August 2004

Compiled and written by
Gary Will
E-mail:
gary@garywill.com

Issue 90 -- September 7, 2004
In this digest:

1. Com Dev keeps busy and maintains profits while new orders ebb
   
2. Open Text's forecast for 2005 spooks investors
   
3. Biorem to go public through merger with capital pool company

4. ARISE grapples with tight cash resources
   
5. Descartes pays the price for future savings
   
6. New leadership at RSS & Unitron

7. STOCK REPORT: Another weak month across the board
   
8. Miscellaneous tidbits from RIM, Virtek, IMS, J2X, Onlinetel,
   PrinterOn

WatStart will create opportunities for early-stage entrepreneurs to get together -- online and in person -- with each other and with local service providers to learn from each other and to receive ongoing guidance, support and encouragement. All at no cost to entrepreneurs.

Everyone recognizes that this community would greatly benefit from a greater number of high-potential startup technology companies. The talent is here and there is an excellent knowledge-base within the community. The highest hurdle is getting a company started and pointed in the right direction. That's the area WatStart will address.

Tech Capital Partners and I began developing WatStart in the spring, and the entire initiative has been made possible by an outstanding group of 12 founding companies.

On the WatStart message boards, you can choose to remain anonymous if you don't want other visitors to know that you're thinking about starting a company -- but please register so we can send you information about get-togethers and other initiatives.

The Web site is still in its earliest stages, but there's already informative content in the forums and it will grow from here ... as long as people participate. Everyone involved has committed to the project for at least one year, and that's enough time to find out what we can achieve to help the next generation of tech startups.

So let's see what we can do. Everyone is motivated to make this work and we just need aspiring entrepreneurs step forward. To get started, just register on WatStart site -- http://www.watstart.ca/

And then check out the ad below for Communitech's "Chapter 2" event on October 5. It's also free for entrepreneurs and, according to the organizers, it will cover "the hard realities of going to market, from basement brainstorming to landing your first big customer. Learn what you need to know, and meet the people who can help you build your company." A perfect complement for WatStart.

--Gary Will

Com Dev keeps busy and maintains profits while new orders ebb
August 26, 2004

Com Dev's quarter ended July 31 (Q3 04) was a lot like the previous quarter ... with one notable exception that was enough to make some investors jittery.

The company reported net income of $3.7 million ($0.06/share) on sales of $32.4 million -- almost identical to its Q2 results when it had a profit of $3.7 million on sales of $31.4 million.

Com Dev came into the quarter with a $93 million backlog, so there weren't many worries about the top line. But so much of the outlook for the company is tied to the recovery and growth of the satellite market that it raised some questions when it reported that new orders in the quarter had dropped to $16 million -- down from $33 million in the previous quarter, $43 million in Q1, and $54 million is Q4. A year ago, Com Dev booked $25 million in orders over the same period. CEO John Keating addressed the issue directly at the beginning of the company's quarterly conference call. There wasn't much of an explanation for the drop, other than it had been a great run for the company that had to come to an end sometime. Keating said he was surprised it had lasted this long and emphasized that the backlog is still $78.5 million, which is $32.6 million above where it was a year ago and "more than sufficient" for Com Dev to achieve its sales targets.

The other number that was down significantly from Q2 was cash flow. Operations generated $1.1 million in cash in the quarter, down from $7.6 million in Q1. From that, the company paid $608,000 in interest on its outstanding convertible debentures. The long-discontinued Com Dev Wireless consumed $383,000 in cash in the quarter. Com Dev is still trying to find someone to take over the lease on the former UK wireless facility. The company ended the quarter with $26.4 million in cash.

Com Dev now has 778 employees, an increase of 38 over the quarter and 120 over the last year. It is continuing to hire people and buy additional equipment to work through its order backlog. Keating said it has been a challenge to cope with the increased workload.

Com Dev is forecasting that the commercial satellite market will be flat next year, and it is looking to the broad consumer rollout of high definition TV as a key driver of growth in the coming years.

Open Text's forecast for 2005 spooks investors
August 31, 2004

With its first full quarter of results that included sales from IXOS, Open Text was able to report record revenues in the quarter ended June 30 (Q4 04), but that didn't stop its share price from going into a tailspin after the results were announced.

For the period, Open text reported net income of US$9.0 million (US$0.16/share) on sales of US$105.0 million. Sales were right at the midpoint of the company's forecast of US$100-110 million while profits were at the bottom end of the predicted range of US$9-12 million, despite a lower than anticipated tax provision in the quarter that added over US$1 million to the bottom line.

IXOS contributed US$39.4 million in revenue in Q4, and if that number is backed out, Open Text sales grew 11% from the previous quarter and 24% from a year ago.

Operations generated a record US$16.9 million in cash in the quarter and an additional US$5.5 million was raised through warrants and the sale of common shares. Open text ended the quarter with US$157.0 million in cash, up US$3.6 million from the end of Q3.

Both Open Text and IXOS have traditionally reported sequential declines in revenue in Q1, and that's the forecast again this year, as the company is forecasting sales of US$87-93 million in Q1. That's a quarter-over-quarter drop of 11-17%, which is in-line with what both companies reported last year.

Open Text announced two acquisitions in August. It will pay US$24 million in cash to buy the Vista Plus product line and associated employees from California's Quest Software. Vista Plus Vista captures and stores information from ERP applications like Oracle E-Business Suite, PeopleSoft, and mySAP. The products had sales of about US$15 million over the previous 12 months. Open Text has also acquired Artesia Technologies, a Maryland-based provider of digital asset management applications. Artesia had sales of US$10 million last year. Open Text will integrate Artesia's technology into its LiveLink suite.

Despite these two acquisitions, Open Text is not changing its forecast from February of sales of US$420-450 million in fiscal year 2005.

The company has about 2,000 employees world-wide, including 500 engineers and 160 quota-carrying sales reps.

Long-time Open Text stock-shorter Marc Cohodes was back in the news this month. He's been shorting Open Text for five years -- during which time the stock is up 21%, making it one of the better performers among the local companies followed here, trailing only RIM and Dalsa. Journalists quoting Cohodes never mention that he predicted in the spring of 2002 that Open Text shares would fall below US$5 (adjusted for last year's split) and that his track record on the company would almost make Sylvia Browne look like a psychic.

Biorem to go public through merger with capital pool company
September 2, 2004

Guelph's Biorem plans to go public by merging with Ontario Capital Opportunities Inc., a capital pool company listed on the TSX Venture Exchange. Biorem shareholders would own 96% of the merged company. One of Ontario Capital's four principal owners is John Pennal, president of TriNorth Capital and a director of Waterloo's IMS.

It was also announced that Biorem recently raised $1 million from an unnamed Canadian venture fund that gave the company a $16 million valuation (post-money, I assume). The majority owner of Biorem is CVF Technologies, which now holds 58% of the company.

ARISE grapples with tight cash resources
September 1, 2004

After struggling through another quarter, ARISE announced that it had reorganized the company and that its VP & GM had resigned.

Michael Ben had been ARISE's CFO until the beginning of the year when his title was changed to VP & GM. He had been with ARISE since 1999 and had worked with the company as a consultant before then. With his departure, the only executive officer who remains from the company's IPO last year is founder Ian MacLellan. Engineering VP Pat Cusack left the company in December and ARISE also disclosed that it had lost its sales manager over the last three months and had closed its Calgary warehouse.

MacLellan has taken on the added roles of acting CFO, GM, and sales manager and said that the changes have reduced costs and "resulted in significantly increased customer satisfaction."

In the quarter ended June 30 (Q2 04), ARISE lost $521,000 on sales of $599,000. Sales were down 4% from a year ago, and up 6% from the company's traditionally weak Q1. Gross profits plummeted to just $75,000, down more than 40% from both last year and the previous quarter. ARISE ended the quarter with just $11,525 in cash and a working capital deficiency of $1.3 million. The company's inventory is now purchased and maintained by EMJ (see May digest) and it would have been a very bleak quarter for ARISE if not for that partnership. ARISE is still looking for new investors.

Former Com Dev Space president Alan Winter has stepped down from the company's board of directors.

Descartes pays the price for future savings
September 2, 2004

Descartes' latest round of restructuring and write-downs led the company to a net loss of US$22.7 million (US$0.56/share) on revenue of US$11.1 million in the quarter ended July 31 (Q2 05). The loss included a US$7.4 million restructuring charge and an additional US$5.8 million asset write-off.

On top of the 130 job cuts that were announced in May (see May digest), Descartes ended up axing another 35 employees which brings its headcount down to 215, mostly in Waterloo and Atlanta. The additional cuts are expected to save US$1 million in expenses per quarter starting in Q4, on top of the savings from the initial layoffs of US$7 million per quarter that are expected to begin in Q3.

Descartes ended the quarter with US$46.4 million in cash. That was down US$10.2 million from the end of Q1, almost all of which was used in operations. The company said that restructuring consumed US$4.3 million in cash and payment of insurance premiums used another US$1.4 million. An additional US$3.7 million in cash is expected to be used to pay for this round of restructuring in future quarters. Just US$96,000 was spent on capital assets in the quarter. Cash net of convertible debentures at quarter-end was US$19.4 million or about CDN$0.62/share.

Sales fell 17% sequentially and 27% from the previous year. A significant drop in margins led to a 34% decline in gross profits from Q1. Operating expenses fell by 21% from the previous quarter. Accumulated deficit now stands at US$407 million following the company's 32nd or 33rd consecutive quarter of losses dating back to its days as a private company in 1996.

Descartes has completely ceased operations in China -- which had been a source of difficulty for the company. Former CEO Manuel Pietra was mentioned in the conference call, but only to say that a Latin American reseller the company had previously used, and who had dumped by Pietra, is back again representing Descartes in the region.

New leadership at RSS & Unitron
August 3 & 17, 2004

The new CEO at RSS Solutions is Carol Leaman, who was president of Fakespace Systems for two-and-a-half years until resigning in March, has been appointed chief executive of the Kitchener-based developer of planning and scheduling software.

Leaman is a chartered accountant who joined Electrohome in the mid-1990s as controller and made the transition to Fakespace -- an Electrohome company -- in 1998 as its finance VP.

Her bio on the RSS Web site says that she works closely with president and co-founder Michael Cox, just in case you were worried that the CEO was acting independently of the president.

Unitron Hearing Canada's new GM is Nicolai Krarup. He was previously president of Bukkehave, a Danish provider of automobiles and other vehicles to corporate customers working in developing countries. Before that, he had worked for hearing aid manufacturer Bernafon for five years.

STOCK REPORT: Another weak month across the board
August 2004

It was a cold August for local tech stocks as the only company to showed a gain was MKS, and that was an illusion of month-end timing. MKS shares really had their worst month since 2002 -- trading at a 20-month low and reaching their lowest monthly high ($1.05) in that time.

It was a rough month all around. Open Text shares have lost a third of their value over the last two months. RDM shares ended the month below a dollar for the first time since October. Descartes shares hit an all-time low. Dalsa shares have lost over a quarter of their value over the last three months. After some big gains in May and June, Com Dev shares are back where they were at the beginning of the year. Virtek shares, which were up 76% over the first three months of the year, have fallen 45% since then and are also back where they began the year.

For the month of August:

MKS [TSX: MKX] +9%
--S&P TSX VENTURE INDEX +1%
ClearFrame [TSXV: CLF] 0%
Turbosonic [OTCBB: TSTA] 0%
===============================
--S&P TSX COMPOSITE INDEX -1%
RIM [TSX: RIM] -4%
Navtech [OTCBB: NAVH] -4%
Com Dev [TSX: CDV] -7%
Virtek [TSX: VRK] -9%
ARISE [TSXV: APV] -9%
Descartes [TSX: DSG] -9%
Dalsa [TSX: DSA] -12%
RDM [TSX: RC] -15%
Open Text [TSX: OTC] -17%
Newlook Industries [TSXV: NLI] -20%

This will be Newlook's final appearance on the list (see below). In the five months it was here, its shares fell 80% in value, and it's still the most overvalued stock on the list.

Companies with core operations outside the area:

Agfa-Gevaert [Brussels: AGFA] +14%
McAfee [NYSE: MFE] +10%
Adobe [Nasdaq: ADBE] +9%
==================================
Ansys [Nasdaq: ANSS] -5%
LSI Logic [NYSE: LSI] -5%
Siebel [Nasdaq: SEBL] -6%
Senesco [Amex: SNT] -8%
Sybase [NYSE: SY] -9%
CheckFree [Nasdaq: CKFR] -9%
SBS Technologies [Nasdaq: SBSE] -20%
CVF Technologies [Amex: CNV] -21%
Blue Coat [Nasdaq: BCSI] -21%
Automated Benefits [TSXV: AUT] -26%

Miscellaneous Tidbits

• RIM's newest handheld device, code named Charm, is expected to be formally unveiled tomorrow. The device is narrower and features a QWERTY keyboard layout where a single key is shared by adjacent letters with software used to guess which of the two letters the user wants. The U.S. patent application for the keyboard was made public last week but photos have been available on the Web for some time.

• Virtek has chopped 14 employees at its offices in Waterloo and Germany. It also closed the office in Lee's Summit, Missouri that it had acquired as part of its purchase of FOBA North America Laser Systems last year. A net five positions were eliminated as the company moved North American support for FOBA products to its Massachusetts office. Virtek now has 167 employees worldwide.

• According to SEDAR filings, Intelligent Mechatronic Systems (IMS) has enough cash and other sources of funding in place to cover operations until the spring. IMS is said to have annual operating expenses of about $2.5 million. The licensing deal the company had with an unidentified "U.S. Tier 1 auto supplier" isn't expected to generate revenue until 2007, and deliveries on the contract it has with an unnamed European OEM for its seat-belt reminder sensor aren't scheduled to begin until 2006. The company currently has no other sources of revenue.

• J2X is one of many Java software developers that will be attending the Orange Code Camp in France this month after being selected as a finalist in the Java Challenge, sponsored by Orange and Nokia. The sponsoring companies are encouraging developers to create applications on their platform. Orange is a major wireless operator in France and the UK.

• Onlinetel -- the operations of Newlook Industries -- is moving to Burlington this month and won't be tracked here anymore. In the quarter ended June 30 (Q3 04), Newlook/Onlinetel reported a loss of $474,000 on sales of $1.3 million. Sales were down 4% from the previous quarter -- the second consecutive quarter of sequential revenue declines. Operational loss was $644,000. Working capital deficiency at the end of the quarter was $578,000.

• PrinterOn's Internet-based guest printing service will be sold by Texas-based Wayport in what was called a "multi-year marketing and affiliate sales agreement." Wayport provides Wi-Fi and wired Internet access to 800 hotels and six airports.