in the wires..."Saint Paul Pioneer Press, Minn., Twin Cities Stocks Column"
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Saint Paul Pioneer Press, Minn., Twin Cities Stocks Column
RELATED SYMBOLS: (YHOO)(APAT)(DMRK)(UNPH)(PSFW)(ADCT)(ETEK)(NT)(MBRS) (LU)(JDSU)
Jan. 30 (Saint Paul Pioneer Press/KRTBN)--APA OPTICS: The quarterly earnings report released in November by APA Optics wasn't the kind that usually ignites a stock: Quarterly revenue fell to $36,000 from $246,000 a year ago; losses deepened to nearly $1 million from $660,000 a year earlier. But the news didn't stop investors from piling in. Yahoo's message board lit up, too -- some 150 messages have been posted since December.
In early November, APA's stock traded at about $6. In late December, it spiked as high as $19.50. It closed Friday at $21.50.
What's happening? It's simple: APA is positioned in one of the hottest sectors in the hot telecom equipment industry, fiber optics.
"It is the sweet spot on the sweet spot of telecom," said Bill Grierson, senior research analyst at Kopp Investment Advisors who focuses on telecom equipment.
Investors apparently like the potential of the company, which says it's getting closer to a market release of one of its fiber-optic products. Executives explained the larger losses as the result of the inventory it has built up as customers evaluate its offerings. Stocks in companies like JDS Uniphase Corp. and SDL Inc. have increased about 870 percent and 1,020 percent respectively in the past year. And JDS used its high-priced stock to buy another hot player in the fiber-optics field, E-Tek Dynamics, in a deal valued at $15 billion. That was its fourth acquisition announced in 1999.
Observers speculate that the segment's froth prompted investors to scour for similar companies, and they came up with APA along with a handful of other small stocks.
APA makes a product that increases the amount of information that can pass through a fiber-optic line. Instead of using only a single pulse of light, APA's product breaks light into colors -- or frequencies -- and reassembles the messages later, multiplying the number of messages that can be carried without laying new line.
That process, called wavelength division multiplexing, isn't new, but it's become one of the hottest products in telecom as Baby Bells try to satisfy the exploding demand to move voice and data. DWDM systems are in such demand, in fact, that biggest players aren't able to make them fast enough.
A complete DWDM system requires a number of components. What APA makes is called a multiplexer/demultiplexer -- basically two boxes that divide and reassemble the light. Anil Jain, APA's chairman and CEO, says its products improve on what's now available because they're smaller -- an important feature when telecom equipment manufacturers are trying to pack more components on a system board.
APA also has a multiplexer/demultiplexer that Jain says is revolutionary. The products now available only work on the more common single-mode fiber. APA has devised a product that works on multimode fiber. Multimode is a cheaper fiber and, potentially more important, it can send data to a satellite.
Bell Labs demonstrated a "wireless fiber-optic" system last year; it could be used to set up a complex telecom system quickly -- at the Olympics, for example, or on a battlefield.
APA's multiplexer would make such a system carry even more information. "We believe we are the show. We believe we are the game in town," Jain said. The company is testing both multiplexers -- single mode and multimode -- and hopes to start shipping in three to six months, he said.
Meanwhile, APA is pushing forward on a completely different technology called Gallium Nitride. After the compound is made, cut into wafers and divided, it can serve as a sensor for UV radiation. Among other commercial applications, APA uses Gallium Nitride to make sensors for building furnaces. It may someday make cell phones smaller and more efficient, Jain says.
APA is betting heavily on a consumer application for Gallium Nitride: It's making a watch that lets its user know when he's been in the sun too long. Dubbed the "Sun Watch," it will retail for $79.95 and be marketed to sports enthusiasts, golfers, cruise-goers and folks in sunny places. The company is talking with retailers, but it hasn't reached any agreements with a major company.
Jain acknowledges that the company lacks the management expertise to bring a consumer product to market. "Marketing is the challenge. No doubt about it," he said.
In fact, bringing products to market -- consumer or otherwise -- is relatively new to APA. That's because until a couple of years ago, APA was primarily a company committed to research. For most of its 20-year history, APA was one of the state's leaders in landing federal grants intended to help commercialize new technological developments.
Jain said that landing research grants created a comfortable business. Too comfortable. "Comfort was getting us nowhere. For real money and real growth and growth in our investors' portfolios," the company had to develop and make some products, said Jain.
Jain, a native of India who has a doctorate from the University of Rochester's Institute of Optics, is optimistic that the company can make the transition. He says the company can generate between $20 million and $35 million in the fiscal year ending in April 2001. That's selling 250,000 watches for $10 million to $20 million and $12 million to $15 million in DWDM products.
But making products move in the telecom equipment business can be tough for a small independent company, according to David Reamer, director of active components for ADC Telecommunications. Reamer should know -- he's one of the founders of Spectracom, an optics-equipment firm that he sold to ADC in 1998.
Any new entrant to the components business must first meet a set of industry standards and then pass more rigorous testing by the big telecom equipment makers like Nortel and Lucent. And getting access to those kinds of players can be difficult.
"The buzzword in the industry is `channel access.' That's what ADC brought to us at Spectacom," Reamer said. "When ADC approached us, that's what they brought home: `Look, you guys are small, and telecoms are difficult to sell to.' We agreed. We knew they would help."
And more and more, telecom equipment makers are looking for "integrated solutions" -- a package of components that includes not only mulitiplexers but other pieces as well, Reamer said. That's prompting companies to become "super-suppliers," which is why a company like JDS has been so active in making acquisitions.
If the company can get through these hurdles, the market for APA's DWDM product is white hot, according to Reamer and others. According to one forecast, the market for DWDM systems will go from $2.1 billion in 2001 in North America to $5.8 billion in 2006. The worldwide market in 2006 is predicted to hit $12.2 billion.
For his part, Jain says he's not averse to considering a buyout. Walking around APA's offices in Blaine, he chats with scientists and ticks off how much the company spent on various pieces of equipment -- $150,000 here, $200,000 there. A soft-spoken man, he grows animated when he talks about that scenario:
"Ten years ago, I would have said, `Hell no, I built this with my nails. I know every piece of equipment here.' All that," he says. "That's not my focus now. Now I want to promote this technology and to promote the interests of our shareholders."
DAMARK: Damark unveiled a broad restructuring last Wednesday, ending its catalog business and creating new divisions for its club membership business and a new e-commerce delivery service. The move paves the way for a spin-off that would create two companies and two stocks, Damark's founder Mark Cohn said in an interview Thursday.
"I think it's clear there are two management teams and two competitive sets. There are no synergies. There may be some services our e-service group can provide for a fee to our membership division. But the understanding is that these are two completely different businesses," Cohn said.
The move would make it easier for Wall Street analysts to value the parts that make up Damark. Investors have been bidding the stock up over the past months -- it's up 224 percent since early December -- on the premise that its e-commerce potential and growing membership businesses were being masked by its unprofitable catalog business.
As of Friday, Damark had a market capitalization of $171 million. Cohn says dividing the company would likely create much more value; he says analysts say each division could be worth roughly $250 million.
Damark's club membership business -- which offers discounts and information to people who pay an annual fee -- will be renamed Insyte. It will closely resemble the largest publicly traded company solely in this business, MemberWorks. MemberWorks had 5.5 million members as of Sept. 30 and third-quarter revenues of $71.6 million.
Insyte will be headed by George Richards, now Damark's president and chief operating officer. The division grew smartly in 1999, with revenue up 55 percent from 1998, to $138.2 million. Its members, who pay an average yearly fee of $66, now number 2.2 million.
But Damark's membership business also has attracted the scrutiny of the Minnesota Attorney General's office, which has led a campaign targeting companies that use individuals' financial information to sell products. Prentiss Cox, an assistant attorney general, said the state was concerned about complaints that Damark charged customers for memberships without authorization, among other things.
Cohn said they produced tapes verifying the transactions. But Damark and the state reached an agreement that governs some of the language their telemarketers will use, an agreement Cohn lauded. The state is in litigation with MemberWorks over similar allegations, Cox said.
The e-commerce fulfillment business, to be headed by Cohn and renamed ClickShip Direct, will resemble companies like PFS Web, a Plano, Texas-based company that went public in a hot IPO in December, and Fingerhut Business Services, a major player in the field.
Fulfillment companies handle backroom tasks for online retailers, from taking and processing orders to shipping to handling returns. That's become a hot sector after e-tailers learned this holiday season that getting orders filled can be every bit as challenging as getting shoppers to come to their Web sites.
Theresa Matacia, a vice president of equity research in Dain Rauscher Wessels' San Francisco office, says direct marketers who get into the field may lack some of the technical skills a PFS Web brings. Matacia follows PFS Web. Direct marketers, she says, "are not end-to-end."
Cohn says ClickDirect will offer the full array of services, from Web hosting to purchase authorization to inventory management to handling returns. Like PFS, it will offer retailers customized reports on inventory levels and customer stats. But he acknowledges that ClickDirect initially will be weaker in the "upstream" functions like Web hosting and online order processing.
If clients say they're looking for more expertise in these areas, "we will make that investment, whether we build or buy." In the meantime, Cohn says, ClickDirect's flexibility -- it can work with a firm that already has an online order processor, for example -- will be a key selling feature. Because of the company's background, "we've created a system were our technologies can plug in" to what the client needs.
By Kevin Maler
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