their highest-ever month-ending price of $21.60 a share. Dalsa is now worth as much as Com Dev, Descartes, MKS, and Virtek combined.

At the other end of the scale, MKS shares hit their lowest point in over a year and had their lowest monthly close since December 2002. Virtek shares fell on news of Bio-Rad's claims against the company, erasing most of the gains made over the previous two months.

For the month of April:

Dalsa [TSX: DSA] +9%
Navtech [OTCBB: NAVH] +3%
===============================
Descartes [TSX: DSG] -1%
RIM [TSX: RIM] -2%
--S&P TSX COMPOSITE INDEX -4%
Open Text [TSX: OTC] -4%
Turbosonic [OTCBB: TSTA] -5%
CME Telemetrix [TSXV: CEM] -7%
Com Dev [TSX: CDV] -8%
RDM [TSX: RC] -11%
--S&P TSX VENTURE INDEX -11%
MKS [TSX: MKX] -15%
Virtek [TSX: VRK] -17%
ARISE [TSXV: APV] -19%
Newlook Industries [TSXV: NLI] -21%
ClearFrame [TSXV: CLF] -27%

It was also a rough month for ARISE, which still hasn't filed its year-end financial statements. The company had told investors the statements would be on SEDAR in March.

RIM shares hit a peak of $146.80 on April 13 -- their highest point since December 2000 -- but then fell to close the month at $119.70. That gave RIM stock its second consecutive declining month after 12 straight months of gains. Market cap at month-end was $11.1 billion.

I've added Newlook (Onlinetel) and ClearFrame to this list. Technically, their headquarters are outside the area, but their core operations are in Kitchener and Waterloo.

Even with the 21% drop in April, Newlook stock remains ridiculously overvalued (see previous digest). The company's market value remains larger than the combined market caps of Virtek and RDM. Newlook's multiple to run-rate gross profits is 66, which is more than three times RIM's and about 15 times Dalsa's multiple.

Companies with core operations outside the area:

CVF Technologies [Amex: CNV] +38%
Senesco [Amex: SNT] +18%
Adobe [Nasdaq: ADBE] +6%
CheckFree [Nasdaq: CKFR] +2%
==================================
SBS Technologies [Nasdaq: SBSE] -4%
Agfa-Gevaert [Brussels: AGFA] -5%
Ansys [Nasdaq: ANSS] -7%
Siebel [Nasdaq: SEBL] -11%
Network Assoc [NYSE: NET] -13%
Blue Coat [Nasdaq: BCSI] -17%
Sybase [NYSE: SY] -19%
LSI Logic [NYSE: LSI] -20%

Foreign high-tech takeovers from a Waterloo perspective
April 15, 2004

ITAC has released a report prepared by Denzil Doyle's consulting firm about the negative effects of foreign -- primarily American -- takeovers of Canadian high-tech companies and how this has impeded the development of world-class Canadian-based tech firms (of which RIM and Open Text were cited as examples). The paper describes how Canadian companies are often reduced to "truncated" R&D centres with little influence on corporate operations or marketing.

Many examples of takeovers in the Ottawa area are listed, although I'm skeptical about how many of them had any chance of becoming multinational powerhouses. It's interesting that the Waterloo experience has been quite different from the picture painted in the Doyle study.

First, in Waterloo there has been much more of a balance here between foreign companies acquiring local firms and local firms acquiring foreign companies. RIM, Open Text, Dalsa, Descartes, Virtek, MKS, Dspfactory, Com Dev, and GBG come to mind as companies that have acquired foreign businesses. If anything, I think we've been more acquirers than acquirees.

Second, the acquisitions that have been made here by foreign companies have produced some significant benefits for the community -- Sybase's acquisition of Watcom and (surprisingly) Cisco's acquisition of PixStream both ended up being very positive for the area. Mitra and BlueGill are harder to judge -- I don't know how much the scope of their operations in Waterloo have been reduced since the acquisitions. Those are the only deals that come to mind in the last several years where the company being acquired had a chance at becoming what Doyle calls a "world-class" tech firm, although I'm probably forgetting somebody.

On the whole, foreign acquisitions haven't been a problem for the Waterloo area and have actually delivered significant economic benefits. (And, realistically, there isn't much you could do about it anyway, unless you bring back the Foreign Investment Review Act, and almost nobody wants that. That's probably why the Doyle recommendations seem so minor -- and focused on creating more financial buyers when Canadian tech companies generally seek out strategic buyers for benefits they offer beyond their ability to cut a cheque.)

The paper is available in PDF form from the ITAC website: http://www.itac.ca

Miscellaneous Tidbits

• Law firm Wildeboer Rand Thomson Apps & Dellelce brought together RIM CFO Dennis Kavelman and six of Canada's top investment bankers (almost all of whom are Tech Digest subscribers) for a well-attended event at UW's Fed Hall. While there have been several large share offerings by high-tech companies in the Waterloo area in recent years, there wasn't a single IPO in Waterloo in the tech boom years of 1999 and 2000 and the last one of any significance was Descartes in January 1998. A couple of companies have come close. Orion's Mark McQueen mentioned working with Dspfactory, which wasn't a big secret around town, but this was the first time I've heard it said in public. Ironically, the only tech IPO in this area in the last six years was also the only company whose logo was on display in Fed Hall -- ARISE Technologies.

• FibreTech has launched another Wi-Fi hotspot in Waterloo Region, this one at the new terminal at the Waterloo Regional Airport. Last year, FibreTech created its first hotspot in the University Plaza area next to UW.

• SlipStream's Web accelerator software is being used by Telus as part of its Telus Fast Dial-up service. Telus is charging customers an additional $2.95 a month for the service, which is currently available in B.C. and Alberta. It will be launched in Quebec this summer.

• Covarity announced a 5-year deal with Credit Union Central of Canada to provide credit risk management services.

• ClearFrame closed its private placement of 6.25 million shares at $0.05 per share, giving the company a much-needed $312,500 in gross proceeds. Just over one-quarter of ClearFrame's outstanding shares are owned by EVER America, headed by J. Paul Haynes, the founder of ClearFrame's Suite Response business.

• Bannister Lake Software announced that its BLElector real-time election results application will be used by Rogers Television during the next federal election as well as the municipal elections in New Brunswick. In January, it announced that Rogers' Sportsnet was using its BLNewsTicker application to generate ticker and "coming-up" pages.

• Sirific is one of 75 companies scheduled to make presentations at Semiconductor Venture Fair III in San Jose next week.

• Reqwireless and J2X are among the many companies nominated for a 2004 Handango Champion Award, recognizing outstanding software for mobile devices.

• I mentioned last month that Global Beverage Group (GBG) is acquiring the assets of Dallas-based Extended Technologies Corp. (Xtek). I didn't realize that Xtek CEO Bill Hampton was the co-founder of Michael Mead & Associates (MMA). In 1997, Descartes acquired MMA and now, seven years later, the company that evolved out of Descartes' direct store delivery business -- GBG -- has acquired the company that evolved out of MMA.