Is Israel's High-Tech Boom Sustainable?

A MONTHLY REPORT COVERING NEWS AND INVESTMENT OPPORTUNITIES JOSEPH MORGENSTERN, PUBLISHER June 1999 Vol. XV Issue No. 6 You are invited to visit us at our website: http://www.ishitech.co.il

Is IsraelÕs High-Tech Boom Sustainable?

The Israeli high-tech juggernaut is fueled by its be marketed easily anywhere in the world. The mass- immense number of start-up companies. Never accu- es of money paid by multi-national corporations in rately counted the generally accepted and oft-quoted acquiring technology-laden Israeli companies has figure puts their number at 3,000. Added to the star- also attracted the attention of a slew of major house- tups are the nearly 150 public companies listed on hold name companies who maintain a universal NASDAQ and more recently, a trickle to European watch on technology developments. In this issue stock markets. To these one may add the tens of high- alone we report on Intel’s investment in TelsciCOM, tech and high-tech related companies listed on the Tel- and the Swedish giant’s Ericsson investment in Aviv Stock Exchange. NovaNet. Merrill Lynch, the global investment The professional number crunchers and venture capi- banker, has just announced that it is investing in tal industry surveys that are published are suggesting Walla, Israel’s Hebrew language leading Internet por- that the future of high-tech in Israel may be less than tal. The hottest global game involves the Internet. rosy when compared to its development since the The worldwide exponential growth of individuals beginning of this decade. The streamlined budget for going on-line and the even more astounding increase research and development supervised by the office of in electronic commerce has fueled a global search for the chief scientist is the subject of discussion, and soothsayers or those who are likely to be affected pre- In this Issue dict a crisis of the high-tech sector. The commentary appearing in our newspapers, fueled www.ishitech.co.il by the comments of “interested parties” including Is IsraelÕs High-Tech Boom Sustainable? industrialists and various industrial organization, can newZPrint Software for Online-News only lead to the erroneous conclusion that the forward Vishay Intertechnology to Set Up $35m. Plant progress of the high-tech industries may be slowed. Oracle Receives Promise for Peace Award Career Jobs in Israel This is far from being the case. The high-tech indus- Ericsson Invests $7.5m. in NovaNet Startup tries are attracting some of the best professional minds Rolls Royce in Joint Venture Haifa Science Museum in Israel. A second generation of managers and entre- Lycos and Versaware Launch New Online Research Center preneurs are heading innovative start-ups. They are Point of Sale Announces Strong Q1 Results showing an ability to avoid the shoals created by the Summary of Quarterly Financial Results: ELSTF, EMITF, GILTF, ORBK, SCIXF, TEVYI, VOCL, ELRNF so-called Asian flu and last fall’s Russian economic NICE in Japan, debacle. Neither are the ups-and-downs of Middle Merrill Lynch buys 10% of Walla East politics a deterrent to foreign investment in this Intel Rumored to Invest $2.0m. in TelsciCOM The Money Tree Survey field. It is obvious that foreign companies are not like- Weizmann Discovers Mechanism Causing Colon Cancer ly to invest in garment companies to be located in IHTIR Favorites: Charts and Analysis: Israel with the hope of supplying Middle Eastern CMVT, GICOF, CHKP, GILTF countries. However, high-tech products are easily Applications for Increased R&D Support shipped and in many cases include software which can Fitch-IBCA Raises Israel Short-term Rating

Copyright 1999: 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 1999 technologies related to the Internet. The Money newZPrint Software Turns Online-News Tree Survey by Kesselman & Kesselman, Price- Sources into Real Newspapers Waterhouse Coopers details that Venture capital New Software Delivers Leading Web Based News Sources in a Traditional Newspaper Format investment in Israeli Internet companies increased infoPager Technologies, a leading developer of sharply, to a record level of $30 million, represent- electronic publishing technology, announced the ing Q1 1999’s most attractive industry. Nearly one release of newZPrint ª a Windows-based client quarter of each of the $130 million total invested software package, which collects content from by 46 Israeli and two American venture capital leading online news sources and delivers it with companies was invested in backing Internet related the “look and feel” of a traditional newspaper. companies. The Israeli venture capital companies, newZPrint provides substantial benefits for end since they are managed by Israelis, generally take users by allowing content from leading news web a shorter-term view towards their investments than sites to be transformed into the same intuitive, easy their American counterparts. They measure and to read style as printed editions of newspapers, estimate how quickly they can cash-out on their magazines, or newsletters. newZPrint employs investment and since Internent companies are patent pending, formatting technology and allows showing an incredible resilience in getting Initial Internet users to Public Offerings schedule a conve- on the world’s Vishay to Set Up Plant wih $35 Mln Investment nient time for stock markets Vishay chairman Dr. Felix Zandman announced that Vishay delivery of their they will contin- Intertechnology, a Fortune 500 company, has decided to set up preferred news ue to attract a new plant for components assembly in Beer Sheva or Dimona. sources. User-de- investment. Initial investment will be $35 million, and the plant will employ fined online sources So while young 500 workers. Vishay chose the tax exemption alternative under are “mined” for start-ups in the the Capital Investments Encouragement Law, deciding to forego information, which medical and a grant for investment in equipment. is then collected electronic fields Vishay executives made it clear that the US parent company, and formatted by may find it more Vishay Intertechnology, would agree to the setting up of a plant newZPrint into a difficult to raise in Israel only if the investment required in Israel would be sim- personalized capital in their ilar to that required in setting up a plant in the Czech Republic. newspaper or infancy and seed magazine. capital contin- newZPrint can ues to be scarce, also be used as a business productivity tool with (with only 5% of the total venture capital invested features that allow users to manage their news pro- in the first quarter of 1999), they will continue to fessionally, including article reprints, archiving, get a portion of the investment funds available, forwarding and printing. “We have created a prod- though to maintain their piece of the available uct that empowers Internet users to decide which money it will take a greater effort on their part. news they want, when they want it, and how they From our vantage point the second half of 1999 want to read it,” said infoPager Technologies CEO will be a banner year for Israeli Internet compa- Drew Tick. “With newZPrint, our latest software nies. We are have tracked two of them in the pages innovation, infoPager Technologies once again of this newsletter. They are quietly preparing to demonstrates that we are putting a human face on move from private to public company status. One the way people receive and read their electronic of these has the potential of achieving an American news.” The newZPrint client software is currently stock market capitalization of more than $350 mil- available on an introductory basis, free of charge lion. and can be downloaded from the newZPrint web site at http://www.newzprint.com June 1999 ISRAEL HIGH-TECH & INVESTMENT REPORT

Oracle Receives ÒPromise For PeaceÓ ernment and municipal officials in Israel and with Award representatives in the Palestinian Authority to set Oracle Corp. recently announced the installation of up 300 network computers in Ariel, Israel and 20 500 network computers that will use the Internet to computers in the Palestinian Authority city of connect students in three Israeli cities with three Gaza. Oracle plans to install an additional 180 Palestinian cities. The historic undertaking is part computers in the Palestinian cities of Nablus and of “Computers for Coexistence,” an extension of Ramallah and another 40 computers in the Israeli the Oracle’s Promise program which has provided cities of Ganey Tikvah and in the Negev city of more than 4,500 network computers to public Sderot. Upon the completion of the project this schools in low-income neighborhoods throughout summer, the computers will link 10 schools, five the United community States. centers and Marc R. Benioff, High-Tech Career Opportunities 3000 Israeli Senior Vice Israeli high-tech companies have launched a recruitment drive in the children and President of United States, seeking to attract personnel with technological skills their fami- Oracle Corpora- by organizing recruitment fairs in California and New York. Repre- lies with tion, was on sentatives from seven companies Ð including Tower Semiconductor, nearly 2000 hand to receive Motorola Semiconductor, Efrat, and Israel Aircraft Industries Ð have Palestinian the “Promise for been interviewing potential candidates at a fair held recently in Palo children and Peace” award in Alto, California, and another in New York. The fairs were organized families gratitude for in coordination with the Ministry of Immigrant Absorption, the Jew- through the Oracle’s friend- ish Agency, the Israeli consulates in New York and San Francisco, Internet. ship and its role and the Association of Electronic Industries in Israel. Hundreds of The stu- in fostering potential immigrants and expatriate Israelis contacted the organizers dents’ first peace through before the fairs opened to express interest. During a similar fair held projects will information last year, dozens of engineers were recruited by Israeli firms. Per be to create technology. The capita production for an engineer is $200,000 a year in Israel. Each Web sites ceremony took engineer employed creates an average of two additional jobs. for their place recently at schools and ACCENT (The to initiate Ariel Center for Communications and Educational regular communication among all students via Networking Technology) as officials unveiled the email. Oracle has arranged to train both Israeli and completed network that connects the first seven Palestinian teachers and a group of students to use schools in Ariel. The resulting system is the most the network this summer through Internet and advanced educational computer network in Israel. computing courses. In Ariel, a special forum will “It has been an honor to work with the Israeli and be established called the “Smart School,” which Palestinian school systems as they strive for peace will pioneer Internet-based education in Israel, cre- through expanded communications,” said Oracle’s ating the first server dedicated towards building a Benioff. “By connecting students, teachers, and unified curriculum in Hebrew for use by Israeli families in the Middle East to the Internet, we hope schools. our work will help increase understanding, knowl- Designed and built with the cooperation of infor- edge, and peace by bridging the ‘digital divide’ mation technology managers in Israel and the here, in the United States, and across the world.’’ Palestinian Authority, the computers were installed To launch the Middle East “Computers for Coexis- by students and teachers with the help of Oracle tence” project, Oracle worked closely with Gov- consultants. The set-up includes access to Netscape, e-mail, Microsoft Word and Excel, mul- 3 ISRAEL HIGH-TECH & INVESTMENT REPORT June 1999

timedia utilities and Java Virtual Machine, allow- the mission and goals of the President’s Summit ing students to surf the Internet, build Web sites, for America’s Future Forward. As of April 1999, chat, learn to use word processing and spread- more than 4,500 network computers have been sheets, and eventually create their own Internet deployed in nearly 100 schools, providing applications. 100,000 students in Atlanta, Chicago, Dallas, “Computers for Coexistence” is an extension of Denver, Los Angeles, Oakland, San Diego, San Oracle’s successful Oracle’s Promise program Francisco, and Washington DC, among others, that currently links 100,000 school children in the access to computer programs and the Internet. United States with the Internet. The ‘Coexis- Oracle Corporation is the world’s leading suppli- tence’ program was established after children at er of software for information management, and Cesar Chavez Mul- the world’s ticultural Acade- second my, an inner-city Ericsson Invests $7.5 Mln in NovaNet Start Up largest inde- Chicago elemen- Swedish company Ericsson’s components division has just pendent soft- tary school, sponta- completed a $7.5 million investment in Ra’anana start up ware compa- neously developed company NovaNet, in exchange for an option on 40% of the ny. With a relationship and company’s shares. The move matches Ericsson’s strategy of annual rev- built a Web site investing in broadband communications products as well as enues of over together with chil- continuing development of products in the telephony market. $8.3 billion, dren in Chiba City, The company reported that the company’s value for invest- the company Japan. Computers ment purposes was $19 million after money. NovaNet is cur- offers its for Coexistence rently in the throes of a second round of fundraising, aiming database, will focus its initial for another $7 million. tools and efforts in the Unit- NovaNet is a start up founded a year ago as a subsidiary of application ed States, the Mid- NovaCom. The company develops and markets chips for products, dle East, and Ire- ATM and Gigabit Ethernet data communication networks. along with land.Oracle’s The company’s products are designed for transmission of related con- Promise is a phil- large volumes of information over great distances. sulting, edu- anthropic initiative NovaNet general manager Avishai Noam said that Ericsson, cation, and of Oracle Corpora- “as a company that produces a variety of components of var- support ser- tion chartered with ious sizes, opens a wide range of opportunities for us and vices, in providing network enables us to utilize the advantages of its size and volume.” more than computers to pub- The company estimates its target market at $160 million a 145 countries lic schools in low- year, with forecast growth bringing the total to $300 million around the income neighbor- in the year 2002. NovaNet’s sales outlook for 2002 is $42 world. hoods. million. Founded in June 1997, Oracle’s Promise was launched with the announcement of Rolls Royce in Israeli Joint Venture $100-million donation to help provide Internet British engine and turbine producer Rolls-Royce and network computer access for every child in Plc. said on Tuesday it had formed a joint venture America. The donation was made in support of with partners in Israel to manufacture aero- America’s Promise Ð The Alliance for Youth, a engine compressor blades. The new company multiyear, national campaign created to propel Techjet Ltd. is 50 percent owned by Rolls-Royce,

4 June 1999 ISRAEL HIGH-TECH & INVESTMENT REPORT with Blades Technolo- gy Ltd. owning a 30 Lycos and Versaware Launch New Online Research Center Fea- percent stake and turing Funk and Wagnalls Encyclopedia, Random House Web- Wertheimer Company sterÕs College Dictionary and News From Reuters Ltd. the remaining 20 Versaware Technologies and Lycos, Inc. (Nasdaq: LCOS), the most visited percent. When fully Internet hub and the world’s largest online community, launched the established early next Lycos.com Research Center, a co-branded site http://www.funkandwag- year in Tefen, northern nalls.lycos.com with content provided by Versaware in its feature-rich Versa- Israel, Techjet will book¨ eBook format. The Lycos.com Research Center, powered by Ver- forge and machine up saware, includes an online version of the acclaimed 29-volume Funk & Wag- to 450,000 compressor nalls Encyclopedia, Random House Webster’s College Dictionary as well as blades a year, Rolls- world news from Reuters. Visitors to the Lycos.com Research Center will be Royce said. The com- able to easily search and access the various services available on the co- pany said it would branded site, which are enhanced with sounds, pictures, maps and animations. invest £8 mln in its Versaware’s patent-pending technologies enable users to simultaneously Hillington factory near cross-search all content converted to the Versabook eBook format. “By team- Glasgow to upgrade its ing with Versaware Technologies, we can provide our users with fast and easy technology to the level access to valuable content in the Versabook eBook format,” said Jan Horsfall, of that used in the vice president of marketing for Lycos. “Our alliances with Lycos and other Israeli factory. leading portal sites, in tandem with the growing list of prominent print pub- “The effect of this lishers using online Versabook technology, highlight our success in making investment would be to Versabook the preferred method for providing multimedia enriched content establish Hillington as for ePublishing on the Internet and other electronic distribution opportuni- a world class manufac- ties,” stated Harry Fox, Founder and CEO of Versaware. Versaware Tech- turing center,” said nologies is redefining the way we learn about the world in which we live. Ron Bates, managing Pioneers in the digital content ePublishing revolution, Versaware’s break- director of Rolls- through patent-pending technologies rapidly and inexpensively convert any Royce compressor sys- content into a rich multimedia format called Versabook¨. Headquartered in tems. “The plan under- New York City, Versaware has Sales and Marketing offices in Silicon Valley lines our commitment and Research and Development facilities in Jerusalem, Israel. Recent to Hillington and gives alliances with leading publishers and strategic alliances include Lycos, World the facility access to Book, AOL UK, Pearson Education, Oxford University Press, Random manufacturing meth- House, Primedia, Merriam Webster, ICTV, Websurfer and others. Founded in ods it does not have at 1995, Lycos, Inc. (Nasdaq: LCOS ) is a leading Web media company and the present.’’ owner of the Lycos Network, the most visited hub on the Internet reaching 51.8 percent of Web users.

Haifa Science Museum Exhibit to Jerusalem are under the auspices of the Technion Israel Insti- tute of Technology. The exhibit superbly demon- The superb exhibit of the Leonardo daVinci Exhi- strated the genius of Leonardo as his drawings bition “Science and Engineer” created by the Israel were converted by the Technion engineers into 30 National Museum of Science was put on display at exhibits. DaVinci was the first to uncover the the newly dedicated Beck Science Center, at the mechanical properties of the screw which lead to Har Hotzvim Science Based Industries Park adja- his designing an automatic machine for making cent to Jerusalem. The Science Museum’s activities

5 ISRAEL HIGH-TECH & INVESTMENT REPORT June 1999

various screws. The displays are interactive and have increased not only in comparison to the corre- allow visitors to manipulate them. The Beck Sci- sponding quarter last year but also sequentially ence Center doubles as the new home for major sci- quarter after quarter.” Mr. Shaked continued, “We ence based industries and as a cultural center. continue to gain recognition in our target markets Attending the gala opening were the Mayor of with the ongoing implementation at Tesco, the Jerusalem Ehud Olmert and Leon Recanati who UK’s largest food retailer, and with our pilot instal- founded the National Science Museum. lation at Albertson’s in the US. At the same time, we are continuing our strategy to focus on expand- Point of Sale Ltd. Announces Strong 1999 ing our sales and distribution capabilities and to Q1 Results invest in the development of new products during Point of Sale Ltd. (Nasdaq:POSIF) reported finan- the quarter. Our products were extremely well cial results for the first quarter ended March 31, received at two US trade shows this quarter and we 1999. Revenues for the first quarter of 1999 expect leads developed at these shows will con- increased approximately 47% to $5.1 million as tribute to increased demand compared to $3.5 million reported in the same peri- About Point of Sale Ltd.: od in 1998. Net income for the first quarter of 1999 Point of Sale Ltd., with headquarters in Israel, was approximately $1.3 million, or $0.12 per share, develops and markets enterprise-wide open soft- compared to $805,000 or $0.09 per share, for the ware solutions predominantly for the food retailing corresponding period in 1998. Investors welcomed industry. These are targeted at improving store the report and the shares advanced to over $11. operations, reducing costs and increasing worker Barry Shaked, CEO of Point of Sale, commented, productivity. “Sales and service revenues, as well as earnings, The company’s products have been installed in

Summary of Quarterly Financial Results

6 June 1999 ISRAEL HIGH-TECH & INVESTMENT REPORT over 9,000 stores worldwide. The company was mates for Nice-Systems Ltd. to reflect increased founded in 1982, and its ordinary shares have been research and development investment and higher trading on the Tel Aviv Stock Exchange since estimates for Y2K related expenses. November 1994. On July 15, 1998, the company Lehman analyst Tim Luke estimated Nice will earn and certain selling shareholders completed an ini- $1.60 per share in 1999 and $2.20 in 2000, against tial public offering of 2,750,000 ordinary shares of previous estimates of $1.81 and $2.25, respective- stock in the U.S. at a price of $7.00 per share. ly. He maintained his “buy” recommendation and 12-month price target of $45 for the share. Elron Electronic Industries Reports Elron Electronic Industries (Nasdaq: ELRNF) Merrill Lynch buy 10% of Walla reported 1Q EPS of $0.22 vs $2.00 in the prior year IBI and the U.S. investment bank Merrill Lynch period, on revenues of $9.0 mln vs $4.2 mln. acquired 10 percent of Mashov Marketing’s Walla! NOTE: 1Q98 includes $36.5 mln gain from the sale Communications last night for about $2 million. of Elbit Medical Imaging Ltd. ultrasound division Walla is Israel’s most popular Internet portal, serv- to GE Medical Systems. Elron expects to record a ing about 50,000 customers a day. 2Q gain of $20 mln related to the sale of all its Walla’s stock has gone up more than 1,200 percent holdings in Elbit Medical Imaging Ltd. over the last year, as the Internet craze on Wall Street has boosted NICE-Systems Intel Rumored to Invest $2.0 mln in TelsciCOM Internet shares trad- in Japan Unconfirmed reports speculate that Intel has invested $2.0 ing on the Tel Aviv NICE Systems mln in TelsciCOM, a young start-up. The company was Stock Exchange as Ltd. (Nasdaq: founded in 1997 by Yossi Ophir, formerly deputy general well. Walla has been NICEY) said the manager of ECI Telecom,. Michael Sternberg and the compa- holding strategic Japanese Ministry ny’s general manger Doron Koren. At the beginning of 1998, investment talks of Transport had the Neuron venture capital fund invested at a company value with a number of installed its Nice- of $26 million. TelsciCOM was originally formed in order to companies in recent Log voice record- develop a faster, better quality and cheaper wireless commu- months. ing system in 14 nications product. TelsciCOM uses a technology called The buy is not airports throughout ‘spreadulation’. It consists of a wireless communications viewed as a substi- the country. Nice- chip, designated for use in the MMDS market, at a speed of tute for a strategic Log is a digital 42 Mbps and for use in the LMDS market, on a 30 Megahertz investment, and voice recording band, at a speed of 155 Mbps. Originally, TelsciCOM intend- sources close to the and archiving sys- ed to manufacture a terminal unit for fast, cheap wireless deal said Walla may tem used to record, communications. Yossi Ophir says, “The company will pro- yet take on a strate- store, evaluate and vide a competitive alternative to cable modems and ADSL gic partner. manage voice modems.” This seems unlikely communications, to happen before call data, desktop Walla finishes rais- screens and video. Nice did not say how much the ing more capital, probably through a TASE issue contract was worth. aimed at raising some $10 million in the third quar- Lehman Brothers recently lowered its EPS esti- ter.

7 ISRAEL HIGH-TECH & INVESTMENT REPORT June 1999

reported in the previous quarter. The Money Tree Seed investment in Q1 1999 remained low, repre- senting just 5% of the total venture backed invest- Survey ment. The average seed stage investment fell from Venture capital investment in Internet companies $1.91 million in 1997 and $1.16 million in 1998 to increased sharply, to a record level of $30 million, $0.8 million in Q1 1999. Software and communica- representing Q1 1999’s most attractive industry. Q1 tion companies attracted all the seed investment, 1999 investment totaled $130 million, a 1% 76% and 24% respectively. decrease in venture capital investment compared to First round investment totaled over $25 million, a Q4 1998. surprisingly large increase of 46%, compared to Q1 Kesselman & Kesselman Pricewaterhouse Coopers 1998 and 152% compared to Q4 1998. Communi- reports that investments in venture backed compa- cations and software companies attracted most of nies (investments where at least one of the investors Q1 1999’s first round investment, 44% and 34% is a venture capital firm) during Q1 1999 remained respectively. Average first round investment virtually unchanged compared to Q4 1998, which decreased from $1.8 million in 1998 to $1.3 million was low compared to the records achieved in previ- in Q1 1999. ous quarters. Most of Q1 1999 investments went to Second round investment totaled $39 million, the the software companies (45%), communications same level as that reported in Q4 1998, but 26% companies (18%) and medical devices companies lower than that reported in Q1 1998. The average (14%). 46 Israeli and 2 American venture capital second round investment increased from $2.8 mil- firms participated in Kesselman & Kesselman lion in 1998 to $3.3 million in Q1 1999. Pricewaterhouse Coopers Money Tre Survey for Third/expansion round investment totaled $26 mil- Q1 1999. lion which represents a sharp decrease when com- Mr. Joseph Fellus, Partner & High-Tech Practice pared to Q4 1998 and Q1 1998. Leader in Kesselman & Kesselman Pricewater- It was also noted that the number of bridge invest- house Coopers, noted that Internet companies were ments in Q1 1999 was relatively high (10 deals) the most attractive in the first quarter, receiving compared to 21 during the whole of 1997 and 20 investments of $30 million. This amount almost during 1998. equaled the total amount invested in Internet com- The analysis of the majority of Q1 1999 investment panies throughout 1998 ($35 million) and was 38% by rounds can be summarized as follows: Seed above the amount invested in Internet companies stage Ð 5%; First round Ð 20%; Second round Ð throughout 1997 ($22 million). According to Fel- 30%; Third/Expansion round Ð 20%; Late/Mezza- lus, the increased investment made in Internet com- nine round Ð 10%; and Bridge round Ð 7%. panies was probably influenced by the trend of the In Q1 1999, the software sector, and in particular massive increases in market capitalization of US the Internet segment, was the most attractive for Internet companies (e.g. AOL, YAHOO!, Ama- venture capital firms. The software sector (which zon.com, eBay etc.), the current IPO and M&A includes Internet, information technology and mul- merger and acquisition activities of internet compa- timedia companies) attracted 45% of the venture- nies and by the fact that the Internet has became an backed investment, representing investments in 25 inseparable part of business and private life. companies. Further analysis into the segments of Fellus also noted that seed investment in venture- the software sector showed that $30 million, of the backed companies remained relatively low. In Q1 $59 million invested in the software sector, was 1999, venture capital firms mainly re-invested in invested in Internet companies. This level of invest- their portfolio companies (57% of investments ment, in the Internet segment, is higher than that made were follow-on), this trend is similar to that invested in any other sector.

8 June 1999 ISRAEL HIGH-TECH & INVESTMENT REPORT

For the first time, we surveyed investments made in recently in the Proceedings of the National Acade- Internet-related companies (i.e. those companies my of Sciences. This research may one day con- that span the gamut of Internet and Internet-related tribute to the development of potential therapies for industries). 38% of investment made in Q1 1999 this type of malignancy and possibly for other types flowed into these venture-backed companies. In the of cancer as well.The discovery of the new mecha- U.S., for example, the level of Internet-related nism has solved two seemingly unrelated molecular investments made in the last two years increased by mysteries. One concerned an important finding more than 3 times. made some two years ago: the fact that colon can- The slowdown trend in cer cells often have the communications sec- abnormally large Ehud Barak Ð IsraelÕs New Prime Minister tor that started during Q4 quantities of a protein 1998, continued during called beta-catenin, Q1 1999, with just $23 Prior to the recent election and in his victory speech one of today’s million invested in 13 Ehud Barak stressed his commitment to restarting “hottest” research companies. This repre- the Peace Process. The election vote totals yielded molecules. Beta- sents 18% of the total the highest majority accorded to a prime minister catenin has been investment made this candidate in recent memory and are an indication of dubbed a “moon- quarter and less than half the desire on the part of most Israelis to move back lighter” because it of the investments made to the “peace track”. holds down two dis- in Q1 1998. Consistent On the economic front a broad coalition govern- tinct cellular jobs. In with 1998, one third of ment is expected to stress a supportive attitude to its better-known task, this quarter’s investment foreign investments and assume a positive stance to beta-catenin binds to went into Data Commu- science-based industries (high-tech). adhesion molecules Ð nications companies and We are hopeful that Israel’s economy, which has those molecules that the balance went into slipped into low gear in the past three years will sit in the cellular Telecommunications again resume its high-growth of the early 1990s. membrane and allow companies. cells to stick together. The medical devices sector attracted $18 million, a In its other role, beta-catenin is known to regulate similar level to Q1 1998, which represents 14% of the performance of genes in the nucleus. However, the total Q1 1999 investment and an increase of how exactly beta-catenin does this Ð and which 26% compared to Q4 1998. genes it controls Ð remained unclear. A team of Almost $10 million was invested in the computers researchers led by Prof. Avri Ben-Ze’ev of the & electronics sector, representing a 24% decrease Weizmann Institute’s Molecular Cell Biology compared Q1 1998. 60% of this investment was in Department, in collaboration with the group of Dr. semiconductor companies. Richard Pestell from the Einstein College of Medi- Just $3.5 million was invested in the biotechnology cine in New York, has now put these puzzle pieces sectors. It was noted that Q4 1998 was a record together. quarter in the biotechnology sector with invest- A patent application for this method has been filed ments of $32 million. by Yeda Research and Development Co., the Weiz- mann Institute’s technology transfer arm. Weizmann Discovers Mechanism Involved These types of intervention may provide the basis in Causing Colon Cancer for developing future therapies for colon cancer, as Weizmann Institute researchers have discovered a well as for melanoma and other types of cancer in molecular mechanism that may be involved in which the levels of beta catenin are abnormally ele- causing colon cancer, according to a study reported vated.

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CMVT remains a Òstrong buyÓ. The companyÕs growth in earnings, estimated at 20%, is driven by growing wireless networks and the deregulated wireless telecommunications industry. The market for the companyÕs products is expect- ed to grow annually by 30%. With a strong cash basis CMVT can continue to finance its growth internally or through acquisitions.

GICOF should be accumulat- ed on weakness in the $13- $15 range. As a leader in pro- viding satellite based interac- tive learning systems world- wide it has the basis for rapid growth. Estimates point to EPS of $2.00 in 2000 to come on the heels of $1.74 estimat- ed EPS for 1999.The compa- ny provides a complete solu- tion for clients as it offers both hardware and software for creating, broadcatsing and conducting educational and GICOF was featured in IHTIR Feb.99 as IHTIRÕs choice of small-cap to outperfrorm in 1999 training operations.

CHKP continues to maintain a leading position in developing, marketing and supporting net- work security software prod- ucts enabling connectivity with security and manageability. Its FireWall technology provides easy to use software that enables system adminis- trators to define and enforce an integrated centrally man- aged enterprise-wide network security policy. A 25% annual growth in earnings is expected GILTF continues as one of our GILTF is IHTIRÕs Choice for a Core Holding over the next two years. favorites with earnings of $0.55 for the June 99 Q a strong likeli- hood. Gilat is expected to earn $2.65 in 1999 to be followed by a $3.24 performance in 2000. The company designs, develops and markets and supports very small aperture terminal satellite earth stations It has proved over the years an ability to enlarge its market Its earnings are advancing at more than 20% annually. At about $50 per share level the Gilat shares offer an attractive investment opportunity.

10 June 1999 ISRAEL HIGH-TECH & INVESTMENT REPORT

Applications for Increased R&D Support development as extremely or very valuable to their Several Israeli companies submitted applications for development, quality assurance, and marketing orga- up to 60% more for government R&D support this nizations; year, compared to their applications last year. This is 86% list “To increase understanding of customer despite the official announcements of cutbacks in the requirements” as an extremely or very important rea- R&D budget for large companies this year. Among son for beta testing; these companies are Motorola, Telrad, ECI, Telecom, 88% consider beta testing an extremely or very Scitex, Indigo, Lucent, El Op and Rad Computers. important quality assurance process; Estimates say some of these companies will be 67% list enterprise and business to business seg- forced to publish profit warnings in their financial ments as their primary markets. reports. “These results address key concerns of investors and The Research Committee headed by Ministry of partners of Israeli high-tech companies,” said Yishai Industry and Trade Chief Scientist Dr. Orna Berry Laks, Consul for Economic Affairs, Government of convened, but did not reach agreement on the Israel Economic Mission. “Israeli’s are famous for removal of the grant restrictions on large companies. R&D, but long-term success rests on their ability to Currently amounting to NIS 407 million, the budget negotiate strategic marketing partnerships which is 37% lower than the support received in 1998, enable closer communication with U.S. customers which totaled NIS 597 million. Following the meet- through all phases of product development and mar- ing, Manufacturers’ Association economic depart- keting.” Survey participant Shlomi Cohen, VP Mar- ment head Shuki Avramovitz estimated that the Min- keting & Business Development, BATM Advanced istry of Finance was close to removing the restric- Communications LTD, an Israeli data communica- tions. tions company concurs, adding “Reaching more U.S. customers, understanding U.S. product marketing Survey Reveals U.S. Marketing Objectives issues, and building credibility among U.S. early and Business Practices of Israeli High-Tech adopters is a top priority for our company. Develop- Companies ing products in isolation is not an option.” BetaSphere, Inc. released results of an in-depth sur- vey of 65 Israeli technology companies (94% having Dear Subscriber, 100 employees or less) attempting to penetrate the We are happy to be able to provide the most U.S. market. Israel, a country less than half the size recent Israel High Tech & Investment Report as of Maine, is home to nearly 3,000 high-tech compa- an exclusive service to our present subscribers via nies. The majority have fewer than 100 employees, the Internet. and many identify the U.S. as their primary target This will allow subscribers to obtain their Israel market. Since little has been written about the role of High Tech & Investment Report prior to obtaining U.S. customer feedback in Israeli product develop- their copy via regular mail. ment and marketing, BetaSphere surveyed Israeli companies to understand how they find prospective This service is password protected. customers, beta users, and partners; how U.S. cus- tomer feedback influences product development; and Subscribers, upon request, will receive the pass- how Israeli marketers assess U.S. acceptance of their word which allows entry to this secure area. products and services. If you would like to enjoy this service, please Important findings: send us your E-mail address containing your 93% state the U.S. market is extremely or very name, occupation, address, and E-mail to important to their business in 1999-2000; [email protected] 86% rate customer feedback obtained during product

11 ISRAEL HIGH-TECH & INVESTMENT REPORT June 1999

BetaSphere initiated the survey following a spike in prospects for reducing inflation to close to trading requests from Israeli companies for U.S. feedback partner levels and the structural shift in the econo- management services. my from traditional industries towards high tech- nology, notably advanced electronics and comput- Fitch IBCA Raises Israel Short-term ing. The agency pointed out that the rate of new Rating business creation remains impressively high. Israel Fitch IBCA, the international rating agency, has become a high income and well-diversified upgraded the Short-term foreign currency rating of economy. Prospects for an upgrade would be the State of Israel to ‘F1’ from ‘F2’. This reflects enhanced by a resumption of strong gdp growth, the build-up in official reserves, low level of public consistent with continuing improvement in the external short-term external debt and special Compaq Adopts Israeli Encryption Software accounts, and access to external by progress in Compaq, the world’s largest PC manufacturer, will install the Pri- financing even in the peace pro- vaSUITE message encryption software produced by Israel’s times of crisis. At cess with the Aliroo, in its professional mini-computers series, operating in the same time, the Palestinians Windows CE. This was reported yesterday by Compaq and agency assigned a and with Syria Aliroo, at the CardTech SecuriTech exhibition currently underway rating of ‘A+’ to the and Lebanon. in Chicago. The mini-computers are meant for the use of roving local currency The rating is employees in large organizations. Compaq intends to market them denominated debt constrained by as part of a comprehensive organizational solution, which also of the State of the legacy of includes communications encryption at the desk-top computer and Israel. Fitch IBCA high public organizational server level. said that the local debt and net Aliroo general manager Meir Zorea said the computers had not currency rating external debt, yet been named, or even priced, but they would be the first mini- reflected a balance albeit offset by computers standardly fitted with an encryption system and a smart of a high public sec- relatively low card reader. The arrangement was actually a three way deal tor debt countered debt servicing between Compaq, Schlumberger and Aliroo. Schlumberger, one by a long-term debt costs thanks to of the world’s largest manufacturers of smart card technologies, structure that concessional will supply the car reading systems, complete with a card securi- reduces the risk of finance, and ty system of Aliroo manufacture. At the same time, Aliroo will failure to refinance by the poten- supply encryption software for the computers themselves. Zorea debt during periods tial for finan- estimated that this is one of the young Israeli company’s most of strain. cial volatility, important strategic deals. He said negotiations had already com- The agency also demonstrated menced with Compaq’s desk top computer and organizational affirmed its Long- by a quick servers divisions managers, with a view to fitting those products term foreign curren- depreciation in with the encryption software. cy rating of the late 1998.The State of Israel at ‘A- agency In explaining its upgrade, Fitch IBCA cited Israel’s observed that political risks are not as great as is strengthening liquidity, notably the rapid rise in sometimes thought. Thanks to the peace treaty with official reserves since 1994 to $22 bln and its Egypt and US support, Israel faces no credible con- unique access to financing through State of Israel ventional military threat while non-conventional bonds (which are made available to the Jewish threats are minimized by international efforts at diaspora through community organizations). non-proliferation and Israel’s retaliatory capability. On the Long-term rating, Fitch IBCA noted the trade access to both the European Union and Unit- improvement in public finances, the strong ed States markets.

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