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The recent, well-publicized arrest of the CEO of Mosum/ISE Consulting, Brigadier General (retired) Yoni Shtriks, is not the only problem the company will have to face in the coming months. ISE, which operates a chain of academic and vocational colleges in several fields of study, has been reporting losses for two years now due to the competition in higher education, the crisis in high-tech and the need to meet the accreditation criteria of the Council for Higher Education.

ISE was acquired by Michael Zelkind and Anthony Pollack in 1997 at a valuation of NIS 100 million. Zelkind is the son of businessman Gershon Zelkind, who has a controlling stake in Elco and Shekem. Pollack, formerly an analyst at Chemical Bank in New York, was arrested in late 1997 by the Securities and Exchange Commission on suspicion of insider trading, in response to a request by the United States Department of Justice. A civil suit was eventually filed against Pollack, who paid a fine of about $550,000.

The fields of study at ISE's institutions include communications, business administration, computers and education. At its height, the company was traded on the Tel Aviv Stock Exchange at a market value of NIS 155 million, following a payout of NIS 40 million in dividends. This made Zelkind and Pollack's deal look quite astonishing.

However, the passage of Amendment No. 11 to the Council of Higher Education Law in 1999, which laid down licensing requirements for recognized institutions and was intended to supervise the granting of academic degrees, caused the company's shares to plummet by about 90 percent.

Since the passage of the amendment, which obligates colleges to meet the Council's standards for awarding degrees, the number of students enrolling in ISE's schools has dropped significantly. Some of the company's institutions did not receive accreditation as degree-granting institutions, and enrollment in them ceased. The company's marketing expenses increased, and it began to lose money. ISE is currently traded at a market value of only NIS 8 million.

A year ago, ISE acquired the activities of Technologies Group, which includes the High-Tech College, for NIS 42 million. The rush to high-tech attracted large numbers of people to sign up for computer studies even without the promise of an academic degree. ISE expected to increase its profitability by getting into a field that was in high demand and was not subject to the regulatory controls of the Education Ministry. This strategy flopped when the high-tech crunch sharply curtailed interest in technological studies.

The company was apparently blinded by the high-tech bubble, even though the crisis in the field had begun before the contract to buy Technologies Group was signed: NIS 18 million of the NIS 42 million that ISE paid for the group were for a noncompetition agreement, and NIS 11 million were for the group's reputation. These sums were depreciated in the company's annual financial reports, reducing its earnings by NIS 3 million per quarter.

The company's profits, which reached about NIS 17 million in 1998, began their downward slide in 1999, after the amendment was passed. The big collapse, however, began in 2000, when the company reported net losses of NIS 6 million. In the first nine months of 2001, the losses grew to NIS 11 million. The activities of the High-Tech College have slowed recently, leading to a drop in revenues.

ISE posted losses of between NIS 1 million and NIS 5 million in nearly all of the last eight quarters. In its board of directors report, the company explained that competition is increasing in all of its spheres of operation. It added that the crisis in high-tech has led to a slowdown in instructional activities within the industry, as a result of which the company is attempting to locate new markets and customers that are not affected by the crisis. The report also said that "widespread efficiency and savings measures were taken in an effort to offset the drop in revenues from instructional activities."

One of ISE's attempts to get around the accreditation problem was through Internet and video-conference distance learning. But this area is in a slump as well, and the company says that "the field is currently being updated and adapted to changing market needs in the area of high-tech studies."

Shareholders' equity, which was NIS 30.5 million a year ago, fell to NIS 19 million. Since most of that reflects the reputation of Technologies Group and the noncompetition agreement, it comes as no surprise that the company is being traded at a value lower than its equity.