ISRAEL 
HIGH-TECH & INVESTMENT REPORT

from the November 1999 issue


How the Global Individual Investor Can Capitalize on Israel's High-Tech Boom

TASE Publicly Traded Venture Capital Companies


Strategic investors such as IBM, Intel, General Electric, Siemens, Deutsche Telecom, Cable and Wireless, pour millions of dollars into the burgeoning Israeli high-tech industries. Experience has proven that Israeli startups possess superb technology resulting in products which create substantial added value.

Israel oriented investors, on the other hand, invest in any one of approximately 125 Israeli companies listed on foreign exchanges, the majority of which are listed on the US Nasdaq market.

Institutional investors and wealthy individuals have the option of investing in the nearly 60 venture capital funds active in Israel. Venture capital investments, however, by definition, are generally high-risk and are offered to individuals whose net worth must be at or above a certain dollar level. Venture capitalists pool investment funds entrusted to them. The venture capitalist fund manager invests according to a set of guidelines such as investing in startups, early stage or mature companies. They may choose to invest In companies having a product with some sales and/or in focused sectors such as biotechnology or Information and Internet Technologies. Venture capitalists aware of the high risk involved in these investments seek investment opportunities with a potential of generating 60% or greater, compounded annual return. Venture capital funds are long term investments with a predetermined life expectancy of 10 years or longer. They do not offer the investor timely exit opportunities.

Investors in venture capital funds expect to compensated for the risk to principal and the consequent variability in the return on investment by the prospect of massive capital gains. There is an alternate investment route available for those who are willing to accept the risk and reward of investing in Israel's start-up high-tech companies. A recent major research by the Israel High Tech & Investment Report has identified ----- "a basket of high-tech Israeli investments" not limited to high net-worth investors. The research focused on five public Tel-Aviv Stock Exchange traded venture capital companies. Overlooked by Israelis and unknown to international investors the shares of these five companies based on the criteria employed are undervalued. At least one of these companies is an exciting medium to longer-term investment opportunity. This company invested in 26 companies covering the gamut of exciting technologies. A $633,000 investment in Netro, one of the portfolio companies founded in 1994, as of June 30, 1999 had a value that exceeded $30 mln. Another company among the five companies has recorded profits of $7.5 mln in the first half of 1999.

Four of the five companies have reported profitable operations in the first half of 1999. The mechanics of buying and selling the shares is uncomplicated, as buy and sell orders can be placed directly with brokers in the US or over the Internet. The price quotations can be followed daily on the Tel Aviv Stock Exchange website.

Teuza - A Fairchild Technology Venture Ltd.

Teuza's portfolio reflects a more conservative approach to investment than its peers, with holdings in semi-conductor equipment, software, healthcare, biotechnology, industrial equipment and printing. Only one of its holdings is in the communications field. The fund benefits from the supportive relationship by its joint founder the US Fairchild Corp. At mid year its total investment in portfolio companies was $ 22 mln and their book value was but management did not report the mid-year value of its portfolio holdings. Teuza earned $7.4 mln in the first half of 1999.

Marathon Capital Developments Funds Ltd.

Marathon's public visibility is lower than its peers as it is the only public venture capital company as yet without a website. Its current market capitalization is at an approximate discount of 20% relative to the company's valuation at mid-year. The portfolio of 13 companies reflects an aggressive management style with a broad spread of technologies and potential IPO candidates in 2000. The company currently has $8 mln available for new investments and at mid year their investment portfolio was valued at $23.4 mln.

Marathon earned $2.0 mln in the first half of 1999.

Sadot R&D - Sadot Research & Development Fund Ltd.

In 1999 the shares of Sadot doubled in value and in spite of the sharp rise are trading at a modest p/e of well under 10. Its major success to date has been its early stage investment in Point of Sale (Nasdaq:POSI). Point of Sale is one of the holdings in the Israel High-Tech & Investment Report's Israel High-Tech Model Portfolio. Part of the investment was realized in 1999 but at mid year Sadot's holding in Point-of -Sale was valued at more than $1 mln. At mid year the company's holdings consisted of 14 companies representing a total investment of nearly $8 mln and an evaluation of these holdings at over $11 mln. Its recent stock market capitalization including convertible debentures was close to $20 mln.

Sadot earned $1.6 mln in the first half of 1999.

Mofet Israel Technology Fund Ltd.

At mid year Mofet held a portfolio of 35 companies at a total cost of $20.5 mln and a book value of $50 mln. The company also had a cash position available for investment of more than $9 mln. The investment portfolio includes promising holdings such as Enigma, Exsight, Mutek, Paradigm Physical, Precise Software and BreezeCom. Founded in 1992, BreezeCom develops, manufactures and markets products for the telecommunications, data telecommunications and wireless LAN applications. It has been voted as being one of Israel's most promising young companies and at exit point should command a substantial valuation. Mofet's portfolio pickers had invested in Netro which is a public company in the US and recently had a market value of more than $1.5 bln!!

Mofet earned $1.5 mln in the first six months of 1999.

Inventech - Inventech Investments Co. Ltd.

Inventech at mid year held a portfolio of 23 companies at a total cost of $23 mln and a book value of $42 mln. Its recent stock market valuation was just under $40 mln. Promising investments holding out a potential for future substantial capital appreciation include NOVA, Peptor and Visionix. Inventech reported an $800,000 loss in Q2 1999.

Inventech reported a loss of $1 mln in the first six months of 1999.


Comments:
The total market capitalization of the five venture capital companies as of October of this year was just over $161 mln. The market value in October, was very close to the total value of holdings as reported by the funds, in the June 30,1999 statements. Teuza does not report any evaluations. Management suggests that analysts' estimates be consulted but none were available for the half year covered in our report.

We would have liked to have evaluations of the holdings to be based on the value used in the most recent equity financing of the portfolio companies. This method of valuations we suspect, could indicate an undervaluation by the market.

An examination of the portfolio holdings reveals numerous companies with a potential participating in Initial Public Offering as wellas becoming targets for acquisition.

The five Tel Aviv Stock Exchange Publicly Traded companies indicate a potential for capital gains over the middle to long term and Mofet seemed to have the most attractive portfolio mix.

At this time there is no tax on capital gains however, this may change within the framework of major Capital Market Taxation Reforms planned for 2001.

It should be pointed out that with the exception of Mofet and Teuza trading volumes are relatively small. Buy and sell orders should should carry limits.

Currency fluctuation have not been a serious issue as the Israeli Shekel has been stable when compared to major currencies vis-a-vis the dollar.

A basket of shares of the Tel-Aviv Stock Exchange Publicly Traded Venture Capital Companies since the beginning of the year, was up by 45%.


The report should not be construed as recommendation to invest in the companies. Effort has been made to present the information as accurately as possible, but it is not guaranteed.


Reprinted from the Israel High-Tech & Investment Report November 1999

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