June 2005

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

Issue 100 -- July 4, 2005
In this digest:

1. RIM's half-billion-dollar settlement with NTP becomes unsettled
2. RIM hits all its quarterly forecasts; sales up 68%
3. Virtek reports stronger sales, cash flow

4. Three former Betacom executives arrested, charged with fraud
5. Navtech reports 14th consecutive profitable quarter
6. STOCK REPORT: Virtek shares jump on promising quarterly results

7. Miscellaneous tidbits from Symbility, PrinterOn, Com Dev, Descartes, RDM

You may have seen a note in The Record that I'll be working with Communitech. It'll be two days a week for the next six months -- starting tomorrow -- helping early-stage companies and entrepreneurs. Theoretically, I'm still doing my other consulting work as well, but between Communitech, WatStart, and working with The Record on its eighth annual Technology Spotlight, I'm booked solid until October. But now, if you're a Communitech member, you can talk to me on Tuesdays and Thursdays (I think) for the rest of this year. I guess that gives me 52 days to change the world. :-)

And I want to thank everyone who came out for the WatStart reception in June. I was very happy with the numbers and quality of the people who were there. We've had about 60 entrepreneurs attend our get-togethers so far, and the website is averaging a few hundred page views a day, so we've come a long way after starting from scratch last year. If you haven't registered on the WatStart site yet, please do. We're not shutting down for the summer.

--Gary Will

RIM's half-billion-dollar settlement with NTP becomes unsettled
June 9, 2005

In a surprising twist, RIM and NTP have not been able to work out the details of what was announced in March as a binding term sheet that would see RIM pay NTP US$450 million to resolve all litigation between them.

At the time, RIM said it still needed to finalize terms with NTP to reach a definitive licensing and settlement agreement. It now says NTP has "refused to honour its obligations" under the agreement and wants the case handed back to the U.S. District Court in Virginia for enforcement of the term sheet. NTP says the term sheet is too vague and ambiguous to be considered an enforceable agreement.

In the time since the term sheet was signed, the U.S. Patent and Trademark Office has cast considerable doubt on the validity of almost all of the NTP patents that RIM was found guilty of infringing. None of the recent decisions of the patent office is final, however, and the reviews probably come too late to be much value to RIM, although they certainly don't help NTP.

RIM is not trying to get out of its agreement and just wants NTP to take its US$450 million and get lost. The term sheet has not been disclosed, but RIM has said the payment covers the use of the patents by all of its partners and customers, including other manufacturers of devices that use BlackBerry technology. Apparently, NTP is taking a narrower view of what the agreement covers and wants to be able to collect additional royalties from RIM partners.

RIM hits all its quarterly forecasts; sales up 68%
June 29, 2005

In the quarter ended May 28 (Q1 06), RIM reported net income of US$132.5 million (US$0.67/share) on revenue of US$453.9 million. Sales were up 12% from the previous quarter and 68% from last year, and were in line with RIM's guidance of US$430-455 million.

The numbers were padded, however, by a US$27.0 million tax recovery. Without it, RIM's profits would have been $105.5 million or US$0.53/share, which was within the range the company had predicted.

There were a net 592,000 new BlackBerry subscribers in the quarter, bringing the total over the 3-million mark to 3.1 million subscribers. That too was at the high end of RIM's forecast of 560,000-590,000. Handheld sales were up 17% from Q4 and accounted for 69% of all revenue.

RIM ended the quarter with US$1.8 billion in cash, up US$103 million from the end of Q4. Operations generated US$135.3 million in cash and US$31.3 million was spent on capital assets. Subtracting what RIM hopes will be the full settlement of the NTP litigation would leave the company with US$1.5 billion.

RIM is forecasting revenue of US$465-490 million in the current quarter -- up US$5 million from previous guidance -- and sales of US$525-550 million in Q3. GAAP earnings in Q2 are expected to be US$0.57-0.63/share.

Virtek reports stronger sales, cash flow
June 14, 2005

It was back-to-back profitable quarters for Virtek, as the company reported net income of $717,000 ($0.03/share) on sales of $13.6 million in the period ended April 30 (Q1 06). Revenue was up 4% from the previous quarter and 19% from last year, while gross profits climbed 14% sequentially.

And this time, Virtek generated cash, with operations providing $2.3 million. From that, the company paid out $1.1 million relating to its FOBA acquisition and reduced its bank debt by $0.3 million. Cash net of bank debt at the end of the quarter was $2.4 million, up from $1.4 million at the end of Q4.

R&D spending jumped 39% from the previous quarter to $1.5 million or 11% of revenue. SG&A expenses declined by a similar dollar amount, leaving over-all expenses flat from Q4 while gross margins improved to 50% from 45.6% in Q4, creating the quarter-over-quarter jump in gross profits.

Order backlog dipped slightly to $5.1 million at the end of the quarter from $5.7 million at the end of Q4. The company expects a "seasonal softening" in sales in the current quarter.

Three former Betacom executives arrested, charged with fraud
June 14, 2005

Three former executives with Betacom, a now-defunct company that evolved out of Waterloo's Control Advancements and had a R&D office in this area, were arrested by the RCMP's Integrated Market Enforcement Team (IMET). Charged with accounting fraud are the company's former CEO, CFO, and COO.

Police allege that the company overstated quarterly revenues in 2002-2003 by amounts ranging from $700,000 to $2.3 million, that it reported false revenue of approximately $1.1 million, and that it did not disclose a $300,000 loan.

Betacom shut its doors in November 2003 (see that month's digest) and went into bankruptcy a few weeks later. At the time, Betacom's CFO had just been elected the new chairman of the York Technology Association, a position which he apparently still holds, according to the YTA website.

According to IMET, when Betacom went into bankruptcy, its secured creditors were owed $6.6 million and were only able to get $5.5 million back from the liquidation of the company's assets. Unsecured creditors got nothing and lost $4.1 million. Approximately 16 employees suffered individual losses ranging from $300 to more than $41,000.

Shareholders also lost everything. Mike Stork, who has invested in a few local high-tech companies, had just been persuaded earlier in the year to put money into Betacom and join its board. If the IMET allegations prove correct, he would have made this investment based on fraudulent financial statements.

In 1998, UW spinoff Control Advancements invested in what was then Caledon-based Betacom Systems for the Disabled Inc. I talked to the Betacom CEO for several minutes at Control Advancements' 1998 fiscal year AGM because there were hardly any shareholders coming up to his booth, where he was demonstrating a video telescope. Within a year he was running the whole company. The CEO he succeeded also ended up being investigated by the Ontario Securities Commission.

Navtech reports 14th consecutive profitable quarter
June 9, 2005

Navtech reported its 14th consecutive profitable quarter in the period ended April 30 (Q2 05), with net income of US$108,000 (US$0.02/share) on sales of US$2.7 million. Sales were up 12% from the previous quarter and 35% from last year. An improvement in margins led to a 18% sequential increase in gross profits.

R&D spending grew 35% from the previous quarter to US$380,000 or 14% of revenue.

Operations consumed a lot of cash in Q2 -- US$328,000 -- and Navtech's cash position was cut in half over the quarter to US$183,000. The company raised US$257,000 in Q2 through the exercise of warrants and options. Purchase of capital assets used an additional US$108,000. DSO climbed to 68 days from 46, and the company attributed the cash shortfall to "the timing of invoicing on certain large contracts."

STOCK REPORT: Virtek shares jump on promising quarterly results
June 2005

Virtek's quarterly results led to the company's shares having their best month in years, gaining 34% to end June at their highest monthly close since September.

RIM shares continued their up-and-down ways. Over the last four months, they had a big gain in March and a big drop in April, followed by an even bigger gain in May and now an even bigger drop in June. This was their worst monthly decline since the end of 2002.

For the month of June:

Virtek [TSX: VRK] +34%
ClearFrame [TSXV: CFA] +25%
Turbosonic [OTCBB: TSTA] +15%
Navtech [OTCBB: NAVH] +14%
--S&P TSX VENTURE INDEX +5%
--S&P TSX COMPOSITE INDEX +3%
ARISE [TSXV: APV] 0%
===============================
RDM [TSX: RC] -1%
Biorem [TSXV: BRM] -2%
Dalsa [TSX: DSA] -2%
Descartes [TSX: DSG] -4%
MKS [TSX: MKX] -5%
Com Dev [TSX: CDV] -5%
RIM [TSX: RIM] -14%
Open Text [TSX: OTC] -14%

Open Text stock closed the month under $18 -- the first time that's happened in almost three years. Com Dev shares had their lowest month-ending price in over a year. For the first time this year, RDM shares traded under a dollar and finished June at $1.04.

In intra-month trading, MKS shares hit their highest levels since a short-lived jump four-and-a-half years ago when it brought in a new management team. They couldn't hold the gains and ended June down 5%.

Companies with core operations outside the area:

Blue Coat [Nasdaq: BCSI] +63%
Leitch [TSX: LTV] +25%
LSI Logic [NYSE: LSI] +15%
AMIS [Nasdaq: AMIS] +11%
Ansys [Nasdaq: ANSS] +7%
Automated Benefits [TSXV: AUT] +4%
==================================
Agfa-Gevaert [Brussels: AGFA] -2%
Siebel [Nasdaq: SEBL] -3%
SBS Technologies [Nasdaq: SBSE] -4%
McAfee [NYSE: MFE] -9%
CheckFree [Nasdaq: CKFR] -9%
Sybase [NYSE: SY] -10%
Adobe [Nasdaq: ADBE] -14%
Senesco [Amex: SNT] -18%

We've reached the half-way point of 2005, and here's how the shares of local companies have fared so far this year:

Navtech [OTCBB: NAVH] +150%
Turbosonic [OTCBB: TSTA] +54%
ARISE [TSXV: APV] +47%
ClearFrame [TSXV: CFA] +38%
MKS [TSX: MKX] +28%
Descartes [TSX: DSG] +11%
--S&P TSX COMPOSITE INDEX +7%
Virtek [TSX: VRK] +6%
===============================
--S&P TSX VENTURE INDEX -5%
RIM [TSX: RIM] -9%
RDM [TSX: RC] -9%
Dalsa [TSX: DSA] -14%
Com Dev [TSX: CDV] -18%
Open Text [TSX: OTC] -28%

Navtech stock has followed its chart-topping 217% gain in 2004 with another 150% jump so far in 2005. Over the last three years, the stock has gone up 1,200%, edging out RIM's 1,022% gain in the same period. Navtech's market value is now just under $20 million -- roughly the same as that of RDM and Virtek.

Open Text shares have plummeted 59% over the last 12 months after posting a huge gain in the first half of 2004.

Miscellaneous Tidbits

• Waterloo's Economical Insurance Group has become the first announced customer for Symbility Solutions. Symbility had announced a three-month regional pilot program with Economical in December. Symbility says its mobile claims system will now be used across Canada for property claims estimation. The companies signed a five-year contract which began in June and was described as a "multi-million dollar" agreement.

• PrinterOn says that hotel guest printed more than one million pages in 2004 using the PrinterOn Guest Printing Service. It says the service is available in over 100,000 hotel rooms across North America.

• Com Dev was no doubt thrilled to be used as the only example in a National Post column by Duncan Stewart warning investors about companies that burn cash while reporting positive earnings. Com Dev has used a lot of cash over the last year to repay an old debt and expand capacity. And then, because of production delays, it wasn't able to invoice customers as quickly as expected, which again added to its cash shortfall. Stewart said the company's stock "probably isn't some ticking time bomb" which I'm sure was a great reassurance to casual investors (well, he really did try to soften the blow by saying good things about the company's products and management). Before the story appeared, Com Dev stock was down about 15% in 2005, so investors had seemed to take account of the increased risk Stewart described.

• Descartes has repaid all of its remaining US$27 million in convertible debentures -- plus US$0.7 million in interest -- with cash. Essentially, the company never used the money and its share price has fallen so far since the debentures were issued that there was no chance of them being converted to shares. So after five years, the debenture holders got their money back plus 5.5% in annual interest. The repayment should leave Descartes with about US$25 million in cash.

• California-based RDM spin-off Xign Corp. sent itself a happy fifth birthday news release and managed to rewrite its own history. The company now says it was founded by CEO Tom Glassanos, which might come as a surprise to the people who ran RDM in those days. They were the ones who actually founded Xign and then recruited Glassanos to manage it. There was no mention of RDM in the release.