February 2001

Compiled and written by
Gary Will

Issue 48 -- March 12, 2001
In this digest:

  1. STOCK REPORT: Black February leaves losses across the board
  2. Waterloo gets locally-managed $23 million venture fund
  3. Descartes forecasts 75% sales growth, US$20M profit this year
  4. Vertical Sky "a mistake" says new MKS CEO
  5. MKS raises $12.5 million through warrant offering

  6. Com Dev says 3G slowdown will erase expected profits this year
  7. RDM reports operational losses, first Web transaction fees
  8. Switchview becomes part of MDR Switchview; trades on CDNX
  9. NDI acquires German business unit, creates European office
  10. Navtech acquires Montreal-based aviation software developer

  11. Miscellaneous tidbits from RIM, Ignis Innovation, Web Pearls, Freedom Intelligence, Agile, Mitra, Virtek, Nanodesign, GUARD, Inscriber, PrinterOn, CME Telemetrix


STOCK REPORT: Black February leaves losses across the board
February 2001

For the first time since I started keeping these lists in 1997, every stock tracked here showed a decline last month, with seven companies losing at least a third of their value in February. And it was some of the area's most valuable companies that were hit hardest.

Com Dev, the stock market success story of 2000, saw its recent slide accelerate in response to problems at Nortel, one of Come Dev's major customers. Shares in Com Dev are down 59% over the last three months and their $7.40 closing price in February was the lowest monthly close since June.

For the month of February:

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EMJ [TSE: EMJ] -4%
Dalsa [TSE: DSA] -4%
GUARD [CDNX: GUA] -5%
Open Text [TSE: OTC] -6%
Navtech [OTCBB: NAVH] -8%
Gensel Biotech [CDNX: GSB] -9%
CME Telemetrix [CDNX: YME] -10%
Virtek [TSE: VRK] -22%
Treasury Int'l [OTCBB: TREY] -26%
MKS [TSE: MKX] -28%
Finline [CDNX: FIN] -33%
RecycleNet [OTC: GARM] -36%
Turbosonic [OTCBB: TSTA] -37%
RDM [CDNX: RC] -38%
RIM [TSE: RIM] -41%
Descartes [TSE: DSG] -45%
Com Dev [TSE: CDV] -47%

Descartes shares were also hit hard, ending February at $23.25 --their lowest monthly closing price since November 1999. It was the largest monthly drop in company history, beating November's 40% loss. It was a year ago last Saturday that Descartes shares hit their all-time high of $134.95. So far in March, Descartes has regained about an eighth of its losses of last month, but as of last Friday's close its shares were still trading below their lowest price in 2000.

RIM's 41% drop was its second-worst ever. And its closing price of $59 in February was its lowest monthly close since May and its second-lowest since October 1999.

Treasury International's 1-for-100 reverse split that was scheduled for February didn't occur until earlier this month, and the company's shares are down nearly 50% so far in March.

As you could probably guess, there isn't a single company on this list whose shares went up in value over the last 12 months (other than GUARD, but that's was a fluke of timing since it had an outlier low closing price in February 2000).

Companies based elsewhere but with development offices in Waterloo didn't fare any better in February:

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CheckFree [Nasdaq: CKFR] -13%
Sybase [Nasdaq: SYBS] -22%
Cisco [Nasdaq: CSCO] -37%
Siebel [Nasdaq: SEBL] -42%
Cyberplex [TSE: CX] -43%
CacheFlow [Nasdaq: CFLO] -62%

Cisco shares have already fallen another 13% so far in March. The $540 million in Cisco shares that PixStream shareholders received in December have a value of approximately $218 million today -- about a 60% drop in three months.


Waterloo gets locally-managed $23 million venture fund
February 7, 2001

A $23 million venture fund that will invest in early-stage Waterloo-area technology companies has been launched by Andrew Abouchar, fund manager of Waterloo Ventures, and Tim Jackson, previously CFO of PixStream.

Abouchar and Jackson will manage the fund, called Waterloo Tech Capital, through their new company, Tech Capital Partners Inc.

It's an actual fund with actual money -- unlike ones the National Post seems to like to write about in this area (disclosure: I worked with Tech Capital Partners as it was attracting investors and continue to work with them). Waterloo Tech Capital is about five times the initial size of Waterloo Ventures, which will also be managed by Abouchar and Jackson.

The new fund will focus on very early stage technologies and use its local presence to work closely with company founders to build complete companies around core technologies with large market potential.

The fund's advisory board consists of Doug Wright, UW president emeritus and director of RIM and Com Dev, Peter Schwartz, CEO of Descartes, Brad Siim, co-founder of PixStream, and Richard Black, VP of Helix Investments and director of Open Text.

Lead investors are OMERS and Cranston, Gaskin, O'Reilly & Vernon Investment Counsel of Toronto. The fund is accepting additional investments of least $250,000 from local individuals and other investors.


Descartes forecasts 75% sales growth, US$20M profit this year
March 6, 2001

Coming off its first profitable year (excluding acquisition-related expenses) in five years, and its first ever as a public company, Descartes is forecasting even stronger growth in sales and profits for the current fiscal year.

For the year ended January 31, Descartes reported revenue of US$66.6 million, of which US$19.8 million or 30% was generated by transactions across the company's Global Logistics Network. Total revenue for the year climbed 73% from the previous year, or 163% after contributions from Descartes' DSD business unit (spun off last spring) are excluded.

Excluding acquisition expenses, the company reported an annual net profit of US$1.6 million (US$0.04/share), all of which was created in Q4 where Descartes reported a net profit of US$3.9 million on sales of US$21.0 million.

Network revenue in Q4 increased 20% sequentially to US$6.1 million, while combined licence and network revenue jumped 30% from the previous quarter to US$17.95 million. A year ago, Descartes forecast that network revenue would account for half of the combined licensing and network sales in Q4. Its actual contribution was 34%, but the combined licensing and network revenues were much higher than initially forecast.

At the end of the quarter, Descartes had US$231.9 million in cash and short-term investments, down US$26.5 million over the quarter. About US$17 million of that cash went toward the acquisition of BCE Emergis' transportation logistics messaging services in December. The company says it had operating cash flow of US$4.3 million in Q4, up from US$1.1 million in Q3.

For fiscal 2002, ending next January 31, Descartes is forecasting total revenue of US$115-120 million -- about a 75% increase. Network revenue is actually forecast to drop as a percentage of total sales to 25-28% or US$30-32 million, down from 30% in fiscal 2001. That's despite the fact that the network just picked up more than 2,500 new customers with the BCE Emergis acquisition.

The biggest revenue gains are expected from licensing, forecast to grow to US$71-78 million for an increase of about 135% above fiscal 2001.

Operating profits are expected to be about US$0.39/share, which would be nearly US$20 million with the number of shares currently outstanding.

In the conference call, CFO Colley Clarke said Descartes acquired Illinois-based iLink Global/TraffiCop in November for US$15.6 million in an all-stock transaction. This came as a bit of a surprise since there's been no announcement of any such deal -- no news release, no SEDAR filing, no mention on Descartes' Web site. Descartes has also agreed to invest US$2.5 million in two TraffiCop spinoffs.

Descartes also invested US$2.5 million in logistics software developer Sameday (a product of the Idealab incubator) as part of that company's US$20 million third round of financing which closed in January. Sameday is based in the Los Angeles area. Descartes will integrate Sameday software into its new Internet-based real-time inventory sourcing product.


Vertical Sky "a mistake" says new MKS CEO
March 7, 2001

Phil Deck, MKS' new CEO, has quickly decided to pull the plug on Vertical Sky. The company's Web application management products will go back under the MKS name, and Vertical Sky (which, combined with MKS' recent fortunes, had inspired such kick-em-while-they're-down parodies as Vertical Slide and Horizontal Slab) will eventually disappear. Plans to spin it off as a separate company have been scrapped.

"The strategy shift was unsuccessful," said Deck in an understated moment in MKS' quarterly conference call. He said one of the key problems was that the company abandoned its existing customer base and the salesforce became detached from the market. Deck described the corporate infrastructure had been put in place as "better suited to a much larger company."

The full magnitude of MKS's dire financial circumstances that led to its financing and restructuring last month became clearer with the announcement of results for the quarter ended January 31 (Q3 01).

For the period, MKS revenues slipped to their lowest point in three years -- US$6.4 million -- a 18% decline from the previous quarter and a 41% drop from a year ago. Product sales slipped 25% sequentially and 54% from last year to just US$3.4 million.

With high-margin software sales contributing a smaller portion of revenues, gross profits fell by 23% from last quarter and 50% from a year ago.

Loss from operations was US$3.0 million, down from US$5.4 million in the previous quarter when MKS recorded a one-time US$2.5 million writeoff of bad debt. Expenses were also lowered by a 31% cut in sales & marketing spending -- attributed partly to staff reduction.

The balance sheet shows US$5.5 million in cash, which pretty much tells the tale since that includes the US$3.1 million MKS received from its new investors in January. The company was nearly running on fumes.

In Q3, MKS' interoperability unit (formerly MKS Software) contributed US$3.3 million or 53% of sales and reported a net loss of US$37,000. The software configuration management segment (formerly Vertical Sky plus whatever's left of SDM) reported a loss of US$4.0 million on sales of US$3.0 million.

Deck says the company is hiring R&D staff "aggressively" and now has 230 employees worldwide. Management's top priority is to grow licensing sales, but Deck said that we shouldn't expect to see significant improvement in revenue in the current quarter.


MKS raises $12.5 million through warrant offering
February 23, 2001

MKS got another much-needed boost to its balance sheet by raising $12.5 million (gross) through the sale of 9.26 million warrants at $1.35 each. Each warrant is convertible into an MKS common share.

With last month's financing and this warrant sale, MKS will now have 40.5 million shares outstanding once all warrants are exercised -- more than double the 17.4 million shares that were outstanding just six weeks ago.


Com Dev says 3G slowdown will erase expected profits this year
February 28, 2001

With the delayed rollout of 3G wireless systems worldwide, Com Dev says it now expects its operations will only break even in the current fiscal year, ending October 31. The company had previously forecast a profitable year.

In a conference call, Com Dev management said that delays in 3G spending have led to increased business for 2G and 2.5G technologies, but while revenue targets remain the same, the new 3G systems have the highest profit margins, so the change in the mix toward lower margin products will eliminate the profits that had been expected.

Com Dev also said that the ramp up of its wireless facility in Suzhou, China has "proved to be complex" and that "new executive resources" from Com Dev Space have gone to China to assist the wireless team.

CEO Keith Ainsworth emphasized that M/ERGY, Com Dev's wireless Internet product scheduled for launch next year, is not 3G technology and may even benefit from the delays in 3G deployment.

For the quarter ended January 31 (Q1 01), Com Dev reported sales of $60.0 million, up 43% from a year ago but down 12% from the previous quarter, which Ainsworth called a "normal cyclical decrease."

Com Dev Wireless wasn't affected by this cycle and reported the highest revenues in its history -- $32.1 million, up 6% from the previous record in Q4. Wireless accounted for 53.5% of sales, with the balance coming from Com Dev Space.

Space sales dropped 27% from a very strong previous quarter, a higher drop than the division has usually recorded between Q4 and Q1. Its order backlog was $102 million, down from $114 million at the beginning of the quarter, which means the division booked about $16 million in new business during Q1. Division president John Keating says his group should surpass the target of 15% revenue growth for this year.

Com Dev reported a net loss in Q1 of $453,000 ($0.01/share), but an operational profit of $45,000.

The company had $2.3 million in cash at the end of the quarter, more than offset by bank indebtedness of $8.7 million. Inventory jumped by $13.6 million over the quarter to $73.0 million, which management said it is working to reduce.

Expenses climbed 25% sequentially, which was attributed in part to M/ERGY development costs. M/ERGY will be unveiled at the CTIA (Cellular Telecommunications & Internet Association) Wireless 2001 tradeshow next week in Las Vegas.

Com Dev also announced that it has partnered with Alpine PCS Inc. of Santa Barbara to perform alpha and beta trials of M/ERGY in California's San Luis Obispo County (which is also the site of Com Dev's Digital and Software Systems Development Center -- the former Lober & Walsh Engineering that Com Dev acquired in 1999). The trials are scheduled to be completed this year and Alpine is expected to be the first U.S. company to purchase the M/ERGY system.


RDM reports operational losses, first Web transaction fees
February 20, 2001

For the quarter ended December 31 (Q1 01), RDM reported sales of $1.4 million, up only 3% sequentially and 18% from a year ago. Gross margins plummeted from 63% in both Q4 and a year ago to 23%, leaving gross profits of just $332,000, down 62% from the previous quarter. No explanation was provided for the drop.

Net loss from operations was $1.5 million ($0.10/share), although RDM says that number would be about $1 million less if Xign-related expenses were excluded. RDM stopped including Xign results in its financial statements midway through the quarter.

The good news in Q1 was growth in the company's point-of-sale systems, which, with the spinoff of Xign, is now RDM's growth segment. POS sales climbed 39% from the previous quarter and 46% from a year ago to $620,000 or 43% of sales, up from 32% in Q4. The POS sales include RDM's first transaction fee-based revenues from its Web-based payment archive service.

RDM is still sitting on a lot of cash, following its warrant offering last September. The company had $16.4 million in cash at the end of the quarter and net working capital of $17.3 million.

Company co-founder and ex-CEO Pat Pavlik did not stand for re-election to the board at this year's AGM.


Switchview becomes part of MDR Switchview; trades on CDNX
February 21, 2001

After some delays and renegotiations, the complex merger-acquisition-financing deal between Switchview, Aquilium Software, MDR Technologies, and Netperforma Corp. (see last digest) has been completed. Switchview is now part of MDR Switchview Global Networks Inc., which trades under the ticker symbol MSW on the Canadian Venture Exchange.

In the end, Switchview shareholders ended up with nearly 50% of the amalgamated company, as was forecast. Shareholders of the other companies in the transaction all received a smaller stake than originally expected.

The financing raised $18.6 million through the sale of 116.25 million Aquilium preference shares that became 5.8 million shares in MDR Switchview. An additional $1 million was raised through 12% (plus "bonus interest") subordinated debentures. The financing was less successful than forecast last month ($25 million through shares and debentures combined), but larger than was feared in a news release sent out early in February ($15.3 million). Trilwood Investment of Toronto invested $7 million, but other investors have not been identified.

The new investors can also purchase an additional 109,000 MDR Switchview shares for $3.20 a share over the next five years. Yorkton Securities, the agent for the placement, received options expiring in two years to purchase 552,000 shares at $3.20, while Clairvest-Yorkton received options to purchase 125,000 shares at $3.20 until February 2006.

So far, Aquilium's shareholders have come out on the short end, seeing their shares go through the equivalent of a 1-for-29.5 reverse split with shares valued well below their recent market price. Adjusting for the merger, Aquilium shares had traded at $9.73 at the end of January and $5.30 at the end of February, and are now trading at $4.00. It was Yorkton that formally advised Aquilium's board that the deal was fair to Aquilium shareholders. Aquilium shareholders will be able to purchase additional shares in MDR Switchview for $3.20 a share under a proposed rights offering.

Switchview founder Art Linton was originally expected to be the combined company's third largest shareholder, but his name vanished with no explanation from a revised list distributed on February 8. Bell Canada, TD Capital, and Jefferson Partners are now listed as the largest shareholders.


NDI acquires German business unit, creates European office
February 27, 2001

Northern Digital has acquired the 3D optical localizer business unit of Germany's Rohwedder Visotech. Financial details were not disclosed.

The acquisition will become NDI Europe, based in Markdorf, Germany, and operate as the company's European sales & marketing office.


Navtech acquires Montreal-based aviation software developer
February 5, 2001

Navtech has acquired Airware Solutions Inc. of Montreal, developers of crew scheduling software for the aviation industry.

Navtech paid Airwave shareholders $50,000 in cash, 133,560 Navtech shares (valued at about $200,000 at the time of the transaction), and warrants to purchase an additional 56,000 shares at an exercise price of US$1.25 a share.

It also issued 76,323 shares (valued at about $50,000) and paid $112,000 in cash to settle some of Airwave's existing commitments.

Derek Dawson, who had been Navtech's president and COO, has stepped down from those roles to become managing director of Airwave and executive VP of business development at Navtech.

Airwave was founded in 1986 and its competitors include AD OPT Technologies, also of Montreal.


Miscellaneous Tidbits