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Late December should have been a nightmare for

Formula Systems

(Nasdaq:FORTY). Its subsidiary

Magic Software Enterprises

(Nasdaq:MGIC) and affiliate

Sapiens International

(Nasdaq:SPNS) both published warnings that highlighted just how rotten their condition is.

Moreover, for both, it was the second quarterly earnings warning in 2000. Not that they shone in the other two quarters.

With other members of the group performing poorly, among them



Crystal Systems Solutions

(Nasdaq:CRYS), which in previous years benefited mightily from converting software to the new millennium, it seems the Formula Group was brought to its knees by the Y2K bug, when it had hoped to be the biggest benefactor from the hysteria it had created.

Formula chairman Danny Goldstein has weathered blow after blow in recent months. The year 2000 was one of the worst his company ever had. But he has already proved his ability to manipulate even the worst situations to his benefit.

During the last five years, Formula has become an empire of Wall Street-traded companies. Beforehand it constricted its activities to the Tel Aviv Stock Exchange, where it operated through its subsidiaries. Then, it had only one outlet on Wall Street, Idan. Idan was a defunct but still-traded company. Beyond that, Formula had holdings in a software company named

Argotech Business Systems

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Full speed ahead at the overseas market

As Nasdaq soared, Goldstein turned all his attention to the overseas exchange. ForSoft, respnosible for Formula's software house activities, was merged into Idan and began trading on Nasdaq. Crystal, an Argotech baby, was successfully issued on Nasdaq. The share prices of both companies were lifted skywards by the raging Y2K phobia.

Formula's billing and customer service company, Wiztec, was also floated in the U.S. and then bought at a high premium by American billing giant Convergys.

Formula itself has decided that with all due respect to the TASE, a big company such as herself should be traded on Nasdaq as well. It dual-listed and issued a significant proportion of its shares in the U.S. In 1998,

Magic Software Enterprises

(Nasdaq:MGIC) caught Goldstein's attention as it crashed to less than $1. He couldn't resist and bought control of the company.

At the end of the first quarter of 2000, technology and IT companies were blossoming. Formula's companies were looking real good. Magic was growing at record-breaking speed, and even Crystal and ForSoft looked like they were about to overcome the Y2K-that-never-happened crisis and to generate income from other changes taking over the market, such as the euro and a growing need for other software services. Formula itself reached a record share price of $92 in March. This price reflected for the company a market cap of almost $1 billion, 10 times its value three years earlier when it was trading only in Tel Aviv.

Crisis control

But the crisis hitting IT and technology slammed Formula too. With the mythological Y2K bug out of the picture, organizations spent less. IT companies issued profit warnings, which sent their shares crashing. Formula's shares were devastated. Crystal sank to $5. ForSoft plunged to the $7 region, and Magic crashed majestically from $30 in March to $2.5.

It was a harsh blow for Formula, which as the parent company kept step and lost two thirds of its value to $32. Danny Goldstein, market maven that he is, took some crisis control measures and set the ground for a new starting point.

His first step was to repurchase and delist ForSoft. Goldstein paid ForSoft shareholders $9 in cash, about the price at which it had gone public two years earlier. Goldstein himself told that as a private company ForSoft would yield more.

Who's next on Goldstein's list

The interesting question is, of course, what is Goldstein's next aim. This question has three possible answers.

Number one could be Crystal. Goldstein refused to commit about repurchasing its shares or not, saying the group takes one step at a time, but, "In any case, it remains a possibility. At the moment, Formula is directly owns about 40% of Crystal's shares. Along with Goldstein himself, the group holds about 60%, making Crystal a top takeover candidate.

Another option is Magic. Goldstein rejected any idea of a takeover. But if the company continues to tread the shallow waters of $2.5, representing the value of the cash in its till, while the rest of its activity is priced at zilch, Goldstein will probably make a move.

When Magic was close to its peak price, Goldstein cashed in on a minute portion of his holdings, collecting $20 million. Since then Magic shares have lost 90% of their value. He could regain full ownership of the company at practically zero investment. This possibility probably hasn't escaped him. His denial of such a plan should be taken with a grain of salt.

Goldstein's third target could be Sapiens International (Nasdaq:SPNS), which secured $15 million from Formula and the VC fund Magnum last night. Sapiens issued bonds convertible into shares for $1.5 each. If Sapiens dips below $1.5, a 10% premium will be tacked on to its market price. Even if Sapiens rises, and the conversion is done at $1.5 per share, Formula will get 10 million Sapiens' shares constituting 30% of the company's share capital.

The group was also given an option to invest an additional $15 million, same conditions applying. When the option is exercised, the group will own 45% of Sapiens, making the group the majority owner. The fact that Formula assigns directors in Sapiens based on the extent of its control over the company shows this is a strategic, not a financial, investment.

Sapiens has been decidedly sluggish in the last few quarters, especially in the fourth quarter, about which it released a particularly harsh profit warning. Sapiens announced that revenue would reach a mere $12 million, whereas its losses will come to $22 million. The current warning is the second issued this year, but fret not. Even if it keeps up this pace, Goldstein won't be fazed. He will simply take advantage of the situation and buy the shares at the all-time low price of $1, gaining 55% of the company's equity.