February 2004

Compiled and written by
Gary Will

Issue 84 -- March 1, 2004
In this digest:

  1. CME cuts nearly all staff after funding search fails
  2. Com Dev sees better quarters ahead; problems mar Q1 results
  3. MKS sales fall short for second straight quarter

  4. RDM reports strong scanner sales
  5. Open Text acquires Ixos
  6. STOCK REPORT: MKS and CME shares take hits on bad news

  7. Miscellaneous tidbits from RIM, ARISE, Onlinetel, Senesco, Dalsa, Dspfactory, Ergus, Fakespace, Virtek, Turbosonic, PrinterOn, IMS, LogiSense



CME cuts nearly all staff after funding search fails
 February 17, 2004

CME Telemetrix has handed termination notices to "substantially all" of its employees after it failed to raise the money it needed to fund operations. It says the terminations will take effect over the next two months and that it will not be on the hook for any statutory termination payments.

It came as no surprise to hear that the company couldn't find buyers for its planned private placement (see last four digests). The offering, headed by Vancouver's Wolverton Securities, would have seen the number of outstanding shares of CME more than double if it had been taken in its entirety. It was originally scheduled to close in December, which was postponed to January, then to February, and then finally cancelled.

For the four years from 1999 to 2002, CEO Duncan MacIntyre was paid salary and bonuses averaging $36,000 a month, which is a lot of cash to be paid to a chief executive whose company is in a pre-revenue R&D phase. Part of that includes a cut of the money he raised for CME from Motorola, even though raising cash would seem to be one of the only duties of a CEO in a company whose operations are almost entirely focused on R&D. CME's stock lost 90% of its value over those four years. MacIntyre is listed as a co-inventor on at least two CME patent applications, so he has apparently also done work as a researcher.

In November 2000, MacIntyre said he was confident that CME was just weeks away from achieving accuracy targets for its non-invasive glucose monitor that would be comparable to conventional methods. Over three years later, those targets have still not been hit and the company's accumulated deficit is now more than $20 million.

At the beginning of February, CME said it had sold some of its assets for $500,000 in cash. The only asset specified was the company's food analyzer business, which was no longer bringing in much revenue. The company has not yet told its shareholders what other assets were sold, other than describing them as "certain intellectual property rights considered non-essential."

CME says it's now looking at the possibility of being acquired and is talking to potential partners. If no financing is found, it says it will take further steps to wind down operations.


Com Dev sees better quarters ahead; problems mar Q1 results
 February 26, 2004

A jump in costs on one of Com Dev's civil space programs detracted from what was otherwise not a bad quarter in the period ended January 31 (Q1 04). The company's revenues, margins, and bottom line all took a hit from the added costs of the project, which Com Dev said was to develop a new technology for a new customer. With more resources being devoted to the troubled program, other projects were also impacted, but the company says it took the full financial impact in Q1 and it expects revenues and margins will return to normal levels in Q2.

For the quarter, Com Dev reported revenue of $22.5 million down 11% from the previous quarter but up 4% from a year ago. The revenue figure no longer includes R&D recovery, so the number isn't directly comparable to ones that have previously been reported. Under Com Dev's previous accounting methods, it looks like revenue for the quarter was $24.1 million. Separating the R&D recovery money is a good move, since the Q4 income statement made it look like Com Dev had cut R&D to the bone when it was actually receiving about an extra $1 million in R&D funding, as it did again in Q1. The higher levels of R&D recovery are expected to continue for one more quarter.

Net income was a break-even $64,000 ($0.00/share, after deducting debenture interest costs, which Com Dev doesn't do for its reported number). After all the negative impact that the rising Canadian dollar had on exports last year, in Q1 Com Dev would have reported a small net loss if it hadn't been for a foreign exchange gain. Operating income was $197,000 compared to $2.7 million in Q4.

Because of the project problems, gross margins plummeted from 23.2% in Q4 to just 17.6%, resulting in a 36% sequential decline in gross profits. Com Dev says it expects margins will be back in the mid-20s by Q2 and remain there for the rest of the year. In the conference call, CEO John Keating addressed the Q1 problems directly and didn't try to ignore them or wait until he was asked about them. Sadly, that becomes noteworthy once you've sat through scores of conference calls.

Operations generated $4.5 million in cash, down from a very strong $10.3 million in the previous quarter, but more than enough to allow the company to pay the interest on its debentures ($609,000) and the interest on its promissory note to THL ($269,000) in cash. Net cash position grew by $2.8 million over the quarter to $26.2 million. Keating said he expects the cash flow from operations will be smaller in future quarters.

Backlog at quarter-end was $93.0 million, up from $73.5 million at the end of Q4. That number is also expected to shrink through future quarters.

The company still expects to achieve 20% revenue growth in fiscal 2004. Last year's revenue was $91 million, and if you deduct $3 million for R&D recovery (Com Dev will be reporting what the actual numbers were for 2003, Com Dev will need to average about $28 million in sales for the remaining three quarters of the year to hit its target.


MKS sales fall short for second straight quarter
 February 24, 2004

MKS reported sales of US$7.2 million in the period ended January 31 (Q3 04) and a net loss of US$1.1 million (US$0.03/share). Sales were down 15% from a year ago and 5% from a poor Q2. With one quarter left in the fiscal year, MKS has abandoned its target of profitability for the year, although it expects to be profitable in Q4. This will be MKS' fourth straight unprofitable fiscal year.

Software change management (SCM) revenue fell 8% from the previous quarter and 12% from a year ago to US$5.1 million. SCM sales outside North America were particularly weak. MKS' interoperability segment reported a US$0.5 million profit on sales of US$2.2 million, up 3% from the previous quarters.

Operations used US$1.2 million in cash and MKS ended the quarter with US$5.7 million in cash.


RDM reports strong scanner sales
 February 9, 2004

For the quarter ended December 31 (Q1 04), RDM reported sales of $3.4 million and a net loss of $293,000 ($0.02/share). Sales were double that of a very weak Q1 last year, but down 4% from the previous quarter. RDM's sales have historically gone down in Q1, and this was a much smaller sequential decline that it has had in the last two years.

With a shift in sales toward lower-margin products, gross profits declined 19% sequentially. At the same time, operating expenses grew 20% which took the company into the red, down from a $254,000 profit in Q4. CEO Doug Newman said the results exceeded management's expectations.

RDM shipped over 4,000 scanners in the quarter, filling the backlog that had been created by production delays in the previous quarter. Digital imaging sales were up 6% from the previous quarter to $2.2 million or 64% of all sales. Net loss for the segment was $709,000. Electronic payments solutions revenue fell 30% from Q4 but still contributed earnings of $238,000, while sales from RDM's traditional quality assurance segment grew 2% to $641,000 with earnings of $268,000.

Operations used $389,000 in cash and RDM spent another $528,000 on capital assets. Through the quarter, the company's cash position fell by $917,000 to $4.6 million. It says it expects to fall below $4 million by the end of Q2 before becoming cash flow positive later in the year. The company still expects to report a small loss in Q2 but says it's on track for 30% revenue growth through the full year.

Following the end of the quarter, RDM settled its copyright infringement suit against Ingenico, which was filed in September 2002. RDM will receive a $200,000 license fee plus an unspecified royalty on document imagers manufactured by Ingenico.


Open Text acquires Ixos
 February 24, 2004

Open Text has successfully made its largest acquisition, obtaining 88% of Ixos Software AG under its tender offer (see previous digest). It says it will now proceed with steps to acquire the remaining shares.

About 93% of the tendered shares were in exchange for Open Text shares and warrants, which ended up being worth far more than the cash alternative.

Starting today, Open Text will consolidate Ixos financial results with its own, so it will have a month's worth of IXOS results in its quarter ending March 31. In the quarter ending June 30 (Q4 04) -- the first full quarter with Ixos results -- Open Text is forecasting revenue of US$100-110 million. By that time, the combined company will have around 54 million shares on a fully diluted basis, up from about 40 million before the acquisition. For fiscal 2005, it is looking for sales of US$420-450 million with net income of US$1.10-1.30/share.


STOCK REPORT: MKS and CME shares take hits on bad news
 February 2004

MKS shares fell 30% in the month after the company announced disappointing results for the second straight quarter, while shares in CME Telemetrix fell to record lows after the company announced that it was not successful in raising funds and was getting rid of almost all its employees.

Shares of Navtech and Virtek, which I mentioned at the beginning of January were trading below their gross profit run rates, have jumped 78% and 68% so far this year. As multiples of gross profits, the companies are now valued at 1.1x and 1.5x, respectively. RIM is up to 31x.

For the month of February:

Turbosonic [OTCBB: TSTA] +43%
Navtech [OTCBB: NAVH] +20%
Virtek [TSX: VRK] +19%
Open Text [TSX: OTC] +18%
ClearFrame [TSXV: CLF] +17%
RIM [TSX: RIM] +15%
Dalsa [TSX: DSA] +14%
RDM [TSX: RC] +10%
ARISE [TSXV: APV] +9%
--S&P TSX VENTURE INDEX +5%
--S&P TSX COMPOSITE INDEX +3%
===============================
Descartes [TSX: DSG] -4%
Com Dev [TSX: CDV] -9%
MKS [TSX: MKX] -30%
CME Telemetrix [TSXV: CEM] -55%

RIM ended the month with a market value of $12 billion. Its shares are up over 50% so far in 2004. If Open Text shares keep their value as Ixos is acquired, its value will jump to more than $2 billion.

In the August 2002 digest, I listed how the shares of the six area companies that had high-profile IPOs between January 1996 and January 1998 had fared since their IPOs. At the time, Dalsa had just overtaken RIM for top spot on the list. Dalsa is still doing well, but it's not even a contest anymore:

1. RIM +1,722%
2. Open Text +288%
3. Dalsa +239%
============================
4. Descartes -43%
5. Com Dev -65%
6. MKS -83%

ClearFrame Solutions Inc. is the new name for the public corporation that used to called Knexa. The Knexa name and product line was spun off and ClearFrame now consists of the Waterloo-based SuiteResponse business that began life as part of JPH International.

Companies with headquarters outside the area:

Blue Coat [Nasdaq: BCSI] +65%
Ansys [Nasdaq: ANSS] 6%
Network Assoc [NYSE: NET] +1%
Senesco [Amex: SNT] 0%
==================================
Sybase [NYSE: SY] -1%
LSI Logic [NYSE: LSI] -2%
Agfa-Gevaert [Brussels: AGFA] -2%
Siebel [Nasdaq: SEBL] -2%
SBS Technologies [Nasdaq: SBSE] -2%
Adobe [Nasdaq: ADBE] -3%
Bio-Rad [Amex: BIO] -4%
CheckFree [Nasdaq: CKFR] -8%
Eiger Technology [TSX: AXA] -17%
CVF Technologies [Amex: CNV] -18%

Shares in BlueCoat -- the former CacheFlow -- have now jumped almost 700% over the last year, which is even better than RIM's 600% increase. The company was founded by former UW professor Mike Malcolm, who created Waterloo Microsystems in the 1980s before moving on to Silicon Valley and launching Network Appliance. His latest company, Kaleidescape, was shopped around to investors last year and recently applied for a patent called "parallel distribution and fingerprinting of digital content," co-invented by Dan Collens who was with CacheFlow in Waterloo.


Miscellaneous Tidbits