4. STRATEGIC ALLIANCES
Throughout the summer and into this fall, one of the major concerns expressed about the feasibility of the company's plan to mirror themselves along the lines of an CMGI / ICGE business model. It was a regular topic of conversation that many people believed that the company was just too small a player to be able to attract the attention of any serious early stage financing opportunities. In addition, some argued that the company didn't have the resources necessary to manage the daunting task of analyzing the thousands of business plans a year needed to find the jewels among the rocks.
Granted, it was often conceded that the company's management team did indeed have the core of experience and background needed to help any company make the difficult transition from start up to a strong growth position. However, given their existing size it was very hard to dispute the fact that in the absence of something spectacular, Jordex's ability to attract a large number of early stage "hot" deals would likely be more of a question of luck rather than of position.
With the recent announcements of their strategic alliances with Argentum and MF Capital groups, Jordex has effectively and dramatically bridged the chasm that seemed to have stood in their way of gaining access to the good deals. These two partnership agreements instantly provide Jordex with access to large deal flows and opportunities that are the stuff of dreams.
It should be mentioned again that these two alliances were only made possible because of personal relationships between the company's management and that of Argentum and MF Capital groups. It would be very rare that other smaller companies would be afforded this opportunity. According to management of Jordex, the agreements with both Argentum & MF Capital are term agreements for multiple years. Assuming that at the end of the terms, all parties see the mutual benefit of co-investing, then the relationships are likely to continue.
MF PRIVATE CAPITAL
MF Private Capital, founded in 1998, is a Boston-based investment group lead by four experienced investment professionals. In the last 18 months, this group has invested / committed approximately $130 million. An affiliate of MF Private Capital, MFPCVI Inc., is the general partner of MF Private Capital Ventures. They have agreed that Jordex will be offered an opportunity to co-invest in the all the fund's deals. In a recently letter from Jordex, Jim Graham stated that "The amount we will co-invest with MF Capital varies each time. It depends on what portion is made available to MFPC. There is no fixed percentage."
William Staudt, president of Jordex, will join the fund's advisory committee. The majority of MF Private Capital's investments are in communications infrastructure, technology, medical device technology, and Internet B2B companies.
Although MF Private Capital is a relatively new fund it has some very impressive credentials.
The founder of MF Private Capital is Mr. Brackett. Mr. Brackett currently serves as a managing director of the fund. From February 1995 to December 1997, Mr. Brackett managed the Corporate Advisory and Investment Banking services for The Bank of Tokyo-Mitsubishi Capital Corporation (http://www.btm.co.jp/). The Bank of Tokyo-Mitsubishi is the largest bank in Asia with over $700 Billion in assets. In addition, from March 1994 to February 1995, Mr. Brackett was President and Chief Operating Officer of State Street Business Group, an well know and very successful investment banking. The other major players in MF Private Capital appear to have equally as impressive backgrounds.
MF Private Capital Inc. is an investment affiliate of Manulife Capital Corporation. Manulife Financial Corporation trades on The New York Exchange (MFC), Toronto Stock Exchange, Philippine Stock Exchange (PSE), and The Stock Exchange of Hong Kong and currently has a market capital of over $10 Billion.
From Manulife's Webpage (http://www.manulife.com/corporate1.nsf/public/millennium.html): "Manulife Financial (Manulife Financial Corporation, The Manufacturers Life Insurance Company and its subsidiaries) is a leading provider of financial protection products and investment management services to individuals, families, businesses and groups in selected international markets. Canadian-based Manulife Financial operates in 15 countries and territories world wide, with more than 28,000 employees and agents. Funds under management by the Company and its subsidiaries were in excess of $105 billion as of September 30, 1999"
The new MF Capital Webpage is currently under construction (http://www.mfpcinc.com/). From the from MF Capitals Vision Statement posted on Manulife's Webpage.
"MF Private Capital, Inc. is committed to helping emerging growth and middle-market companies establish themselves as the leaders of tomorrow. Through a combination of innovative financial strategies, resources, and advisory services, MF Private Capital delivers solutions that today's growing companies need to reach the next level of success."(http://www.manulife.com/corporate1.nsf/public/contact_us_mfpc.html)
When looking at the background of the people and companies behind MF Capital it is hard to imagine that this fund they will not have access to some of the best early stage finance deals on the street.
THE ARGENTUM GROUP
The Argentum Group, founded in 1987, has a long and successful business record. They are the general partners of four equity funds totaling approximately $420 million. Argentum, through one of its funds, was the initial investor in Medsite.com and is currently its largest shareholder. In the 13 years the fund has been running they have demonstrated a strong investment record and have built up a experienced internal staff to support companies and perform due diligence on new investments.
Argentum has agreed to offer Jordex the opportunity to co-invest with Argentum in amounts ranging from $500,000 (US) to $1 million (US) at Jordex's option, in all transactions in which Argentum has the opportunity to invest at least $2.5 million (US) to $3 million (US). Management has stated that almost all of the deals been performed by Argentum in the future will be over $3-million (US) which allows Jordex to participate in almost every deal.
Walter Barandiaran and Danial Raynor, general partners and co-founders of The Argentum Group, both served as senior executives at Steinberg & Lyman, a successful investment banking and venture capital firm prior to joining the The Argentum Group in November 1987
Jordex has agreed to grant 500,000 options to Argentum to purchase its shares for a five-year period, of which 170,000 options are subject to shareholder approval of an amendment to its stock option plan.
5. INVESTMENT IN MF PRIVATE CAPITAL FUND.
In the November 22, 1999 news release the company announced that they had agreed in principle to invest $2.2 million ($1.5 U.S.) investment in one of the new MF Private Capital funds, MFPCVI Inc. The Manufacturers Life Insurance Company (U.S.A.), part of Manulife Capital Corporation, is the indirect majority owner of MF Private Capital. They are participating in the new fund by contributing a percentage of their original deals that were sourced and are managed by an affiliate of MF Private Capital, as its equity contribution. These deals are from the communications infrastructure, technology, medical device technology, and Internet B2B sectors.
This early stage investment by Jordex in this fund has the potential for significant growth over the next several years as the new seed capital deals in the fund mature and grow. In essence, Jordex now owns a small percentage of numerous seed capital deals through this fund. Jim Graham recently stated in a letter to a shareholder that "Jordex will receive distributions from the fund as the individual investments in the fund mature"
6. MEDSITE.COM (http://www.medsite.com/):
Jordex has made an early $1.5 million pre-IPO investment in Medsite.com. On October 28, 1999 this investment was exchanged for 200,000 Class B Preferred Shares of Medsite.com.
With current revenues of ~$14-18 million for the present fiscal year, and an estimated $50 million in revenues for next year, Medsite.com is not your standard Medical website. Medsite.com is a private company that has already received coverage by Forbes, Bloomberg, CNBC, and numerous other industry publications. It also has been previously picked by CNN as one of the three top medical Internet sites. They currently have over 300,000 regular medical professional users, and receive well over 50,000 hits a day with these numbers growing daily.
Unlike most other Online Medical Sites, Medsite.com does not receive the majority of its revenue from advertising dollars. Medsite.com is firmly entrenched in business-to-business Internet sector and has a wide range of products and services. Unlike many other start up companies, Medsite.com has a relatively long and successful track record.
From a recent CBS MarketWatch article (November 2 1999) It is out belief that "the business-to-business sector is one of the hottest places to be in e-health right now"….."Medsite is the leading destination -- really a physician portal -- for medical professionals. The company has a solid business model with multiple revenue streams and real revenue."https://www.siliconinvestor.com/readmsg.aspx?msgid=11786993)
The products and services offered by Medsite.com include:
Medsite Supplies: Currently offers an electronic catalogue of over 2000 medical instruments and replacement parts from nearly 100 suppliers. It is important to understand just how big this market is. There is over $140 billion spent world wide by hospitals and medical centers on everything from tongue depressors to multi-million dollar imaging devices! What is most exciting is that Medsite.com is a market leader for these online medical sales. (http://www.medsupplies.com/)
MedBook: Offers over 90,000 medical books. TechWeb recently called them "the medical industry's Amazon.com". (http://www.techweb.com/wire/story/TWB19990331S0018)
Medsite Software: Currently carries thousands of medical software titles.
MedMoney: Offers a wide range of financial services for the medical community. This includes medical equipment leasing, practice management content, financial planning and a Medsite.com credit card.
Medsite University: Offers accredited online Continuing Medical Education. There is currently a $6 billion health care education market and this service will make engaging, affordable education a reality to over 5 million medical professionals.
Medsite Journal Tracker: A powerful service that delivers abstracts and table of contents from the choice of the world's leading medical journals directly to the clients e-mail account for a fee.
Coming Soon:
Med-Filer - The first comprehensive, secure, online insurance application,
Medsite Filer saves the user countless hours of documentation time. It allows the user to complete an online application only once, and their smart technology will adapt it to the requirements of individual payers.
Medsite Journals: Will allow electronic subscriptions to leading medical journals. Issues will be e-mailed to subscribers for a fee.
To help secure their dominance in the sales arena they offer an affiliate program (http://www.medsite.com/affiliate.cfm?FirstLevel=affiliate).
With this program, other online medical sites can offer Medsite.com's products and services under their own medical site name. Medsite.com takes care of all the infrastructure tasks such as processing all the orders, shipping, customer service, etc. For this referral service, the partner site receives 5% of the sale of books, software and journal tracking, and 1% of supply sales. For example, the book icon on the popular online Medical site Medscape.com is actually a direct link to Medsite.com's bookstore. (http://medscape.medbookstore.com/index/index16.cfm?CFID=13331&CFTOKEN=32374585&si=234&chan_id=1)
The American Medical Association recently announced a for-profit web site (http://www.medem.com/) which is destined to become one of the most popular online medical sites. Although this site is under construction they have just announced that "Consumers / Patients will be provided the opportunity to easily access and purchase various medical and pharmaceutical products, including books and educational materials created by participating medical societies, and also made available through, various partnerships established with e-commerce vendors." As the AMA has been a partner of Medsite.com since November 3, 1998 (http://www.medsite.com/company/index.cfm?page=ama), and it currently offers MedBookStore.com on their current website, then it can be assumed that it is very likely that the AMA will be offering Medsite.com products on their new site as well. This behind the scenes "supplier" form of partnership significantly adds to the bottom line of Medsite.com. In real terms, it extends their product distribution reach far beyond what they could under their own brand name. They will have the best of both worlds as they will be offering these products on their own site, while at the same time be acting as a wholesaler to their perceived competitors / partners.
The company has developed strategic partnerships and alliances with industry-leading hospitals, medical schools, associations, and health care companies from more than 60 countries. Medsite's customers include: physicians, residents, nurses, medical students, physician assistants and pharmaceutical companies. The list of strategic business partners reads like a who's who in the Medical field: America's Health Network, Medcast, Medscape, Physicians Online, WebMD, QD Online, HealthGate Data Corp, etc. Just as impressive is the list of Medical Associations that Medsite.com has partnered with: American Medical Association, American Medical Student Association, Southern Medical Association, International Federation of Medical Student Associations, European Medical Student Association, American Preventative Medicine Association.
Medsite.com has also been able to attract some impressive people to their company. Recently Gregory W. Scott, the former CFO of Prudential HealthCare, joined the company as Chief Financial Officer (http://www.medsite.com/company/index.cfm?page=91499). Mr. Scott was the person behind the sale of Prudential HealthCare to Aetna for approximately $1 billion on August 6, 1999. On December 2, 1999 the company announced the addition of Mr. Feitel, former Vice President of Suncare marketing for Schering-Plough Healthcare Products, and Ms. Klingbiel from Procter & Gamble's Health Care Division to their marketing division.
medsite.com
As mentioned earlier, on October 28, 1999 the companies $1.5 million investment in Medsite.com was exchanged for 200,000 Class B Preferred Shares of Medsite.com. It is not know at this time what the Preferred to common share exchange ratio will be but it is certain to be greater than, or equal to 1:1. This ratio will be released in the Medsite.com S1's, due out soon. The current market capitalization of online Medical companies (comparable to Medsite.com) who have already gone public can best be described as staggering:
Drugstore.com (DSCM) – current price $50 ($75Cdn), high of $70 ($105Cdn)
Market Capital - $2.1 Billion U.S (peaked $3 Billion)
Healtheon Corporation (HLTH) – current price $46 ($69 Cdn), high of $126 ($189 Cdn)
Market Capitalization - $6.8 Billion U.S (peaked over $10 Billion)
It is unknown at this time by anyone what price Medsite.com will climb to, but by any reasonable estimate, Jordex should make several multiples of their initial investment on this deal. However, I believe that it is the quality of their first financing deal that speaks volumes about the future of Jordex.
IPO DATE: In a recent press release the company stated that "it is anticipated that Medsite will complete an IPO during the first quarter of 2000" (http://www.jordex.com/news9909.html).
7. ENVIROMATION
On November 22, 1999 the company entered into a letter of intent to acquire 100 per cent of Enviromation - a private company based in Syracuse, NY. Founded in 1992, Enviromation provides system design and integration, product fabrication and maintenance services for Municipal, Industrial, Commercial water treatment facilities.
For the nine-month period ended Sept. 30, 1999, Enviromation reported revenue of $3.3 million and net income before taxes of $420,000. Revenue for the year ended Dec. 31, 1999, is projected to be approximately $5 million. According to their projected numbers, the revenue in the last quarter will be $1.7 million or 50% of the revenue of the past 9 months. These projections suggest that either this company is going to have a good quarter or they are anticipating some serious growth.
Although water treatment facilities might not sound sexy, almost every city in the modern world has at least one facility. There also has been a steadily increasing demand in the past decade for monitoring and processing control information for water systems. Many of these facilities require significant re-engineering of the existing systems or construction of new systems. Contracts for large facilities can run into the millions of dollars and there are literally thousands of facilities spread across North America alone.
Presently the industry supplying these services is highly fragmented with small firms scattered throughout North America. There does not appear to be an abundance of dominant players. The company stated in a recent release that "the acquisition of Enviromation will serve as a base from which additional growth can be achieved, both in the United States as well as the Canadian markets" and intends to "expand Enviromation's markets by expanding it distribution channels, including using the power of marketing over the Internet". Brian Hinchcliffe, chairman, stated: "It offers us the opportunity to grow the business through its existing channels of trade and to utilize our knowledge of Internet marketing to expand its marketing initiatives."
In addition to the system design/integration and product fabrication business the company has stated that it "intends to develop revenue streams by selling off-site monitoring services and providing connections and communications over the Internet."
On the Enviromation web page they state that they develop software and equipment for most common makes of SCADA software. SCADA (Supervisory Control And Data Acquisition) system refers to the combination of telemetry and data acquisition. It consists of collecting information, transferring it back to a central site, carrying out necessary analysis and control, and then displaying this data on a number of operator screens. The SCADA system is used to monitor and control a plant or equipment. Control may be automatic or can be initiated by operator commands. For more information see –
micrologic.com.ph. Although I do not have figures on revenue flow from this type of service I have found that world market for SCADA application is estimated to be in the billions of dollars.
WHY ENVIROMATION?
Although Enviromation appears to be a very solid company with the potential for large growth most investors were expecting a technology or Internet acquisition by the company and many were caught off guard and confused about the announcement of the purchase of Enviromation. I don't think many people have realized the benefits of having a core operating company, and I believe along with the tremendous growth potential this acquisition offers, the company made this purchase to satisfy two other business requirements:
Toronto Stock Exchange (TSE) Listing
What many people might not realize is that over the next 4 month an estimated 25% of the companies on the TSE will be delisted from this exchange. This action will be a result of the new Toronto Stock Exchange regulations released on October 1, 1999. These regulations state that any company not meeting their new listing requirements will be removed from the exchange on March 31, 1999. Clare Gaudet, TSE Vice-President of Corporate Finance Services recently stated that "the raising of continued listing requirements will improve the overall quality of TSE listings to ensure their attractiveness to investors."
(http://www.tse.com/news/index.html)
The company easily meets all these new requirements expect for the new rule that all companies must have at least $3 million in yearly revenue. In order to maintain their listing, the company had to acquire a core operating company with at least $3 million or more in revenues. With the purchase price of technology companies currently running 15-25 times yearly revenue, a 100% of a technology company with over $3 million in revenue would not have been possible without a large share dilution. The purchase of Enviromation solves their listing problems and also provides the company with a core operating company with the potential for significant growth.
NASDAQ Rules:
There is an old 1940 NASDAQ rule that states something to the effect that if you are just a holding company for other companies and don't have a core operating business you must pay out 90% of your earnings in the form of dividends to shareholders. Some shareholders are content with receiving steady dividends. However, for companies who attempting to grow, having to pay out much of their available cash puts a large damper on the companies potential for growth. This is because the company can't reinvest its profits back into itself. One of the main reasons CMGI bought out Alta Vista last April was so they would have a core-operating business and would not have to worry about this rule. By buying Enviromation, Jordex (like CMGI) now has a core operating which will make its move to NASDAQ that much easier.
8. INSIDER HOLDINGS:
In Canada, insider-trading reports are published by the TSE. However, in order to obtain insider-trading reports as soon as they are released, I subscribe to Carlson Online.
According to the latest insider report, these are the insider holdings for Jordex Resources.
Brian Hinchcliff: 2,274,771 shares (Co-CEO)
William Staudt: 1,300,000 shares (President, Co-CEO)
Note: 800,000 owned by Hamilton Group LLC (President -William Staudt)
Carlo Civelli: 1,731,666 shares (Director)
Note: 1,441,666 owned by Clarion Finanz AG (Beneficial Owner - Mr. Civelli)
During the past year the insiders have been aggressively purchasing shares. They have purchased ~3 million shares during this period. In addition, during the past 12 months no current insiders of the company have sold shares.
The insider purchases include:
-A private placement of 800,000 shares to Mr. Staudt
jordex.com
-A private placement of 500,000 shares to Mr. Civelli
jordex.com
As mentioned before, this aggressive buying speaks volumes about the confidence the management of JDX has in their company's future. In addition to the insiders, groups identified as "friendly hands" have also been accumulating the stock during the past year (see details below)
FRIENDLY HANDS:
Along with insider purchases, there are two groups, which I refer to as 'friendly hands' currently holding shares of JDX.
HAYWOOD SECURITIES INC (http://www.haywood.com/)
In Canada, it is possible to identify which brokerage houses have bought or sold shares in a Canadian held security. I have spent considerable time going back through all of the trading records since last June 1998. As a result of my investigations, I have found that Haywood Securities has been accumulating shares of the company since last October 1998.
According to these records, it shows that a group at Haywood Securities has net purchased ~3 million shares during the past year and is still holding these shares. These purchases have included several major crosses involving Haywood Securities at last years lows as well as numerous purchases spread across the past year:
11/03/98 - 172,000
11/03/98 - 280,000
11/03/98 - 179,000
12/07/98 - 208,500
12/07/98 - 478,500
It can be argued that a single broker house accumulating a large position in a company might not be of great significance. However in this case, I believe that the accumulation is of great significance as the head of Haywood Securities is a Mr. John Tognetti. I have been able to determine that that Mr. Civelli and Mr. Tognett have had a long business relationship and have been involved in several large promotions together in the past. For example, a joint Haywood/Civelli promotion - Novadigm (NVDM) proved to be very successful for both groups. (http://www.haywood.com/corporatefinance/novadigm.html). I find it hard to discount as just a coincidence that Haywood Securities held a large position in NIR (TSE) before it went on its amazing 2500% run last year.
In the past months, as the company's price rose to a new high and retracted Haywood Securities still net bought a total of 14,000 shares. Given their past track record, it gives me a great deal of confidence in the future of this company when I see Haywood Securities, along with the insiders of Jordex, continually accumulating and holding large amounts of JDX shares.
EUROPEAN HOLDINGS
In talks with the company, they mentioned that several large European investors were holding ~6 million shares in European holding houses. I went hunting to see if I could find the origin of those shares.
- Back in 1991, Yorkton Securities placed a total of $5.75 million US of European investors' money into 7.5% three-year convertible debentures in Jordex.
- The debenture was first priced at $3.15. In 1994, it was renegotiated for .92 US with a longer maturity date.
- In June 1997, this debenture was converted into 6,414,651 shares of JDX at ~$1.30 a share.
- When the shares where converted in June 1997, the price of JDX was $1.20. Since that time the shares have not traded above $1.20.
-During the same period that the financing was being negotiated in 1991, Mr. Civelli was involved with the company. Since he is very well known for setting up financing with Europeans it stands to reason that he was most likely the one behind this financing.
So, what does this lead me to surmise? Well, I believe that we now have several very large shareholders - likely connected to Mr. Civelli - who have been holding a significant number of shares for almost 9 years. After this length of time, investors with this size of holding would understandably expect to see a very large return on their investments. I also don't see it as just a coincidence that Mr. Civelli recently joined the board and purchased a large number of shares for himself. |
