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 December 2000
Biotechnology & Drugs

Ms. Mya Wagle - Equity Analyst
RedChip.com, Inc.

January 2001
Companies to Watch:

Carl Frappaolo
Executive Vice President and Co-Founder

Delphi Group

February 2001
The Kriegsman Group -
A full service investment and merchant bank
that starts companies with their own capital

Steven A. Kriegsman

The Kriegsman Group

March 2001
Healthcare Services
Providing an attractive investment
given it's typically defensive and non-cyclical nature

Andreas Dirnagl
Senior Equity Analyst
Gerard Klauer Mattison & Co.

Technology, Retail
& Healthcare

Internet infrastructure and network security

Howard Smith

First Analysis Security


Biotechnology & Drugs

Diagnostic Devices


Ms. Mya Wagle - Equity Analyst - RedChip.com, Inc.   Phone: 503-241-1265

Interview conducted by:
Walter Banks, Co-Publisher


December 2000


CEOCFOinterviews - Give a brief career history.

Ms. Wagle – “I cover stocks in the Healthcare arena ranging from diagnostic devices to biotech companies.  These are the sectors that I like to cover because my background is as a trained Biochemist.  I have spent extensive time getting postgraduate work done in that area as well as business school.  I also spent some time with health regulators in state health departments and insurance companies.  I enjoy putting everything that I’ve learned together in a package as an Equity Analyst at RedChip.” 

CEOCFOinterviews - Can you take us through the steps of what it takes a biotech company to bring a new drug to the market place?

Ms. Wagle – “The steps that a company has to go through to bring a drug to market is as follows: they must put it through an INDA or an investigational new drug application.  After a few studies on it you then put in for an NDA, which is a new drug application and in between all of that you have the clinical trials, Phase I, Phase II and Phase III, with each clinical trial taking a minimum of about twelve to eighteen months.  So if you’ve got an investigational drug application through the FDA, which normally takes about four to six months, then you start your studies and your clinical trials, with every Phase taking eighteen months, five years has just past right there.  Once a study is over you have to put all of the data together and focus on how you will plan the next study, because things may have cropped up in that study which you will want to address in the next study.  So there will be a period of about a four to six month waiting period before you start the next study, in which you chew on the data and then plan your next Phase.  So that’s the reason why it takes any biotech company a minimum of five to seven years to get a new drug out, and most of these companies don’t turn profitable until about the second year after they’ve started selling the drug.”            

CEOCFOinterviews - Why do you like the healthcare sector and why should an investor be interested in diagnostic devices and biotech stock?

Ms. Wagle – “When I grew up my father always said that you make money for two reasons.  One is to feed your family and the other is for your basic health, because if you don’t have health you can’t enjoy anything else that you have.  The desire to help people live longer may also be the reason why we have so many different areas of research, and scientists tend to do research in areas that are of concern to them.  In the twentieth century we’ve seen advances in antibiotics and now drug resistant bacteria, with scientists trying to get to the drug resistant bacteria through biotech means.  We also now have major advances in the understanding of the human DNA, with scientists trying to get at the root of the cause of so many diseases.  So biotech becomes the key to the search for a solution to diseases.”

 “I think investors should look at biotech stock because the companies are trying to get at the root of the matter, but trying to get at the root of the matter is always longer than going over it superficially.  For example, instead of just putting a band aid on a cut, or simply treating the symptoms, some companies are researching into genetics to find out which genes could be responsible for certain diseases.  Once they get to a gene that has gone wrong, they may try to correct the gene or create a compound in such a way that it counteracts the effect of the malfunctioning gene.  To do all of this requires many resources in money and intellect, and in today’s capitalistic society, scientific research is done by only a few people.  There are more people in business than there are in scientific research.  Not too many people are willing to put in those long pain staking days at the lab bench, it’s almost like a labor of love, so they need support in their effort to try to find the cause for diseases.”         

“When it comes to biotech stock, in terms of the research, clinical studies and getting approval for a new drug, therapy or device before a company can even bring it to the market place, it is a long process.  I like to think of it, as, instead of a mother going through a nine-month pregnancy, she has to go through it for nine years.  A long term pregnancy and even longer labor process, but at the end there is always that wonderful baby.”

CEOCFOinterviews - What is the upside and reward like for the investor who is willing to wait through this long process?

Ms. Wagle – “The upside can be unbelievable.  Let’s just take Amgen, Inc. (NASD: AMGN) into account.  Amgen has Epogen and Neupogen, and these are factors to help stimulate the production of your red blood supply.  Many times during surgery, the patient loses blood-causing anemia.  Well there was no real solution to this problem until Amgen came along with a biotech product that is similar to the one that your body produces and which could be injected into a patient.  Sometimes even a transfusion does not work as well, because this is a purely genetic product that could save someone.   It’s like a flashlight going off when the product is finally on the market.  We can use it here, we can use it there, and so they generally find out that there are multiple uses for it, even widening its market.  If the investor wants something worthwhile like a scientist working in the lab, working towards this greater goal, the investor must be patient.  With biotech companies it’s not only the effort, the brain power and the monetary resources, but it’s also like Edison said, “success is one percent inspiration ninety nine percent perspiration”, and I think that statement which was true at the beginning of the twentieth century, should be applied now at the beginning of the twenty first century.”

CEOCFOinterviews - What should an investor look for in the management team of a biotech company?

Ms. Wagle – “Of the basic principals of investing, number one is that management has to be focused, promoting from within and especially with biotech companies, the scientist have to have creative license.  They need an entrepreneurial CEO who can look at the scientific as well as the business side of things, because after the scientist has created a product, you need someone to sell it.  Therefore, the CEO has to be alert in forming relationships, especially with the smaller biotech company who will need to liaison with a large pharmaceutical firm to bring a product to the market.  The CEO has to be                developing those helping hands along  the way and can’t wait until he or she is at the end of Phase III to try and do this.”             

CEOCFOinterviews - Which of the companies that you follow, do you feel meet those criteria of having a strong management team and forming those important alliances?

Ms. Wagle – “Targeted Genetics Corp. (NASD: TGEN), in Seattle has done a good job at forming alliances.  Their CEO Ms. Steward Parker has been a fascinating ambassador, linking up with the big pharmaceutical companies these days.  They have an alliance with Biogen Inc. (NASD: BGEN), one with Elan Pharmaceuticals (Elan Corporation, plc, NYSE: ELN) and yesterday I received an email saying that they now have an alliance with American Home Products.  These are fabulous large companies, who know how to sell, who know how to market to their target audience and they have a sales force in place.  This is what was necessary for a small company like Targeted Genetics, which does not have any sales force.  Targeted Genetics now has a product in Phase III clinical trials, and along with Corixa Corporation (NASD: CRXA) were spin-offs of Immunex Corporation (NASD: IMNX), also based in Seattle.”

“Another company that I cover called NeoRx Corporation (NASD: NERX), had problem with one of their products during a Phase II trial and their stock dropped when the FDA stopped the study, but I believe they will recover because of their management team.  They have a very sharp CEO, Paul G. Abrams.  He is an MD himself and a JD, so we have to realize that he knows the medical and the legal implications.  He’s a brilliant man who is also very good at business, so he’s been able to nurture this company for the last eight years.  He’s facing a tough battle to get this company up and going, but knowing him I’m sure he’s going to see what went wrong and where.”

CEOCFOinterviews - What other basic principals of investing should be looked at when considering a biotech or diagnostic device company?

Ms. Wagle – “Of the basic principals number one is management, number two is product, number three is ensuring that they have the proper mechanism in place to nurture the product, and number four would be numbers, such as earnings and sales, but to get those earnings and sales they must have the proper mechanism.”

CEOCFOinterviews - What aspects do you consider when you look at a companies technology or product?

Ms. Wagle – “One of the important things that I look for when I decide to cover a company is the technology.  Where does the product fit?  Will it add, will it be synergistic or will it be just an addendum?  I have a diagnostic company that I follow, it’s not a biotech company, it’s called Cardio Dynamics (Symbol: CDIC).  I love that company, and I give them a Strong Buy.  Would you want a catheter passed up through your groin for an angiogram or would you prefer four sensors placed on your chest, and your heart condition monitored.  I would rather the sensors, and Cardio Dynamics.  This wonderful little machine has four sensors, two for the neck and two for the chest.  You can get all of the heart parameters that allow you to figure out what is wrong with the patients heart, using a noninvasive technology.  GE is selling their product on the market.” 

“There’s another company called Imatron Inc. (NASD: IMAT) which I give a buy to, who used to have alliances with Seamans.  For a couple of years they were almost treated like the pariah.  Seamans dictated all of the terms and said they were going are going to sell your instrument this way and their marketing strategy was wrong.  When Imatron distanced itself from Seamans it faced a tremendous uphill battle.  In October, Opera had a show in which she had a complete heart condition diagnosis on the Imatron scanner.  They have gotten about sixteen hundred calls per day now since that show, because there scanner is almost fifteen times faster than the GE scanner.  What it does is it takes a picture of your heart and arteries in 3D slices, and it comes up with a calcium count.  You might have a normal cholesterol and lipid level, but there might still be plaque in your arteries.  The plaque deposition happens in conjugation with the lipids and the amount of calcium in your system.  Therefore, Imatron came up with what is called the calcium score that indicates whether you have heart disease, or whether you have a predisposition towards heart disease.  It’s almost a prognostic instrument.  If you have a high calcium score, then you can change your life style so that you don’t develop a plaque deposition.  They are now selling it by themselves, and they are doing a great job.  They are turning profitable.  They’ve just started marketing it themselves within the last year and a half.  They have a fabulous World Wide sales VP, Jack Marquess, and President, Terry Ross who has invested about three million dollars of his own money into the company.  They’ve been selling almost seven or eight instruments per quarter, and these instruments cost about two million dollars a piece.  People don’t buy these instruments on a shopping spree, but they’ve been able to sell them and they are making money.  Both Cardio Dynamics and Imatron have fabulous management.  To me management is number one.  Cardio Dynamics has dynamic management.  They have the best thing for getting regulatory approval.  I would say that they have the best mechanism for a small company that I’ve ever seen.”                    

CEOCFOinterviews - Of the companies that you cover, which are situated the best with their cash and credit.

Ms. Wagle – “Targeted Genetics has set up all of these alliances with these large pharmaceutical firms who have very deep pockets.  A Phase I trial cannot only last about twelve to eighteen months but it can also cost anywhere from one million to three million dollars.  Therefore, a biotech company needs a strong force of cash, to finance all of this Phase I, Phase II and Phase III trials, all of these studies at these different hospitals, which expect to be paid.  For the small biotech companies such as Abbott Laboratories (NYSE: ABT), Merk & Co, Inc. (NYSE: MRK), or Pfizer Inc. (NYSE: PFE) , American Home Products (NYSE: AHP) can provide that.  So, the alliances that Targeted Genetics has made will prove to be very profitable in that they will be paid in mile stone payments.  Many times there is an up front payment, a mile stone payment, and then royalties and licenses along the way.  What has happened with these large companies is that they’ve gotten to the point where they have all of these successful drugs, and other drugs in their R&D pipeline, but many of them don’t have the biotechnology know how, in house.  So the large companies are giving out a helping hand to the smaller companies who are more entrepreneurial and coming up with the new drugs, but need the money.  The large companies provide the money in an agreement, which allows them to license and market the new technology.  In a way, it proves to be profitable for both and many times, if the small company is smart they will form these alliances, because to get to the size of a Pfizer and a Merk, didn’t come within a few years.  They also have fabulous distribution systems in place, to which the smaller companies don’t have any access.  It would be easier for an Abbott or a Merk to sell their liaison’s drug to a hospital or doctor because they generally will only have ten minutes to make the sale and the doctor will most likely listen to the larger company with the proven track record.”  

CEOCFOinterviews - Can you tell us about ABAXIS, which is another diagnostic device company that you cover?

Ms. Wagle – “ABAXIS, (Nasdaq: ABAX) under Clint Severson and Don Parker have had the shrewd management to guide them into the vet arena.  They have this little instrument, and they realized that they could get these little instruments into the vet market without the chloride test.  They went in, capitalized and have done a fabulous job.”   

“There is plenty of room for ABAXIS to grow in the Vet arena, and continue to build value.  To get more instruments in there, with the passage of time ABAXIS may have to make their prices more competitive, both for their instruments and for their discs.  Currently people are buying their VetScan, a point-of-care blood analyzer because ABAXIS has made a name for them, but as with any industry, there comes competition and the lowering of prices.  They really have the advantage of gaining more market share because of the quality of the product and the Vets like it.  They have quite a few sales people of their own along with distribution partners in Europe.”

CEOCFOinterviews - What are your recommendations for the companies that you cover?

Ms. Wagle – “ABAXIS is in the category of a Strong Buy because of the way that they’ve garnered market share and increased production capacity.  They are also establishing a customer service and a technical service, which is very crucial when a company gets to the size that ABAXIS is. Customers want the feeling of reassurance that there is someone, whom they can call; in the case, that something goes wrong.  Along with the VetScan the customer must also purchase consumable rotors in order to analyze the blood.  Right now, they are in their new production facility, which will allow them to meet customer demand for those rotors.  That should do well for them in the Vet market.  Their success in the human market depends on an alliance with a big house and if they can add the chloride test which is necessary for that market and have it approved”.

“Targeted Genetics would be a Strong Buy right now with all of their alliances.  Their products are in Phase II and Phase III trials, and they are making the right connections at the proper time.  They also have a good R&D department headed by a strong Vice President, Barrie J. Carter, and Ph.D.  You need all of these mechanisms in place before you can go anywhere.  For biotech investors, it’s a long waiting process.  Do not expect any earning, do not expect any dividends, but the companies valuations generally go up at the end of the Phase II and throughout the Phase III trials, and the stock can go up tremendously.”

CEOCFOinterviews - Are there any other companies which you may have a buy or strong buy on?

Ms. Wagle – “I would like to tell you about IMPATH Inc. (NASD: IMPH).  What IMPATH has done is that there are many cancers, which are hard to diagnose in a small hospital or academic institution. With cancer one of the important things is getting to the root.  To treat a cancer you have to know where the primary site of the cancer is. Many times when you find a cancer it has started to metastasize.  About fifteen percent of cancers in general are what     you would call tumors of unknown origin.  IMPATH is company, which is made up of a group of pathologists and oncologist.  If you go into a small county hospital the oncologist or the family practice physician, after sending the sample to their lab, still doesn’t know what the primary origin of the tumor is, they can send the sample to IMPATH via FedEx.  IMPATH with it’s team of pathologists and oncologist gives it’s diagnostic and prognostic information on the cancer and gets back to the physician in approximately about forty eight hours.  With a tumor, the more aggressive the tumor is the greater the chance that it will recur.  The slower growing tumors have a lesser risk of recurring.  In general, the maximum amount of money spent is when a tumor continues to recur.  Therefore, the best thing would be to stop the tumor at the very beginning and IMPATH with their service in diagnostics is a fast turn around time.  This fast turnaround time gives these physicians the options of going ahead with an aggressive treatment for the tumor.  Up front the treatment may be more expensive, but if you can stop it from recurring, you will lower the long term cost, which could be greater.”

“IMPATH has that service and they also have a huge database.  It has linked up with a large number of hospitals and has a whole database of diagnostic and prognostic profiles, treatment and outcome data.  So if you want to look at certain outcome data, they can provide that information and hospitals can license this software.  The third arena that they are in is because of all of the names that they have.  IMPATH gets six hundred samples a day for testing.  Therefore, their database is up to about six hundred and fifty thousand cancer profiles in their database.  Only five percent of cancer patients in the U.S. are in that kind of clinical trial.  What IMPATH does is work with the biopharma companies, and helps them get the right patient profiles into their clinical trials.  Therefore, it performs a service that is extremely unique.  Because of all of the profiles in it’s database it can for example, go to a Genentech, Inc. (NYSE: DNA), and if they are doing a new study on breast cancer, IMPATH can offer the names of ten women with the profiles that they are looking for.  I think that is how IMPATH is building up their business niche.  It not only provides the diagnostics and prognostic lab services, it also has a database of information and it’s capitalizing on its database of information by providing it to the genomic companies.”

CEOCFOinterviews - And what is you recommendation on them?

Ms. Wagle – “It’s a buy right now because their stock has been on a tear.  It’s gone up eight to eighty in the last eight months.”

CEOCFOinterviews - What thought would you like to leave the investment community?

Ms. Wagle – “If investors buy a biotech or diagnostic device company at the end of Phase I trials, when you know the product is going to work, and they have the patients to wait for another six to seven years, it usually will pay off.”




Delphi Group

Ten Post Office Square
Boston, MA 02019
Phone: 617-247-1511
, Fax: 617-247-4957
Email: cf@delphigroup.com  


Carl Frappaolo
Executive Vice President and Co-Founder

Interview conducted by: Walter Banks , Co-Publisher


January 2001

BIO OF Exec. VP & Co-Founder

Mr. Frappaolo (cf@delphigroup.com) is the industry’s leading authority on the challenges of integrating technology and business goals when designing information management strategies for knowledge sharing and collaboration. Mr. Frappaolo has assisted many enterprises, large and small, strategize approaches for enterprise-wide knowledge, e-learning and information management, many of which begin with a 'knowledge audit' of their organization. He has authored over 100 studies on the technology of digital documents and regularly provides market commentary and analysis to leading industry periodicals and business magazines, including Forbes, The Wall Street Journal, Intelligent Enterprise, Knowledge Management Magazine, Computerworld, InformationWeek, CIO, INFORM's eDOC, and The Review. He is the co-creator of Delphi’s Knowledge Management Methodology (KM2), and Portal Design methodology. He is also the author of two books, Electronic Document Management Systems: A Portable Consultant, an extensive text that analyzes the role of the electronic document as the cornerstone of today’s knowledge-based paradigm of computing (McGraw-Hill, 1995); and Smart Things to Know About Knowledge Management, the leading primer on this business paradigm (Capstone, 1999).

CEOCFOinterviews – Mr. Frappaolo, please give us a brief history of the Delphi Group.

Mr. Frappaolo – “Delphi Group was founded twelve years ago at what we thought was a very critical point in the history of information technology.  We saw evolving in the marketplace, a family of technologies that were going to seriously impact the ways in which corporations manage unstructured information. This is information that doesn’t fit nicely into a relational database -- for example, documents, pictures and images.  We established the company to be vigilant on the new ways in which information technology was impacting how businesses operate.  By keeping our focus there, Delphi Group, over the last twelve years, has introduced many organizations to concepts of document management, workflow systems, business process analysis, knowledge management, just in time e-learning, and business portals.  Today we are talking about issues like, on-line communities and collaborative commerce.  We see these as connected by their ability to affect a business’ approach to information management.  We are more focused on the business application than on the technology itself.  The service we provide is a vigilance for the next new technology that will have an immediate impact on businesses.  We are visionaries. We introduce corporate America, and global enterprises, to what is coming so they can plan ahead wisely. We tell our clients how that technology marketplace is shaping up, who the leaders of that market are/will be and how these organizations should be evaluating the products coming from those vendors.”

CEOCFOinterviews – How is your information distributed?

Mr. Frappaolo – “Our information is distributed through three separate product lines: research, education and consulting. We do our own primary market research. That information is distributed to clients via a website, where users are able to interact with the information published in an electronic format.  We also publish paper-based versions of the information for our clients who still prefer paper.  We also condense our knowledge into educational seminars, and conferences. These are live-, community-focused events. We are also adding new ways to participate in these educational events through innovative web-based access.  Lastly we provide hands-on business consulting where we go into organizations and do a very targeted, focused discovery of business needs, and how these are or are not met by the organization's technology direction.. We follow that with a report that details what the organization specifically needs to do to integrate technology with their business strategies.”

CEOCFOinterviews – What types of clients need your service?

Mr. Frappaolo – “Our client list runs the spectrum of the Who’s Who in the Global 1,000, and leading government agencies.  We have worked with companies such as Pfizer Pharmaceuticals, Smithklein Beecham, Bristol Meyer Squib, American Family, American Express, Clorox, and National Life of Vermont.  We are providing information to these companies that is helping them reshape their organizations through the effective application of  new technologies.”

“We do continuous research on emerging technology areas through a separate branch at Delphi.  We are market sentinels, watching for emerging technologies that solve business problems in the areas of information, knowledge and business value chains. A recent example is the business portal. From our work with end users and vendors in the area of knowledge management, we saw the seeds of the business portal emerging. We dedicated a team of analysts to identify the vendors that are starting to introduce solutions targeted at the knowledge worker's need for a single and personal point of contact -- a starting screen on their computer -- that would link them to all the information resources they used in a typical business day. We learned everything there is to know about the technology and the vendors and the business cases for portals.  We then internalized that and evaluated whether or not there is a legitimate business need for it.  Once we were certain there was, we defined the business need and architected a methodology to help businesses evaluate technology providers.”

CEOCFOinterviews – It sounds as though your website would have valuable information for investors and shareholders of publicly traded technology companies.

Mr. Frappaolo – “Investors and shareholders of publicly traded technology companies could gain tremendous insight because what we do in the market research is to assess an entire marketplace.  Therefore, an investor interested in a tech stock could learn about the demand for the technology family they are investing in (or considering investing) and that could lead to more than one stock selection.  They'd learn the potential size of that marketplace, whether there are commercial verticals that find this technology attractive, and who is the typical buyer.  An investor would learn about the forces driving this marketplace and determine who are the market leaders from a solutions provider viewpoint. It is the kind of information they'd use to assess whether or not the public companies they’ve invested in have a strong current standing in the market place, who their toughest competition is, and what makes them competitive.”

CEOCFOinterviews – Does the Delphi Group have any competitors?

Mr. Frappaolo – “We are not the only company in the world that does assessments of technology vendors, but we believe we are a unique organization in our ability to focus exclusively on how information and the way it is manipulated technically, impact the business' value chain... We do not believe that there is any other consultancy that focuses only on that area and for that reason we believe that we do it deeper than anyone else We understand the knowledge management, the portal, the e learning, the business process and the document space better than anyone out there, because it’s an exclusive focus for us.”

“What has spelled Delphi’s success over the last twelve years is our very keen sense for the next big technology wave.  Earlier, when I introduced Delphi, I said that we started out looking at imaging and text search engines. Indeed twelve years ago, that was leading edge, though at the time, there was little momentum, very few companies were using the technology, and most were bewildered as to why they would even need it.  We did not allow ourselves though to stay imaging and text search engines specialists, although there is still a need for that and we continue to do a fair amount of consulting in that area. Today, when you look at Delphi Group's market research and education, we are light years beyond that first technology focus.  Delphi Group has been successful through the years because we are able to identify the next killer technology early in the game and frame it in a perspective that is clearly understood in the business environment.  We’ve been right on for twelve years. Search Engines were a successful market place, but they are not the bleeding edge anymore.  We were dead right again with Document Management. Throughout the 1990s we were the premier resource for guidance on workflow, Business Process Redesign and Knowledge Management (KM).  We have a successful track record of knowing where the next big impact from technology is going to be.”  

CEOCFOinterviews – What is the big, impact technology of the future?

Mr. Frappaolo – “The next thing that Delphi is working on is the concept of Collaborative Commerce, e-Community Building, and the Wireless Organization.  Too often, when people hear wireless they think, “oh that’s old, you’re talking about using PDA’s, cell phones to access the web”. Actually that’s a very small piece of it. Delphi is looking at what the work world will look like when the reality of a wireless workforce has been achieved. What kind of applications are going to be running in that wireless network? How is that going to change the way your employees are located, how they get their jobs done, and how they are compensated?  We are looking at information delivery vehicles, process management vehicles, and how they will operate in a wireless environment.”

CEOCFOinterviews – How many companies are in that area?

Mr. Frappaolo – “I would say that there are somewhere in the neighborhood of fifty or sixty companies that are doing R&D, or have announced or are planning to announce availability in the wireless space.”

CEOCFOinterviews – When do you see a big push in the product area?

Mr. Frappaolo – “Possibly in another eight to twelve months.  You are hearing a little of it right now, but you will hear a great deal more over the next twelve months.”

CEOCFOinterviews – Could you tell us more about e-Communities?

Mr. Frappaolo – “The idea of e- Communities is really interesting and powerful. It is going to start off somewhat simply, as a way for organizations to better leverage their intellectual capital.  In very large multinational organizations, for example, it is impossible for anyone to track what each individual in that company knows.  Many of our clients tell us about incidents where, for example, their people in Japan just came out with a wonderful new invention only to find out that the folks in the UK have been working on the same thing for the past eight months. Neither group knew of the other, so there was no information sharing of any kind!  The challenge facing larger organizations is how do we share what our people know collectively, and how do we broker our people so that teams are not constrained by physical location, but rather united by common interests, experience, and vision? And finally, how do we build "communities that collaborate" and share knowledge, resources, information within our dispersed organizations?  That in and of itself is pretty fascinating and it is starting to evolve. When we talk about e-Communities, we see not just that, but also how can the organization start applying that knowledge and information-sharing expertise outside of its corporate walls. e-Communities will really test current business models. This gets deeply into the concept of extended value chains -- how do you start brokering your intellectual capital with the intellectual capital of partners, suppliers, customers and, dare we say, the competition?  But think about it, if you and your competition start working together and sharing what you know via these communities of like-minded individuals perhaps -- in the end, you may jointly own certain rights to certain technologies or products collectively.  You are therefore a competitor in one sense and a cooperator in another.  That is more in line with what we envision longterm when we say e-Community.  It takes a particular type of CxO to appreciate what this could lead to and what it means.  Companies such as Dailmer Chrysler, Ford and GM.are showing evidence of a similar vision.   They think the automobile market is big enough and it is going to become even bigger.  If by working with their competitors, they can grow the marketplace as a whole, they will see bigger profits in a shorter period.  They will take what they have discovered in automobile safety for example, and share that with the competition, so that the automobile industry, from a safety standpoint, advances more quickly. Buyers will purchase different types of automobiles, growing the market at a greater speed.  Daimler Chrysler can then internally make sure that their products account for a certain percent of that market." 

CEOCFOinterviews – What type of research do you provide on the technology suppliers?

Mr. Frappaolo – “We don’t just look at their technology, we look at the management team behind the company, their profit and loss track record, their standing in the community amongst the buyers and evaluators of their market space.”

CEOCFOinterviews – How is that information displayed on you website?

Mr. Frappaolo – “ It is displayed via annotated charts and graphs, which contrast and compare elements in the market place.  It is also portrayed in bodies of text and paragraphs, which position the vendor company within their market space as well as within their technology arena.. This will soon be merged into a personalized portal environment.”

CEOCFOinterviews – What types of services can you offer a CEO.

Mr. Frappaolo – “The CEOs we work with fall into two broad groups: CEOs of technology companies, and CEOs of companies who use technology to make their company better, leaner and smarter at what they do.”  With the latter group, we work with the CEOs to build and formulate a Business/Technical strategy that ensures they are using technology to leverage their intellectual capital to the nth degree, so that they achieve their marketplace goals and objectives more readily.  When we work with the CEO of a technology company, or one who is thinking of becoming the CEO of a technology company, (and we’ve done both), we help them clarify their value proposition and determine what their chances of success look like.  We help them understand the competitive marketplace into which they are going to be playing. We evaluate what it would take for them to succeed. We'll also review their product vision.  If they already have a product, we can rate it on a feature-by-feature basis, to give them a sense of how competitive it might be and what the user community's reaction would be.  We see many new products that have some very nice features, but if the user community isn’t interested in them, it won't spell market success.”

CEOCFOinterviews – We would like to close by letting our readers know that Mr. Frappaolo is available for public speaking on the following topics: Survival in the Knowledge-based Economy, The Empowered Document, Information Management in the 21st Century, Building Effective e-Communities, eLearning, Content Management, Knowledge Management, and Business Process Redesign.                                                

Mr. Frappaolo – “Thank you for this opportunity. "

  Companies to Watch:

The Delphi 100

The Delphi 100 is a list of leading publicly-held B2B, e-content, e-learning, and wireless companies. The total number of companies on the list may change from time to time based on performance and other factors. The Delphi 100 can be found online at, www.delphi100.com.


Accrue Software


Aether Systems






Art Technology Group






Blue Martini
















Commerce One






Cognizant Technology Solutions












e-Business Technologies


eGain Communications








Exchange Applications
















Hungry Minds






i3 Mobile








IntraNet Solutions




i2 Technologies




Kana Communications






Mercury Interactive






Net Perceptions




Net Genesis


Open Market




Optika Imaging Systems




Open Text






Purchase Pro


Persistence Software














724 Solutions
















Extended Systems



February 2001


The Kriegsman Group - A full service investment and merchant bank
that starts companies with their own capital


The Kriegsman Group

11726 San Vicente Blvd., Suite 650
Los Angeles, California 90049
Phone: (310) 826-5449
Fax: (310) 826-5529


Steven A. Kriegsman

Interview conducted by:
Walter Banks, Co-Publisher

February 2001


CEOCFOinterviews - Mr. Kriegsman, can you tell us about the Kriegsman Group?

The Kriegsman Group is a firm based in Los Angeles and New York.  We pride ourselves on our expertise in technology.  In addition to working in information technology, environmental technology and related fields, we have a particular specialty in the health care field, including biotech, genomics, pharmaceuticals, medical devices, medical diagnostics, medical services and medical e-commerce.  In the nine years that we have been closing transactions in healthcare, we have achieved compounded returns of 85% per year.  For a nine-year period, that return may be the highest in the world.  We have been particularly successful in some of our top stocks, such as Closure Medical (NASDAQ: CLSR), in the medical device sector, and Novoste (NASDAQ: NOVT).  These stocks were ranked number 1 and number 10 in returns to investors in 1997.  In addition, we have worked with Advanced Tissue Sciences (NASDAQ: ATIS), with Miravant Medical Technologies (NASDAQ: MRVT), and with Maxim Pharmaceuticals (NASDAQ: MAXM).  All of these companies had a tremendous run in stock price appreciation

"We take a very analytical approach in looking at individual companies and studying the industry, but we are basically interested in undervalued firms.  Our specialty is finding companies with stock prices under $10-15.  We do merger and acquisition work; we arrange strategic alliances; we assist both public and private companies with raising equity and debt; we write research reports and help those companies in increasing shareholder value.  Additionally, we manage money, act as advisors to several fund groups and represent wealthy families interested in investing in the health care sector.  We have a number of excellent professionals in the company, including managing directors and analysts, many with very substantial educational backgrounds at some of the finest universities.  One of our key people is an M.D., M.B.A., Ph.D. out of Wharton and UCLA.  We are able to attract very talented people." 

"In addition to being a full service investment and merchant bank, we start companies with our own capital and move them along to an IPO or a private placement.  We recently invested and started a genomics company, which we think will become one of the most successful in the world.  We put in a total of $2 million, brought in a President, Chief Financial Officer, Chief Technology Officer, a blue chip Board of Directors, including a Nobel Laureate in Medicine, Dr. Louis Ignarro from UCLA.  The Vice Chairman of our Scientific Advisory board is Dr. Michael Hayden, one of the world’s leading genomics experts.  We think we will capture a tremendous amount of market share in the genomics field, which right now, is a very important field in biotech”.

CEOCFOinterviews - Will this be a public company?

Mr.Kriegsman: "Yes, we plan to go public shortly, either by merging into a public company or raising more money and doing it the conventional way. The name of the company is Global Genomics Capital, Inc. and I serve as the Chairman of the Board. The full Board of Directors, Board of Advisors, management team, and all the principals have made investments in the company. We have already bought 40% of a company in Minneapolis, which has a very unique technology in the DNA area. The company’s name is Blizzard Genomics, very apropos for Minneapolis since the weather is so bad there.  We intend to purchase additional companies in the near future. We have been working on that project for about two years, and although it is still early in the game, we will become a leading force in genomics."

CEOCFOinterviews – Please tell us about some of the companies that you cover?

Mr.Kriegsman: "We have looked at the 2001 market and are very hot on certain dramatically undervalued companies.  One of them is HEARx (AMEX: EAR), and their stock is now at about $2. It is the third leading provider of hearing care in the USA with about 80 retail centers located in three regions representing a $600 million market. Through a carefully executed strategy, the company has developed a reputation for providing quality hearing care in its own hearing care centers and it has become a dominant provider of hearing care in the regions that it services. We think HEARx could be at least an $8 stock within a year."

"Another company we like very much is Supergen, (NASDAQ: SUPG), founded by Dr. Joe Rubinfeld, who was also one of the founders of Amgen. Supergen has completed Phase III trials for a pancreatic cancer treatment. If you have pancreatic cancer, there is a 99% chance that you will die within 4-6 months. It is a terrible and fatal disease.  Supergen has a compound called Rubitecan, which we hope will be approved by the FDA, that extends the life of patients with pancreatic cancer. The company is also in Phase III trials for treatments of other forms of cancer. Supergen could be a $50-100 stock in the next 12 months." 

"Miravant Medical Technologies (NASDAQ: MRVT) is also currently very undervalued. Their stock has come down from about $30 to only $8.  This company has probably the best technology in the world to treat age related macular degeneration. We expect their product to reach the market next year and it could be the leading product in the world."

"Then there is Cytomedix (OTC BB:CYDX). They have a patented technology for wound closure. If you have diabetic ulcers and face amputation, their product will let you avoid drastic surgery. I think this company is very undervalued at about $3. They need to raise additional capital and have been successful in doing so in the past. They have agood management team and I think their stock will rebound tremendously."

"Also, there is Siga Technologies, (NASDAQ: SIGA) a leading company in vaccines. They are a very interesting, early stage company with very good technologies and undervalued at $3."

CEOCFOinterviews – What is your thoughts on the management team of

Mr.Kriegsman: "Dr. Paul Brown is the principal executive at HEARx. He was Chairman and Chief Executive Officer of Metpatch, which was sold to Corning Glass for $140 million in l982. He is a graduate of Harvard, with an M.D. from Tufts.  Paul is a brilliant executive, and he and his management team can build HEARx into a major company. We think that ultimately HEARx will either make a substantial number of acquisitions or will be
acquired at a very significant price. And, we think that its stock is one of the most undervalued in America right now."

CEOCFOinterviews - How does HEARx market their product?

Mr.Kriegsman: "They are basically doing retail hearing care in their centers. There are 33 of them in Florida, 13 in New York, 15 in New Jersey and 19 in Southern California. Their headquarters are in West Palm Beach, Florida.  They cater to patients whose health insurance and managed care organizations have contracted with them for such care, and to retail self-paying patients."

CEOCFOinterviews - What does HEARx have to do to grow?

Mr.Kriegsman: "I think they will make some key acquisitions, some strategic alliances, and open more centers. They know how to manage their centers and their revenue base is growing dramatically. This year it could grow 40% . We project that they are going to be very profitable in the year 2002 doing about $87 million in revenue and earning about $5 million in after tax profits. The stock is now worth about $20, yet it is selling for about $2. A company growing that fast could be worth at least $250 million, yet it is only worth $20 million now."

CEOCFOinterviews – What is the outlook for the medical e-commerce

Mr.Kriegsman: "The e-commerce market has been devastated, all the stocks have gone down almost next to nothing and many companies have faced bankruptcy. I think the problem with the e-commerce marketplace is shareholders that bought stock, did not actually understand how difficult it is going to be to penetrate the medical marketplace. Doctors are very busy servicing their patients and do not have the time to be on their PCs, and their staff is not necessarily adept at working with computers. I believe that there was also a great deal of hype in terms of what could be done in the medical and health care fields. Many companies jumped on the bandwagon and at the end, it was the emperor's new clothes. There are no clothes and they are basically naked.  Most of the companies are naked in this field and will be lucky to survive.  I am conservative when it comes to e-commerce in healthcare; I am not sure who is going to make it.  A lot of money has been thrown at WebMD, and they have tremendous problems.  Whether they can make it at this point is debatable. I think it will work for anybody who can dominate the market, who can develop great products that people want at a good price, and who can get doctors, patients, hospitals, and health care facilities using their systems and make a profit. However, I think there will be, and has been, a tremendous shakeout in the field and I am not sure what or how many, if any, are going to make it in the e-commerce field. Before going into a deal in e-commerce, I would do an extraordinary amount of
competitive analyses and due diligence.  If through doing this research, we can find the few companies that will survive and succeed, then we would do very well."

CEOCFOinterviews – What final thought would you like to leave with the investment community?

Mr.Kriegsman: "We love the health care space, because you can save a lot of lives and also make a lot of money.  I think that working in health care and investing in health care is about the best place to be. If you invest in a company like HEARx, which improves the quality of life for many, contributes to community economies, and is also financially successful, you can be sure that it will be a sound investment."


March 2001
Healthcare Services

Providing an attractive investment
given it's typically defensive and non-cyclical nature


Gerard Klauer Mattison
& Co.


  Andreas Dirnagl
Senior Equity Analyst

Interview conducted by:
Walter Banks
, Co-Publisher

March 2001

Bio of Analyst

Andreas J. Dirnagl is a Senior Vice President and research analyst at Gerard Klauer Mattison. Before joining the firm in 1998, Mr. Dimagl was a vice president - investment banking in the Healthcare Group with Deutsche Morgan Grenfell. Prior to that, he worked in Eurobond underwriting in London with Deutsche Morgan Grenfell and as a client relationship manager with Deutsche Bank in New York. Mr. Dimagl earned an MBA from New York University and a BS in Business Administration from Georgetown University.

  About Gerard Klauer Mattison & Co.  

Gerard Klauer Mattison (GKM) is an equity research and investment banking firm, serving the institutional marketplace.  With over 20 senior, published analysts, the GKM Equity Research department covers more than 200 public companies, with a principal focus on the technology/telecommunications, media/entertainment, healthcare, energy and consumer industries.  GKM offers its investment banking clients the benefits of its award-winning research coverage, coupled with the depth of the firm's industry contacts and knowledge base.  GKM has raised over $4.7 billion in public offerings and private placements, and advised in over $3.0 billion of mergers and acquisitions, bankruptcies and leveraged buyouts.

Gerard Klauer Mattison Asset Management, comprising GKM Advisers, Inc., GKM Private Client Services, GKM Venture Partners, L.P., and Pattern Recognition Fund, L.P., has over $600 million in assets under management through its hedge funds and traditional money management services.

Founded in 1989, GKM remains privately held.  The firm is headquartered in New York City, with offices in Boston, Chicago, Los Angeles, San Francisco, and Tel Aviv.

CEOCFOinterviews - Mr. Dirnagl, please tell us the sectors that you cover?

Mr. Dirnagl:  "I cover the Healthcare Services space for the firm, which includes areas such as the acute care hospital sector as well as the renal dialysis sector; the assisted living sector and some selected medical technology."

CEOCFOinterviews What trends are driving investors towards these spaces?

Mr. Dirnagl: "There are differing investment and thesis for the particular areas that we cover.  In general, healthcare services, particularly in the sort of markets that we’ve been seeing over the past couple of weeks and months are traditionally considered a very defensive non-cyclical sector.  They tend to be safe havens for investors in times of economic uncertainty, and economic recession, usually characterized by things such as falling interest rates, and rising inflation fears. Certainly some of the tech gloom and doom that we’ve been seeing over the past few months means that investors are shifting their money out of those sectors, and again are just looking for defensive non-cyclical areas.  Unfortunately, people will continue to get sick, no matter what the economy is like, and that continues to benefit companies such as hospital companies, and renal dialysis companies.  There is also the medical technology side, which is very similar, in that it is healthcare oriented. Perhaps not as much driven by some of the negative market sentiment, is the fact that there are many companies out there with innovative medical technology that have very good growth prospects going forward. This is based on general Healthcare trends, including things such as the aging of the US population.  The “baby boom” population is now beginning to hit their 50’s, and it’s traditionally in the 50’s and 60’s, where people tend to require a lot of medical intervention or a lot of their healthcare needs.  In fact, about 80% of a persons lifetime healthcare expenditures will be spent in the last few years of their lives. Moreover, these few broad trends are driving investors towards these spaces."

CEOCFOinterviewsWhich of the companies that you cover would you describe as trendsetters.

Mr. Dirnagl: "We  have a couple, one of which is a Hospital Company under coverage called Universal Health Services (NYSE: UHS), which is one of our favorite picks in that space, and we are giving them a buy rating.  They focus on acute care hospitals, in what we call “tweener markets”, in which we normally divide hospital companies into urban/suburban providers or rural providers. Universal Health focuses on those in-between markets.  They are in places like Las Vegas, Nevada, in McAllen, Texas, and many of the border communities of Mexico down in Texas.  They are also in places like D.C., and Puerto Rico.  Those areas are characterized as having double the national population growth and a hospital company whose local facility usually has a dominant, number one position or a strong number two position. Universal Health Services is also making a number of acquisitions, which we think will help fuel growth in the future.

On the other side, a company that we like is CardioDynamics International Corp. (NASD: CDIC).  They are a company in the medical technology field, which we believe have a very innovative and new paradigm for hemodynamic monitoring, which is the monitoring of certain heart functions.  These are heart functions, which can’t be monitored without an extremely costly and very invasive procedure, which requires a couple of days hospital stay. Their main product is the “BioZ System”. This is a machine that performs a test to monitor the six main hemodynamic functions, using just more than a few sensors and electrodes to the body and can be done in about ten minutes at a much lower cost than the other option, which requires a lengthy hospital stay."

CEOCFOinterviewsCan you give us an evaluation of their management team?

Mr. Dirnagl: "I think that the company has an extremely strong management team., starting  with Michael Perry, their CEO.  Mike has been a successful person in the healthcare field.  He served as VP of operations for a company called Pyxis, which was a healthcare management information systems company. Prior to that, he was in various manufacturing and finance positions at Hewlett Packard’s medical products group, so he obviously has a lot of experience in this industry, particularly in taking what are innovative technologies and bringing them to the market. Mike is supported by a number of people, including Rhonda Pederson, who is the President of CardioDynamics.  She has 15 years of experience in the industry, and was President and CEO of a company called Culture Technology, Inc, which was a private Biotech company. Prior to that, she held a number of positions, including companies such as American Home Products, in their medical devices division and General Electric Medical Systems.  Finally, and probably worth mentioning is Dennis Hepp, who is the Chief Technology Officer of the company. He has almost thirty years of experience in cardio vascular medicine and the medical device industry.  He was previously with Medtronic, Inc. (NYSE: MDT), which is the industry leader in cardiac products, and he holds a degree in Electrical Engineering.  Therefore, they have a broad management team that is very experienced in medical devices and medical technology, and probably most importantly is experienced in bringing new medical devices and technology into the market."

CEOCFOinterviewsHow long have you been covering CardioDynamics?

Mr. Dirnagl: "I’ve been covering CardioDynamics a little over a year now."

CEOCFOinterviewsWhat did you want to see them accomplish over the past year, and have they met those goals?

Mr. Dirnagl: "They’ve done exactly what they said they were going to do. The thrust of the company, and I think it is the most important aspect, which is; when bringing a new medical technology or new medical device to the field, the key to success from a financial point of view for a company trying to do that is, physician adoption. That means that the company has to educate the entire physician community, letting them know that there is a new option out there for the treatment of various patients, and in the case of CardioDynamics, anything that requires hemodynamic monitoring.  The core of the companies focus right now is in the congestive heart failure market, so they’ve been doing a very good job of getting out to such functions as the American Cardiology conferences, and getting the real thought leaders in the Cardiology field to stand behind their technology and to support what CardioDynamics is trying to do.  They are undertaking a number of clinical studies in which they are trying to show the efficacy of this product for various types of patients. I think where the company has done a very good job, is where they continue to look for ways to expand their potential market.  They currently focus on the congestive heart failure market, but over the past couple of months, they’ve been expanding that focus to include such things as the hypertension market, which potentially dwarfs the congestive heart failure market. They’ve recently announced a joint venture, alignment or agreement with the Heart Lung Associates of America, to focus on the use of the product with renal dialysis patients, which is another 300 thousand patient population in the United States.

From a financial point of view, the company has continued to grow sales at a pretty impressive rate.  Their most recent quarter showed 51% increase in revenues year over year.  There was quite honestly a bit of a disappointment from an earning point of view back in the 4th quarter, just a few months ago. We were looking for a loss of 3 cents for the quarter, whereas the company posted a loss of 18 cents.  It really had a lot to do with the company investing in its future, specifically building up its sales and marketing in it’s clinical and support areas, looking through their list of customers. They along with a number of other companies had one customer in particular that was more of an Internet related play, and therefore decided that the most prudent thing to do would be to basically write off all of the inventory and accounts receivable associated with that customer. 

Finally, from a positive trend point of view, the company has what I believe is a very important relationship with GE Medical Systems, who is their partner in terms of distribution of the “BioZ System”. They have not only expanded that partnership in terms of its scope, i.e., into such places as Japan, but they’ve also expanded that partnership in terms of its scale. Most importantly, is an announcement and a recent introduction of their new product, the "BioZ ICG Module" which is designed to be used with GE Medical's "SolarT" monitoring system, and will be a module that will simply plug in to existing monitoring systems in hospitals, of which GE is the market leader. That, I think has a very large potential from the point of view, that floor space is basically a very high commodity within a hospital environment. The ability to be able to simply plug into an existing monitor system as opposed to having to have yet another box within the hospital environment, particularly in the ER section, could be very important and would most likely be a good driver of sales going forward. "

CEOCFOinterviewsWhat would you like to see CardioDynamics accomplish over the next 6 months to a year 

Mr. Dirnagl: "I think the biggest goal that I would be posting for them is one that they have accepted, and that is, reaching breakeven status, which we estimate is going to be sometime between the second and third quarter this year (2001).  The company has a good cash position, and has more than enough cash to see it through to that breakeven, but that’s obviously an important turning point for an early stage company.  Other than that, we want to see them very much continue what they’ve been doing now. We expect to see the benefits of some of these investments that they’ve made over the last couple of months, again particularly in their sales, marketing and clinical support areas, begin to bear fruit in terms of accelerating sales, not only of the actual product, which is the Bio-Z monitor, but also with their disposable sensors. It is sort of the old razor blade verses razor financial model, and the clinical support staff will go along way in terms of driving that disposable sensor income as well.  Finally, what is important with any early stage company such as CardioDynamics is the continued investment in research and development as we’ve highlighted before, particularly in terms of trying to find new areas of applicability for the product."

CEOCFOinterviews What is your rating for CardioDynamics?

Mr. Dirnagl: "We rate them a buy. Overall, what I would want to say about CardioDynamics is that from my point of view, this is a typical early stage medical device company. It is probably even past early stage at this point, where the key really is adoption. What we have seen repeatedly within the Healthcare industry is that adoption is something that probably takes longer than what you expected it to take, but once it takes off it really becomes an accepted standard, and becomes broadly used among the industry.  There are many examples of this; in the past a company called Nellcor, which was acquired by Puritan-Bennett which was in turn acquired by Mallinckrodt, started off very similarly in terms of their technology, called pulse oximetry, which is the ability to read the oxygenation of the blood. They had a slow start and then the technology exploded in terms of its acceptance."

CEOCFOinterviewsDo you see that happening with CardioDynamics?

Mr. Dirnagl: "I do see that happening with CardioDynamics. Quite honestly, from an investment point of view, the question is when does that occur, and that is something that is very difficult to predict with any clarity. However, with the company positioning itself very well in terms reaching breakeven status, sometime mid this year, they continue to grow the company slowly until the point where they really can take off in terms of their acceptance."

CEOCFOinterviews Is there another sector that you would like to mention in closing?

Mr. Dirnagl:  "I would like to leave you with yet another sector which we cover, and that is the renal dialysis sector.  A company that we like in that sector is a company called DeVita Inc. (NYSE: DVA), formally known as Total Renal Care. They are a renal dialysis provider; they own and operate dialysis clinics.  Dialysis is basically the substitution of artificial means for patients who have had kidney failure, i.e., it’s a way to filter the toxins out of the blood. The Dialysis Industry as a whole is a pretty good and stable business, with a 6 to 9% patient population growth, and very stable in terms of predictability of revenue and cash flow, from the point of view that patients have to come to you 3 times a week, or they die.  The company about two years ago at this point, faced a huge disappointment from the point of view that they made a major acquisition and their administrative and back office functions collapsed, causing cash flow to go negative and revenues to decline precipitously. A new management team was put in place at the company with Kent Thirty, as the Chairman and CEO. He has very good experience in the industry, and he has done an excellent job over the past 12 months, in turning that company around on an administrative basis, and now he is taking what we would consider a laser like intensity of his focus from the administrative side, now that its fixed, and placing it on the operations side. Theirs, is another story where we think the possibilities are very good, and that turning that company around, putting it back into an acquisition mode and really focusing on operations could provide a lot of upside from where we stand now."

CEOCFOinterviewsWhat is the rating that you’re giving DeVita Inc.?

Mr. Dirnagl: "We rate them a “buy” as well.      

CEOCFOinterviews What final thoughts would you like to leave with investors?

Mr. Dirnagl: "In times of economic and market uncertainty, healthcare provides for an attractive investment given it's typically defensive and non-cyclical nature.  Traditional areas such as hospitals and dialysis providers can provide an attractive and highly visible earnings stream, which should provide for good stock appreciation.  Finally areas such as medical devices and technology, particularly early-stage companies can provide for dramatic upside as their products gain acceptance and increased usage in their respective fields."

April/May 2001
      Technology, Retail
& Healthcare Companies

Internet infrastructure
and network security

First Analysis

9500 Sears Tower
233 S. Wacker Drive
Chicago, IL 60606
Phone: 312.258.1400

Howard Smith

Interview conducted by:
Walter Banks, Co-Publisher

May 2001

Bio of Analyst

Howard Smith

Howard joined First Analysis in 1994 and, as a senior vice president, coordinates the firm’s Internet infrastructure investment and research activities. As a private capital investor focused on growth equity opportunities in the sector, Howard works with entrepreneurs building cutting-edge Internet-based businesses, and evaluates hundreds of business plans annually. As a public equity analyst covering Internet infrastructure and network security companies (such as Exodus Communications and VeriSign), Howard regularly speaks with the senior management teams of the sector’s leading public companies, and he has deep knowledge of the sector’s competitive dynamics and market trends. Howard has also played a key role in several mergers, acquisitions, and public equity underwritings in the sector (such as the IPO of PKI player Zergo, now Baltimore Technologies)

Howard’s understanding of the sector is grounded in his earlier work in the telecom infrastructure and equipment sector, where he established coverage of several prominent public companies (such as Comverse Technology). Prior to joining First Analysis, Howard was a senior tax consultant with Arthur Andersen, where he advised investment partnership clients on tax-related issues.



University of Chicago: MBA (finance)
University of Illinois at Urbana-Champaign: B.S., accountancy, Highest and Bronze Tablet Honors

Certified Public Accountant (1991 Elijah Watt Sells AICPA award winner

About First Analysis

Founded in 1981, First Analysis is an integrated, research-driven investment organization serving:

-          emerging growth companies, with (growth) equity and venture capital investments

-          financial institutions, with public equity research and

-          corporations, with corporate finance and M&A advisory services


First Analysis applies a unique strategy to achieve deep domain expertise in the areas of focus.  Its 40 investment professionals average more than 10 years of relevant experience.


Successful execution of this strategy has yielded results including

-          $500 million in private capital funds invested in over 150 companies since 1985

-          first –quartile private capital performance supported by over 50 IPOs and major M&A transactions

-          research on more than 100 publicly traded companies

CEOCFOinterviews – Mr. Smith, what is your position at First Analysis Security?

Mr. Smith: I coordinate our technology research practice, my area of expertise is network security.

CEOCFOinterviews Please tell us about the industry which you cover?

Mr. Smith: The network security industry is a very dynamic industry, and a high growth industry.   We’ve been following it here at First Analysis Security since the Internet caused an up-tic in the growth, which happened about 1995. There are several different sectors within this industry. First, there is anti-virus, which has been around since the 1980’s. The other sectors are firewalls, which have been around since the mid 1990’s, virtual private networking equipment, intrusion detection to try and detect when people are coming into a network who shouldn’t be, and strong authentication – that is when you’re logging onto a network or computer, making sure you are who you claim to be. As the world has become more distributed in terms of how it controls data and where that data is placed, and who has access to the data, such as outside partners, vendors, and suppliers, the security issues associated with that data have increased exponentially, so it’s been a phenomenal investment area.

CEOCFOinterviews What do you see on the horizon for these areas?

Mr. Smith: There will be no shortage of new threats coming about. To date, the incidents which have gotten a great deal of attention have been websites that have been defaced, and it’s more of a PR issue for the companies that have been attacked rather than a real financial loss issue. You are starting to hear of issues of credit cards being taken off servers, and more serious issues just recently with some companies such as Microsoft where  a Russian hacker stole source code. Lucent is another example of a company that got some press because one of its R&D projects was stolen by some engineers. I think that you will start to hear more of those types of incidents. Therefore, the real threats as most data has suggested, is with internal employees, actually stealing or manipulating or causing problems with the systems and the real financial losses will start to get more publicity. All of this will just serve to force more attention on the sector. Chief Security Officers will probably be as common as Chief Information Officers in large corporations a couple of years from now.

CEOCFOinterviews What effect will that have on investors?

Mr. Smith: I think that it will continue to create opportunities. There are a couple of nice things from an investment perspective. First, the numbers and types of threats keep changing, so that there is always a new area of security emerging to address those newer threats. Therefore, it’s not a static area where you have a leader today, and that’s the leader for all time. Secondly, there are two aspects to security. Number one is prevention or protecting assets and the other is opening up new revenue opportunities or new ways to do businesses. People are not going to conduct business online and have a paperless economy that many of the exchanges, such as the B2B exchanges, and the B2C exchanges have been talking about, unless the security issue is solved, and that is a whole different area of security that’s at a newer stage in its life cycle than the asset protection solutions.  Another interesting area is wireless security, which is not a whole new sector, but there are some unique wireless security angles such as wireless commerce and wireless data which are really going to take off, and security is going to be right along with it and that will provide an opportunity for investors.

CEOCFOinterviews What companies do you like in this sector?

Mr. Smith: We have two strong buys in that sector right now. One of our long-term favorites has been Check Point Technologies (NASD: CHKP), which is an Israeli based company, and they are the leader in the firewall and VPN markets, which are two of the most dynamic markets. The company is well managed, and has one of the highest margins of any publicly traded company. Their net after tax margin has been running over 50% for the last several quarters. We have a strong buy on that stock.

Our other strong buy is a very different type of company, called ValiCert Inc.  (NASD: VLCT). This is an emerging opportunity, a very small company with much greater risk, but is in an interesting emerging market, and given it’s market capitalization and the opportunity in front of it, we think that it provides, for a risk tolerant investor, a good opportunity.

CEOCFOinterviews – What is your evaluation of their management team?

Mr. Smith: I think their management team has proven to be very adept at changing with the market, and that is one of the things that we look for and one of the things that we like about the company. We’ve know this company for quite some time, pre-dating it’s IPO in July of 2000, when the company was really a pure play on certificate validation.  A certificate is a little esoteric term in security. It’s basically an identifier that could be issued to a person, much like a passport, and once it’s issued it has an expiration date but there is really no mechanism to find out if, for some reason, it was revoked before its stated expiration, by the person who issued it. For example, a company might issue certificates to its employees.  Once a person is no longer an employee of the company and they want the world to know that it has revoked that credential.  However that credential is still out there, with an expiration date that hasn’t come up yet. Therefore, ValiCert Inc. has some very unique technology for solving that problem of letting the world know when a certificate is no longer valid, and that is a pure play on derivatives of digital certificate adoption, which hasn’t been as fast as a lot of people have thought. So they were very quick to go out and expand their offering and their value proposition to customers by acquiring some digital receipt technology and some secure file transfer technology and putting it all together. More recently, with the down turn of the tech market, what I’ve been impressed with is that they’ve remarketed or repackaged this technology to target vertical applications. They have a cash management application, and an insurance claims application, an e-government application and they are not selling the core technology to the customer. They are selling a way to bring your business on line and save money, a good ROI sale. Therefore, what I would highlight about management is their ability to adapt to the economic conditions and environment that they are facing, and they’ve managed to do it without missing a beat or missing numbers at any point.

CEOCFOinterviews Can you give us a picture of their market?

Mr. Smith: The core original business of validating certificates is a small market today. It may be less than 10 to 15 million dollars on an annual basis, but as this whole infrastructure builds out over the next 5 to 10 years it could grow into a multi-billion dollar market, and they are positioned to be the leader there, which is one of the things that has us excited about the stock.  But there’s a question of how quickly that happens and how quickly the market expands. If you look at the market more broadly, as the market for providing solutions to move processes online, that is a much bigger market today.

CEOCFOinterviews What would you like to see them accomplish over the next year to reach that next level?

Mr. Smith: The key for ValiCert Inc. is to reach cash flow positive. This was one of the last companies that came out under the Internet model of IPOs and public offerings, where the company could still be burning a lot of cash and not have that much revenue. They are currently burning about 8 million dollars a quarter of cash, and the management believes and we do as well, as long as they hit their plans, that they have enough cash in the bank to take them to profitability without accessing the capital markets. However, clearly, that is the issue on investors minds, and that is what they have to execute and prove the next year. We would expect them to be profitable at the very end of 2002. What I think also highlights some of the quality of their management, is their recognizing the economic environment that we’re in today. They took the proactive step of reducing their expenses through a head count reduction of about 10%, to help enable them to meet that profitability objective.

CEOCFOinterviews Are there any other companies that you would like to highlight?

Mr. Smith: There are two other companies that I would highlight as being long-term leaders in the space. One is VeriSign, Inc. (NASD: VRSN), a large cap company which is very well managed, and the other would be RSA Security Inc. (NASD: RSAS), which is in the strong authentication space, and it has some pretty core technology in encryption as well as their main business, which is the authentication. They are also a player in the emerging area of digital certificates. Therefore, it has been one of the longer term, steady performers, and we thing that is an interesting long-term play as well.

CEOCFOinterviews Thank you for your very insight on this Industry.


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