By Aaron Katsman
IsraelNewsletter.com

Allot Communications Ltd. (ALLT)  a provider of intelligent IP service optimization solutions for DSL, wireless and mobile broadband carriers, service providers, and enterprises, reported less than stellar Q4 numbers last week and the stock was punished. A year ago the stock was trading at around $10. Today it’s under $3.  The stock IPO’d at $12.

While some investors may look at their cash position and think this stock is a buy, watch out. Correct that they have a higher cash position than their market cap, but the number is misleading. As we have seen with other Israeli companies (See post on Optibase), their cash management style must be questioned. Is Allot a hi-tech company or an aspiring asset manager?

The following was in their earnings report:

“As of December 31, 2007, net of allowance for devaluation of $4.9 million, Allot’s cash and cash equivalents, including short and long-term deposits and investments in marketable securities, totaled $70.8 million.

As of December 31, 2007, the Company had $40.3 million of principal invested in Auction Rate Securities (ARS) ranked AAA and AA at the time of purchase, and there had been no change in their rating, except for one security with a par value of $0.9 million. All securities continue to pay interest in accordance with their stated terms. However, since these ARS have experienced multiple failed auctions due to a lack of liquidity in the market for these securities, based on initial third party indications, the Company has revalued its ARS portfolio. As a result, it has recorded an impairment charge of $3.7 million on the profit and loss statement with respect to ARS of $6.6 million in par value, the devaluation of which is considered “other than temporary.” For the balance of ARS holdings of $33.7 million in par value, the Company has recorded an unrealized loss of $1.2 million in other comprehensive income as a reduction of shareholders’ equity. Based on initial third party indications, the Company currently believes that this impairment is temporary. All of these ARS were classified as long term assets.”

More than $40 million of their cash position is not at all liquid. Isn’t the whole point of “cash” to be liquid? The cash is supposed to help fund business opportunities and to help grow the business. To put such a large percentage of cash into ARS, in order to squeeze out another percentage point or two in yield is flat out irresponsible. What ever happened to risk vs. reward? Great, had this worked out they would have made an extra million dollars on cash in the best case scenario. Big deal. Is the chance to earn an extra $1 million worth  the chance that they would lose sizable amounts of money or worse yet, have no access to the cash? I think not.

I am not signaling out Allot, they just happen to be the latest to get burned. Where is the corporate oversight? Why does this continue to happen without anyone taking responsibility?

As usual, the only losers are investors.

Disclosure: Author’s has no position in any stock mentioned as of 2/18/08.

Please see our Disclaimer HERE.

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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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By Aaron Katsman
IsraelNewsletter.com

Optibase (OBAS), a company that deals with advanced digital video solutions, today announced a “change” in its investment policy. They will decrease their holdings in structured notes, after taking a loss. They had invested about $10 million, about 40% of all their cash, in a structured note that they have since sold at a loss of over $300,000. In today’s announcement, they didn’t specify the principal amount but they said as of July 30, the loss would have been over $900,000. It appears to me that they invested in some kind of range accrual structured note, where, as long as the Libor rate was within a specific range, they earned high rates of interest, but once the range is breached, they get nothing.  They obviously did this when rates were still low; as rates rose, they got nailed.

My question is where is the corporate oversight?

How was the company able to manage their cash position in such a speculative manner?

Where was the Board of Directors?

If you investigate the company, you will find that the Chairman of the Board also happens to be CEO. I am not naive enough to think that Optibase is the only company with this arrangement, but clearly there is a conflict of interest with this structure. If Optibase wants to turn into an investment company and take more risk with their cash, that’s their choice, but how about a little transparency for investors?

It’s a shame that this has happened because the company has been executing their core business model well. For the first half of ‘07, revenues totaled $12.2 million, compared with $8.3 million for the first half ‘06. Net loss for the period was $1.6 million compared to a net loss of $2.4 million.

Maybe the fact that they are stepping up to the plate and taking responsibility for the loss will mean the end to this practice. Let’s hope Optibase stays on the cutting edge of broadband streaming solutions and leaves the investing to professionals.

Please see our Disclaimer HERE.

Disclosure: Author’s fund has no position in OBAS as of 8/10/07.

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Aaron Katsman is the lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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