prime - I appreciate your optimism, however
I still maintain that our folks at IMSC got hoodwinked on the P.P. loan.
I think they were set up, actually.
It is all unraveling now IMO
You can see here P.P. Is well experienced at being cute:
June 26, 2000 12:01 a.m. ET
Let's Make a Deal
Who are the real winners when ailing U.S. companies merge with Israeli start-ups?
By Jacqueline Doherty and Bill Alpert
H ow does a tiny company on the verge of being delisted from Nasdaq suddenly boast a market capitalization of almost $1 billion? A group of U.S. investors and Israeli companies have discovered a cookie-cutter formula for such financial success, and they've used it three times. Involved in each deal are David Bodner and Murray Huberfeld, investors with checkered pasts. Also figuring in each transaction, directly or indirectly, are David Rubner, the former head of ECI Telecom , one of Israel's largest telecom companies, and Rabbi Irwin Katsof, executive vice president of the Jerusalem Fund of Aish HaTorah, a prominent Jewish charity.
Here's how it works: A struggling publicly traded U.S. company with few shares outstanding issues millions of new shares to acquire a foreign company with little operating history and no reported profits. The U.S. company's shares rise as press releases promote the acquired company's technological prowess. If the technology companies succeed, all will make money. But even if the shares subsequently fall to $2 or $3, company insiders could reap millions because of the huge blocks of cheap shares they own.
Broad Capital, Bodner and Huberfeld's New York City-based investment firm, appears to have been instrumental in these deals, commonly called "reverse mergers" or "reverse acquisitions." (Neither Bodner nor Huberfeld returned our calls for comment, nor were they in when we visited their plush West 57th Street offices last week.) True or not, one thing is certain: Their wives, Naomi Bodner and Laura Huberfeld, own large blocks of stock in the one deal that has progressed far enough to require disclosure of shareholders. Indeed, their holdings of Multimedia KID are worth $7 million each, despite the recent collapse in the value of its shares, to 2 1/16 from a high of 7 7/8 in February.
The three U.S. companies involved in these reverse mergers with Israeli tech firms are Western Power & Equipment , a distributor of heavy equipment, Sensar , known as a maker of measuring devices, and Jenkon International, which once made software for marketing and direct-sales companies. Last year, the shares in all three companies traded as low as 1 1/2. In April, Western Power & Equipment had a $14.9 million market cap. In October 1999, Sensar was valued at $18 million, and in August 1999, Jenkon was worth $9.8 million.
Each has now completed, or is completing, a reverse acquisition. In April, for example, Western Power struck a deal with e-Mobile, which hopes to produce handheld devices to access the Internet. Western's shares rose to a high of $10 on May 1, ballooning its market cap to $553 million. Recent price: 6 11/16.
In October, Sensar struck a deal to merge with Net2Wireless, a company that plans to compress data so that cellular operators can offer high-speed data transmission and access to the Internet on existing phones and other communications devices. Sensar shares rose as high as 89 7/8 in March, giving it a $3.9 billion market cap at the time. Recent price: 22 1/8.
In December, Jenkon completed its reverse acquisition with Multimedia KID, which develops interactive learning software for children and adults, and its shares rose to 4 9/16. They continued to climb to a high of 7 7/8 in February, for a $269 million market cap. Recent price: 2 1/16.
No Scrutiny
For years, private companies have done reverse acquisitions with public companies, to gain access to the public market. But the method sometimes raises warning flags because it allows the private companies to circumvent the scrutiny linked to an initial public offering.
But Nechemia Davidson, chief executive of Net2Wireless and the founder and chairman of e-Mobile, insists that this isn't the case with any transaction he's involved with. He says the reverse merger will allow the participants to access the public market quickly. "We have a very strong window right now because we have a very strong technology," he says. Being public, he adds, will allow his company to offer employees stock options and thus attract the best people.
Perhaps. But the bona fides of financiers Huberfeld, 39, and Bodner, 43, don't exactly inspire confidence. Two years ago, the Securities and Exchange Commission alleged that the pair had covertly received over 513,000 shares of restricted stock as collateral for a loan to a director of a company called Incomnet. The two immediately sold the shares in the now-bankrupt long-distance reseller for a profit of about $3.7 million, in violation of securities laws, according to the SEC complaint.
Broad Capital also was cited for failing to disclose, as required by law, that it held over 5% of Incomnet's outstanding securities. Broad, Huberfeld and Bodner settled the case without admitting or denying the SEC's allegations and were ordered to disgorge their profits, plus interest, which together totaled $4,649,125. Civil penalties also were imposed: Broad was ordered to pay $50,000; Huberfeld and Bodner, $15,000 each.
As a result, the pair were automatically "statutorily disqualified" from working for a broker licensed by the National Association of Securities Dealers.
Huberfeld and Broad Capital had another brush with the law in 1996, when they were targets of an SEC administrative complaint related to Wye Resources, a heavily promoted Canadian firm that claimed interests in various gold- and diamond-mining properties. "Broad Capital was aware of, and participated in, Wye's promotional efforts in the United States," the SEC alleged. The firm was also charged with buying unregistered shares of Wye at a discount and mischaracterizing the purchase as a loan. Without admitting or denying the commission's findings, Broad Capital and Huberfeld consented to the issuance of an order finding that they violated Section 5 of the Securities Act and they agreed to disgorge $426,790, representing profits made as a result of the transactions in Wye stock plus interest.
And in 1992, Bodner and Huberfeld pled guilty in Federal court in Brooklyn, New York, to possession of false identification with the intent to defraud. The duo got snagged having imposters take the Series 7 securities brokers' examination in their stead. Each was sentenced to a minimum of one year's probation and fined $50,000.
Anatomy of a Deal
That doesn't seem to have slowed them, however. Consider the Jenkon International deal, which the Jerusalem Fund's Katsof recalls was "made available" to him by Huberfeld and Bodner. A little over a year ago, Jenkon shares were trading at 1 1/2. Then, on August 26, the reverse acquisition with Multimedia KID was announced. A Jenkon press release issued at the time noted that Multimedia KID was "awarded the prestigious Computer Software Award from the Office of the Prime Minister of Israel for the category of Special Innovation and Invention in Education."
As part of the deal, Jenkon issued 840,000 common shares to Multimedia KID shareholders, along with preferred stock that converts into an additional 24 million Jenkon shares. If the preferred stock were converted, Multimedia KID shareholders would own 83% of Jenkon. The deal later included a $4.5 million private placement of notes that convert into 4.5 million Jenkon shares.
According to SEC filings, former ECI Telecom chief David Rubner consented to become non-executive chairman of the newly combined company at the conclusion of the deal. Rubner, who stepped down from his post at ECI in February, had been with that Nasdaq-traded company since 1970 and was named chief executive in 1991. During his tenure as CEO, he is credited with expanding ECI's revenues from $74 million to $1.2 billion. Rubner also serves as chairman of Net2Wireless and, if the reverse acquisition with Sensar is completed, he's slated to chair that combined entity, as well. Rubner says he was introduced to Huberfeld and Bodner through a friend, whose name he declines to reveal. He says he was unaware of the duo's history with the SEC. "As far as shareholders are concerned, we cannot check their history," he told Barron's .
Jenkon completed the reverse acquisition and the $4.5 million private placement in December, and the Jenkon software business was sold to executives in the predecessor firm. Shares of Multimedia KID hit a high of 7 7/8 February 14.
Press releases about the deal fail to reveal much about the business or its finances. But according to SEC filings, for the six months ending June 30, 1999, about 44% of Multimedia KID's $747,743 in revenues came from Romania, 33.6% from the U.S. and 19.8% from Israel; and 97.7% of the company's sales during that period came from just three unidentified customers. A more recent SEC filing shows that the company had a loss before discontinued operations of $5.75 million and "generated only limited revenues from the sale of products, services and marketing rights" in the nine months ended March 31, 2000.
Earlier this month, Multimedia KID filed with the SEC to register 13,283,239 shares for sale. The shares result from the conversion of the preferred stock and the private placement. The registration, which isn't yet effective, makes for interesting reading. Listed as the largest shareholder is Zehava Rubner, David's wife, who owns 6,818,606 shares, a 19.9% stake, valued at $14.1 million by today's market. Of her total holdings, 2,650,000 shares will be registered.
Also on the shareholder list are Naomi Bodner and Laura Huberfeld, who each own 3,409,302 shares, with a combined value of $14.1 million. Each will register 1,325,000 shares.
Another name on the shareholder list is Robert DePalo, who owns 829,848 shares, all of which will be registered. DePalo is chairman of Equilink, a New York City investment firm, which was an adviser on the Multimedia KID deal. Says he: "By all predictions, the company should be profitable by the fourth quarter of this year, based on information given to me by the CFO."
Table:
Urge to Merge
The highest profile name on the shareholder list, however, belongs to Irwin Katsof, 45, who is shown as owning 200,000 shares, half of which will be registered for sale. Rabbi Katsof says some of those shares are owned by the Jerusalem Fund, which he heads, and says the charity is also invested in the Net2Wireless and e-Mobile deals.
Katsof prominently displays photos of himself with the likes of comedian Jerry Seinfeld, former British Prime Minister Margaret Thatcher, boxer Muhammed Ali and talk-show host Larry King in his midtown Manhattan office, across the street from the Broad Capital offices. Indeed, Katsof is the co-author, with King, of the popular book Powerful Prayers, which details the prayers of the rich and powerful.
Katsof says that Bodner and Huberfeld "are among the top philanthropists in the Jewish world." He adds: "David and Murray are known as upstanding individuals. They're friends. I trust their judgment."
"Worth a Lot of Money"
The second deal, between Sensar and Net2Wireless, was announced on October 7, 1999. Sensar, formerly known as Larson-Davis, had been involved in the design, development, manufacturing and marketing of analytical scientific instruments. Six months earlier, Sensar had executed a 1-for-5 reverse split and its board of directors resigned. Taking over as chief executive was Howard Landa, a partner at Sensar's outside law firm. Sensar then began selling off its various operations and looking for other acquisitions or investments. During the September 1999 quarter it had no sales from continuing operations, but held cash and cash equivalents of $3.17 million.
Then came the announcement that Sensar would buy all the outstanding shares of ITES, now known as Net2Wireless. As part of the deal, Sensar would issue 17 million shares (adjusted for a subsequent split) to ITES stockholders. Another million shares would be given to unnamed parties who helped structure the deal.
"Net2Wireless was introduced to us by Broad Capital," says Sensar's Landa. Broad, he says, had invested in Sensar's predecessor and had approached him with a number of Israeli reverse-acquisition candidates. Landa says he liked the technology offered by Net2Wireless and met with Net2Wireless CEO Nechemia Davidson and Broad Capital in New York City. "My first attraction to the company was [David] Rubner because of his experience with ECI Telecom," says Landa.
Upon closing, Net2Wireless' officers, including Davidson, will take control of Sensar. Davidson, who told Barron's he worked for Israel's Ministry of Defense from 1987 into the mid-1990s and was involved with communications, data compression and encryption, says. "I searched for capital, and I met David Rubner, who was head of ECI." He adds that Rubner knew the U.S. investors and introduced him to Sensar. Davidson insists he knows nothing about Huberfeld's and Bodner's past run-ins with the SEC. "They're not active shareholders," he says. "It's David Rubner who's important."
Net2Wireless is developing a technology to compress data and transmit it wirelessly. Its hope is that cellular phone companies will buy its equipment to transmit video and the Internet over today's existing second generation, or 2G, devices. Most analysts don't expect wireless systems to be able to offer such services until 3G equipment is deployed, sometime in the next two to three years.
Sensar's shares started moving north after it announced that ITES had entered into a development agreement with Partner Communications, the Israeli affiliate of Orange, the British wireless operator. Net2Wireless will test, at its own expense, its streaming multimedia platform on Partner's system. In return, Partner received an option to purchase 7% of the company's outstanding stock at an exercise price of $5.5 million. At today's price, those shares would be worth about $67 million.
"It is in the first stages of testing, but we have not been disappointed," says Dan Eldar, vice president of carrier and international relations at Partner. One Partner unit is currently helping 12 startup companies to develop technology. And on Thursday PelePhone Communications, an Israeli cellular carrier, said it had installed Net2Wireless' technology and would begin pilot testing.
In late March, Net2Wireless completed a $29 million private placement of preferred stock, which is convertible into 1,041,140 Sensar's shares. At that point, Sensar decided to exercise its option to acquire Net2Wireless and slightly increased the shares involved. Sensar will issue 18,295,060 shares and options for 14,766,649 shares in addition to the split-adjusted one million shares used to pay an introduction fee. When all is said and done, the combined company will have just over 43 million shares outstanding on a diluted basis. Net2Wireless investors will own 65% of the new company. Those investors, along with Partner, have options to boost their ownership to 77%.
Shareholders were slated to consider the merger on June 16, but the company hasn't released any news to that effect. The combined entity will be dubbed Net2Wireless, and Davidson will take over.
Net2Wireless lost $493,178 between April and December 31, 1999, according to its most recent SEC filing. Yet at Sensar's current share price, the merged entity would boast a market value of $953 million. Is it worth it? "It's worth much more than that," effuses Davidson. "Content is the future." David Rubner sounds equally confident. "Net2Wireless is a company that's worth a lot of money," he explains. "It will revolutionize the cellular industry."
Who's on First?
The most recently announced deal we found with a Bodner/Huberfeld connection involves Western Power & Equipment, a struggling heavy-equipment distributor. Results for the quarter ended April 30 show revenues of $35.3 million, down 13% and a loss of $947,000, or 29 cents per share, compared with the prior year's loss of two cents. At the company's annual meeting in February, two of Western's incumbent directors resigned and two new directors were elected. Two months later, on April 18, Western announced plans to merge with e-Mobile, a startup developing a small, expensive wireless device, like a Palm organizer, that enables users to retrieve and display voice and data. On that day, Western's three million shares closed at 4 1/2 .
Western Chief Executive Dean McLain explains that the company didn't have the money to expand its existing business, so it started looking for ways to merge, do a buyout or sell the company's shell. He adds that Robert M. Rubin, a Western director and the company's largest shareholder, knew the folks at Equilink, which was trying to bring e-Mobile public; Broad Capital, McLain says, is involved in raising $7-$8 million in a private placement, which is part of the deal.
McLain says he's never met with anyone from e-Mobile and Rubin has met only with Nechimiah Davidson. "We're relying on our board and Equilink to keep us updated," said McLain. Barron's was unable to reach Rubin for comment.
Davidson, for his part, says: "I'm not involved with the details [of e-Mobile]. I'm very busy with Net2Wireless."
He suggests speaking with Eytan Ramon. Ramon, in turn, told Barron's he was still on the job at Motorola, where he says he has worked for 17 years. He assured us, however, that two people now labor fulltime at eMobile, identifying market needs and working on the technology. "We think we have a big thing on our hands," he maintains. On Thursday, the company announced that Ramon had been named chief executive of e-Mobile.
On such hopes now rest a potential market cap of $380 million, based on the current price and the 52 million new shares that Western will issue to purchase e-Mobile, plus the three million shares now outstanding. (Western's management and directors will buy Western's heavy-equipment business for $4.7 million.) So far, Western hasn't disclosed any financial information about e-Mobile in press releases or in the SEC filings. Nor has it submitted the letter of intent for the reverse acquisition to the SEC. So, the investors in e-Mobile haven't been publicly disclosed yet. That said, Katsof observes that the Jerusalem Fund is in the deal. And Rubner tells Barron's that he, his wife or his children are invested in all three of these transactions.
Nice work, if you can get it.
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