Is Capitalism About to Self-Destruct?

A MONTHLY REPORT COVERING NEWS AND INVESTMENT OPPORTUNITIES JOSEPH MORGENSTERN, PUBLISHER June 2001 Vol. XVII Issue No.6 You are invited to visit us at our websit: http://ishitech.co.il

Is Capitalism about to self-destruct? An unlikely scenario! Someone out there is likely to be researching and more and more perceived as seeders of pennies writing the novel that will provide ultimate insights and harvesters of dollars. into a period of booming share prices. The publica- The venture capitalists formed alliances and found tion of the Kesselman & Kesselman Pricewater- ready friends among investment bankers, respon- houseCoopers Money Tree Survey, the report card sible for creating a public market for the shares of of venture capital activities for Q1 2001 in Israel, the companies fueled by venture capital. Securi- and the popular pressÕ cries of crisis in the high-tech ties analysts joined the fray as the men and sector, prompts us to step back and put things into women capable of analyzing balance sheets and perspective. In the past five years we have experi- Ôprofit and loss statementsÕ. They are part of the enced nearly non-stop gains in equity prices. A same investment banks whose rapid rise in technology equity prices began to vested interest was for inflate into a bubble. The bubble dangerously expanded, grew to ever larger proportions. When it http://ishitech.co.il exceeded the bounds of physical restraint, "it burst all over us". In this Issue

Venture Capitalists and Investment Bankers, at the Is Capitalism about to self-destruct? An unlikely scenario! Infineon and Saifun Semiconductors to Develop Flash Memory outset of the Ôplatinum ageÕ 1990s, were individuals Technology unknown to most, except perhaps to students of Benchmark Capital Closes $220 Million Fund to Invest in Israeli finance and to those in need of capital. High Tech Biotechnology Consortium Launched with $30-40m. Investment BRITECH Provides Funding Traditionally, venture capitalists function in a world Israel Unveils new Air-to-Air Missile apart from other, detached from conventional finan- $270 million in OCS Research and Development Grants cial pursuits. Venture capital is and was an industry Israel's hi-tech industry has fired 5,000 workers this year Editorial Comment whose primary task was to gather excess capital, How the Global Individual Investor Can channel it to creating new and productive enterpris- Capitalize on IsraelÕs High-Tech Boom es and as part of the process, create substantial DoubleTwist and Yeda in Exclusive Agreement Millennium Materials Fund 2 Invests in Cymbet fees and profits. Those who were privy to the nego- ISRAEL HIGH-TECH MODEL MILLENNIUM PORTFOLIO and tiations between venture capitalists and the UPDATES: providers of capital, heard explanations of the high Retalix BreezeCom risk these investments entailed. They were also told Orbotech that 60% compounded annual return was the busi- CheckPoint ness goal of the venture capitalist. Comverse The International Monetary FundÕs Report on Israel GalayOr Networks Secures $8 Million Seed Funding The venture capitalists, as the happy results of their activities were popularly publicized last year, were

Copyright 2001: Israel High-Tech & Investment Report Subscription, Bulk copy and reprint information available on request Editorial Offices: P.O.Box 33633, Tel Aviv 61336, Israel Tel: 972-3-5235279 Fax: 972-3-5227799 E-mail: [email protected] ISRAEL HIGH-TECH & INVESTMENT REPORT June 2001 analysts to announce Ôbuy recommendationsÕ. portfolio companies. So what is ahead of us? The Judging by the proportion of Ôbuy recommenda- venture capitalist will avoid start-ups and will tionsÕ, almost totally to the exclusion of Ôsell rec- shore up his portfolio holdings and await signs of ommendationsÕ. The system worked in an upward an American economic revival, that will be herald- moving market. However, in the final analysis, it ed by a 30-40% recovery in stock prices, based worked almost exclusively to the benefit of the on historical statistical studies. As prices rise the investment banker. Initial Public Offering market will revive, and the In the US alone, approximately 50% of Americans cashing out process for the venture capitalists, own shares. The public was hypnotized by the will resume. Profits will increase and private equi- apparently unending rise in share prices. Its ty investors will seek to allocate more funds. response to ÔBuy recommendationsÕ was followed When will this happen? Hard to tell exactly! The by quick and discreet calls to brokers with instruc- stock markets could begin their upward move as tions to buy. Occasional drops in the share market early as the November 2001-March 2002. were "used" by others to enter. A global wave of In the meantime only 33 start-up companies in greed ensued. The greed was fanned by analysts. Israel received any sort of funding in Q1 2001. In The great Isaac Newton lived in a period of boom- the preceding quarter 59 start-up companies ing share market prices. He accumulated a port- received investment. Israeli entrepreneurial activ- folio of shares on the London Stock Exchange. ity will be delayed but it will not evaporate. They rose and rose and one day the brilliant sci- Engineers, communications specialists and tech- entist decided it was time to reap his good for- nologists currently thrown out of work, will find tune. It could not continue to go up, he reasoned. employment in existing companies. The Intels Also, the profit was above all expectations. And and Vishays with their well established Israeli so he sold and banked the profit. But then repur- operations, will be happy to employers of the chased the sold shares because, he was unable skilled, intelligent and diligent. Some may even sit on the sidelines while prices continued to rise. return to the high tech jobs in the army! The market shortly afterwards collapsed and so did Isaac NewtonÕs fortune. For the rest of his life Israel High-Tech & Investment Report he never again mentioned the stock exchange. first published in January 1985 The market succumbed to The Law of Gravity and crashed. Publisher and Editor in Chief Is capitalism, of which venture capitalists are an Joseph Morgenstern integral part, about to self-destruct? An unlikely Technology Review Board scenario! There may be structural flaws but not Prof. S.J. Joel-Cohen, MD, FRCS. FRCOG irreparable damage. The flow of statistics reen- Prof. Hylton Miller, M.B. Ch.B. force this view. IVC-ONLINE has concluded that Dr. Clive L. Carpel, M.B. Ch.B. at the end of 2000 the local venture capital industry had a $3.0 billion accumulation of cash. This Copy Chief almost identically matches the $3.1 billion raised Debbie Mor by Israeli high-tech companies in all of 2000. Not Web Master exactly a shortage of cash. Marty Bokel The seeds of the next boom in venture capital are already being sown. As start-ups inevitably feel Subscription Inquiries the squeeze, further cash reserves are likely to Tel. 972-3-5235279 Fax. 9723-5227799 accumulate in the coffers of the Venture Capital- E-mail: [email protected] ists. According to the Money Tree Survey, 18 ven- Annual subscription t $95.- per year,11 issues, Israeli residents add 17% ture capital funds made no investments during the Web Edition and Achives quarter, either in new companies or in their own http://ishitech.co.il

2 June 2001 ISRAEL HIGH-TECH & INVESTMENT REPORT

$ 471m. was invested in 132 companies in this quarter, as compared to $ 845m. invested in 193 companies in the previous quarter.$ 471m. was invested in 132 companies in this quarter, as compared to $ 845m. invested in 193 companies in the previous quarter.

Kesselman & Kesselman PricewaterhouseCoopers Money Tree Survey Infineon and Saifun Semiconductors to that it has closed a $220 million fund, dedicated Develop Flash Memory Technology to accessing the Israeli high-technology market. Benchmark Israel has drawn support from insti- Infineon Technologies AG (FSE/NYSE: IFX) and tutional investors, leading corporations and influ- Netanya based Saifun Semiconductors Ltd. ential high-tech executives in the U.S., Israel and announced that they have established a joint Europe. venture, named Ingentix. The new company will In addition to Benchmark institutional and individ- develop, manufacture and market flash memory ual partners, including Cisco Systems (Nasdaq: products based on SaifunÕs patented Nitrided CSCO), Rational Software (Nasdaq: RATL), Mer- Read Only Memory (NROM) technology. cury Interactive (Nasdaq: MERQ), and Infineon Ingentix initially will focus on developing MultiMe- Technologies (NYSE: ISX). Benchmark and its diaCardTM storage products, the worldÕs small- corporate partners will work together to best est memory cards. The company expects to roll leverage Israeli high-tech opportunities. out an extremely low-cost Flash-MultiMediaCard, ÒSupport for Benchmark Israel has been very with a memory capacity of 64 megabyte (MB), in strong,'' said Mark Kremer, general partner of the third quarter of the year 2002. Benchmark Israel. ÒThe vibrant Israeli high-tech industry is second Benchmark Capital Closes $220 Million only to Silicon Valley,Ó said Paul Levy, chairman Fund to Invest in Israeli High Tech of Rational Software. ÒWorking with Benchmark Benchmark Capital,Silicon Valley's leading early- for the last five years, I am excited about what we stage high-tech venture capital firm, announced can do together for both portfolio companies and 3 ISRAEL HIGH-TECH & INVESTMENT REPORT June 2001 investors.Ó The new fund will focus on early- Biotechnology Consortium Launched stage investing in technology companies that with $30-40 million Investment seek to create new markets in areas where the A number of Israeli biotechnology companies partners have direct experience. These areas have received approval in principle to establish a include enterprise applications, infrastructure consortium in cooperation with the Magnet Pro- systems, software, networking equipment and, gram of the Office of the Chief Scientist at the semi-conductors and optical devices. Ministry of Industry and Trade. The consortium Benchmark Israel is the sixth fund established by will include both biotechnology companies and the company since it was founded in Silicon Val- academic institutions. ley in 1995. It will be managed in Israel by general partners Mark Kremer, Arad Naveh and The consortium is to be called Pharma Logica. A Nachman Shelef. core group from the consortium is now being Despite the security situation in Israel and mar- formed before final approval is received. The ket uncertainty, this financing drive exceeded the consortium, operating under the aegis and original goal of $200 million in record time of financing of the Office of the Chief Scientist, will about six weeks. Benchmark is considered one develop technologies and forecasting systems of the top ten VC firms in America, following out- for the low risk development of pharmaceuticals. standing investments in Internet firms like eBay. The company suffered a significant blow during The consortiumÕs partners include bio-pharma- the last year, as one of its funds invested largely ceutical companies D-Pharm, Peptor, and Phar- in dot.coms which ultimately failed. Benchmark's mos (Nasdaq: PARS); bioinformatics companies current portfolio totals approximately $2 billion. Compugen (Nasdaq: CGEN), BioIT, and HBI and Benchmark noted that in addition to institutional HPBM of the Harlan group, and representatives investors (such as leading American universi- of academic labs and institutions. ties), four strategic partners were signed on: Cisco Systems (Nasdaq: CSCO), Rational Soft- D-Pharm VP of Research and Development Dr. ware (Nasdaq: RATL), Mercury Interactive (Nas- Itzchak Angel, will serve as consortium chair- daq: MERQ), and Infineon Technologies (NYSE: man. Angel stated that the financing for the new ISX). ÒBenchmark and its corporate partners will project is estimated at $30-40 million, but the work together to best leverage Israeli high-tech,Ó sum is not final, because the Office of the Chief the statement said. Scientist will authorize financing based on annual or multi-year R&D proposals. According to Naveh, the strategic partners joined the Israeli fund because of the technological Pharma Logica will operate for three years, character of Israeli industry, which operates with- according to the group's plan. 70% of the financ- out a local market. ing will come from the Office of the Chief Scien- tist, with the remainder coming from academia Shelef said that "we plan to invest in about 15 companies, with an average investment over its BRITECH Provides Funding lifetime of between $10-15 million." Bi-National British-Israel Technology Fund has Benchmark Israel has to date invested in Inte- made available $720,000 as part of a collabora- gra5 and Lycium Networks. Its fields of primary tive R&D project. One partner is International interest include organizational applications, infra- Technologies Lasers (ITL). It manufactures and structure systems and software, communications exports night vision products for military and civil- equipment and software, semiconductors and ian purposes. Partnering with ITL is British optical equipment. company MDL (Measurement DevicLtd), with

4 June 2001 ISRAEL HIGH-TECH & INVESTMENT REPORT which ITL will develop the next generation data $270 million in OCS Research and collection devices for the GIS (Geographic Infor- Development Grants mation Systems) market. Ministry of Industry and Trade Chief Scientist Carmel Vernia, announced NIS 1.122 billion The product is intended to enable data to be col- (approximately $270 million) current allocations lected in a head-fitting device consisting of a for R&D projects for large and medium compa- precision laser meter, tiny video camera, GPS nies. At the same time he estimated royalty antenna, sophisticated digital compass and cel- income from successfully completed projects to lular communications. reach NIS 570 million (approximately $137 million). All the acquired data will be screened on a tiny 155 companies submitted 448 projects, valued display, positioned in front of the wearerÕs eyes. at NIS 4.287 billion, (approximately $1.03 billion) to the Chief Scientist, a 10% increase in propos- Israel Unveils new Air-to-Air Missile als for R&D grants, compared to 2000. The The Derby is a beyond-visual-range medium- OfficeÕs research committee approved funds for range missile produced by Rafael, Israel Arma- 302 projects carried out by 131 companies. ment Development Authority. Rafael has been Grant allocation by sector of activity indicated permitted by the Defense Ministry to exhibit the that 55% was allocated to communications, 18% missile at the Le Bourget Air Show this month. to electronics, 7% each to software and pharma- The missile was originally developed for the ceuticals, 4% to electro-optics, 3% each to Israeli Air Force. biotechnology and medical equipment and 2% to the chemical sector. Officials described the Derby as an all-weather active radar-guided missile, that can be Israel's Hi-Tech Industry has Released deployed against multiple targets at short- and 5,000 Workers so Far This Year medium-range. The missile is capable of lock-on The high-tech hiatus of closures created by after launch as well as before launch. The former mostly, but not exclusively dot com failures, has is ideal for medium-range targets and the latter resulted in an unprecedented wave of dismissals is best for short-range targets in engagements, this year. According to recently published figures such as dog-fights. by TheMarker.com, at least 5,000 hi-tech workers have been fired this year. The Derby is meant to resist electronic counter- measures through a guidance system devel- The layoffs began at the end of 2000. Startups oped by Israel Aircraft Industries's Mabat divi- were the first to announce dismissal, but older sion. companies followed quickly. The Derby is an autonomous Ôfire-and-forgetÕ weapon. It is one-quarter lighter than the U.S. Prominent companies that laid off staff in recent AIM-120 Advanced Medium Range Air-to-Air months include ECI Telecom (Nasdaq:ECIL), Missile. which is dismissing 1,000 workers beyond the 400 workers it fired in January. Comverse Tech- Officials said the Derby has been successfully nology (Nasdaq:CMVT) revealed 400 job cuts tested and can be deployed on such aircraft as because of deteriorating macroeconomics. the F-16, F-5 and Mirage. Rafael's vice president for marketing, Udi Ganani, said the Derby has Cisco Israel (Nasdaq:CSCO) announced 100 been offered to several countries and is already dismissals, mostly from the development team, operational.

5 ISRAEL HIGH-TECH & INVESTMENT REPORT June 2001

as its parent company slashes staff in the thou- transmission systems also said its first-quarter sands. The profit warning that Gilat Satellite revenue would be between $252 million and Networks (Nasdaq:GILTF) released for the $260 million. Analysts were expecting revenue fourth quarter of 2000 led to the dismissal of 275 of $286 million. The company declined to esti- workers out of a workforce of 1,500. It targeted mate the amount of the operating loss for the all divisions. ECI and Comverse Head R&D Grant Promising startups were also hurt by the dismissal waves, such as OnePath Networks, for- Recipients merly called Foxcom, which sent home 50 out of ECI Telecom still leads the list of those firms 160 workers, including 20 of its R&D staff. In its receiving state support for research and latest financing round, OnePath raised $40 mil- development from the Industry and Trade Min- lion at a company valuation of $200 million. The istry. Chief Scientist Carmel Vernia company has raised over $54 million to date. announced yesterday that the digital telecommunications company Editorial Comment ECI will receive a grant of NIS 161 million in 2001. Last year the company received a state "Pain" is the adjective widely used by investors grant of NIS 177 million. ECI is expected to in describing the emotional experience caused return royalties of NIS 104 million to the state by falling stock prices, the slimming down of during the year. investor portfolio values and the disappoint- Comverse which will receive NIS 69 million in ments caused by the disappearance of many state support for research and development in dot coms. But the real "pain" is the one caused 2001. The company received NIS 101 million by receiving the "pink slip"---. In the Israeli uni- last year in government R&D grants, and will verse of high-tech, until a half a year ago, get- return substantial royalties this year. ting the "pink slip" was seen as an opportunity for switching jobs, perhaps better wages and most certainly a more favorable options quarter. ECI Telecom in the 1980s began its arrangement. Today getting the "pink slip" not rise and emerged as IsraelÕs stellar high-tech only brings with it the inconvenience of looking communications company. It showed an uncan- for a new job but also the uncertainty of finding ny ability to develop and commercialize a core work in oneÕs chosen field. We hear about the technology of speech and fax multiplication over closure or downsizing of Israeli companies with existing old fashioned communications lines. the accompanying dismissal of hordes of The recent dismal results, according to sources employees. However it came as a real shocker close to the company, were only partially when ECI Telecom, as already mentioned in this caused by the decline in the global telecom Report, said it plans to reduce its work force by market which saw companies like Cisco and about 1,000 employees world-wide and cut the Nortel, among others, misjudge the growth of salaries of its top managers by 10%. The com- telecom sales. They build up inventories which pany currently has over 6,000 employees. In a remained on shelves as demand dwindled. seemingly perverse investor reaction in trading Decisions previously taken by ECIÕs board of on the Nasdaq Stock Market, the company's directors, have had an erosive effect on sales shares responded by rising 29 cents to $6.38. In and losses. In a turnaround strategy first the fourth quarter 2000, ECI recorded a net loss announced in the summer of 2000, only less of $113m. compared to net income of $56m. the than a year after introducing a 'bigger is better' previous year. Revenues for the Petah Tikvah- restructuring plan, ECI Telecom announced its based digital communications solutions devel- new initiative to divide the telecommunications oper increased 6.5% to $306m. from $288m. in giant into five smaller publicly traded compa- 1999. The maker of telecommunications and nies. The "demerger" was a bad idea, we were told. Publicly announcing it, before execution,

6 June 2001 ISRAEL HIGH-TECH & INVESTMENT REPORT was bad strategy. ECI Telecom was a name and also will integrate GeneCards into its online known to the market place. The five new com- product, DoubleTwist.com. Additionally, Dou- panies are five unknown little guys calling on bleTwist will fund further development of clients," our source added. Another source, also GeneCards at the Weizmann Institute. very close to the company, agreed that that the GeneCards a searchable database, that offers "demerger" was a bad idea. ECIÕs marketing access to concise summaries of more than muscle was fragmented, he suggested. Howev- 20,000 genes and their disease associations. er, he conceeded that in the environment of The information contained in GeneCards is par- 2000, it was difficult to hold on to key employees. ticularly useful for researchers who wish to find Many were attracted by the prospect of joining information about genes of interest in the context new companies, that would be brought to the of functional genomics and proteomics. stock market and the new perk options, would "Researchers from industry have been wanting a make them millionnaires. way to license GeneCards. I am delighted that Wall Street apparently bedazzled the ECI Board we can now address their needs through this by forecasting that the total value of the five new partnership with DoubleTwist,Ó said Marilyn companies to be spunoff, would be a multiple of Safran, head of the GeneCards development ECIÕs market capitalization. However, market team. "In addition to expanding access to conditions prevailed. As of the end of April, ECIÕs GeneCards, this relationship will allow us to con- market capitalization was under $590 million. Its tinue to enhance and update this valuable single digit stock price reflects a near fall of 85% resource.Ó from less than a year ago when it traded just ÒGeneCards has been popular with academic under $40. For investors, undoubtedly there was researchers, and we are very pleased to now pain associated with the fall in value of the ECI make this functionality available to the private shares. sector," said John Couch, Chairman and CEO of However, for personnel among those receiving DoubleTwist, Inc. "pink slips" the pain is likely to be of a different GeneCards, was developed under the direction nature. They will look for employment within this of Professor Doron Lancet, head of the Weiz- country. Their know-how and experience puts mann Institute's Crown Human Genome Center. them at the very top of international communica- The Institute is a major center of scientific tions expertise. But should they not find suitable research and graduate study, located in jobs they may have to look overseas and that Rehovot, Israel. Its 2,500 scientists, students would be the beginning of yet another "pain". and support staff are engaged in more than 1,000 research projects across the spectrum of DoubleTwist and Yeda in Exclusive contemporary science. Agreement DoubleTwist, Inc. and Yeda Research and Millennium Materials Fund 2 Invests in Development Company Ltd., the commercial Cymbet arm of the Weizmann Institute of Science, US Cymbet Corp. announced receiving a $4.5 recently announced an agreement whereby the million private placement from two venture capi- former will commercialize the Institute's tal investment groups, of which one is from GeneCards(TM) database. The GeneCards Israel. The Israeli investor is the Millennium database provides human gene data and rele- Materials Fund 2. Cymbet Corp. was co-found- vant links to other databases of highly character- ed by Mark Jenson and Genesis Business Cen- ized human genes. Under the agreement, Dou- ters foundedby Harlan Jacobs, as a develop- bleTwist will have the exclusive rights to license ment stage company which aims to develop a the GeneCards product to commercial entities, low cost unique manu-

7 (continued on page 9) ISRAEL HIGH-TECH & INVESTMENT REPORT June 2001 How the Global Individual Investor Can Capitalize on IsraelÕs High-Tech Boom

UPDATE TASE Publicly Traded Venture Capital Companies Results for the individual companies Sadot - 8.0 %*

Teuza + 13.6 %*

Marathon - 26.0 %*

Mofet - 4.0 %*

Inventech -47.0 %* Tamir Cap + na

* Yields Year to Date and as of April 29, 2001

Mofet Venture Capital earned NIS7.1 m. profit (approx $1.7 m.) in Q12001. In the comparable period in 2000 Mofet netted a NIS132 million profit (approx. $31.8m.). Mofet cashed out part of its investment in Precise Software (Nasdaq:PRSE) (a holding in the Israel High-Tech Millennium Portfolio, see p11.) and recorded a pre-tax profit of NIS 33.7 million (approx. $8.1m.) However, that profit was partially offset by a ÒwriteoffÓ of NIS22.3m. (approx.$5.5m.) Losses on Investments in VCON and NemoDynamics, responsible for a great part of the loss. Mofet sold $3.7 million worth of Precise shares in Q2, and is expected to post a $3.4 million pre-tax profit. . Mofet made three new investments totaling NIS10 million (approx.$2.4m.) in Q1. The largest of these was $2 million in Virtio, a US company. The other two investments were fol- low-up investments in NemoDynamics ($144,000) and in Correlate Technologies ($223,000). As of the date of the report Mofethad more than NIS 122.1m. (approx $29m.) in cash, available for future investments. In the past month, the shares advanced by about 20%. .

8 June 2001 ISRAEL HIGH-TECH & INVESTMENT REPORT facturing process based on battery chemistry But a company executive warned, that it is taking developed over a 12 year period at Oak Ridge measures to deal with the possibility of little or no National Laboratories. It is said to have significant growth in the second quarter, fromyear to year. It advantages over the best rechargeable batteries will continue to manage its business with pru- in the market. An important characteristic of the dence, and will take precautionary measures such Cymbet battery, is that it is a true solid state tech- as paring back certain operational and other nology, resulting in an extremely large number of expenses and monitoring its inventory levels recharge cycles (70,000) with minimal loss of closely. capacity. BreezeCom & Siemens Sign Agreement In a joint announcement, Siemens Information and IHTIR Millennium Communication Networks (ICN) Group and BreezeCOM (Nasdaq: BRZE), a leading global Portfolio News provider of broadband wireless access solutions, signed a long-term agreement for Siemens to Retalix Ltd. (Nasdaq:RTLX) announced it moved source BreezeCOM's wireless BreezeNET LAN into profit in the first quarter. Chief Executive Barry products. This agreement will allow Siemens to Shaked, in a conference call with analysts predict- provide new options in its HiPath MobileOffice ed that revenues would increase by more than Suite. The first item on offer will be HiPath Wire- 50% in 2001 to $55m. and that he expects the less, a mobility-enabled LAN solution. company to remain profitable in 2001, but he refused to provide more specific projections. China Grants Comverse Access He also said that the company would be seeking Licenses further acquisitions, with available cash reserves of more than $26m. Retalix posted first-quarter net Comverse, a unit of Comverse Technology, Inc. income of $2.2 million, or diluted earnings per (NASDAQ: CMVT), has become the first non-Chi- share of $0.18, compared with a net loss of nese vendor authorized to sell both voicemail and $276,000, or $0.03 per share, in the same period short message systems (SMS) to service a year ago. providers in China. The results, beat concensus forecasts of EPS of $0.11. The Ministry of Information and Industry (MII) has The US remains the companyÕs most important granted access licenses to Comverse for its SMS market, with a growing sector share of Ôtier oneÕ and voicemail systems, making Comverse the companies. Retalix shares are a part of the Israel only overseas vendor to have this privilege. Com- High-Tech & Investment ReportÕs Model Millenni- verse submitted a comprehensive range of tests um Porfolio. administered by the MII Mobile Equipment Quality Test Center in order to be considered for the MII access license. MII experts highly praised Com- Net Income and Revenue Up at Orbotech verse's successful test results, including the func- First quarter 2001 revenues at Orbotech Ltd. tionality, reliability, flexibility, and signaling perfor- (Nasdaq:ORBK) totaled $104.9 million, an mance of its products. increase of 27% from the $82.3 million recorded in the first quarter a year ago. Net income for the first The prestigious MII accreditation follows quarter of 2001 was $21.0 million, or $0.65 per announcements made in 1999 and 2000 that share (diluted), an increase of 30% compared to China Mobile Communications Corporation (China net income of $16.6 million, or $0.50 per share Mobile) and China Unicom respectively, had (diluted), in the first quarter of 2000. placed Comverse on their list of authorized ven-

9 ISRAEL HIGH-TECH & INVESTMENT REPORT June 2001 dors for SMS, reinforcing Comverse's status as International Monetary FundÕs Report the leading mobile enhanced services provider on Israel in mainland China. Six major mobile operators in The International Monetary Fund established in China have deployed the Comverse ISMSC sys- 1946, serves as a "global crisis banker". In time tem and have officially launched SMS to their of fiscal or monetary crisis, the IMF bolsters indi- customers. These operators include Guangdong vidual countries by providing the FundÕs gener- Mobile (GMCC), Shanghai Mobile, Liaoning al resources for short pwriods. It provides them Mobile (LMCC), Hei Longjiang Mobile, Wuhan with an opportunity to correct maladjustments in Mobile and Shanghai Unicom.Comverse has their balance of payments, without resorting to been operating in China since 1993. The com- measures, destructive of national or internation- pany has offices in Beijing, Shanghai and al prosperity. As part of the process in carrying Guangzhou, with research and development out its aims, it monitors the economies of its centers in Shenzhen and Hong Kong. members, that now number 183. It also super- vises exchange stability, and orderly exchange Analysts Comments on CHKP arrangements. Check Point Software (Nasdaq;CHKP) was Stanley Fisher, IMFÕs managing director was dropped by Lehman Brothers to a recently in Jerusalem, and presented the IMFÕs ÒBuyÓ from a "Strong BuyÓ. Lehman lowered its report. Its content covers nearly all aspects of price target on the stock to $70 from $110, citing IsraelÕs economy. The report stated, that Israeli increased competition from firms like Cisco economy by the end of Q3 2000 had experi- (CSCO), recent pricing promotion, suggesting enced the "best three quarters in recent memo- weaker customer demand, the "absence" of ry" but this was followed by "a very sharp decel- CHKP in three recent major deals, and bank- eration", resulting from a global turnaround of ruptcies in the service provider channel, which the high-tech boom, on which a good part of the put revenue growth at risk. After an initial sharp growth had depended. It also noted the negative drop of nearly 10 per cent the shares recovered impact of the security problem, which had partic- in the sessions that followed the announcement. ularly affected the tourism, agricultural On balance, analysts continue to maintain very sectors.sectors. positive ratings for CHKP. While the company It lowered its previous projection for the growth reported year-over-year revenue growth of 86%, of IsraelÕs economy from 4.5% to a "more sub- to $145 million, and EPS of $0.32 Ñ besting the dued level" of 1.5-2% for 2001. Street's number by $0.03 Ñ Revenues came in $1 million below the consensus. This brings into The report also noted, that expectations are for question one of technology's highest 2001 price- a lower level of the record capital inflows in to-sales valuations. 2000. However, there is no expectation of a worsening of the balance of payments, due to Since the shares have seen a nice run up the large sums raised last year, and that are only recently, and the company reported a revenue now being repatriated. As a result the shekel will ÒmissÓ, some believe, the time has come to be revalued as a result of the repatriation of cur- move to the sidelines. For 2001, the expecta- rency. The shekelÕs strength will also be under- tionsEPS of $1.36 (no change) on revenues of pinned, the report suggests, in response to pro- $647 million. For 2002, forecasts are for EPS of ductivity growth of the Israeli economy, which will $1.79 on revenues of $862 million. be led by the resumed buoyancy of the high-tech sector. We continue to maintain CHKP in the IHTIR The report recommended to IsraelÕs policy mak- Model Millennium Portfolio. ers, to concentrate on main- continued on p 12 taining fiscal stability. One of

01 ISRAEL HIGH-TECH & INVESTMENT REPORT June 2001

ISRAEL HIGH-TECH MODEL MILLENNIUM PORTFOLIO

Since the start of 2001 the Israel High-Tech Millennium Portfolio is only down by 11.8%. It is showing signs of strong recovery since March 21 when it was down by 27%.

The ISRAEL HIGH-TECH MODEL MILLENNIUM PORTFOLIO is a simulated portfolio We accept no responsibility for investment results based on the Model Portfolio.

11 ISRAEL HIGH-TECH & INVESTMENT REPORT June 2001 the ways to achieve that goal is to reduce interest Aviv University. Dr. Haronian established GalayOr rate levels from the current real rate of interest of together with Noel Elman, a MEMS researcher at six percent. Cornell University and Dr. Uri Geiger, GalayOrÕs CEO, in late 2000.

A Good Report Card from the IMF GalayOr's core technology is an extension of inte- * looks for a Òsubdued rate of growthÓ of 1.5-2.0% grated optics, and is based on suspended wave- for 2001 guides fabricated on chips, which are integrated * a strong currency supported by capital inflows with other optical components such as DWDM and *skillful management of fiscal and monetary optical amplifiers. The four basic characters of the policies technology are: integrating optics at the chip level, and a recommendation switching optical signals, integrating sensing *reduce the level of interest rates which at the devices for feed-back control and integrating intelli- current real rate of interest of six percent, leaves gent devices for the digital processing of informa- room for loweringÓ tion. GalayOr's leading-edge technology can be used for a variety of optical solutions, including optical Israels acknowledges concern about the disparity switching and cross-connect, OADM (add & drop), among its population in levels of income came tunable DWDM, dispersion correction and intensity under scrutiny of the IMF which offered sugges- equalizers. tions as how to alleviate the problem. The IMF report recommends a rebalancing of spending, According to Dr. Geiger, ÒThe current round of fund- with an increasing emphasis on growth enhancing ing, especially during these turbulent times in the investments in infrastructure, education and train- industry, expresses the confidence of the investor ing. community in GalayOr's technology and manage- While recognizing the short term deceleration of ment team. The company currently focuses on the Israeli economy from its heights in 2000, the retaining experts in MEMS, VLSI, optics, communi- report states that the long-term growth prospect cation, software, testing and simulation for its R&D for the economy are bright, particularly after solu- facilities near Ben-Gurion Airport in Israel and its tions are found to the security problem. fabrication center in Ithaca, N.Y.Ó ÒThere are causes for optimism that the Israeli According to Adi Gan, a general partner with Ever- economy will emerge from the current downturn green, "What makes GalayOrÕs technology unique. with financial stability intact, and poised for a is its simplicity and the ability to manufacture the resumption of rapid sustainable output growth" the product through standard mass-production silicon report concluded. processes.

GalayOr Networks Secures $8 Million The intellectual property developed by Dr. Haronian Seed Funding was transferred to GalayOr by Ramot University GalayOr Networks has completed a seed round of Authority for Applied Research & Industrial Devel- $8 million, in the largest seed financing by an opment Ltd., which is now one of GalayOr's share- Israeli company since the beginning of the current holders under a new model developed by Yizhac period of uncertainty in the capital markets. Kolberg, CEO of Tel Aviv University Economic Galayor Networks develops on-chip integrated Development Company, for the commercialization Micro Opto-Mechanical Systems (MOMS) based of intellectual property invented at Tel Aviv Universi- on a technology that was developed by its chief ty. ÒGalayOr is considering the possibilities of coop- scientist, Dr. Dan Haronian, beginning in 1996, at eration with Tel Aviv University for further develop- which time he served as the head of the MEMS ment of the technology,Ó according to CEO Dr. Uri (Micro Electro Mechanical Systems) group at Tel Geiger.