The Anatomy of a T echnology Startup - · PDF fileThe Anatomy of a T echnology Startup ... New Dimension Software Acquired for $650 million Gilat Communications Satellite Soars Comverse

A MONTHLY REPORT COVERING NEWS AND INVESTMENT OPPORTUNITIES JOSEPH MORGENSTERN, PUBLISHERApril 1999 Vol. XV Issue No.4 You are invited to visit us at our website: http://www.ishitech.co.il

The Anatomy of a Technology Startup

Copyright 1998: Israel High-Tech & Investment Report Subscription, Bulk copy and reprint information available on requestEditorial Offices: P.O.Box 33633, Tel Aviv 61336, Israel Tel: 972-3-5235279 Fax: 972-3-5227799 E-mail: [email protected]

In this Issue

Anatomy of a Technology StartupComverse Acquires AmarexCivilian Imaging Satellite to be LaunchedPCs in 50% of US HomesWeb Rating Reports Agree on LeadersNet Usage to DoubleNICE Management System Selected by First USAPalm-sized Communications DevicesLaptop TelephonesIsraeli Telecoms at CeBITOP-ED: Repay Government Grants!ECI & TadiranTelecom Merger CompletedUS Investment Bank & Nassua Zannex CooperateElbit Systems Seeks to Acquire Cyclone AviationGilat Satellite Reports Earnings GainOshap Shares Climb on SunGuard DealWilliam Cohen in Missile TalksECI Denies Acquisition BidInvestment Banker Touts IndigoNew Dimension Software Acquired for $650 millionGilat Communications Satellite SoarsComverse Results Exceed ExpectationsICQ Users Now Go Off-Line

Innovation and technology are evolving to bringmany benefits to the way the business world carriesout its activities. A young startup, “Onset Technology,Inc.” (Onset), has developed and is currently rollingout a software program which links the traditionalfacsimile to the modern E-mail. The result is majorstep-up in office communications efficiency and thelikelihood that Onset may create for itself an impor-tant marketshare in a segment of the business com-munications industry.The small but very smart company, is developing apackage with the capability to provide voice, fax andE-mail in a single mailbox. Onset Technology Inc.was founded by Israeli Gadi Mazor who during hisarmy service became acquainted with the power ofalgorithms when applied to telecommunications prob-lem solving. Prior to founding Onset in 1997 Mazor,under the aegis of the BIRD-Foundation, providedrisk-free R&D services. The customer would only payhis participation cost in the program if satisfied withthe results. The entrepreneurial no-risk approach toAmerican companies proved a success. After herepaid the first of a series of grants in nine months theBIRD-Foundation encouraged Mazor to continue thisactivity. One of the companies was Caere which even-tually became a strategic partner in Onset.Onset focuses on developing products that enable thenext phase in human interaction with computers - theautomatic interpretation, or recognition, of text andvoice data and commands. It develops and marketsautomatic-recognition products that help users com-municate with their computers. Automatic-recogni-tion tools are software products that recognize andinterpret text and voice data and convert them intodigital format. Onset’s highly proprietary technologyrelates to context-related recognition using probabilis-

tic algorithms. It applies this technology to low-reso-lution image interpretation, thus improving opticalcharacter recognition (OCR), enhancing color pro-cessing, and enabling application-specific recogni-tion. Onset also applies the same core technology tospeaker-independent voice recognition, enabling effi-cient voice compression, voice over data, and hands-free dialing.

BackgroundFacsimile is so commonly used that it is taken forgranted. Yet is a highly complex technology of com-munication. Facsimile is the communication of aphotograph, or written or typewritten characteristicsby electrical means over usually fairly long distances.

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The information is converted into signal waves andentered into the transmission system. At a remotereceiving point, a receiver reconverts the informa-tion signal into a copy of the original material.Facsimile is widely used in the United States.There 40% of US phone charges are accounted forby fax usage. The facsimile market is very appeal-ing because there are 500 million users worldwide. E-mail, by contrast, is the most commonly usedInternet application. It is easy to receive and tostore. It may be replied to, forwarded to, or resentat the click of amouse. Its useis widespreadand unlike af a c s i m i l e ,whose messageis a staticgraphic repre-sentation, thecontents of anE-mail mes-sage may bechanged oraltered. Thisinherent quali-ty makes e-mail ideal forusage in draftcontracts, jour-nalism or in the transmission of any texts whichrequire some alteration, editing or adjustment. Thee-mail market is also very appealing as it has 100million users worldwide and the number is growingdaily.

Providing the SolutionThe answer is Onset’s flagship ThruFax, a faxrouting software. It identifies incoming faxes andautomatically routes them to the addressee via e-mail. The software’s Optical Character Recognitioncapability converts the fax image into useful text -users can edit contracts, modify copy, or save thedata to their own information systems such asresumé databases. The product is being presented atthe current CeBit show. ThruFax is sold for $395

per server. ThruFax requires a network connectionto a working fax server system, Windows 95, 98,NT4 or higher, a Pentium-based CPU, 20MB freedisk space, 32MB RAM (64MB/NT), and a MAPI-compliant e-mail system.

MarketingThe company’s products are sold by the Santa Cruzbased American Onset Technology Inc. The busi-ness plan calls for the marketing of 2,000 packages

of ThruFax to bulkfax users, by the endof the year. ThruFax will be dis-tributed through faxserver partner com-panies and valueadded resellers aswell as directly fromthe company’s web-site.Financing Onset’sActivities.Initial funding forOnset came from feesfrom consulting toIsrael’s Ministry ofDefense but were notenough to financedevelopment activi-

ties.In 1997 the company secured a strategic invest-

ment from a Taiwanese scanner manufacturer. Pur-suing a pattern of seeking only strategic partnersOnset acquired the Belgium Flanders LanguageValley as its other strategic investor. Currently it israising an additional sum of $3.0 million.

What is in the PipelineOnset is well advanced in developing “the unifiedmessage” box. This will offer the option of receiv-ing a fax which will be delivered as an E-Mail orvoice message.

The company has been invited to appear and pre-sent its novel voice recognition product at the

ISRAEL HIGH-TECH & INVESTMENT REPORT April 1999

Transfering Information GloballyMore than 3.4 trillion e-mail messages crossed the Internet in theUnited States in 1998. By comparison, 107 billion pieces of first-class mail were delivered by the U.S. Post Office last year. (eMar-keter Inc.) Nearly 50 percent of the U.S. population, or 135 millionpeople, will communicate via e-mail by 2001. Fifteen percent ofthe U.S. population (approximately 30 million adults 16 and over)use e-mail now. (Forrester Research) More than 3 billion "permit-ted" commercial e-mail messages were sent in 1997 and this num-ber will grow to 250 billion by 2002, creating a market that willsoar from less than $8 million in 1997 to more than $950 millionin 2002. (Forrester Research) Electronic mail has overtaken thetelephone as the primary means of business communication.(American Management Association) 41 percent of online userscheck their e-mail daily. (FIND/SVP)

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Demo Mobile Show to be held in San Diego inApril.

The CompetitionAn American company, eFax.com reported that100,000 users registered to use its free service in itsfirst month. eFax.com offers a fax number to indi-viduals so they can receive faxes in their own e-mail account. A company executive said the ser-vice processed almost 250,000 pages during theperiod. “Their product does not touch the fax itself,only transfers it to your e-mail account. Basically,you sign for a number that they allocate to you (inthe Chicago area). Then, any fax that is received bythem, is sent through e-mail to your account. Theyembeded a micro-viewer, so that their faxes can bemore compressed.”American investors during March, boosted theprice of these shares by 50% in one week.

Conclusion and ProjectionsThere is a major business opportunity for productsthat enable the automatic interpretation, or recog-nition, of text and voice data and commands. Onsetcould well become a candidate for acquisition byeither a major producer of scanners or possibly byan Internet portal. Probably the most attractiveroute for the company is via the Internet where it ispossible to attract millions of viewers. Onset’stechnology is extremely sophisticated and thoughit may not establish for the company a unique posi-tion, it does offer the combination of fax, e-mailand voice-mail in one neat bundle, a step-up onexisting market offerings. The company requires amajor effort in establishing broad recognition, andthere is little doubt in our minds that in the currentconsolidation of smaller companies into the largeones, Onset could be seen as a prize plum, ripe forthe picking. Furthermore, given the size of themarket, even a small share could turn Onset into amajor participant in the unified messaging field.

Comverse buys AmarexComverse Technology, Inc. (Nasdaq: CMVT)announced the acquisition of privately-heldAmarex Technology, Inc. Amarex, based in New

York City, NY, develops software-based intelli-gent peripherals and service nodes for telecom-munications network operators, including BritishTelecommunications plc (NYSE: BTY) and MCIWorldCom, Inc. (Nasdaq: WCOM), which enablea wide range of interactive voice response-basedservices. Amarex also develops software for callcenter-based customer service applications.

Amarex brings to Comverse a range of interactivevoice response-based enhanced services for net-work operators, such as virtual private network ser-vices, 800 services, network announcement ser-vices, customer service/customer care services,operator-free collect calling, call forwarding ser-vices, and directory services, that complement ourcurrent offerings. Amarex is a proven, establishedsupplier, with software already integrated withComverse's platforms, and relationships with cus-tomers including British Telecommunications andMCI WorldCom. Comverse, as the world's leadingprovider of platforms for multimedia messagingand other enhanced services to the network opera-tor community, brings to Amarex its more than 275wireless and wireline customers, whichinclude 13 out of the world's 20 largest telephonecompanies. By combining forces, we believe that alarge number of Comverse's customers will benefitfrom the increased number of services they canoffer to their residential and business customers.”Comverse Technology, Inc., headquartered inWoodbury, New York, designs, develops, manu-factures and markets computer and telecommuni-cations systems and software for communicationsand information processing applications.

Imaging Satellite to Be Launched in 1999The first Israeli-US civilian imaging satellite,developed by Israel Aircraft Industries (IAI) andEl-Op, in conjunction with US company CORESoftware Technology (CST) will be launchedDecember of this year.

$250 million will be raised to finance the launch ofthe first three satellites, including insurance,launch, and operation. Part of the finance willcome from the partnership’s shareholders’ equity,

ISRAEL HIGH-TECH & INVESTMENT REPORTApril 1999

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and preparations have now begun for issuing bondsin the US. The issue is to be managed by MerrillLynch. The intention is that after the first satellite islaunched, the company will be made public.The imaging satellite is named "Eros", and is basedon the "Ofek" series of military imaging satellites.West Indian Space has signed an agreement withthe Israeli government for the provision of servicesfrom the satellite, and it will compete in interna-tional markets with US company Lockheed Martin,which has developed a similar satellite. Companysources said the satellite would have the sameimaging and resolution capability as the competingUS satellite, with a ground resolution of just onemeter.

PCs in 50 percent of U.S. HomesHalf of U.S. households currently own a PC and 33percent have online services, according to OdysseyResearch of San Francisco. Odyssey also reportsthat PC households increased the number of hoursthey spent using PCs for entertainment by 23 per-cent to 4.9 hours per week in the most recent study,up from 4 hours per week six months ago. OdysseyPresident and CEO Nick Donatiello said the PC "isgraduating from a productivity tool to an entertain-ment platform." He added, "The TV has been theunrivaled entertainment and information mediumin U.S. households for decades. The PC hasn'tchanged that yet, but it is successfully competingfor attention."

Web Rating Reports Agree on Leaders The Web site properties of America Online (AOL),Yahoo! (YHOO) and Microsoft (MSFT) were thethree most heavily-trafficked Internet sites in Feb-ruary, according to separate reports issued Mondayby Media Metrix and Nielsen/NetRatings (NMR)services. Media Metrix estimated there were almost64 million users on the Net during February, whileNielsen/NetRatings estimated the number of peoplein the United States with Net access is 97 million,or 34 percent of households. The toll of tax seasonwas evident as Media Metrix said among at-workusers, USTreas.gov, an entry point to the IRS taxWeb site, ranked No. 22 in February with 40 per-

cent of all visitors accessing the site from work.The balance of the Media Metrix top 10 ranking ofWeb properties, in order, were Lycos (LCOS), Dis-ney (DIS) and Infoseek's (SEEK) Go Network,GeoCities (GCTY), Netscape, Excite (XCIT), TimeWarner Online (TWX) and Blue Mountain Arts.The Nielsen/NetRatings report also estimated thelargest Web advertisers.

Microsoft was top-ranked, showing 302 millionbanner ads during the month to 32.2 million people,and reaching 54.7 percent of Internet users. Theother top-five banner advertisers were CatalogLink,Amazon.com (AMZN), Yahoo! and First USA.

Net usage to double A British market research firm projects the numberof people using the Internet will double to 300 mil-lion by 2005. In the United States, DatamonitorPLC expects 95 million people will be online,Bloomberg news reported. One factor driving thegrowth will be the declining cost of access to Netservices, as free access providers grow and com-puter makers bundle service with hardware. Use ofaudio and video, Net telephony, video conferencingand online music listening will also boost usage.

NiceÕs Management System Selected byFirst USANice-Systems Limited said First USA has selectedits call centre, monitoring and quality managementsystem, NiceUniverse, for all of its customer ser-vice centres. The completed implementation ofNice's computer telephony intergrated solution isvalued at millions of dollars, Nice said. First USA, a subsidiary of Bank One Corp, will useNiceUniverse to monitor and evaluate the activityof its customer service representatives who serveover 56 million credit card members.

Palm-sized Communication DevicesNews from CeBIT this year has been dominated bycompanies exhibiting smaller and smaller comput-erized communications devices. CeBIT hasunveiled new palm-size computers that can surf theInternet, play audio, act as word-processors in


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color, and connect with personal computers byinfra-red or radio.

Laptop TelephonesLaptops incorporating a telephone are now beingoffered. Microsoft unveiled its Hermes Internettelephone powered by its Windows CE (compactedition) software. The world's biggest personalcomputer maker Compaq Computer Corp(NYSE:CPQ) show-cased a little hand-held device-- the Arrow 2100 -- which boasts a color screenand radio connectivity. 3Com Corp of the U.S., which leads the hand-heldmarket with its best-selling Palm Pilot, announcedimproved products in the form of the Palm V andPalm IIIx. IBM joined in the act announcing a dealwith Finnish mobile telephone power house NokiaOyj and travel services company SABRE for trav-el booking for executives on the move. The Japan-ese telecommunications giant NTT announced adeal with Symbian, the consortium includingMotorola of the U.S., Ericsson of Sweden, Nokiaand Psion Plc which plans to market the next gen-eration of Internet devices. NTT later announced italso planned a deal with Microsoft. At the CeBITshow Sun Microsystems announced a tie-up withSymbian. Analysts said this was an outflankingmove against Microsoft. All these products aim tobe the next generation of devices that can surf theInternet, and appeal to mass consumer markets.“The first 200 million computer owners used Win-tel machines - (PCs using Intel Corp(Nasdaq:INTC) chips and Microsoft's Windowssoftware) - the next 800 million will not,” 3Comchief executive officer Eric Benhamou was recent-ly quoted as saying. IBM believes that in the nextfive to 10 years there will be over one million busi-nesses and one billion people using one trillionmobile and network devices to communicateworldwide.

Israeli Telecommunications at CeBITMore than one hundred Israeli companies dis-played at the CeBIT exhibition. Those who werenot exhibiting were businessmen reviewing newproducts, conducting business meetings with sup-

pliers, and sometimes making a purchase. Anotherrespectable Israeli delegation represented Israelicompanies that had come to view and learn, most-ly in the communications field. Israeli communi-cations companies generally send to the CeBITexhibition both marketing and technical personnel,as a sort of advanced training course. CeBIT is agiant melting pot for such training, perhaps theworld’s best. Germany regards CeBIT as an eco-nomic event: 7,508 exhibitors, 2,862 of them fromoverseas, in an area nearly 100 acres. Besides Ger-many, which has more than 4,000 exhibitors, Tai-wan had 524, the US 434, Britain 304, the Nether-lands 118, France 105, and Israel was representedby 120 companies. Communications is regarded as CeBIT’s mostimportant exhibition, since it draws all other fieldsto it, such as information, software, multimedia,Internet, e-commerce, and other technologies. Thecommunications exhibition area, spread overseven huge halls, has grown 16% compared to lastyear, and the number of companies incorporated inthe field has grown 14% to 934. The focus of com-munications this year was telephony in general, andInternet cellular telephony in particular. Exhibitedwere networks combining land line and cellulartelephony, and new communications products. 250software companies exhibited more than one thou-sand software products for small and medium sizedcompanies, plants and offices. Over a hundredInternet companies presented the latest Internetuses and applications, complete Internet solutions,security, management, design and various hard-ware products. According to all the initial signs, inaddition to communications, the hottest area atCeBIT 99 was e-commerce on the Internet. Manysoftware, communications and information tech-nology products and presentations focused on thisfield, which is still in it infancy. If e-commerce wasconsidered somewhat minor at last year’s CeBIT,it took a key role this year.

ED-OPRepay Government Grants

A rule of thumb is that every $1.00 spent onresearch and development results in $10 worth ofsales. The following table lists six years of Elscint’s


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net revenues compared with six years of R&Dspending. The correlation is an almost perfect $10of sales resulting from each $1.00 spent on R&D.A vibrant, exciting and economically high con-tributing group in Israel is its high-technology sec-tor. It yields many benefits to this small country interms of big-time exports, jobs for a highly educat-ed population and international prestige. In the pastyear lengthy discussions with local Australian gov-ernment representatives, a visiting Australian min-ister and members of that country’s business andfinancial communities all point to their efforts atunderstanding what makes Israel’s high-tech grouptick. Much positive comment from the Australianshas been bestowed on this country’s Governmentprogram of assisting technology based companieswith bountiful research and development funding.Individuals close to the scene will add to the R&Dfunding, a well endowed venture capital industrywith a war chest of more than $1 billion available,highly educated graduates of Israel’s institutes ofhigher learning and a supply of intelligent Russianimmigrants.With growing signs of economic diffi-culties in Russia there is a strong likelihood of newarrivals from that country.

Credit for Israel’s prowess as an exporting high-tech economy is partially traceable to the Govern-ment of Israel’sgenerous pro-gram of indus-trial researchand develop-ment grants.50% and insome instances60% of industri-al R&D budgetsare funded bythe Governmentgrants. The underlying philosophy behind the pro-gram, is to create jobs and exports.The Office of theChief Scientist of the Ministry of Industry andTrade supervises the program. If the R&D results incommercial sales the R&D grant is repayable at therate of 2% or 3% of turnover.

Hindsight is 20/20 vision. But our view is that theOffice of the Chief Scientist, of the Ministry ofIndustry and Trade is negligent in not having pre-pared a framework for dealing with the Govern-ment R&D grants in the event that the startup orrecipient company is sold to a foreign company.This lack of a framework for dealing with such sit-uations has created a recent flap of considerableproportions. This issue calls for urgent review andthe establishment of norms. Its resolution probablywill be at the expense of the taxpayer.

The current debate originates in a November 29,1998 announcement when Elscint Ltd. (NYSE:ELT), a subsidiary of Elbit Medical Imaging Ltd.(Nasdaq: EMITF), reported that it had completedits sale of its CT business to Picker International for$ 269.5 million. Elscint also announced the com-pletion of the sale of its (MRI) magnetic resonanceimaging and (NM) nuclear magnetic medicinebusinesses to GE Medical Systems for $100 mil-lion. The operations sold by Elscint had more than450 employees from all over the world.

The products paid for by Picker International andGE Medical Systems were developed with the ben-efit of heavy R&D funding, as evidenced in Elsic-nt’s annual report and the hundreds of employess

owed theiremployment tothe excellenceof the compa-ny’s products.

Following thisand in a totallyu n e x p e c t e dt r a n s a c t i o nElron Electron-ics Industries a

40% owner of Elbit Medical Imaging Ltd. (EMITF)which is a 57% owner of Elscint Ltd has sold con-trol of EMITF to a real estate company whose flam-boyant owner has announced his intention to oper-ate his acquisition the field of real estate.To many observers the proposed sale appeared to


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be sacrilegious.The medical imaging assets sold for$270 million were created with Government andprivate funding. As a result of the sale to foreigncompanies the Government of Israel could loseroyalties of up to a quarter of a billion dollars. Proposals for guarantees that the sellers undertaketo invest $200 million in Israeli high-tech compa-nies are absurd when taking into account that theframework of Elron’s business, a company whichhas been in the foreground in developing many ofIsrael’s high-tech enterprises, is an investment inhigh-tech. Asking the real estate tycoon to invest$50 million in medical imaging is equally absurd.We firmly align with Efi Arazi, a Scitex founderwho says that “anyone receiving assistance fromthe Chief Scientist should sign a contract obliginghim to repay the amounts in the event that he sellshis start-up to a foreign company, or transfers itsmain activities from Israel. It’s an entirely legiti-mate demand that entrepreneurs repay the ChiefScientist for the grants, at high interest, accordingto the length of time and the amount of the assis-tance. I’m an entrepreneur and not an administra-tion expert, but the rate of the repayment should besuch that the State benefit from the risk it takeswhen it invests in start-ups. The refund can be eventen to twenty times the amount of assistance. It’simpossible to prevent companies leaving Israel.However, it’s possible to create a climate in which,if companies choose to leave, they will repay thegrants, since they are not fulfilling the aims forwhich the grants were given, such as providingjobs." We have entered a period of mergers andacquisitions when a week does not go by withoutan announcement of a foreign company buying upan Israeli high-tech company.

Big sums are involved and if Government researchand funding programs are not to be seen as massivegiveaways of the public funds a simple frameworkfor a return of unpaid royalties should be estab-lished. Israelis have a wonderful expression forsuckers ... they call them freyers. The national pho-bia is not to become a freyer. We think that the time

has come for establishing regulations which takethese issues into consideration and demandaccountability.

US Investment Bank and Nessua ZannexNessua Zannex reported to the Tel Aviv Stock Exchangethat it had reached an agreement in principle tocooperate with a US investment bank in the provi-sion of investment banking and trading services inIsraeli securities traded primarily on Nasdaq. It isrumoured that the Investment bank in question isPiper Jeffrey of Minnesota. Nessua Zannex is a rel-atively new brokerage firm, formed by combiningNessua, a veteran brokerage firm and Zannex is ayoung firm of financial portfolio managers.

Elbit Systems Seeks to Take Over Cyclone Elbit Systems Ltd. (Nasdaq: ESLTF) announcedthat it is issuing a tender offer for 100% of theshares and debentures of Cyclone Aviation Prod-ucts Ltd. ("Cyclone”) of Karmiel, Israel, traded onthe Tel-Aviv Stock Exchange. The value of theoffer is approximately $10 mil. Cyclone providesmaintenance and logistics services and support toaircraft and helicopter operators and manufacturesaircraft structures and assemblies.

Gilat Satellite Reports Earnings Gain Gilat Satellite Networks Ltd (Nasdaq:GILTF)reported 4Q EPS of $0.76 vs $0.51 in the prior year,on revenues of $49.7 mln vs $30.0 mln in 1997.Analysts' mean estimates were $0.75, according toFirst Call. Full year EPS were $2.14 vs $1.51.

Oshap Shares Climb on SunGard Deal Oshap Technologies Ltd. (Nasdaq:OSHF) sharesrecently collapsed in one session by 27%. Oshapannounced that it is being acquired by computerservices and software firm SunGard Data SystemsInc. for $210 million in stock. The offer represent-ed nearly a 50% premium over Oshap's previousclosing price of $10.50. As a result of the acquisi-


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tion SunGard will move into asset-managementsoftware, which will enhance its financial-servicessoftware line. Oshap has an 18% stake in the IsraeliTecnomatix Technologies Ltd. (Nasdaq:TCNOF).

William Cohen in Missile Talks with IsraelAmerican Secrtary of Defense, William Cohen in arecent visit to Israel, stated that the United Stateswas exploring ways to fund R&D on a third batteryfor Arrow, an Israeli-produced missile jointly fund-ed by both countries. Early last year, Israel askedthe U.S. to expand the Arrow anti-missile missileproject from two batteries to three. Development ofthe Arrow began a decade ago as part of the U.S.“Star Wars” Strategic Defense Initiative but reallytook off after Iraq fired 39 Scud missiles at Israelduring the 1991 Gulf War. When the U.S.-suppliedPatriot missiles proved disappointing in that con-flict, the United States and Israel pushed ahead todevelop the Arrow. It is designed to track incomingmissiles and guide an anti-missile missile at a speedof two miles (three km) per second towards the tar-get.

ECI Denies Acquisition BidECI Telecom Ltd (Nasdaq:ECILF) denied it was intalks to acquire Advanced Fibre Communications."We know AFC but we haven't had negotiations.We don't have any such deal and we don't intendto," ECI CFO Doron Inbar stated, "We are in con-tact with a few companies, but AFC is not one ofthem," Inbar said, saying any discussions were at apreliminary stage. ECI has been looking for a U.S.acquisition that would complement its core busi-ness in digital telecommunications and data trans-mission. Analysts said the goal was to win access tothe American market rather than to acquire tech-nology. The United States accounts now for about aquarter of ECI's revenues. In the days following theannouncement large blocks of ECI’s shares wereoffered for sale, driving down the price of the stockby nearly 20% to $32 per share.Investment Banker Touts IndigoLehman Brothers said it raised Indigo NV to a buyfrom a neutral rating. Lehman believes the compa-ny's 1999 turnaround is on track. Unit shipments

will be driven by accelerating U.S. demand.Lehman projects strong growth in high margin con-sumables and service revenues, to be up 27% in1999. During the second half of 1999 and duringthe year 2000 the company should benefit from therollout of new high-end, faster speed UltraStream,with wider third party distribution in the U.S. andEurope. Together with growth in the U.S. salesforce the company should experience an increase insales. Estimates for 1999 are an $0.05 loss per shareand a profit of $0.22 per share for 2000.

Makhteshim-Agan Change FocusMakhteshim-Agan is likely to move from chemicalprocessing to biotechnology. Makhteshim-Agan, aglobal leader in generic agrochemistry, is likely tochange its focus and move into three defined direc-tions according to vice president for R&D YoelSasson. Makhteshim-Agan is also a global leader inplant protection chemicals. The company’s market-ing network is deployed in five continents, and ithas the major market share for several of its prod-ucts. According to Sasson, agrochemistry has beenundergoing comprehensive changes in recent years.The market is characterized by a range of new,highly active molecules with focused selectivity (atdrug level). He says that, due to these changes, thecompany’s continued growth is likely to be basedon three possible alternatives: Conversion of thecompany’s technological base from chemistry tolife science and biotechnology, similar to the movemost of the large agrochemistry companies in theworld have made. Change in strategic concept, byentering the field of discovery, development andmanufacture of original, active molecules.Strengthening and deepening of capabilities in cur-rent areas of expertise - generic agrochemistry -while continuing to develop new, patent-basedproducts.

Makhteshim-Agan recently reported in its financialstatements that the global economic crisis, includ-ing the Brazilian crisis (the company’s main exportmarket), has not adversely affected activities, apartfrom some marginal effect. The company’s annualsales total $600 million.


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Comsor Invests in Lanoptics LanOptics Ltd. (Nasdaq: LNOPF), a manufacturerof Fast Ethernet and Gigabit Ethernet Switches andInternet applications, announced that ComSorTrading Fund, an affiliate of Comverse Technolo-gy, Inc. (Nasdaq: CMVT), has entered into a bind-ing agreement in principle to invest in LanOptics.ComSor is a partnership with InternationalFinancier George Soros. ComSor will purchaseLanOptics at a price of US$3.00 per share. Closingof the investment is expected to occur early April.

New Dimension Software Acquired for$650 million.U.S. firm BMC Software Inc has signed an agree-ment to acquire Israel's New Dimension SoftwareLtd for $52.50 a share. “The transaction is a cashpurchase value at more than $650 million,” Hous-ton-based BMC Software said in a statement. BMCSoftware said it will carry out the acquisitionthrough a cash tender offer for all outstanding NewDimension shares. It said it has entered into optionagreements with two holders of more than 60 per-cent of the outstanding shares. The agreements givethe U.S. firm the right to purchase these shares atthe tender offer price for a stipulated period andrequire the shareholders tender their shares to BMCSoftware. New Dimension develops system man-agement software. Its shares closed up $1.375 at$48.94 in Nasdaq trading after the announcementwas made public.

Optimism on TASEOverseas Investors RecommendIncreased Investment in Israel Flemings Bank’s regional desk, one of the out-standing desks for overseas investors’ activity onthe Israeli stock market, recommended consider-ably increasing investment in the Israeli market, atthe expense of reducing investment in the Greekmarket. The desk, which monitors Europe, Africa,and the Middle East, makes its recommendation onthe basis of the IFC emerging markets index, andspecifically on the basis of the IFC index for coun-

tries in Europe, Africa, and the Middle East. Thedesk’s recommendation now is to increase invest-ment in the Israeli market to 40% above Israel’sweight in this index, and, conversely, to reduceGreece’s weight to 80% of its index weight. Theexplanation of this preference is the sharp riserecently posted by the Greek market, now consid-ered expensive, and the lag in the Israeli market,which is a long way behind in dollar terms. Flem-ings points out that the Israeli market is now trad-ing at a third of the value of the Greek market, andthat the Israeli market is expected to rise, with areduction of at least 2.5% in Bank of Israel interestrates in the course of the year. Flemings especiallyrecommends the shares of Israeli banks, which areexpected to benefit from the interest rate reduction,from lower than predicted allowances for doubtfuldebts, and from recovery in economic activity inIsrael. The recommendation from Flemings Banktoday is another in a series of recommendationsfrom overseas investors on the Israeli marketrecently. It is estimated that foreign investors havebeen stepping up their activity in the Israeli market,which explains, among other things, the market’srecent rises few days - although it is generallyagreed that, this time, the advances were in fact ledby local investors. Nevertheless, the reports ofrecent overseas investor activity are not consistent,and some Israeli banks claim that, for the timebeing, there is no noticeable revival in their inter-est. TASE Managing Director, Saul Bronfeld saidtoday that “the continuation of privatization duringthe coming year will further increase the interna-tional interest in Israel.” The TASE spokespersonsaid foreign analysts were optimistic regarding themarket’s future. In its February market commen-tary, Salomon Smith Barney analysts recommend-ed increasing Israel’s weighting in the emergingmarkets portfolio from 2.3% under the IFC’s cur-rent benchmark to 7.3%, while ING Baringsbelieves that the TASE share indices will rise by19% in 1999, and that the inflation rate will fall to5%. The bank’s economists expect the TA 100index to reach a level of 345 points by the end ofthe year. Moreover the Israeli government is planning to


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offer 14% of the shares of Bezeq, Israel Telecom-munication Corporation, for some $370 million inApril. International investment banks are showingan avid interest in the offering, which is expected tobe the largest ever in the history of the Tel AvivStock Exchange. The largest offering to date wasthe government’s $300 million tender offer for 30%of Israel Chemicals’ shares in December 1998.Recently the government and Bezeq chose the lead-ing underwriters. The privatization of Israel’slargest banks is continuing as well. The govern-ment also sold another block of Bank Leumi’sshares, amounting to 2.5% of the bank’s equity.The shares were sold to Lehman brothers, the win-ning bid in a tender that included Goldman Sachsand UBS. In April 1998, Lehman Brothers won asimilar tender when it purchased 2% of BankLeumi’s shares. TASE’s Managing Director, SaulBronfeld said: “The success of privatization provesthat the Tel Aviv Stock Exchange is an attractivevenue for foreign investors. Despite the drop in thenumber of issues in recent months, the TASE’sallure has not declined. Large, high quality compa-nies continue to be a source of attraction for foreignand local investors. The continuation of privatiza-tion during the coming year will further increasethe international interest in Israel.” Foreign ana-lysts are optimistic regarding the market’s future.

Pharmos Corporation Receives Noticeof Allowance on Dexanabinol Patentfor Use in the Treatment of MultipleSclero-sis

Patent Approval Follows Report

Highlighting Medical Benefits of MarijuanaPharmos Corporation (Nasdaq: PARS)announced that it has received a Notice ofAllowance from the U.S. Patent and TrademarkOffice for a new patent entitled Tumor NecrosisFactor Alpha Inhibiting Pharmaceuticals, withclaims covering the use of dexanabinol as well asvarious non-psychotropic cannabinoid analogs,derivatives or metabolites in the treatment of mul-tiple sclerosis.The new patent defines novel therapeutic applica-

tions for the use of dexanabinol and other synthet-ic, non-psychotropic analogs of cannabinoids. Inpreclinical tests, Pharmos has demonstrated thatdexanabinol could exert anti-inflammatory effectsby preventing the production or release of TumorNecrosis Factor (TNF) alpha. These compoundsare also advantageous in that they do not producecertain side effects of other anti-inflammatorydrugs used in the treatment of multiple sclerosis,such as steroids, and particularly in that they do notcause the psychoactivity of natural cannabinoids.

“We are very pleased with the granting of thispatent,'' said Dr. Haim Aviv, Pharmos' Chairmanand CEO. “Our expectations of dexanabinol havingmultiple neurological applications are confirmedby, among other factors, its amelioration of theseverity of multiple sclerosis in animals. Dexanabi-nol's neuroprotective properties could also be ben-eficial by preventing or decreasing the cumulativeneurological damage caused by multiple sclerosis,which is a chronic degenerative disease. We arelooking forward to the beginning of Phase III trialsto confirm dexanabinol's efficacy in head traumapatients.''

The recent completion of a successful Phase II clin-ical study showed dexanabinol to be safe and well-tolerated in severe head trauma patients. Therewere no unexpected adverse experiences reportedfor either the drug treated or placebo group.Intracranial pressure, an important factor and a pre-dictor of poor neurological outcome, was signifi-cantly reduced in the drug treated patients throughthe third day of treatment, without a concomitantreduction in systolic blood pressure.The patent allowance follows last week's much


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anticipated report from the National Academy ofSciences' Institute of Medicine (IOM) evaluating themedical benefits of marijuana. The IOM, which wascommissioned by U.S. drug czar Barry McCaffrey,found that marijuana's active components are poten-tially effective in treating muscle spasms associatedwith multiple sclerosis, AIDS related anorexia, pain,nausea, and other ailments. However, due to the risksassociated with smoking marijuana -- lung damage,cancer, and emphysema -- the drug should be admin-istered by a safer, fast-acting, and reliable method.The report recommends that more clinical trials beperformed to develop a smokeless alternative to treatpatients.The worldwide market for dexanabinol in the treat-ment of severe head trauma may reach $1 billionannually and is significantly larger if other neurolog-ical conditions such as multiple sclerosis and strokeare treated with the drug. An estimated 2.5 millionpeople suffer from multiple sclerosis, which is mostcommonly found in the United States, Canada,Europe, and South America.

ECI Announces Share Buy ProgramECI Telecom Ltd. (Nasdaq: ECILF )announced that its wholly owned subsidiary, ECITelecom (1990) Export Ltd., has adopted a share pur-chase program under which it will purchase up to atotal of 1,000,000 Ordinary Shares of ECI TelecomLtd. from time to time, in open market purchases ornegotiated block trades. Purchases will be dependentupon market conditions and may be discontinued atany time. Purchased shares will be held by the sub-sidiary for investment purposes.The announcement comes in the wake of a sharpdrop in ECI’s shares (see chart )

Gilat Shares Gain 50% in Two Months IHTIR’s Choice of a Small Cap for 1999 was GilatCommunications Ltd. (GICOF:Nasdaq) (see IHTIR:January 1999).Subsequently two recommendations were announcedby two investment bankers in the US. Apparentlythese recommendations attracted a spate of buyersand the shares which had traded under $9 a share inJanuary advanced sharply to the $15 level on averagedaily trading turnovers of more than 40,000 a ses-sion.On March 3 the company released its strong Q4results. The below chart shows the movement of the Gilatshares over the past year.Our analysis points to a further growth in sales andearnings and leaves Gilat as our premier choice forfurther capital growth among Israel’s low. capitaliza-tion companies.

Comverse Technology Announces RecordFourth Quarter and Fiscal 1998 ResultsComverse Technology, Inc.(NASDAQ: CMVT)announced for the fourth quarter of fiscal year1998, ended January 31, 1999 record net income


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after taxes of $32,369,000 ($0.66 per diluted and$0.72 per basicshare), and record sales of$190,102,000.

Comverse’s Board of Directors also declared athree-for-two stock split, Shares resulting from thesplit are to be distributed by April 15, 1999. For fiscal year 1998, ended January 31, 1999, Com-verse posted record net income of $111,527,000($2.33 per diluted share; $2.52 per basic share), andrecord sales of $696,094,000.Editorial Note: In our IHTIR January issue we fea-tured Comverse Technology and wrote that:“CMVT is one of the outstanding companies offer-ing enhanced services platform and its record isamong the best in the field. Its management is com-mitted to further broadening its already command-ing position and sees the wireless communicationto the Internet as “the greatest business opportunityof our times”. Based on the market’s perception ofthe CMVT shares it would seem that the current p/eratio of 26 x 1999 estimated earnings is a support-able price level.

ICQ Users Now Go Off-Line A new global seamless technology called Signalerautomatically notifies ICQ users that somebodywants to chat, even when the user is not on-line.The Signaler software is the latest offering fromNECS, subsidiary of Israeli Bell South Internation-al Group, creators of MailPush e-mail notificationservice http://www.mailpush.com and C-WebMailsoftware http://www.cwebmail.com. Signaler willmake the popular ICQ on-line chat network more

convenient while giving the entire Instant Messag-ing industry a boost. ICQ was created by Israeli

Mirabilis and was acquired by America OnLine in1998.“Signaler allows ICQ users to be reachable evenwhen their PC is not connected to the Internet,”said NECS General Manager Zvika Eadan. “Sig-naler enables chat buddies to send ICQ chatrequests even while they are not connected to theInternet -- as long as their PCs are turned on.Currently, when you want to connect with a personoff-line, the choices are either 1) sending a messageand waiting for your buddy to get on-line -- whichcould take hours, or 2) making a phone call --which defeats the whole purpose of on-line chat,''said Eadan.Signaler features a patent-pending “signaling”technology that pops an ICQ message onto your PCscreen that actually includes the name of the chatbuddy who is looking for you. The icon is accom-panied by the signature ICQ sound effect and ispreceded by a special telephone ring that gives youan additional heads-up.While Signaler enables users to know when theirchat partners are on-line or off-line, your privacy isprotected. Users have the ability at any time to 'turntheir ICQ flower to red' and thereby become invis-ible to the ICQ world.


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Documents

The Anatomy of a T echnology Startup - · PDF fileThe Anatomy of a T echnology Startup ... New Dimension Software Acquired for $650 million Gilat Communications Satellite Soars Comverse