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The attack that broke the Israeli back

Not only Israel's microfish on the Street are shrinking to dots

"Israel has more companies on Wall Street than any foreign country other than Canada," investment bankers pushing Israeli stocks love to tell potential investors.

It's true, too. But after the latest flood of earnings warnings by Israeli companies this week, chastened bankers may have to amend that dramatic presentation to something like "Israel has more shell companies on the Street than any other foreign country".

Simply: Many Israeli companies are shrinking infinitesimally, to the point of disappearing outright. And not all began as bitty firms riding the wave.

Take the warning published by Israeli DSL company Metalink (Nasdaq:MTLK) (MTLK) . It is hardly alone in hurting these days, but its warning still stands out.

Its announcement is all of six lines. Waggling the usual platitudes, from "our advantageous position" to "our success in these emerging markets", the message provides only one solid figure: $1.2 million third-quarter revenues.

That's the kind of quarterly result expected from a small-town supermarket. A sum that puny spells out loud and clear: The company can't drum up demand for its products. This from a company that is not, in fact, a grocery: At its peak it achieved a value of $900 million, in March 2000.

Sitting pretty on fat kitties
Meanwhile, for all the companies are watching their share prices shrink to dots as customers walk on by, they're sitting pretty on plush kitties. Metalink alone has $82 million in hand. Vyyo (Nasdaq:VYYO), Netro Corporation (Nasdaq:NTRO), Ceragon (Nasdaq:CRNT), London-traded Zen Research (LSE:ZEN) and Optibase (Nasdaq:OBAS) (OBAS) - Get Optibase Ltd. Report are all reporting embarrassing sales after successful flotations.

By the way, the well-wadded minnows are evidently looking toothsome. Optibase was taken over by a Swiss-Israeli financier, while Netro averted a recent takeover attempt by Israeli tycoon Yitzhak Tshuva. The others can expect similar experiences.

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Even Israel's RadWare (Nasdaq:RDWR) (RDWR) - Get Radware Ltd. Report, touted as the exception to the rule, looks like a dud. The Mahwah, New Jersey-based company, a member of the Tel Aviv-headquartered RAD group, thought it would make money from its intelligent surfer traffic management systems. So far, not so good.

This week Radware admitted it may lose $3 million on sales of $8 million in the third quarter. It blamed its woes on the terror attacks on the U.S. causing customers to postpone orders. But the attacks were only three weeks ago. One must conclude that sales ground to a total halt since then, leaving doubt as to when they will resume.

Spiraling down from erratic orbit
Then there's Gilat Satellite (Nasdaq:GILTF) (GILTF) Now we're talking about another league altogether.

Gilat boasts annual sales in the hundreds of millions. It is a true world leader in its sphere and consistently posted profits for years. If not for its ill-fated Internet-by-satellite venture Starband, it would probably still be in the black.

But yesterday this giant too warned investors of a red-ink bath. Gilat predicted third-quarter revenues of $80 million. That's 32% down from the previous quarter, but still reasonable enough. It's the rest of its figures that consternate.

Gilat yesterday warned of a stratospheric one-time $247 million loss. It has to record an "impairment of assets, primarily goodwill" of about $80 million, write off $70 million worth of inventory plus $57 million investment in customers, provide $10 million for doubtful debt, and take a restructuring charge of $30 million. That comes to $247 million, or $11.4 per share.

The company presents its travails as a one-time affair. But a glance at previous reports indicate that its one-time woes, consisting of this or that charge or provision, are pretty repetitive. In fact, it hasn't been cash-flow positive since 1996, including in years for which it reported profits. Its 1996 cash flow was zero, whence it eroded into eight-digit negative numbers last year.

How does a company with negative cash flow maintain orbit? Through offerings. In 1997 Gilat raised $74 million from bonds, followed by $260 million through a massive stock offer in 1999 and $118 million worth of debt in 2000.

Metalink, Radware and the others were hi-tech hopefuls that rode the Internet wave to Wall Street. Gilat was another breed altogether, a huge hi-tech firm with thousands on its payroll. But its chief executive Yoel Gat stated this week, "¿we will align the size of the company and its expense structure to reflect revised expected revenues". Sounds like the Israeli satellite giant could also downsize to dot-size, in another body blow to Israeli hi-tech.