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Saint Paul Pioneer Press, Minn., Twin Cities Stocks Column
RELATED SYMBOLS: (YHOO)(APAT)(DMRK)(UNPH)(PSFW)(ADCT)(ETEK)(NT)(MBRS)
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
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
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,"
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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