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Gold/Mining/Energy : CSI Credit Systems CSU.VSE

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To: Ally who wrote (74)6/14/1999 5:10:00 PM
From: Stephen O  Read Replies (1) of 90
CSI credits engineer for buyout situation - The Vancouver Sun

Alan Daniels Vancouver Sun

Glenn Baglo, Vancouver Sun / WINNING HAND: Mike Lukas flashes flush of loyalty cards.

Mike Lukas is a man with a $15-million brain.

That's the price Royal Bank of Canada has offered for Credit Systems International Inc., the Burnaby-based electronic marketing company Lukas, its software developer, co-founded 10 years ago.

The $1.30-a-share offer will be mailed to shareholders Tuesday. Last year, CSI shares traded at an average price of 96 cents on the Vancouver Stock Exchange.

CSI directors are recommending acceptance of Royal's offer, but dissident shareholders say they will hold out for a higher price.

John Pryde, investment advisor for Vancouver-based Canaccord Capital Corp., whose clients control 30 per cent of CSI shares, believes $2 a share is more realistic.

"This company has just started its rapid growth phase," Pryde said in an interview. "They are close to significant contracts for their software and it would be very valuable to the Royal Bank, because it can, with its marketing muscle, really put it to work.

"Mike Lukas is a genius. I have heard from other engineers he is one of the smartest on the west coast of Canada -- or the U.S. -- in his area."

Although he founded the company and has developed all its software to date, Lukas is not CSI's chief executive, nor does he wish to be, nor is he the company's largest shareholder.

He describes himself as a hands-on engineer, a man who takes ideas and builds things. Initially, he worked for two years, with no income, developing and manufacturing the company's first product, custom designed software for the parking-lot industry.

For years, when he was trying to expand CSI, he wasn't even among its highest paid employees.

"He's the technical brains; he's the guy who developed the technology and where it came from," said CSI president and CEO James Christensen, who was controller of Blackcomb Mountain until he joined CSI four years ago.

"There's a recurring joke around here: 'If Mike gets hit by a bus, it's over.'

"When it comes to the impact some of the rest of us have, it's an issue of vision: Where do we go with these brains?"

The Royal offer, which expires July 6, needs 75 per cent acceptance to succeed.

Pryde believes the bank could generate potential revenue of $40 million to $50 million a year in transaction fees from its 95,000 retail merchant customers in Canada and 200,000 in the U.S. once it controls CSI's ERNEX point-of-sale software, which Lukas designed.

Customers for ERNEX, which operates in restaurants and retail outlets throughout North America, include Original Levi's Stores, Nike and Superstar Group Ltd.

"They [Royal would pay for this [acquisition] in a very short time," Pryde said.

A point-of-sale terminal is the machine at the store checkout counter that swipes your credit or debit card. What ERNEX does, when used in tandem with a credit card, is promote loyalty for the retailer by offering instant rewards such as electronic coupons.

In addition to processing debit- and credit-card transactions, ERNEX also collects and "warehouses" transaction data about a store's customers, used for developing market strategy.

Analysts say effective loyalty programs result in incremental spending by customers, more dollars spent more frequently.

"What I like about this company is its entrepreneurial spirit," said Frank Moore, Royal's vice-president of merchant and point-of-sale services. "It's important the company remains intact. It's a good fit with their electronic loyalty marketing technology and our merchant payment business."

Lukas supports the takeover, noting CSI will continue to operate under current management as a wholly-owned subsidiary of Royal Bank.

He believes CSI shareholders should accept the offer.

"No one can say it is not a good return on investment, but it's not the home run, that people look for when they invest in a VSE company," he said.

"Is it worth giving up something we dreamed would be a $10 stock? It will be the shareholders' decision.

"In terms of the management decision to endorse the offer, we looked at it from the point of view that it gives an opportunity to do what we have been preaching for a couple of years: A chance to attack the market and grow more quickly."

Lukas said a small company is only as valuable as the people who work for it. "If there is interference, people will be disillusioned and start to walk away," he said. "If the people leave, the bank's investment is worthless.

"What the bank is buying is a concept. We have some technology and customers, but basically it's still very much a concept, but it's a concept that fits well with where it wants to go."

Lukas was one of the first graduates of SFU's engineering program in 1989, but he says what he came away with was worth more than a degree.

"You graduated from that program with the mind-set that you had to create an opportunity; you didn't just go and work for somebody else," he says.

What he created, initially with three SFU buddies who have left the company, was ENSC Ventures, now a wholly-owned subsidiary of CSI.

Last year, CSI lost $513,000 despite "historic high" revenues of $2.2 million. According to its annual report, the loss was "primarily due to research and development."

"I have been, all along, responsible for the technical side of the company," he said. "I have designed myself, or played a large role in designing, everything we have done.

"I have never been in this for the money. If that was the case, I would have got off long ago. People kept telling me I was stupid to stick with it so long."

"My father instilled in me this sense of responsibility that once you start something, you finish it, and do the best you can.

"Until I have been able to build something that's a success, I am not going to walk away."

Now that's loyalty.

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