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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended June 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from
to
COMMISSION FILE NUMBER: 0-29144
ILOG S.A.
(Exact name of Registrant as specified in its charter)
THE REPUBLIC OF FRANCE
(Jurisdiction of incorporation or organization)
9, RUE DE VERDUN, 94253 GENTILLY, FRANCE
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the
Act: None
Securities registered or to be registered pursuant to Section 12(g) of the
Act: None
<TABLE>
<CAPTION>
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
American Depositary Shares, each
Representing one Ordinary Share Nasdaq National Market
Ordinary Shares Nasdaq National Market*
</TABLE>
* Not for trading, but only in connection with the American Depositary Shares.
------------------------
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
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The number of outstanding shares of each of the issuer's classes of capital
or common stock as of June 30, 1998 was 13,740,677 Ordinary Shares of FF 4.00
nominal value, including 9,116,548 American Depositary Shares (as evidenced by
American Depositary Receipts), each corresponding to one Ordinary Share.
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
/X/ Yes / / No
Indicate by check mark which financial statement item the registrant has
elected to follow.
/ / Item 17 /X/ Item 18
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<PAGE>
Unless the context otherwise requires, references herein to "the Company" or
to "ILOG" are to ILOG S.A. and its consolidated subsidiaries.
------------------------
The Company's name together with its logo is registered as a trademark in
France, the United States and a number of other countries. This Annual Report on
Form 20-F may also contain tradenames or trademarks of companies other than
ILOG.
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EXCHANGE RATES
ILOG publishes its financial statements in dollars. In this Annual Report on
Form 20-F, references to "dollars" or "$" are to U.S. dollars and references to
"francs" or "FF" are to French francs. Except as otherwise stated herein, all
monetary amounts in this Annual Report on Form 20-F have been presented in
dollars.
The table below sets forth, for information purposes only, for the periods
indicated, the high, low, average and end of period noon buying rates in New
York City for cable transfers in French francs as certified for customs purposes
by the Federal Reserve Bank of New York ("Noon Buying Rate") for the franc
against the dollar. Such rates are not used by the Company in the preparation of
its consolidated financial statements included elsewhere in this Annual Report
on Form 20-F. See Note 1 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
AVERAGE END OF
YEAR ENDED JUNE 30, HIGH LOW RATE(1) PERIOD
- ------------------------------------------------------------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C>
(FRANCS PER DOLLAR)
1994......................................................... 6.06 5.41 5.80 5.44
1995......................................................... 5.46 4.79 5.18 4.85
1996......................................................... 5.19 4.78 5.02 5.15
1997......................................................... 5.87 5.00 5.42 5.87
1998......................................................... 6.20 5.77 6.03 6.05
</TABLE>
- ------------------------
(1) The average of the Noon Buying Rates on the last business day of each month
during the year.
For information regarding the effects of currency fluctuations on the
Company's results, see Item 9, "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
------------------------
AMERICAN DEPOSITARY SHARES
Pursuant to a program sponsored by the Company, Ordinary Shares of the
Company (the "Shares") are traded in the United States in the form of American
Depositary Shares ("ADSs"), each ADS representing one Share placed on deposit
with Morgan Guaranty Trust Company of New York, as depositary (the "Depositary")
and issued and delivered by the Depositary through its principal office in New
York City at 60 Wall Street, (36th Floor), New York, New York, 10260. Under the
terms of the Deposit Agreement, dated as of February 13, 1997 and amended on
August 13, 1998, among the Company, the Depositary and the holders from time to
time of ADSs (the "Deposit Agreement"), Shares may be deposited with the Paris
office of Banque Paribas, as custodian (the "Custodian"), or any successor or
successors to such Custodian. The Depositary provides a variety of services to
registered holders of American Depositary Receipts, as more fully set forth in
the form of the Deposit Agreement which was filed as an exhibit to the Company's
Registration Statement on Form F-6 effective with the Securities and Exchange
Commission on February 13, 1997 and amended on August 13, 1998.
2
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. Description of Business......................................................................... 4
Item 2. Description of Property......................................................................... 17
Item 3. Legal Proceedings............................................................................... 18
Item 4. Control of Registrant........................................................................... 18
Item 5. Nature of Trading Market........................................................................ 18
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.............................. 19
Item 7. Taxation........................................................................................ 19
Item 8. Selected Financial Data......................................................................... 25
Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 26
Item 10. Directors and Officers of Registrant............................................................ 41
Item 11. Compensation of Directors and Officers.......................................................... 45
Item 12. Options to Purchase Securities from Registrant or Subsidiaries.................................. 45
Item 13. Interest of Management in Certain Transactions.................................................. 47
PART II
Item 14. Description of Securities to be Registered...................................................... 49
PART III
Item 15. Defaults Upon Senior Securities................................................................. 49
Item 16. Changes in Securities and Changes in Security for Registered Securities......................... 49
PART IV
Item 17. Financial Statements............................................................................ 49
Item 18. Financial Statements............................................................................ 49
Item 19. Financial Statements and Exhibits............................................................... 49
</TABLE>
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors." Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. ILOG undertakes no obligation
to publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof. Readers should carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission, including reports on Form 6-K
filed by the Company.
3
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
ILOG develops, markets and supports software components for user interface,
resource optimization and data services functions that are fundamental to the
development of strategic business applications. By creating pre-built and
pre-tested features to address these common software functions, the Company's
object oriented components reduce the time, cost and risk in the development
process, and allow users to focus their own efforts on value-added, business
specific programming tasks. The Company's components provide high performance
and scalability, run on the most popular Windows and Unix platforms, and can be
used to facilitate client-side, server-side or web development efforts. The
Company also offers a range of consulting, customer training and maintenance
services.
ILOG's C, C++ and Java software components address common strategic business
software development needs. These needs include user interface, resource
optimization and data services functions such as information coordination among
applications and databases. The Company's components can be purchased for
integration into new or existing applications individually or in combination
with other components. The Company is enhancing the performance and scalability
of its current components, porting them to different platforms and additional
programming languages and expanding the number of components to address common
software development needs.
BACKGROUND
Increasing global competition and rapid changes in technology are
accelerating the demand by organizations for strategic business applications to
achieve competitive advantage. However, organizations face significant
challenges in developing strategic business applications that can keep pace with
this changing environment. These challenges include meeting the demand for new
applications, adapting these applications as business needs evolve and taking
advantage of new technologies such as distributed client server computing and
the internet/intranet. The result is a large and increasing backlog of strategic
business applications that need to be developed, maintained and enhanced.
Organizations address their needs for strategic business software either by
purchasing packaged applications or writing their own applications. Packaged
applications are used for certain systems, such as back-office accounting, human
resources and order management, where the tasks are well defined. Where
organizations have specific needs and seek a proprietary advantage, but are
unable to customize fully packaged applications that meet their needs, they will
seek to build their own applications.
Software development is a lengthy and difficult process. Developers must
build user interfaces, provide resource optimization and data services functions
into their applications as well as other structural layers of development. The
Company believes that these common programming functions typically represent
between 15% and 40% of the number of lines of code for strategic business
applications. The challenge of undertaking all these programming tasks increases
the risk of failure and time to market, and requires significant additional
expertise and maintenance.
The shortage and high cost of software developers has created a need for a
hybrid approach to software development that combines the advantages of custom
developed software with pre-built and pre-tested software components or
libraries. The emergence of object oriented technology allows for the creation
of pre-built software components that address common programming tasks, thus
allowing programmers to shorten development time by combining these components
with their own programming. In order for these software components to meet the
evolving business and technology requirements of the specific organization, they
must provide high performance and scalability and yet be open and adaptable.
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THE ILOG SOLUTION
ILOG develops, markets and supports software components for user interface,
resource optimization and data services functions that are fundamental to the
development of strategic business applications. The Company's object oriented
components, which are written in the C, C++ or Java languages, can be readily
adapted to application development requirements. Since ILOG has effectively
pre-written many of the complex portions of each application, enterprises can
concentrate on the development of other portions of the application that are
specific to their respective businesses. The Company believes that its
components provide users with the following benefits:
TIME TO MARKET AND COST REDUCTION. ILOG components allow enterprises and
independent software vendors ("ISVs") to accelerate development time
significantly. The cost of a development license for an ILOG component is
substantially less than the cost for an organization to develop those same
features internally. Moreover, ILOG's continuing maintenance and improvement of
its components ensures periodic performance and functionality enhancements for
its customers.
HIGH PERFORMANCE AND SCALABILITY. The proprietary algorithms embedded in
ILOG components are highly efficient and scale well to specific application
needs. Applications using ILOG components can run efficiently on small PCs as
well as on the most powerful parallel workstations and servers because ILOG
components are both CPU and memory efficient. Intensive users can display or
manage tens of thousands of objects. ILOG components are currently being used in
demanding applications such as telecommunication network management, real-time
air traffic control, industrial control and military command and control.
EASE OF USE. The Company's components consist of layers of components that
can be used without modification if the customer so elects. With a few lines of
code, developers can implement their enterprise specific components on top of
the Company's high level components.
FLEXIBILITY. Unlike many components that are inflexible black boxes, the
Company's components are built as documented layered classes. The lower layers
can be exposed to allow programming changes at all levels of the component's
behavior to meet individual business specific requirements.
DEVELOPMENT RISK REDUCTION. The common development task components provided
by the ILOG components enable software developers to rapidly prototype and test
the performance of an application. Developers are able to quickly confirm that
the envisioned system successfully addresses the problems and will withstand its
final design load before they enter into the detailed specification and design
of the actual application. This approach greatly decreases the technical risks
associated with the creation of a new application by providing a sound,
pre-built infrastructure.
HARDWARE AND OPERATING SYSTEM INDEPENDENCE. The programming interfaces for
ILOG components are identical for all platforms that the Company addresses,
which makes deploying applications across PCs and workstations easier.
DEVELOPMENT STRATEGY INDEPENDENCE. ILOG components are open (i.e.,
compatible with most development environments, compilers or methodologies and
software testing tools). The Company's customers can choose components from
other vendors and combine them with ILOG components in a true open environment.
STRATEGY
ILOG's objective is to be the leading worldwide provider of visualization
and optimization software components. Key elements of the Company's strategy to
achieve this objective include the following:
EXTEND TECHNOLOGICAL LEADERSHIP. The Company intends to maintain and extend
its current technological leadership as a provider of object oriented software
components. The Company intends to focus its
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development efforts on enhancing the performance and scalability of its current
components, porting them to different platforms and additional programming
languages and expanding the number of components to address common software
development needs. For example, the Company has recently introduced a Java
version of its C++ graphical component ILOG Views. As part of the strategy of
extending its technological leadership position, the Company, in August 1997,
acquired the business of CPLEX Optimization, Inc., ("CPLEX") an established
leader in math programming optimization components.
EXPAND SALES GEOGRAPHICALLY. The Company's sales have historically been
concentrated in Europe, particularly in France. The Company believes that the
North American and Asian markets represent large growth opportunities for its
components. Since the beginning of 1995, the Company has significantly expanded
its sales effort by adding substantially to its U.S., Singapore and Japan direct
sales forces, which has resulted in rapid growth in these regions. The Company
intends to continue to add to its direct sales and consulting forces in all of
its three principal geographic regions.
PENETRATE VERTICAL MARKET BASE. Starting in 1997 the Company has devoted
significant sales efforts to two vertical markets: (i) graphic tools for
telecommunications network management and (ii) optimization engines for supply
chain management software applications. The Company has become a leader in these
two markets and may continue this strategy by adding further vertical markets.
LICENSE COMPLEMENTARY COMPONENTS FROM THIRD PARTIES. Certain of the
Company's customers build add-on components using the Company's software
components and the Company may license and resell worldwide some of these add-on
products. In this way, the Company hopes to promote the use of software
components by developers worldwide.
INCREASE PENETRATION OF EXISTING CUSTOMER BASE. The Company intends to
expand sales of its components to its existing customers. Since the Company's
components are initially licensed to a few developers for benchmarking projects
inside an enterprise, the successful completion of these projects and the
launching of additional software design projects within a customer's
organization create additional sales opportunities for the Company. The Company
uses the success of projects with existing customers as an internal reference
for horizontal expansion within that organization through on-site seminars and
other marketing events.
EXPAND INDIRECT SALES CHANNELS. The Company intends to expand its global
sales capabilities by increasing the number of system integrators, value added
resellers ("VARs") and original equipment manufacturers ("OEMs") that market its
components worldwide and the number of distributors where it does not have a
local presence. The Company believes that these sales channels will allow the
Company to access additional vertical and geographic markets where it does not
currently possess marketing or sales capabilities.
EXPAND ISV AGREEMENTS. The Company has agreements with approximately 80
ISVs and intends to sell its components to additional ISVs for inclusion in
packaged software products. Due to the recurring revenue nature of the royalty
payments made by ISVs that ultimately include one or more ILOG components in
their products, the Company is currently increasing its marketing efforts to
ISVs. Approximately 50% of the revenues received from the Company's CPLEX
products, which were acquired in August 1997, are from ISVs and indirect sales
channels.
SOFTWARE COMPONENT TECHNOLOGY
The Company believes that the software component technology development path
is analogous to the integrated circuit revolution of the 1970s. At that time,
the components used to build circuit boards were elementary fine-grain
components such as capacitors, resistors and transistors. The advent of packaged
larger-grain integrated circuits precipitated a shift in the computer
manufacturing industry, from a model where every computer manufacturer built its
own boards from self-defined designs that assembled fine-
6
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grain components to a model where much larger components were integrated onto
much smaller boards. This shift considerably reduced the time and risk of
designing new boards, as well as the cost of mass-producing them. The result was
less expensive computers.
The Company believes that software component technology offers to the
software industry a similar potential to that which integrated circuits offered
the computer hardware industry. Software components are predefined pieces of
readily reusable software. These components provide ready-made, high level
functions without requiring software developers to understand the internals of
the components. This allows developers to focus on the use of these higher-level
functions to achieve the business-specific results that the application
requires. For example, a Gantt diagram (a standard scheduling graphic) component
will display the use of resources by activities over time in a predefined
fashion. The application developer using such a component will not have to
program the details of the diagrams, but rather can concentrate on the
definition of the activities, the resources and their relationships. The
developer will therefore be able to develop a scheduling application that
includes a Gantt diagram more rapidly.
Components have been used in user interfaces for more than ten years. Menu
bars, push buttons and selection boxes are reusable components that are
available on operating systems such as Windows, Unix and Macintosh. The
inflexible black-box nature of many of these components, however, can prevent
software developers from obtaining the desired effect. For example, a developer
may wish to create a read-only Gantt diagram that only displays information. If
the component has been built without this feature, the development speed gained
by the use of the predefined component is lost by the difficulty encountered in
designing around some of its predefined behaviors.
Components created using object oriented technology add significant
flexibility. Using a component for a specific application often requires adding
new behaviors. Object oriented programming involves a cloning process that
allows developers to add new behaviors to existing classes of objects. This
"extensibility" is the principal reason that well-implemented object oriented
code has a longer life than traditional code. Object attributes (data) and
methods (behaviors) can be added to or changed without altering the original
"base classes," so that changes as the object environment evolves are
transparent to applications dependent on the base class. As a result of the
ability to further specify the behavior of code after it has been designed,
written and tested, object oriented technology allows the large-scale reuse of
components without sacrificing the flexibility needed for application-specific
behavior and optimization.
Object oriented techniques greatly simplify the development of complex
strategic business applications. Each coherent part of the task is represented
as a set of interdependent classes assembled together using a protocol. Some of
these classes will be reused as large grain components, others as fine-detail
implementation classes useful only for extension purposes.
In the example of the Gantt diagram, the elementary bars that appear in the
drawing can be thought of as instances of classes that are more fine-grained
than the Gantt diagram top level class. With this design, flexibility is pushed
one step further. It is now possible not only to extend the global Gantt object,
but also to extend some of its internals as well. For example, the developer may
wish to draw activities in a Gantt diagram in a different way, where a new
element of information is added to each of the bars. In that case, the developer
will extend the bar class of the Gantt-diagram library, instead of the
Gantt-diagram class. This is the flexibility that object oriented components are
intended to achieve.
Object oriented components, or class libraries, are coherent sets of
predefined components written in an object oriented language in such a way that
black-box components become clear-box components that can be redefined locally
when some behaviors do not match the exact needs of the application. Therefore,
object oriented components that cover a particular infrastructure task, such as
user interface programming, are more than a set of independent components.
Object oriented components consist of layers of components, where each layer
relies on documented extensible lower components.
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PRODUCTS
The Company's products are high-performance C, C++ or Java software
components sold in binary form on CD-ROMs. The Company's software components are
sold to C, C++ or Java developers within information technology (IT or MIS)
departments of end-user enterprises or to system integrators, ISVs, VARs and
OEMs. The components facilitate rapid development and deployment of complex
applications by providing pre-written portions of the software in order to
reduce the time, cost and risk of the application development cycle. The
Company's components are independent and can be purchased for integration into
new or existing applications individually or in combination with other
components. The components run on the most popular Windows and Unix platforms
and can be used to facilitate client-side, server-side or internet development
efforts.
The Company typically commences a customer relationship with one or more
licenses to use one or two of the Company's products for a given customer
development project. A single development license for one of the Company's
products normally ranges from $2,500 to $20,000, with a typical development sale
usually totalling approximately $20,000. Once the customer completes its
development projects, it must enter into run time licenses with the Company in
order to use any of the Company's resource optimization or data services
components needed to deploy the developed application within or outside its
organization. A customer typically does not purchase any run time licenses until
the successful completion of the application development process, which
typically takes between three and nine months from the initial order. Such run
time licenses start at $30,000 and are based upon the future number of
simultaneous users of the application, the number of different sites on which
the application will be deployed and the number and type of ILOG components used
in the application. The Company has reached a number of agreements for
deployment licenses valued at over $100,000.
The following table sets forth certain information regarding the components
licensed by the Company:
<TABLE>
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YEAR OF FIRST
COMMERCIAL
PRODUCT CATEGORY AND NAME SHIPMENT PRODUCT DESCRIPTION
- ------------------------------ --------------- --------------------------------------------------------------------
<S> <C> <C>
USER INTERFACE
ILOG Views................... 1993 Data visualization and graphical user interface in C++
ILOG InForm.................. 1996 Data visualization for database applications
ILOG Vision.................. 1996 3-D structured graphics environment
ILOG TGO..................... 1997 Graphic components for the telecommunications industry
ILOG JViews.................. 1997 Data visualization in Java
ILOG JTGO.................... 1998 ILOG TGO in Java
RESOURCE OPTIMIZATION
ILOG Solver.................. 1993 Constraint-based reasoning for resource allocation
ILOG Scheduler............... 1994 Add-on product for Solver for short-term scheduling
ILOG Planner................. 1996 Add-on product for Solver for long-term planning
ILOG Dispatcher.............. 1997 Add-on product for Solver for the transportation industry
ILOG CPLEX................... 1997 High performance components for linear programming in C
DATA SERVICES
ILOG Rules................... 1993 Real-time agents for filtering and alarm management
ILOG Server.................. 1995 Application integration and real-time event notification
ILOG JRules.................. 1997 Real-time agents for filtering and alarm management in Java
</TABLE>
Historically, the Company has made minor revisions to its products
approximately every six months and has released new versions of its products
every 12 to 18 months.
8
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The following describes the Company's software components by product
category.
USER INTERFACE COMPONENTS
The Company currently markets six user interface components: ILOG Views,
ILOG JViews, ILOG InForm, ILOG Vision, ILOG TGO and ILOG JTGO. Approximately 45%
of the Company's revenues from license fees for 1998 were derived from
visualization components. See "Risk Factors--Product Concentration Risk."
ILOG Views and JViews are each a comprehensive data visualization and
graphical user interface environment providing components for structured
two-dimensional graphics. ILOG Views is used to solve a wide range of graphics
problems in industrial and commercial environments. ILOG Views is composed of a
core technological layer and a number of pre-defined, high-level graphical
components.
The core layer provides performance and portability (i.e., the ability to
implement platform independent interfaces) and the object oriented
representations of all the basic graphical entities. This layer provides
developers with hundreds of classes of graphical objects and methods to
construct highly interactive graphical environments, allowing real-time display
of several million graphical objects in a single display space. Applications can
rapidly pan and zoom within this virtual display area, allowing selection and
manipulation of objects anywhere in the display. The Company believes its
emphasis on performance represents an important advantage of ILOG Views for
implementing the graphical user interface of complex applications such as
real-time network supervision.
ILOG Views also includes a number of pre-defined, high-level display
components, including a grapher, maps, graphs, a spreadsheet, a Gantt diagram, a
hypertext viewer and a graphical user interface ("GUI") editor. The ILOG Views
Grapher allows an application developer to represent entities as nodes and arcs
linking these nodes. Due to the object oriented nature of ILOG Views Grapher,
the developer can easily define application specific aspects and behaviors for
both the nodes and the arcs, as well as superimpose the graph on top of a map
representing the geography of the application. These features are implemented
with a small number of lines of C++ or Java code, because they reuse all the
common classes of both the underlying graphic engine and the Grapher.
Other graphic components, such as ILOG Views Gadgets, allow for the
implementation of the structural part of the GUI in a portable link between
platforms such as Unix Motif and Microsoft Windows. Available as a component or
within an interactive Interface Builder, ILOG Views Gadgets provides a simple
way to rapidly construct the parts of an application's GUI. Furthermore, ILOG
Views presents an extensible class for building specialized high-performance
graphics editors that customers can use to manipulate complex objects. Each of
these customer-defined components can be used to accelerate further the
construction of highly customized display environments.
ILOG InForm is an extension of ILOG Views that facilitates the development
of graphic-intensive database applications. Client server applications involving
multiple databases can be built almost entirely in a drag-and-drop environment,
without requiring Structured Query Language ("SQL") or significant C++ coding.
The Company believes that ILOG InForm has an advantage over competing products
because it works with ILOG Views C++ objects, which facilitates higher
performance and more efficient development. ILOG InForm also exploits all of a
customer's prior ILOG Views development and automatically generates C++ objects
that can be used in other development projects. ILOG InForm allows routine
applications to be constructed by users or developers with limited C++ knowledge
or related tools.
ILOG InForm provides three advancements to the underlying ILOG Views feature
set: Studio, Data Sources and Data-Aware gadgets. ILOG InForm Studio provides an
intuitive environment for rapid application development and testing, and adds
new visual items that are useful for common database applications such as data
entry and review. Because ILOG InForm Studio is a superset of ILOG Views, the
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Company's customers can rapidly take advantage of it even if their application
does not involve a database. ILOG Data Sources' innovation allows easy
definition of the tables and views needed in a client server application.
Instead of requiring SQL code manipulation, ILOG InForm Data Sources' GUI allows
more rapid selection of the rows and columns to be accessed. Once Data Sources
are set up, ILOG InForm's Data-Aware gadgets (e.g., spreadsheets, selection
buttons, data-entry fields) automatically connect to the relevant database
records for read or write access. This combination of features allows ILOG
Views' users to accelerate application development and customization whether the
user needs to work with relational or non-relational data.
ILOG Vision is a component for high-performance 3D structured graphics that
can be used as a companion component to ILOG Views for very advanced graphics
applications. ILOG Vision provides a comprehensive set of high-level graphic
services (e.g., lighting, shading, object behaviors, animation) that facilitate
the development of sophisticated 3D applications. Developers can save
significant effort by using ILOG Vision's high-level application programming
interface ("API") instead of the basic OpenGL or Direct3D libraries that are
part of the platform operating system.
ILOG TGO (Telecom Graphic Objects) is an extension to ILOG Views dedicated
to the creation of graphical user interfaces for telecommunication network
management and data applications. ILOG TGO provides in a single product
graphical objects representing dedicated industry behaviors and thus offers
major productivity improvements to telecommunication network software developers
and users.
ILOG JTGO is a Java version of ILOG TGO and allows the development of pure
Java telecom graphical user interfaces.
RESOURCE OPTIMIZATION COMPONENTS
The Company currently markets five resource optimization components.
The ILOG Solver constraint-programming component provides the basic
programming layer embedding the core constraint processing technology, and the
ILOG Scheduler, ILOG Planner and ILOG Dispatcher components are vertical
add-ons. ILOG Solver provides developers with an off-the-shelf engine for
solving a wide variety of industrial problems, such as short-term scheduling
(e.g. MRP). Finding a high-quality solution was impractical until the advent of
constraint-based reasoning. ILOG Solver provides a problem-definition and
nonlinear modeling system that allows for accurate characterization of
real-world problems. ILOG Solver's solution algorithms (constraint propagation,
branch-and-bound, and numerical and logical processing) can then be used by
programmers to solve these difficult problems in telecommunications, defense,
transportation and manufacturing.
The ILOG Scheduler time-constraint component is an extension to ILOG Solver
for solving complex scheduling problems quickly. ILOG Scheduler integrates
algorithms specific to scheduling and predefines a set of classes that model
scheduling activities. Constraints specific to scheduling define the different
ways to link activities and resources; an activity may either produce or consume
a resource. Furthermore, a typology of resources is defined that allows a direct
representation of domain specific data, freeing the developer from the difficult
task of analyzing the scheduling activity. ILOG Scheduler gives the developer a
pre-defined object oriented model that may be easily extended to suit
application specific needs. ILOG Scheduler also adds an "edge finder" algorithm
that improves the speed of finding solutions. By extending ILOG Solver
algorithms and supplying templates for common scheduling problems (e.g.,
bottlenecks, conflicts and sequencing preferences), ILOG Scheduler further
reduces the application development effort for programmers in a number of
application domains. ILOG Scheduler has been used for resource allocation,
personnel rostering, maintenance scheduling, labor-cost optimization and other
finite-capacity problems in utilities, transportation, medical and manufacturing
companies.
The ILOG Planner linear-programming component also complements ILOG Solver.
ILOG Planner provides a number of new mathematical algorithms for solving ranges
of problems that ILOG Solver is not
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<PAGE>
designed to address, including the Simplex algorithm (embedded in the ILOG CPLEX
component) for optimizing continuous-process manufacturing plants. ILOG Planner
allows for optimal long-term mixes of resources for factories, refineries,
warehouses and other logistical systems. However, when there are temporal
constraints that interfere with the ideal resource mix, ILOG Planner and ILOG
Scheduler together can identify the best short-term answer considering the
long-term objectives. The Company believes that this contingent or reactive
scheduling offers operational benefits that are unavailable from any other C++
component vendor.
The ILOG CPLEX callable components provide a comprehensive set of linear
programming C routines for integration with ILOG Solver and other application
development components. These algorithms solve large and difficult linear
programs, mixed integer programs, quadratic programs and network problems at a
very high level of speed performance and are also integrated into ILOG Planner.
DATA SERVICES COMPONENTS
The Company currently markets two data services components.
The ILOG Rules component allows the development of intelligent agents for
monitoring data flows in real time. With ILOG Rules' dynamic engine these agents
monitor and evaluate complex conditions. When high performance correlation and
evaluation of data trends are critical for quick response, ILOG rules can
provide decision agents that respond more rapidly than humans. ILOG Rules can
also be used as an intelligent advisor embedded within editors and graphical
systems or provide real time simulation of events and processes. ILOG has
recently upgraded ILOG Rules to accept new rules without recompilation. The
Company licenses ILOG Rules from a third party and pays a small per unit royalty
to such third party when it licenses ILOG Rules. ILOG JRules offers in Java the
same functionality as ILOG Rules.
The ILOG Server component facilitates the implementation of distributed
applications by introducing the concept of sharing objects in real time. ILOG
Server provides both high level object oriented modeling tools simplifying the
implementation of business processes and integration services and allowing the
different components of an application to be shared in real time in a
co-ordinated manner. These characteristics enable it to be an excellent medium
for solving system integration and business process operational problems.
SERVICES
ILOG provides a number of services to assist customers in the design,
development and deployment of their object oriented software implementations.
Consulting services are available for designing, analyzing, implementing and
optimizing applications. In addition, the Company provides custom development
services to customers that request unique or proprietary product extensions.
Depending on the nature, complexity and duration of the project, these services
may be performed by third-party integrators, consultants or the Company.
Training is offered on a regular basis for customers needing to accelerate their
mastery of ILOG technologies and interfaces. Maintenance and technical support
are available for all ILOG components at an annual fee of 15% of the standard
software list price.
11
<PAGE>
CUSTOMERS AND APPLICATIONS
As of August 31, 1998, ILOG components had been licensed by over 1500
customers for development and/or deployment in a wide range of applications.
Many of these customers have licensed multiple copies for use in different
applications. The Company believes that the following customers are
representative of its customer base, in terms of their industries and types of
applications. Each has licensed at least $30,000 of components from the Company
and has a current maintenance agreement with the Company.
<TABLE>
<S> <C> <C>
TELECOMMUNICATIONS AEROSPACE AND DEFENSE TRANSPORTATION
Alcatel British Aerospace Aeroports de Paris
Ascom CEA Air France
AT&T Cogema American Airlines
British Telecom Dassault Aviation Aviation Civile Francaise
Bull Defense Research Agency British Airways
Cegetel DGA Civil Aviation of Singapore
Cisco Systems EDS Defence Delta Airlines
CS Telecom Electricite de France Federal Aviation
Ericsson Framatome Administration
Evolving Systems Gaz de France Federal Express
France Telecom Giat Industries GEC Alsthom
Fujitsu Telecommunications Grupo Endesa Holding Hactl (Hong Kong)
Hewlett-Packard Iberdrola Lufthansa
Matra Communication IBM-Data Sciences Metro de Madrid
MCI INDRA MTRC
Motorola Joint Research Center Ispra Port of Singapore
Nortel Technologies Lockheed Martin RATP
NTT Logica Sabre
Siemens Nixdorf Long Island Lighting Company SNCF
SITA Marine Francaise United Airlines
Telefonica Ministry of Defense, United Parcel Service
UB Networks Singapore
Vodafone Group Petrosystems ENTERPRISE RESOURCE PLANNING
Red Electrica de Espana Aspen Technology
MANUFACTURING Royal Air Force Broner Group
British Steel Sagem i2 Technologies
Chrysler Sandia National Labs J.D. Edwards
CSIRO Manufacturing Tech. Sextant Avionique Manugistics
Danone Syseca Optichrome
Ford Cadiz Technicatome PeopleSoft
General Motors Techno-Sciences SAP
Mannesman Thomson-CSF Systems & Computer
Michelin TNO Technology Corp. (SCT)
Peugeot TRW
Renault Union Fenosa
Uncle Ben's Vega Group
Whirlpool Westinghouse
</TABLE>
In any given quarter, a relatively small number of customers may constitute
a significant percentage of the Company's total revenue. See "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations.
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<PAGE>
The customers listed above, and others, have licensed ILOG components for
development of a wide range of applications, including but not limited to the
following:
<TABLE>
<S> <C> <C>
TELECOMMUNICATIONS AEROSPACE AND DEFENSE ENERGY AND PUBLIC UTILITIES
Network and Systems Command, Control, Supervision, Command and
Management Communications and Control
- Network Visualization Intelligence (C3I) systems - Electrical network
- Configuration management - Data fusion monitoring
- Fault management - Geographic information - Electrical powerplant
- Performance management systems monitoring
- Security management - Image processing - Procedures monitoring
Service Management - Logistics mapping - Water and gas network
- Dynamic tariff policy Process Monitoring monitoring
management - Data flow monitoring Analysis and Tests
- On-demand service - Radar visualization - Measuring systems
provisioning - Test bench monitoring - Seismic data analysis
- Flexible invoicing Simulation - Simulation tools
Network Planning - Capability analysis Enterprise Resource Planning
- Economic analysis - Flight simulators - Equipment configuration
- Ground and space - Scenario analysis - Maintenance planning and
equipment scheduling Resource Allocation and scheduling
- Satellite mission Optimization - Network planning
planning - Frequency and bandwidth - Nuclear plant
- Network modeling allocation decommissioning
- Mission planning - Staff planning
- On-board resource Customer Services
scheduling - Claim resolution
- Payload optimization - Price negotiation
- Supply chain logistics
MANUFACTURING TRANSPORTATION
Supervision and Data Resource Optimization
Visualization - Airport counter, gate and
- Equipment performance belt allocation
analysis - Command and control
- Geographic information - Crew allocation
systems - Distribution planning
- Process monitoring and - Equipment scheduling
control - Fleet management
- Quality analysis - Geographic information
Resource Optimization systems
- Equipment configuration - Maintenance planning and
and diagnostics scheduleing
- Logistics and - Timetabling
distribution - Traffic monitoring
planning - Traffic planning
- Manpower planning and - Vehicle tracking systems
crew scheduling - Warehouse management
- Production line
scheduling
Production planning
- Supply chain logistics
- Warehouse management
</TABLE>
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<PAGE>
SALES AND MARKETING
ILOG markets and sells its products worldwide principally through its direct
sales force and, to a lesser extent, through ISVs and OEMs to two types of
customers: end users and solution providers which integrate the components into
specific software applications or as system enhancements.
END USERS. The Company has direct sales offices and/or subsidiaries in
France, the U.S, Germany, Japan, Singapore, Spain and the U.K. The sales
organization includes field sales representatives, who bear primary
responsibility for customer relationships; field sales engineers, who answer
technical questions, perform demonstrations and develop prototypes or
proof-of-concept projects for customers and inside telesales representatives.
Due to the strategic nature of ILOG products, potential customers typically
conduct extensive evaluations of the available technologies before making
product acquisition decisions. Common objectives of such evaluations are to
determine whether a packaged application (as opposed to a component-based
development effort) exists that sufficiently meets requirements, and to assess
the degree of leverage provided by purchasing ILOG products versus rewriting
their salient features. Consequently, ILOG's sales cycle is generally three to
six months or more and varies substantially from customer to customer.
A prospective customer typically has a specific strategic need for one or
more specialized software applications to help it gain a competitive advantage
in its market, as well as adequate technical expertise and resources in-house to
support a software development effort to meet that need. During the evaluation
period, meetings involving ILOG's field sales and technical staff are typically
conducted at the customer's site and at ILOG's offices. Upon completion of the
evaluation, the customer may purchase one or more development licenses for ILOG
products, as well as associated training courses, consulting services and
product maintenance. A customer typically does not purchase any run time
licenses until the successful completion of the application development process,
which typically takes between three and nine months from the initial order.
There is no advance guarantee that any particular customer's application
development process will be successful and will ever yield deployment license
revenues to ILOG.
PARTNERS. An important part of ILOG's sales strategy is the cultivation of
indirect sales channels. Of the approximately 1500 total ILOG customers, more
than 80 are ISVs or OEMs that develop and resell software based on ILOG
technologies. The Company also sells through systems integrators and VARs, and
distributors in Europe, Asia and South America. Substantially all of the
Company's indirect sales channels add significant value to the product in the
form of application development, integration with other software and/or hardware
products, consulting and/or training.
MARKETING. ILOG conducts worldwide marketing communications programs
intended to position and promote its products and services. Specific promotional
tactics vary according to regional opportunities and best practice, but in
general include direct mail, advertising in technical journals, exhibition and
speaker placement at industry trade shows, press and industry analyst relations,
and horizontal (by technology) and vertical (by industry) seminars. The Company
also maintains web sites that contain extensive product and Company promotional
materials as well as localized content by region.
ILOG's software is typically shipped to customers promptly upon receipt of
an order and the execution of a license agreement. Consequently, ILOG seldom
experiences a material backlog of unfulfilled orders, and does not consider
backlog to be a meaningful indicator of future performance. See "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations."
RESEARCH AND DEVELOPMENT
The Company has committed, and expects to continue to commit in the future,
substantial resources to research and development. Research and development
efforts are focused on enhancing the performance, features and scalability of
its current components, porting them to different platforms and additional
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<PAGE>
programming languages and expanding the number of components to address common
software development needs. During 1996, 1997 and 1998, net research and
development expenses were $4.4 million, $4.6 million and $6.6 million,
respectively. Gross research and development expenses before the offsets of
funding provided by the European Union and agencies of the French government
were $7.0 million, $5.0 million and $7.2 million in 1996, 1997 and 1998,
respectively. See "Risk Factors--Risk of Loss of Government Research and
Development Funding" and "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations."
Since its inception, the Company has maintained a research and development
focus on the solution of complex problems using object oriented technology. This
focus requires the fusion of different programming cultures, including object
oriented developers, who tend to be attracted by high-level modeling, and
developers working on complex algorithms, who tend to focus on tight low-level
code. This ILOG culture has arisen from eleven years of day-to-day development,
algorithmic optimization and object oriented design. The Company's engineers
work with customers to ensure that the customer's problem is solved efficiently.
The Company's engineers also interact closely with the scientific and academic
communities, which the Company believes is the best way to obtain and maintain
high performance algorithms.
The Company's future success will depend in large part on its ability to
improve its current technologies and to acquire, develop and market new products
and product enhancements that address these changing market requirements on a
timely basis. There can be no assurance that the Company will be successful in
acquiring, developing and marketing new products or product enhancements, that
the Company will not experience difficulties that delay or prevent the
successful acquisition, development, introduction or marketing of such products
or enhancements or that any new products or product enhancements will adequately
address market requirements and achieve market acceptance. As is customary in
the software industry, the Company has in the past experienced delays in the
introduction of new products and features, and may experience such delays in the
future. If the Company is unable, for technological or other reasons, to
integrate acquired products, develop new products or enhancements of existing
products in a timely manner in response to changing market conditions or
customer requirements, the Company's business, operating results and financial
condition would be materially adversely affected. See "Risk Factors--Rapid
Technological Change and Introduction of New Products and Product Enhancements."
COMPETITION
The Company believes that the primary competitive factors in its markets are
product performance and features, sales and distribution capabilities and total
cost. The Company's present direct competitors include a number of private and
public companies such as Dash Associates Limited, Dynatech Corporation, IBM,
Neuron Data, Inc., Software, Inc., SL Corporation and Template Software, Inc.
The Company also competes with companies that provide packaged software with
respect to specific applications. In addition, virtually all of the Company's
customers have significant investments in their existing solutions and have the
resources necessary to enhance existing products and to develop future products.
These customers have or may develop and incorporate competing technologies into
their systems, thereby replacing the Company's current or proposed components.
This would eliminate their need for the Company's services and components and
limit future opportunities for the Company. The Company therefore is required to
persuade development personnel within these customer organizations to outsource
the development of their software and to provide products and solutions to these
customers that cost-effectively compete with their internally developed
products. The Company expects to face additional competition from other
established and emerging companies if the market for its components continues to
develop and expand. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
the Company's current and prospective customers. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly gain
significant market share. New or enhanced products introduced by existing or
future competitors could increase the competition faced by
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<PAGE>
the Company's products. Increased competition could result in fewer customer
orders, price reductions, reduced transaction size, reduced gross margins and
loss of market share, any of which could have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to maintain prices for its products at
levels that will enable the Company to market its products profitably. Any
decrease in prices, as a result of competition or otherwise, could have a
material adverse effect on the Company's business, operating results and
financial condition.
Some of the Company's current, and many of the Company's potential
competitors have longer operating histories, significantly greater financial,
technical, marketing, service and other resources, significantly greater name
recognition, broader product offerings and a larger installed base of customers
than the Company. In addition, the Company's current and potential competitors
may have well-established relationships with current and potential customers of
the Company. As a result, such competitors may be able to devote greater
resources to the development, promotion and sale of their products, may have
more direct access to corporate decision-makers based on previous relationships
and may be able to respond more quickly to new or emerging technologies and
changes in customer requirements. There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competitive pressures will not have a material adverse effect on its
business, operating results and financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, the Company licenses its
software pursuant to signed license agreements and, to a lesser extent, "shrink-
wrap" licenses displayed in product packaging, which impose certain restrictions
on the licensee's ability to use the software. In addition, the Company seeks to
avoid disclosure of its trade secrets, including requiring those persons with
access to the Company's proprietary information to execute confidentiality
agreements with the Company and restricting access to the Company's source
codes. The Company seeks to protect its software, documentation and other
written materials under the laws relating to trade secrets and copyright, which
afford only limited protection. The Company has no patents or pending patent
applications.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products,
obtain or use information that the Company regards as proprietary or use or make
copies of the Company's products. Policing unauthorized use of the Company's
products is difficult. In addition, the laws of many jurisdictions do not
protect the Company's proprietary rights to as great an extent as do the laws of
France and the U.S. In particular, "shrink-wrap" licenses may be wholly or
partially unenforceable under the laws of certain jurisdictions, and copyright
and trade secret protection for software may be unavailable in certain
countries. Under French intellectual property laws, rights over software are not
patentable but are protected under copyright law and infringements by third
parties can be enjoined. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology.
There can be no assurance that the Company will not receive communications
in the future from third parties asserting that the Company's products infringe,
or may infringe, on their proprietary rights. There can be no assurance that
licenses to disputed third-party technology would be available on reasonable
commercial terms, if at all. In addition, the Company may initiate claims or
litigation against third parties for infringement of the Company's proprietary
rights or to establish the validity of the Company's proprietary rights.
Litigation to determine the validity of any claims could result in significant
expense to the Company and divert the efforts of the Company's technical and
management personnel from productive tasks, whether or not such litigation were
determined in favor of the Company. In the event of an adverse ruling in any
such litigation, the Company might be required to pay substantial damages,
16
<PAGE>
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to infringing
technology. In the event of a successful claim against the Company and the
failure of the Company to develop or license a substitute technology, the
Company's business, operating results and financial condition would be
materially adversely affected. As the number of software products in the
industry increases and the functionality of these products further overlaps, the
Company believes that software developers may become increasingly subject to
infringement claims. Any such claims against the Company, with or without merit,
as well as claims initiated by the Company against third parties, could be time
consuming and expensive to defend or prosecute and to resolve.
EMPLOYEES
As of August 31, 1998, the Company had 415 full-time employees, including 81
in research and development, 281 in sales and marketing, consulting and customer
support and 53 in finance and administration. As of August 31, 1998, 259 of the
Company's employees were located in Europe, 103 were located in North America
and 47 were located in Asia.
The Company has never experienced a work stoppage and believes that its
relationships with its employees are good. The future success of the Company
depends in large part on its ability to attract and retain highly skilled
technical, sales and managerial personnel. Competition for such personnel in the
software industry is intense, particularly with respect to technical personnel
with expertise in object oriented technology, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel.
Management is required under the French Labor Code to hold monthly meetings
with a delegation of elected employee representatives to discuss, in particular,
employment matters and the economic condition of the Company and to provide
appropriate information and documents relating thereto. As required under the
French Labor Code, two representatives of the employees are entitled to attend
meetings of the Board of Directors of the Company, but do not have any voting
rights.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate headquarters are located in Gentilly, France, a
suburb of Paris, in premises consisting of approximately 54,000 square feet
under leases expiring in 2004. The Company maintains a research and development
facility in Sophia-Antipolis, in the south of France, in premises consisting of
approximately 2,300 square feet under a lease expiring in 2005. The Company has
its U.S. headquarters in Mountain View, California in premises consisting of
approximately 14,000 square feet under a lease expiring in 1999. The Company
maintains a telemarketing sales office and research and development facility in
Incline Village, Nevada, in premises consisting of approximately 4,000 square
feet under a lease expiring in October 2002, and a sales office in Cambridge,
Massachusetts. The Company has its Asian headquarters in Singapore in premises
consisting of approximately 6,500 square feet under a number of leases expiring
in 1999. In addition, the Company maintains sales and customer support offices
in Bracknell, outside of London, England; in Bad Homburg, outside of Frankfurt,
Germany; in Madrid, Spain; and Tokyo, Japan.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal proceedings from time to time. There is no
such proceeding currently pending which the Company believes is likely to have a
material adverse effect upon the Company's business. Any litigation, however,
involves potential risk and potentially significant litigation costs, and
therefore there can be no assurance that any litigation which may arise in the
future will not have a material adverse effect on the Company's business.
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<PAGE>
ITEM 4. CONTROL OF REGISTRANT
To the Company's knowledge, it is not owned or controlled by another
corporation or by any foreign government.
The table below sets forth certain information with respect to the
beneficial ownership of shares of the Company as of August 31, 1998 by any
person known to the Company to be the owner of more than ten percent of the
Shares:
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) OWNED
- ----------------------------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
INRIA.................................................................................... 2,212,250 15.8%
BP 105, 78153 Le Chesnay Cedex, France
All directors and executive officers..................................................... 6,443,551 46.1%
as a group ((13) persons) (2)
</TABLE>
- ------------------------
(1) Number of Shares and percentage ownership is based on: (i) 13,967,183 Shares
outstanding as of August 31, 1998. Beneficial ownership is determined in
accordance with the rules of the U.S. Securities and Exchange Commission and
includes voting and investment power with respect to such shares. Shares
subject to options that are currently exercisable or exercisable within 60
days of August 31, 1998 are deemed to be outstanding and to be beneficially
owned by the person holding such options for the purpose of computing the
percentage ownership of such person, but are not deemed to be outstanding
and to be beneficially owned for the purpose of computing the percentage
ownership of any other person.
(2) Includes 329,581 shares issuable upon exercise of options to purchase shares
granted to executive officers and directors of the Company which are
exercisable within 60 days of August 31, 1998.
ITEM 5. NATURE OF TRADING MARKET
The ADSs are quoted on the Nasdaq National Market under the symbol "ILOGY".
Neither the ADSs nor the Shares are listed or quoted on any other quotation
system or securities exchange. The following table sets forth the range of
quarterly high and low closing sale prices of the ADSs (each ADS representing
one Share) on the Nasdaq National Market for each full quarterly period within
the last fiscal year.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1998:
First Quarter.................................................................................. 9.375 5.625
Second Quarter................................................................................. 11.375 7.750
Third Quarter.................................................................................. 13.750 8.500
Fourth Quarter................................................................................. 16.375 12.250
</TABLE>
On August 31, 1998, the last sale price for the ADSs as reported on the
Nasdaq National Market was $7.125 per ADS.
The Depositary in respect of the ADSs is Morgan Guaranty Trust Company of
New York. Each ADS registered on the books of the Depositary corresponds to one
Share. As of August 31, 1998 there were 10 record holders of American Depositary
Receipts evidencing 9,116,548 ADSs. As of August 31, 1998 there were 123 holders
of record of the Company's 13,967,183 Shares.
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<PAGE>
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
EXCHANGE CONTROLS
The payment of any dividends to foreign shareholders must be effected
through an authorized intermediary bank. All registered banks and credit
establishments in The Republic of France are authorized intermediaries.
Under current French exchange control regulations, there are no limitations
on the amount of cash payments that may be remitted by ILOG to residents of the
United States. Laws and regulations concerning foreign exchange controls do
require, however, that all payments or transfers of funds made by a French
resident to a non-resident be handled by an authorized intermediary bank.
OWNERSHIP OF SHARES BY NON-EUROPEAN UNION PERSONS
Pursuant to a Decree dated February 14, 1996, the acquisition of a
controlling interest in ILOG by any Non-European Union ("EU") resident is
generally no longer subject to an AUTORISATION PREALABLE or prior authorization
of the French Ministry of the Economy, Finance and the Budget. Under the new
regulations, the acquisition of a controlling interest in ILOG by either an EU
or non-EU person or group of persons is subject to a simple declaration
containing the details of the acquisition. The declaration must be filed at the
time the investment is made. Direct and indirect ownership of 20% or more of a
quoted company is generally regarded as a controlling interest, but a lower
interest may be held to be a controlling interest in certain circumstances (such
as an option to purchase additional shares).
Under French law, there is no limitation on the right of non-resident or
foreign shareholders to vote securities of a French company.
ITEM 7. TAXATION
The following is a general summary of certain material French tax and United
States federal income tax consequences to certain holders of ADSs that are U.S.
citizens and residents, U.S. corporations, and certain other entities and
organizations potentially affected by U.S. Federal income taxation
(collectively, "U.S. Holders"). This summary does not purport to address all of
the material consequences to these U.S. Holders or to any other holders. This
summary also does not take into account the specific circumstances of any
particular U.S. Holder although such circumstances might materially affect the
general tax treatment of such U.S. Holder. Therefore, all prospective purchasers
of ADSs are advised to consult their own tax advisor with respect to the United
States federal, state and local tax consequences, French tax consequences, or
foreign tax consequences of the ownership of ADSs and the Shares corresponding
thereto.
The statements of French and United States tax laws set out below assume
that each obligation in the Deposit Agreement and any related agreement will be
performed in accordance with its terms. In addition, such statements are based
on the laws in force as of the date of this Annual Report on Form 20-F, and as a
consequence are subject to any changes in United States or French law, or in the
double taxation conventions between the United States and France, occurring
after such date.
The Convention between the Government of the United States of America and
the Government of the French Republic for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital of
August 31, 1994 (the "Treaty") was ratified on December 30, 1995. Its provisions
concerning withholding taxes on dividends are applicable to amounts paid on or
after February 1, 1996. Its provisions for the partial refund of the AVOIR
FISCAL (a 50% tax credit attached to French-source dividends) to tax-exempt
entities are retroactive and are effective for dividends paid on or after
January 1, 1991. With respect to any other taxes on income or with respect to
the French wealth tax, the provisions of the Treaty are effective January 1,
1996. Investors having questions regarding the treatment of any item under the
double taxation convention in force between the United States of America and the
French Republic prior to the Treaty should consult with their tax advisors.
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<PAGE>
In order to be entitled to benefits conferred by the Treaty, a U.S. holder
must be a "resident" of the United States (hereafter referred to as a "U.S.
Resident Holder") within the meaning of the Treaty. Included in the category of
"U.S. Resident Holders" would generally be: (i) citizens or residents of the
United States; (ii) corporations organized under the laws of the United States,
or of any State thereof; (iii) certain pension trusts and other retirement or
employee benefits organizations established in the United States by a "resident"
thereof but generally exempt from U.S. tax; (iv) certain not-for-profit
organizations established in the U.S. but generally exempt from U.S. tax; (v)
U.S. regulated investment companies, U.S. real estate investment trusts, and
U.S. real estate mortgage investment conduits; and (vi) partnerships or similar
pass-through entities, estates, and trusts to the extent the income of such
partnerships, similar entities, estates, or trusts is subject to tax in the
United States as income of a resident in its hands or the hands of its partners,
beneficiaries, or grantors. In addition, in order to be entitled to benefits
conferred by the Treaty, a U.S. Resident Holder must also qualify for such
benefits under the limitation on benefits provisions of Article 30 of the
Treaty. The discussion below is based on the assumption that a U.S. Resident
Holder would so qualify but each U.S. Holder should consult with their own
advisor to ensure that this is the case.
For most purposes of the Treaty and the United States Internal Revenue Code
of 1986, as amended (the "IRC") as in effect as of the date of this Annual
Report on Form 20-F, U.S. Holders of ADSs will be treated as the owners of the
Shares corresponding to such ADSs. Accordingly, the French and United States
federal tax consequences discussed below will generally be applicable to U.S.
Holders of Shares.
TAXATION OF DIVIDENDS
Under French law, dividends paid to non-residents of France are subject to
French withholding tax at a rate of 25%. A resident of France is entitled to an
AVOIR FISCAL, or a tax credit, in respect of a dividend received from a French
corporation, such as ILOG, equal to 50% of the amount of the dividend. The AVOIR
FISCAL is allowed to shareholders who are not residents of France only pursuant
to a treaty or similar agreement between France and such non-resident's country
of residence.
Assuming dividends paid to a U.S. Resident Holder are not attributable to a
permanent establishment or fixed base maintained by such holder in France, under
the Treaty, the rate of French withholding tax on such dividends is generally
reduced to 15%. The rate of French withholding tax may be further reduced to 5%
if the U.S. Resident Holder is a company that owns directly or indirectly at
least 10% of the capital of ILOG.
The French tax authorities established an instruction on June 7, 1994 (the
"Instruction") providing that dividends paid to a U.S. Resident Holder which is
entitled to either a full or partial refund of AVOIR FISCAL as described below
will no longer be subject to the French withholding tax of 25% (with this tax
reduced at a later date to 15% subject to filing formalities), but will be
immediately subject to the reduced rate of 15% provided that such U.S. Resident
Holder establishes before the date of payment that he is a "resident" of the
United States under the Treaty.
In addition, assuming again that dividends are not attributable to a
permanent establishment or fixed base maintained in France, certain U.S.
Resident Holders described below are also entitled to a payment equal to the
AVOIR FISCAL, less a 15% withholding tax, with respect to such dividends. These
U.S. Resident Holders are: (i) individuals or other non-corporate persons; (ii)
United States corporations, other than regulated investment companies, that do
not directly or indirectly own 10% or more of the capital of ILOG; and (iii)
regulated investment companies that do not directly or indirectly own 10% or
more of the capital of ILOG but only if less than 20% of their shares are
beneficially owned by persons who are not citizens or residents of the United
States. It is important to note that a U.S. Resident Holder described
immediately above may receive a payment of the AVOIR FISCAL only if such holder
is subject to United States federal income tax on the payment of the AVOIR
FISCAL and the related dividend. Nevertheless, a partnership or trust may also
qualify but only to the extent that the partners, beneficiaries, or grantors
would qualify under (i) or (ii) immediately above (and are subject to United
States federal income tax on the payment of
20
<PAGE>
the AVOIR FISCAL and the related dividend). In addition, in order to receive
payment of the AVOIR FISCAL, the U.S. Resident Holder may be required to
demonstrate to the French authorities that he is the beneficial owner of the
dividend and that his shareholding does not have as its principal purpose, or
one of its principal purposes, to allow another person to obtain the refund of
AVOIR FISCAL.
Under the Treaty, any payment of the AVOIR FISCAL (whether full or partial)
is subject to a 15% withholding tax. Thus, for example, provided that the
requirements of the Instruction are satisfied, if ILOG pays a dividend of 100 to
a U.S. Resident Holder (who is not a tax- exempt entity) entitled to a refund of
AVOIR FISCAL, such holder will initially receive 85 and will be entitled to an
additional payment of 42.5 (resulting in an aggregate payment of 127.5)
consisting of the AVOIR FISCAL of 50, less a 15% withholding tax on that amount
equal to 7.50. As noted below, the payment of the AVOIR FISCAL less a 15%
withholding tax on that amount will not be received until, at the earliest,
January 15th following the close of the calendar year in which the dividend was
paid.
The Treaty provides that certain tax-exempt U.S. pension trusts and other
organizations established and maintained to provide retirement or employee
benefits and certain tax-exempt not-for-profit organizations (as well as certain
individuals with respect to dividends beneficially owned by such individuals and
derived from an investment retirement account and the United States, its
political subdivisions or local authorities, and any agencies or
instrumentalities thereof, from the investment of retirement assets) which are
U.S. Resident Holders are entitled to receive a payment equal to 30/85 of the
AVOIR FISCAL, less a 15% withholding tax, provided that these entities own,
directly or indirectly, less than 10% of the capital of ILOG. The net effect of
the partial refund of the AVOIR FISCAL is to offset the economic effect of the
15% French withholding tax imposed on the gross amount of the dividend.
Under the Instruction, in order to benefit from the reduced withholding tax
rate of 15% immediately upon payment of a dividend and to receive, where
applicable, the payment of the AVOIR FISCAL less the 15% withholding tax on that
amount, a U.S. Resident Holder must complete and file a French Treasury form RF
IA EU-No. 5052, entitled "Application for Refund", before the date of payment of
the dividends. The form, together with instructions, will be provided by the
Depositary to all U.S. Holders registered with the Depositary and may also be
available from the United States Internal Revenue Service (the "Service").
However, should a U.S. Resident Holder not be able to complete and file the
French Treasury form RF IA EU-No. 5052 on the date of payment of the dividends
at the latest, such U.S. Resident Holder could benefit from the favorable
treatment provided by the Treaty if he or she completes and files a simplified
application form before the date of payment of the dividends. A model of such
simplified application form is provided by the Instruction. The Depositary will
arrange for the filing with the French fiscal authorities of all forms completed
by U.S. Holders registered with the Depositary and returned to the Depositary in
time to be filed with the French fiscal authorities prior to the payment of the
dividend. The payment of the AVOIR FISCAL (net of withholding tax) is not made
before the close of the calendar year in which the related dividend is paid.
In addition, U.S. pension funds must, inter alia, provide the CENTRE DES
IMPOTS DES NON-RESIDENTS with a tax certificate from the Service indicating that
such pension funds have been established and are operated in accordance with
Sections 401(a), 403(b) or 457 of the IRC. A mutual fund or other investment
company must provide a certification by the Service of such Company's status as
a regulated investment company under Section 851 of the IRC.
Amounts distributed as dividends by French companies out of profits which
have not been taxed at the ordinary corporate income tax rate or which have been
earned and taxed more than five years before the distribution are subject to a
PRECOMPTE or prepayment by such companies equal to one-half of the net amount
distributed. If a U.S. Resident Holder is not entitled to the AVOIR FISCAL
payment described above (or is entitled to only a partial payment of the AVOIR
FISCAL), such a holder generally may obtain from the French tax authorities a
refund PRECOMPTE (or a partial refund of PRECOMPTE in the case of a partial
payment of the AVOIR FISCAL), if any, paid in respect of the dividends less
French withholding tax on the amount thereof for United States federal income
tax purposes, the gross amount of any distribution as well as the
21
<PAGE>
gross amount of any AVOIR FISCAL (or PRECOMPTE) paid to a U.S. Resident Holder
(before reduction for French withholding taxes) will generally be treated as a
dividend to the extent paid or deemed paid out of the current or accumulated
earnings and profits of ILOG (as determined for United States tax purposes) and
will be included in gross income of the U.S. Holder as ordinary income in the
year actually or constructively received. A dividends received deduction will
generally not be allowed with respect to dividends paid by the Company. For
purposes of determining the amount included in gross income, any French franc
distribution or AVOIR FISCAL payment (or PRECOMPTE refund) will be converted to
U.S. dollars at the spot exchange rate on the date so included. Generally, gain
or loss (if any) resulting from currency exchange fluctuations during the period
from the date the dividend is included in income to the date such dividend
payment is actually converted into U.S. dollars will be treated as ordinary
income or loss from sources within the United States.
French withholding tax imposed on dividends paid by ILOG and imposed on
related payments of AVOIR FISCAL (or PRECOMPTE) may, subject to certain
generally applicable conditions and limitations, be taken as a deduction or as a
foreign tax credit against such U.S. Holder's United States federal income tax
liability. Dividends and related payments of AVOIR FISCAL (or PRECOMPTE) will,
in most cases, be considered "passive income" from sources outside of the United
States for purposes of these U.S. foreign tax credit provisions.
The passive foreign investment company ("PFIC") rules discussed below may
affect the U.S. tax treatment of distributions from ILOG.
TAXATION OF CAPITAL GAINS
In general, a U.S. Resident Holder will not be subject to French tax on any
capital gain derived from the sale or exchange of ADSs, except where such gain
is attributable to a permanent establishment or fixed base maintained by the
U.S. Resident Holder in France.
For U.S. tax purposes, U.S. Holders will generally recognize gain or loss
upon the sale or exchange of ADSs equal to the difference between the amount
realized from the sale or exchange of the ADSs and the U.S. Holder's basis in
such ADSs. In general, such gain will be capital gain from sources within the
United States and, furthermore, will be long-term capital gain if the U.S.
Holder has held the ADSs for more than 12 months at the time of disposition (18
months for sales or exchanges between July 29, 1997 and December 31, 1997). The
maximum rate of tax on long term capital gains for most capital assets held by
an individual is 20%.
However, application of the PFIC rules discussed below may affect the U.S.
tax treatment of gain derived by a U.S. Holder from the disposition of ADSs.
FRENCH TRANSFER TAXES
Transfers of Shares will not be subject to French registration or transfer
taxes, unless the transfer is effected by means of a written agreement that is
executed, registered, or enforced within France.
FRENCH ESTATE AND GIFT TAXES
Under the Convention Between the United States of America and the French
Republic for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Estates, Inheritance and Gifts, a transfer of
ADSs by gift or by reason of the death of a U.S. Holder that is an individual
that would otherwise be subject to French gift or inheritance tax, respectively,
will not be subject to such French tax unless the donor or the transferor is
domiciled in France at the time of making the gift, or of his or her death, or
the ADSs were used in, or held for use in, the conduct of a business through a
permanent establishment in France.
22
<PAGE>
FRENCH WEALTH TAX
Under the Treaty, the French wealth tax applicable to individuals does not
apply to U.S. Holders owning alone or with related persons, directly or
indirectly, ADSs giving the right to less than 25% of ILOG's share capital.
PASSIVE FOREIGN INVESTMENT COMPANY PROVISIONS
ILOG believes that its ADSs should not be treated as stock of a passive
foreign investment company (a "PFIC") for United States federal income tax
purposes, but this conclusion is a factual determination made annually and thus
is subject to change.
In particular, because all or a portion of the proceeds of an offering of
ADSs or Shares might be considered to generate "passive" income or be considered
to be "passive" assets as determined for PFIC purposes, ILOG might be a PFIC in
the taxable year in which any offering is consummated or in a subsequent taxable
year.
ILOG will be a PFIC with respect to a U.S. Holder if, for any taxable year
in which the U.S. Holder holds ADSs, either (i) at least 75% of the gross income
of ILOG for the taxable year is passive income; or (ii) at least 50% of the
average fair market value (assuming ILOG is not a "controlled foreign
corporation" as defined under U.S. law) of ILOG's assets consists of assets that
produce or are held for the production of passive income. For this purpose,
passive income generally includes dividends, interest, royalties, rents (other
than rents and royalties derived in the active conduct of a trade or business
and not derived from a related person), annuities and gains from assets that
produce passive income. For the purpose of the PFIC tests, ILOG will be treated
as owning directly its percentage share (presently 100%) of the assets of its
subsidiaries and of receiving directly its percentage share of each of those
subsidiaries' income, if any, so long as ILOG owns, directly or indirectly, at
least 25% by value of the particular subsidiary's stock. However, if ILOG owns
at least 25% of a U.S. corporation and is subject to the U.S. accumulated
earnings tax in IRC 531, then any amount included in ILOG's gross income with
respect to such shares shall not be treated as passive income.
If ILOG is treated as a PFIC, unless a U.S. Holder makes a "QEF election",
as described below, any gain realized on the disposition of ADSs as well as any
distributions with respect to such ADSs which constitutes an "excess
distribution" (defined as the excess of the amount received with respect to ADSs
in any taxable year over 125 percent of the average received during the shorter
of the three prior years or the prior years during which the U.S. Holder held
the ADSs) will be taxed in the following manner. First, the gain or excess
distribution will be allocated ratably over the period during which the U.S.
Holder held the ADSs. Second, the gain or excess distribution so allocated to
the current year or to any prior year during which ILOG was a PFIC will be
included in the current year as ordinary income (rather than, for example, as
capital gain). Third, gain or excess distribution allocated to any prior year
during which ILOG was a PFIC will be subject to tax at the highest rate of tax
applicable to the U.S. Holder during such prior year. Fourth, interest will be
charged as if the tax computed with respect to gain or excess distribution
allocated to such prior years had been due in such prior years but had not been
paid.
The special PFIC tax rules described above will not apply to a U.S. Holder
if the U.S. Holder elects to have ILOG treated as a "qualified electing fund" (a
"QEF election") and if ILOG complies with certain reporting requirements. Once
such an election is made by a U.S. Holder, it can be revoked only with the
consent of the Service.
A U.S. Holder that makes a QEF election must include in income each year its
pro rata share of ILOG's ordinary income and net capital gain (at ordinary
income and capital gains rates, respectively) for its taxable year in which the
taxable year of ILOG ends--regardless of whether or not such ordinary earnings
and net capital gain are actually distributed to such U.S. Holder. The U.S.
Holder's basis in ADSs will be increased to reflect taxed but undistributed
income. Distributions of income that had previously
23
<PAGE>
been taxed will result in a corresponding reduction of basis in ADSs and will
not be taxed again as a distribution to the U.S. Holder.
Special rules apply with respect to the calculation of the amount of the
foreign tax credits available with respect to excess distributions by a PFIC or
inclusions under a QEF election.
A U.S. Holder who owns Shares or ADSs during any year that ILOG is a PFIC
must file Internal Revenue Service Form 8621.
FOREIGN CURRENCY ISSUES
If dividends are paid in French francs, the amount of the dividend
distribution to be included in the income of a U.S. Holder will be the U.S.
dollar value of the payments made in French francs, determined at a spot French
franc/U.S. dollar rate applicable to the date such dividend is to be included in
the income of the U.S. Holder, regardless of whether the payment is in fact
converted into U.S. dollars. Generally, gain or loss (if any) resulting from
currency exchange fluctuations during the period from the date the dividend is
paid to the date such payment is converted into U.S. dollars will be treated as
ordinary income or loss.
ITEM 8. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," the Consolidated Financial Statements and related Notes thereto and
other financial information appearing elsewhere in this Annual Report on Form
20-F. The selected statement of operations data set forth below for each of the
years ended June 30, 1996, 1997 and 1998 and the balance sheet data at June 30,
1997 and 1998 have been derived from the Consolidated Financial Statements of
the Company, which have been prepared in accordance with U.S. GAAP and audited
by Ernst & Young Audit, independent auditors, and included herein. The selected
statement of operations data for the years ended June 30, 1994 and 1995 and
balance sheet data at June 30, 1994, 1995 and 1996 are derived from audited
financial statements not included herein.
24
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees............................................. $ 8,035 $ 12,233 $ 18,848 $ 22,553 $ 34,141
Services................................................. 4,271 5,523 7,166 10,772 20,455
--------- --------- --------- --------- ----------
Total revenues............................................. 12,306 17,756 26,014 33,325 54,596
Cost of revenues:
License fees............................................. 282 677 1,050 801 1,107
Services................................................. 1,725 3,615 4,458 5,962 10,821
--------- --------- --------- --------- ----------
Total cost of revenues............................... 2,007 4,292 5,508 6,763 11,928
--------- --------- --------- --------- ----------
Gross profit............................................... 10,299 13,464 20,506 26,562 42,668
--------- --------- --------- --------- ----------
Operating expenses:
Marketing and selling.................................... 4,467 7,726 17,227 21,451 26,949
Research and development................................. 4,073 2,926 4,437 4,566 6,575
General and administrative............................... 1,496 2,842 3,554 4,292 6,013
Write-off of acquired intangible assets.................. -- -- -- -- 31,045
--------- --------- --------- --------- ----------
Total operating expenses............................. 10,036 13,494 25,218 30,309 70.582
--------- --------- --------- --------- ----------
Income (loss) from operations.............................. 263 (30) (4,712) (3,747) (27,914)
Net interest income (expense) and other.................... (257) (352) (259) 1,124 (121)
--------- --------- --------- --------- ----------
Net income (loss).......................................... $ 6 $ (382) $ (4,971) $ (2,623) $ (28,035)
--------- --------- --------- --------- ----------
Net income (loss) per share................................ $ 0.00 $ (0.06) $ (0.73) $ (0.31) $ (2.22)
--------- --------- --------- --------- ----------
Shares and share equivalents used in per share calculations
(1)...................................................... 5,919 6,454 6,855 8,376 12,613
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents...................................... $ 1,262 $ 5,146 $ 4,977 $ 26,037 $ 20,052
Working capital................................................ 2,179 7,135 5,059 25,117 21,919
Total assets................................................... 9,470 15,623 19,085 41,308 43,418
Convertible bonds.............................................. 1,279 4,533 4,272 -- --
Other long term obligations.................................... 1,159 2,044 2,364 1,134 5,980
Shareholders' equity........................................... 813 2,466 1,236 27,027 19,751
</TABLE>
- ------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of Shares and Share equivalents used in
per share calculations.
ILOG has never declared or paid any cash dividends on its Shares. ILOG
currently intends to retain all future earnings to finance future growth and
therefore does not anticipate paying any dividends in the foreseeable future.
25
<PAGE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS SECTION CONTAINS TREND ANALYSIS AND OTHER FORWARD-LOOKING STATEMENTS
THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. THESE STATEMENTS ARE BASED ON
CURRENT EXPECTATIONS AND ACTUAL RESULTS MAY DIFFER MATERIALLY. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE BUT ARE NOT LIMITED TO, THOSE SET FORTH
UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM 20-F.
OVERVIEW
ILOG develops, markets and supports advanced software components for user
interface, resource optimization and data services functions that are
fundamental to the development of business applications. In 1988, the Company
began shipping software components developed in the LISP programming language.
In 1992, the Company started to transition its products to the C++ programming
language. In 1993, the Company began shipping ILOG Views and ILOG Solver, which
product families represented 45% and 23% respectively of the Company's total
license fee revenues in 1998. During 1998 the Company introduced Java versions
of certain of its products which constituted approximately 6% of 1998 license
fee revenues.
In August 1997 the Company acquired the business of CPLEX Optimization, Inc.
("CPLEX"), located in Incline Village, Nevada, which provides linear based
optimizer products written in C and constituted approximately 12% of the
Company's revenues in 1998.
Up until its initial public offering in February 1997, which raised $24.9
million, the Company has financed itself through a combination of venture
capital investments and interest free loans from French government agencies and
the European Union. The Company partially financed the August 1997 CPLEX
acquisition through the issuance of 1.7 million shares and promissory notes
totaling $5.0 million. In June 1998 a further financing of $10.5 million was
received from SAP A.G. in exchange for approximately 0.7 million shares.
The Company's software development efforts are based in France except for
the CPLEX products, which are developed in Incline Village, Nevada. In 1998, the
Company's French-based revenues and expenses were 28% and 43%, respectively, of
the Company's total revenues and expenses excluding the write-off of intangible
assets.
The Company derives its revenues from the sale of development licenses to
application developers and from run time or deployment licenses once
applications are developed and deployed. Revenues from license fees represented
approximately 63% of the Company's total revenues in 1998. Gross margins from
license fees have increased from 94% in 1996 to 97% in 1998. Services consist of
consulting to facilitate the adoption of the Company's products, maintenance and
customer training. Gross margins for consulting and maintenance were
approximately 40% and 75% respectively in 1998. Consulting, maintenance and
training accounted for 22%, 12% and 3%, respectively, of the Company's total
revenues in 1998.
The Company's sales have historically been concentrated in Europe,
particularly in France. The Company believes that the North American and Asian
markets represent large growth opportunities for its products and services.
Since the beginning of 1995, the Company has significantly expanded its sales
effort by adding substantially to its U.S. and Asian direct sales forces and in
August 1997 acquiring CPLEX which has resulted in rapid revenue and expense
growth in these regions.
In 1997 and 1998, U.S. revenues grew by 33% and 119%, respectively, over the
preceding year and Asian revenues grew by 35% and 53%, respectively, over the
preceding year. Without the revenues contributed by CPLEX, U.S. revenues would
have grown by 55% in 1998 over 1997.
26
<PAGE>
The Company made major infrastructure and sales and marketing investments in
the U.S. in 1997 and in the U.S. and Japan in 1998 resulting in marketing and
selling expenses increasing in 1997 and 1998 by 25% and 26%, respectively, over
the preceding year.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statement of operations as a percentage of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Revenues:
License fees........................................................................... 72% 68% 63%
Services............................................................................... 28 32 37
--- --- ---
Total revenues..................................................................... 100 100 100
--- --- ---
Cost of revenues:
License fees........................................................................... 4 2 2
Services............................................................................... 17 18 20
--- --- ---
Total cost of revenues............................................................. 21 20 22
--- --- ---
Gross margin............................................................................. 79 80 78
--- --- ---
Operating expenses:
Marketing and selling.................................................................. 66 64 49
Research and development............................................................... 17 14 12
General and administrative............................................................. 14 13 11
Write-off of acquired intangible assets................................................ -- -- 57
--- --- ---
Total operating expenses........................................................... 97 91 129
--- --- ---
Loss from operations..................................................................... (18) (11) (51)
Net interest income (expense) and other.................................................. (1) 3 (0)
--- --- ---
Net loss................................................................................. (19)% (8)% (51)%
--- --- ---
--- --- ---
</TABLE>
REVENUES
Total revenues increased from $26.0 million in 1996 to $33.3 million in 1997
and to $54.6 million in 1998, representing increases of 28% and 64%,
respectively.
The Company has significantly increased its geographical market coverage to
include the U.S., Germany, Japan, Singapore, Spain and the U.K., through the
establishment of subsidiaries and in a number of other countries through
distributors. During 1996, 1997 and 1998, revenues generated from customers
outside of France totaled $15.0 million, $21.3 million and $37.4 million,
respectively, representing 58%, 64% and 69% of total revenues, respectively. The
growth in revenues generated from customers outside of France resulted primarily
from the Company's increased presence in North America and Asia and the
acquisition of CPLEX which contributed revenues totaling $6.3 million since its
acquisition on August 20, 1998. During 1996, 1997 and 1998, revenues generated
from customers in North America totaled $7.4 million, $9.9 million and $21.7
million, respectively. During 1996, 1997 and 1998, revenues generated from
customers in Asia totaled approximately $2.4 million, $3.3 million and $5.0
million, respectively.
In 1996 and 1997 no single customer accounted for more than 5% of total
revenues. In 1998 SAP A.G. accounted for 7% of total revenues. An order from a
single customer in a particular quarter can materially
27
<PAGE>
affect the Company's revenues and operating results for such period. See "Risk
Factors--Fluctuations in Operating Results."
LICENSE FEES. Revenues from license fees increased from $18.8 million in
1996 to $22.6 million in 1997, and to $34.1 million in 1998 representing
increases of 20% and 51%, respectively. These increases in license fees reflect
the growing market acceptance of the Company's products and the expansion of the
Company's product offerings which in 1998 included the CPLEX products. During
this period, the Company was generally able to maintain the price levels of its
products.
SERVICES. Revenues from services consist of consulting, maintenance and
training. Consulting and training services are billed by the person day or on a
fixed price basis. Maintenance services are available at an annual fee of 15% of
the standard software list price. Cash related to maintenance contracts is
generally received in advance while revenues are deferred and recognized ratably
over the term of the maintenance agreement, which is typically 12 months.
Revenues from services increased from $7.2 million in 1996 to $10.8 million in
1997 and to $20.5 million in 1998, representing increases of 50% and 90%,
respectively. The increases in revenues from services were due primarily to
increased demand for the Company's consulting services.
GROSS MARGIN
The following table sets forth the gross margin for both categories of
revenues for 1996, 1997 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
<S> <C> <C> <C>
1996 1997 1998
----- ----- -----
Gross Margin:
License fees............................................................................. 94% 96% 97%
Services................................................................................. 38 45 47
Total revenues....................................................................... 79 80 78
</TABLE>
LICENSE FEES. The Company's gross margin for license fees is currently
affected by the pricing of its products as it relates to documentation and
packaging costs. Cost of license fees, consisting primarily of documentation,
packaging and freight expenses, decreased from $1.0 million in 1996 to $801,000
in 1997 and increased to $1.1 million in 1998 representing 6%, 4% and 3% of
revenues from license fees in 1996, 1997 and 1998, respectively. The payment of
royalties to third parties is currently not a significant component of the cost
of license fees; however, in the event the Company significantly increases the
incorporation of third-party technology in its products, the payment of such
royalties may have the effect of lowering gross margins.
SERVICES. The Company's gross margin for services is primarily impacted by
the mix of consulting, maintenance and training revenues, where consulting and
training revenues are relatively lower margin activities. The need for
consulting and training services by the Company's customers to facilitate their
adoption of the Company's products and the Company's ability to satisfy the
demand for such services frequently has a direct impact on the Company's ability
to generate license fees. Cost of services, consisting of employee-related
expenses for these services, increased from $4.5 million in 1996 to $6.0 million
in 1997 and to $10.8 million in 1998. The services gross margin increased from
38% to 45% and to 47% in 1996, 1997 and 1998, respectively, as a result of
greater demand for the Company's consulting services.
OPERATING EXPENSES
MARKETING AND SELLING. Marketing and selling expenses consist primarily of
salaries and other payroll related expenses such as incentive compensation,
promotional marketing activities, customer pre-sales technical support and
overhead costs relating to occupancy. Marketing and selling expenses increased
from
28
<PAGE>
$17.2 million in 1996 to $21.5 million in 1997 and to $26.9 million in 1998,
representing 66%, 64% and 49% of total revenues, respectively. The level of
marketing and selling expenses as a percentage of total revenues in 1996 and
1997 is attributable to the significant worldwide expansion, particularly in the
U.S., of the Company's marketing and selling organization. The increase in
marketing and selling expenses over the last three years is due primarily to
sales and marketing headcount growth which increased from 57 people at June 30,
1995 to 177 at June 30, 1998. The increase in headcount resulted from growth in
the U.S. and the opening of offices in Germany and Japan in 1997 and 1998
respectively. The Company intends to continue the expansion of its sales and
marketing organization in all three of its geographic regions, to promote its
products and provide local customer support capability. Accordingly, the Company
anticipates that marketing and selling expenses will continue to increase in
absolute terms.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
principally of personnel costs, overhead costs relating to occupancy, equipment
depreciation and travel, less amounts received from French government agencies
and the European Union to reduce the cost to the Company of certain specific
research and development projects. This financial support is recorded as a
reduction of research and development expenses in the periods the projects are
undertaken and the related expenses are incurred. The following table sets forth
research and development expenses and the amounts of government funding for
1996, 1997 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Gross research and development expenses.............................................. $ 6,986 $ 4,954 $ 7,204
Less government funding.............................................................. (2,549) (388) (629)
--------- --------- ---------
Research and development expense, net of funding..................................... $ 4,437 $ 4,566 $ 6,575
--------- --------- ---------
--------- --------- ---------
</TABLE>
Research and development expenses increased from $4.4 million in 1996 to
$4.6 million in 1997 and to $6.6 million in 1998, representing 17%, 14% and 12%
of total revenues, respectively. The decrease in gross research and development
expenses in 1997 compared to 1996 was due to the reduced level of government
funding and completion of sponsored projects. The increase in research and
development expenses in 1998 over 1997 was due to the CPLEX acquisition and
generally increased staffing associated with the expansion and enhancement of
the Company's product line. During 1998 research and development staffing
increased by 25 or 49% to 76 at June 30, 1998. The Company has not capitalized
any software development costs and all research and development costs have been
expensed as incurred. See "Risk Factors--Risk of Loss of Government Research and
Development Funding" and Note 1 of Notes to Consolidated Financial Statements.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel and related overhead costs for finance and general
management. General and administrative expenses increased from $3.6 million in
1996 to $4.3 million in 1997 and to $6.0 million in 1998, representing 14%, 13%
and 11% of total revenues, respectively. The increase in general and
administrative expenses since 1996 results primarily from increased staffing to
support the Company's growth. From June 30, 1995 to June 30, 1998, the number of
the Company's employees engaged in general and administrative functions
increased from 38 to 54.
WRITE-OFF OF ACQUIRED INTANGIBLE ASSETS. Write-off of acquired intangible
assets of $31.0 million in 1998 relates primarily to the expensing of software
under development or earlier versions thereof nearing the end of their life
cycle, which was acquired from CPLEX in August 1997.
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NET INTEREST INCOME (EXPENSE) AND OTHER
Net interest income (expense) and other totaled $(259,000), $1.1 million and
$(121,000) in 1996, 1997 and 1998, respectively. The increase in 1997 was due to
a $1.1 million grant received from an agency of the French government with
respect to the Company's establishment of subsidiaries outside of France. In
1998 net interest income (expense) and other reflects primarily interest expense
arising from the promissory notes issued in connection with the CPLEX
acquisition. In 1998 interest income from the Company's cash equivalent
investments was offset by the interest expense related to the local borrowings
of certain subsidiaries.
CURRENCY FLUCTUATIONS
The Company operates on a multinational basis and a significant portion of
its business is conducted in currencies other than the U.S. dollar (the
financial reporting currency), namely the French franc and, to a lesser extent,
the Singapore dollar. Historically, a majority of the Company's expenses have
been incurred in French francs, especially research and development expenses. A
significant portion of the Company's revenues is denominated in French francs,
with the remainder in U.S. dollars, and, to a lesser extent, Singapore dollars
and other currencies. Fluctuations in the value of the currencies in which the
Company conducts its business relative to the U.S. dollar have caused and will
continue to cause dollar-translated amounts to vary from one period to another.
Due to the number of currencies involved, the constantly changing currency
exposures and the volatility of currency exchange rates, the Company cannot
predict the effect of exchange rate fluctuations upon future operating results.
Under the Company's accounting policy for foreign currency translation, the
results of the Company and each of its subsidiaries are measured in the currency
in which that entity primarily conducts its business (the functional currency).
The functional currencies of the Company and its subsidiaries are their
respective local currencies in accordance with Statement of Financial Accounting
Standard No. 52, "Foreign Currency Translation." All assets and liabilities in
the balance sheets of entities whose functional currency is not the U.S. dollar
are translated into U.S. dollar equivalents at exchange rates as follows: (i)
asset and liability accounts at year-end rates; and (ii) income statement
accounts at weighted average exchange rates of the year. Translation gains or
losses are recorded in shareholders' equity, and transaction gains and losses
are reflected in net income (loss). The net exchange gain for 1996, 1997 and
1998 was $36,000, $2,000 and $76,000 respectively. These amounts represent
transaction gains and are included in net interest income (expense) and other.
To date, the Company has not undertaken hedging transactions to cover its
currency transaction exposure but may undertake such transactions in a limited
manner in the future. See Note 1 of Notes to Consolidated Financial Statements.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes."
At June 30, 1998, the Company had net operating loss carryforwards from
various tax jurisdictions of approximately $14.5 million, of which $4.3 million
and $6.7 million were in France and the U.S., respectively, which will generally
expire between 1999 and 2012 if not utilized. Pursuant to the U.S. Internal
Revenue Code, use of the U.S. net operating loss carryforwards may be limited if
a cumulative change in ownership of more than 50% occurs within any three-year
period.
As of June 30, 1998, a valuation allowance of $30.9 million had been
provided against total deferred tax assets of $30.9 million (which consists
primarily of the tax benefit of net operating loss carryforwards and the
amortization of acquired intangible assets). The Company's expectation for
realizing the deferred tax asset and the determination of the amount of the
valuation allowance is based upon the existence of both taxable temporary
differences and the likelihood of sufficient taxable income in the carryforward
period of certain jurisdictions.
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LIQUIDITY AND CAPITAL RESOURCES
Over the last three years, the Company has financed its operations,
investments in capital equipment and intangible assets acquired from CPLEX
through the issuance of equity securities for approximately $50.2 million and
$6.9 million of loans from the CPLEX vendors, banks and European government
agencies, of which a portion were interest free.
The Company has lines of credit with a French bank allowing for a maximum
borrowing of approximately $3.3 million available until May 30, 1999. At June
30, 1998, $1.3 million was outstanding under this facility. The lines of credit
bear interest at the Paris InterBank Offering Rate plus 1.5% which at June 30,
1998 corresponded to an effective rate of 5.1%.
As of June 30, 1997 and 1998, the Company had cash and cash equivalents of
$26.0 million and $20.1 million, respectively, and working capital of $25.1
million and $21.9 million, respectively. The net cash decrease of $6.0 million
in 1998 was due to $15.6 million being used for the CPLEX acquisition and $1.9
million for capital expenditure, offset by $10.5 million received from SAP A.G.
in exchange for an approximate 5% equity interest in the Company, $1.2 million
received from employees for shares issued in connection with employee stock
option and purchase plans and $1.5 million provided from operating activities
less a net decrease in other working capital items.
Accounts receivable increased from $9.7 million at June 30, 1997 to $15.2
million at June 30, 1998. The increase in accounts receivable during this period
resulted from the growth in revenues.
Net cash used for operating activities in 1996 and 1997 totaled $3.6 million
and $1.4 million respectively, due to the net losses incurred in the respective
periods after adjusting for changes in working capital. In 1998 the Company was
provided cash from operations of $1.5 million reflecting the Company's operating
profitability before the write-off of acquired intangible assets and after
adjusting for changes in working capital.
The Company's investing activities have consisted primarily of expenditure
on fixed assets, which totaled $1.5 million, $1.1 million and $1.9 million in
1996, 1997 and 1998, respectively. In addition in 1998, as part of the CPLEX
acquisition the Company acquired $31.8 million of intangible assets consisting
primarily of software products under development or earlier versions thereof
nearing the end of their life cycle. As a result, $31.0 million thereof was
written-off in 1998.
In 1996, 1997 and 1998, the Company's financing activities provided $4.0
million, $24.5 million and $10.8 million respectively, of which, in 1996 $3.4
million was from the issuance of shares to venture capital firms, certain
existing shareholders and to employees, in 1997 $24.9 million were proceeds from
the Company's initial public offering in February 1997 and in 1998 $10.5 million
was from the issuance of shares to SAP A.G. for cash.
While operating activities may provide cash in certain periods to the extent
the Company may experience growth in the future, the Company anticipates that
its operating and investing activities may use cash and, consequently, such
growth may require the Company to obtain additional sources of financing.
YEAR 2000 COMPLIANCE RISKS
The Company is aware that many currently installed information technology
("IT") systems, such as computer systems and software products, as well as
non-IT systems that include embedded technology, were not designed to correctly
process dates after December 31, 1999. The Company's own component products have
been determined by the Company to be "Year 2000" compliant, although the
customer applications into which they are integrated may not be Year 2000
compliant.
The Company is also assessing the impact of such Year 2000 issues on its
internal IT and non-IT systems as well as on its customers, suppliers and
service providers. The Company plans to implement a new internal IT and
enterprise accounting system in 1999 and believes that this will aid it in
ensuring that
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<PAGE>
its own internal IT systems will be Year 2000 compliant. The Company estimates
that the expenses it has incurred to date to address Year 2000 issues have not
been material and, although it has not completed its full assessment of its Year
2000 readiness, it does not expect to incur material expenses in connection with
any required remediation efforts.
To date the Company has not identified any significant areas of
non-compliance with respect to its products or IT systems and expects that the
assessment and plans for remedial action for all of its products and non-IT
systems will be completed by the end of 1999. Further the Company anticipates
receiving assurances from its key suppliers and service providers in addressing
any Year 2000 issues which may affect the Company, in particular from utility
companies, telecommunication service companies and other mission critical
service providers that are outside the Company's control. Therefore, it may be
difficult for the Company to ensure Year 2000 readiness from such third parties.
Considering the complex interrelationships among Year 2000 issues both internal
and external to the Company, there can be no assurance that the Company will be
able to identify and accurately evaluate all Year 2000 issues and that
unresolved or undetected internal and external Year 2000 issues will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
If any customers, suppliers or service providers fail to appropriately
address their Year 2000 issues, such failure could have a material adverse
effect on the Company's business, financial condition and results of operation.
For example, because a significant percentage of the purchase orders received
from the Company's customers are computer generated, a failure of one or more of
the computer systems of the Company's customers could have a significant adverse
effect on the level and timing of orders from such customers. Similarly, if Year
2000 problems are experienced by any of the Company's significant suppliers or
service providers, such problems could cause or contribute to delays or
interruptions in the delivery of products or services to the Company; such
delays or interruptions could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company may develop contingency plans in the event it has not completed
all of its remediation programs in a timely manner. Such contingency plans may
also address Year 2000 issues relating to third parties who provide goods or
services essential to the Company's business but fail to appropriately address
their Year 2000 issues. Even if these plans are completed on time and put in
place, their can be no assurance that unresolved or undetected internal and/or
external Year 2000 issues will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Finally, disruption in the economy generally resulting from Year 2000 issues
could also materially adversely affect the Company. The occurrence of one or
more of the risks described above could have a material adverse effect on the
Company's business, financial condition or results of operations.
INTRODUCTION OF THE EURO
The Euro is scheduled to be introduced on January 1, 1999 in eleven European
Monetary Union countries including France where the Company has its headquarters
and a significant part of its worldwide operations is based, and in Germany and
Spain where it has sales subsidiaries. Legacy currencies however will continue
to be used as legal tender through January 1, 2002. The Company believes that
the introduction of the Euro will simplify the conduct of its business in the
above countries over time, however changes and/or improvements will need to be
made to its accounting and related internal systems.
The Company has commenced planning and the training of its personnel to
handle the currency change and in addition the Company is also assessing the
impact of the Euro on its internal IT and non-IT systems. The Company plans to
implement a new internal IT and enterprise accounting system in 1999 and modify
certain existing systems to accommodate the introduction of the Euro. The
Company believes that such systems and system modifications will aid in ensuring
that it will be able to accommodate the accounting and reporting requirements of
the new currency.
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<PAGE>
The Company does not expect to have to make major investments, other than in
IT systems, to handle the changeover. There however can be no assurance that new
systems will be introduced or existing systems modified in a timely and/or
effective manner such that the Company will be able to properly handle the
changeover to the Euro without causing a disruption to its business processes
and operations, which in turn may result in a material adverse effect on the
Company's business, financial condition and results of operations.
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<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED AND INCORPORATED BY REFERENCE
IN THIS FORM 20-F, THE FOLLOWING FACTORS SHOULD BE CAREFULLY CONSIDERED IN
EVALUATING THE COMPANY AND ITS BUSINESS:
HISTORY OF LOSSES; ACCUMULATED DEFICIT; FUTURE OPERATING RESULTS UNCERTAIN
The Company has incurred net losses in all but one of the last five fiscal
years. As of June 30, 1998, the Company had an accumulated deficit of
approximately $39.4 million. There can be no assurance that the Company will be
profitable on a quarterly or annual basis in the future. The Company's limited
operating history and the relative immaturity of its market, together with the
factors described under "--Fluctuations in Operating Results" and "--Seasonality
of Operating Results," make the prediction of future operating results
impossible. The Company's past financial performance should not be considered
indicative of future results. Although the Company has experienced revenue
growth in recent periods, there can be no assurance that the Company's revenues
will continue to increase or will not decrease. Future operating results will
depend on many factors, including the growth of the market for the Company's
object oriented components, demand for the Company's products and services, the
level of competition, the Company's success in expanding its direct sales force
and indirect distribution channels and the ability of the Company to develop and
market new products and product enhancements and to control costs, as well as
general economic conditions. See "--Fluctuations in Operating Results," "--Risk
of Loss of Government Research and Development Funding," "--Seasonality of
Operating Results" and "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations."
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have varied significantly in the past and
may vary significantly in the future, on a quarterly and an annual basis, as a
result of a number of factors, many of which are outside the Company's control.
These factors include demand for the Company's products and services, the size,
timing and structure of significant licenses by customers, cost overruns on the
Company's fixed price consulting contracts, changes in the mix of products and
services licensed or sold by the Company, product life cycles, the publication
of opinions about the Company, its products and object oriented technology by
industry analysts, changes in pricing policies by the Company or its
competitors, changes in the method of product distribution (including the mix of
direct and indirect channels), customer order deferrals in anticipation of
product enhancements or new product offerings by the Company or its competitors,
customer cancellation of major planned software development programs, the grant
of research and development expense reimbursements by government agencies and
the timing of such research and development reimbursements. Moreover, declines
in general economic conditions could precipitate significant reductions in
corporate spending for information technology, which could result in delays or
cancellations of orders for the Company's products. The Company's expense levels
are relatively fixed and are based, in significant part, on expectations of
future revenues. Consequently, if revenue levels are below expectations, expense
levels could be disproportionately high as a percentage of total revenues, and
operating results would be immediately and adversely affected. The Company has
historically operated with little backlog because its products are generally
shipped as orders are received. As a result, revenues from license fees in any
quarter are substantially dependent on orders booked and shipped in that quarter
and on sales by the Company's distributors and other resellers. Sales derived
through indirect channels are harder to predict and may have lower margins than
direct sales. The Company also believes that the purchase of its products is
relatively discretionary and generally involves a significant commitment of a
customer's capital resources. Therefore, any downturn in any potential
customer's business would have a significant impact on the Company's revenues
and quarterly results. In addition, the Company has historically recognized a
substantial portion of its revenues from sales booked and shipped in the last
month of a quarter such that the magnitude of quarterly fluctuations may not
become evident until late in, or at the end of, a particular quarter. Because a
number of the Company's individual orders are for
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<PAGE>
significant revenue, the Company's operating expenses are based on anticipated
revenue levels and a high percentage of the Company's expenses are relatively
fixed, the failure to ship a significant order in a particular quarter could
substantially adversely affect revenues and operating results for such quarter.
To the extent that significant sales occur earlier than expected, operating
results for subsequent quarters may be adversely affected. Revenues are
difficult to forecast because the market for the Company's products is rapidly
evolving. The Company may choose to reduce prices or increase spending in
response to competition or to pursue new market opportunities. If new
competitors, technological advances by existing competitors or other competitive
factors require the Company to invest significantly greater resources in
research and development efforts, the Company's future operating results may be
adversely affected. Due to these and other factors, the Company's quarterly
revenues, expenses and operating results could vary significantly in the future,
and period-to-period comparisons should not be relied upon as indications of
future performance. There can be no assurance that the Company will be able to
grow in future periods or that it will be able to sustain its level of revenues
or its rate of revenue growth on a quarterly or annual basis. See "--Risks
Associated with Sales Cycle," "--Risk of Loss of Government Research and
Development Funding" and "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations."
MARKET ACCEPTANCE OF OBJECT ORIENTED TECHNOLOGY
The Company's products are designed for use in object oriented software
application development. Object oriented applications are characterized by
technology, development style and programming languages that differ from those
used in traditional software applications. Object oriented technology offers
greater flexibility and re-usability of code than traditional technologies.
Object oriented languages offer significant capabilities not available from
traditional programming languages, but require greater discipline and attention
to detail from developers. In addition, object oriented modeling and analysis
techniques are more sophisticated than traditional techniques. To transform a
software application written in a traditional programming language into an
object oriented application would involve significant re-design and re-
architecture. In many cases, every line of code would have to be re-written. The
Company's growth depends upon continued growth of the market for, and broader
acceptance of, object oriented technology. There can be no assurance that the
market for the Company's products or services will grow or be sustained or that,
if it does, the Company will benefit from such growth. The acceptance of object
oriented technology depends upon the widespread adoption of object oriented
programming, and there can be no assurance as to the rate or scale of such
adoption. For example, the number of software developers using object oriented
technology is relatively small compared to the number of developers using more
traditional software development technologies. The adoption of object oriented
technology by software programmers who have traditionally used other technology
requires reorientation to significantly different programming methods, and there
can be no assurance that the acceptance of object oriented technology will
expand beyond sophisticated programmers who were early adopters of the
technology. Furthermore, there can be no assurance that potential customers will
be willing to make the investment required to retrain programmers to build
software using object oriented technology rather than structured programming
techniques or other technologies. If the market for object oriented technology
fails to grow or grows more slowly than anticipated, the Company's business,
operating results and financial condition would be materially adversely
affected.
The market for object oriented technology is characterized by a lack of
standards and numerous competitors in the areas of components, methodology and
services. The Company's future financial performance will depend in part upon
the development of standards that the Company's products address. There can be
no assurance that the Company will be able to respond effectively to the
evolving requirements of the market. For example, to date the Company has
focused its efforts on the C, C++ and Java programming languages. Should these
languages lose acceptance in the marketplace or be replaced by other advanced
languages, the Company's business, operating results and financial condition
would be materially adversely affected. See "Business--Software Component
Technology" and "--Products."
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MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS
The Company's future growth depends upon market acceptance of its products.
There can be no assurance that a significant number of organizations will choose
to use the Company's products, or that they will do so in a time frame that will
benefit the Company. In particular, many of the Company's customers have
licensed only small quantities of the Company's components, and there can be no
assurance that these or new customers will license additional components from
the Company or broadly implement object oriented technology. Industry data
indicate that many complex software development projects are abandoned before
completion or fail to satisfy user requirements, often after the expenditure of
substantial amounts of money and time. While the Company believes that the
components and professional services that it provides can increase the
likelihood that a software development project will be completed successfully,
the Company participates in an industry with an inherently high failure rate and
there can be no assurance that the Company's customers will achieve success when
using the Company's products and services. Any publicized performance problems
relating to object oriented technology or products offered by the Company or by
any competitor of the Company could also slow customer adoption of the Company's
products. Moreover, to the extent that the Company is associated with
unsuccessful customer projects, even if due to factors beyond the Company's
control, the Company's reputation and competitive position could be materially
and adversely affected. See "Business--Products."
RISKS ASSOCIATED WITH SALES CYCLE
The Company's sales cycle is generally three to six months or more and
varies substantially from customer to customer. Due in part to the strategic
nature of the Company's products, potential customers are typically cautious in
making product acquisition decisions. The decision to license the Company's
products generally requires the Company to provide a significant level of
education to prospective customers regarding the uses and benefits of the
Company's products, and the Company must frequently commit substantial presales
support and consulting resources. The Company has been constrained in its
ability to provide consulting resources as a result of a lack of trained
personnel, which may cause sales cycles to be lengthened or result in the loss
of sales.
Sales of licenses are subject to a number of risks over which the Company
has little or no control, including customers' budgetary constraints, customers'
internal acceptance reviews, the success and continued internal support of
customers' own development efforts, the efforts of distributors and the
possibility of cancellation of projects by customers. The uncertain outcome of
the Company's sales efforts and the length of its sales cycles could result in
substantial fluctuations in operating results. If sales forecasted from a
specific customer for a particular quarter are not realized in that quarter, the
Company is unlikely to be able to generate revenues from alternate sources in
time to compensate for the shortfall. As a result, and due to the relatively
large size of some orders, a lost or delayed sale could have a material adverse
effect on the Company's quarterly operating results. Moreover, to the extent
that significant sales occur earlier than expected, current operating results
and/or those of subsequent quarters may be adversely affected. See "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations."
RISK OF LOSS OF GOVERNMENT RESEARCH AND DEVELOPMENT FUNDING
The Company has received significant amounts of research and development
funding from the European Union and, to a lesser extent, agencies of the French
government, which approximated $2.5 million, $388,000 and $688,000 for 1996,
1997 and 1998, respectively. Such funding has been netted against, and has
therefore reduced, the Company's reported research and development expenses on a
dollar for dollar basis. Relevant authorities award research and development
funding on a discretionary basis based on applications made by the Company for
specific product related projects. The Company has contracts that provide for
additional research and development funds through March 2001 based upon recent
funding applications. However, there can be no assurance that any future grants
will be made. Failure to
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<PAGE>
receive future funding, a reduction in existing levels of funding, or delays in
receipt of additional funding may cause the Company's research and development
expenses to increase and may adversely affect the Company's operating results on
a dollar for dollar basis. See "--Fluctuations in Operating Results" and
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations."
SEASONALITY OF OPERATING RESULTS
A majority of the Company's sales have historically come from Europe.
Similar to many companies in the software industry with significant sales
outside of the U.S., the Company generally realizes lower revenues (i) in the
September quarter than in the immediately preceding quarter due primarily to
reduced economic activity in Europe in the summer months; and (ii) to a lesser
extent, in the March quarter compared to the immediately preceding quarter due
to the concentration by some customers of purchases in the fourth quarter of the
calendar year, and their consequently lower purchasing activity during the
following quarter. See "--Fluctuations in Operating Results" and "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations."
RAPID TECHNOLOGICAL CHANGE AND INTRODUCTION OF NEW PRODUCTS AND PRODUCT
ENHANCEMENTS
The market for the Company's products and services is characterized by rapid
technological change, dynamic customer demands and frequent introductions of new
products and product enhancements. Customer requirements for products can change
rapidly as a result of innovations or changes within the computer hardware and
software industries, the introduction of new products and technologies
(including new hardware platforms and programming languages) and the emergence,
evolution or widespread adoption of industry standards. For example, increasing
commercial use of the internet may give rise to new customer requirements and
new industry standards. There can be no assurance that the Company will be
successful in modifying its products and services to address these requirements
and standards. The actual or anticipated introduction of new products,
technologies and industry standards can render existing products obsolete or
unmarketable or result in delays in the purchase of such products. As a result,
the life cycles of the Company's products are difficult to estimate. The Company
must respond to developments rapidly and make substantial product development
investments. Any failure by the Company to anticipate or respond adequately to
technology developments and customer requirements, or any significant delays in
product development or introduction, could result in loss of competitiveness
and/or revenues.
The Company's future success will depend in large part on its ability to
improve its current technologies and to develop and market new products and
product enhancements that address these changing market requirements on a timely
basis. There can be no assurance that the Company will be successful in
developing and marketing new products or product enhancements, that the Company
will not experience difficulties that delay or prevent the successful
development, introduction or marketing of such products or enhancements or that
any new products or product enhancements will adequately address market
requirements and achieve market acceptance. As is customary in the software
industry, the Company has in the past experienced delays in the introduction of
new products and features, and may experience such delays in the future. If the
Company is unable, for technological or other reasons, to develop new products
or enhancements of existing products in a timely manner in response to changing
market conditions or customer requirements, the Company's business, operating
results and financial condition would be materially adversely affected. See
"Business--Research and Development."
PRODUCT CONCENTRATION RISK
The Company currently generates approximately 68% of its total license fees
from the ILOG Views and ILOG Solver product families. The Company expects that
revenues from these two product families will continue to represent a
substantial portion of its total license fees for the foreseeable future. As a
result, any factor adversely affecting licenses of either ILOG Views or ILOG
Solver would have a material adverse effect on the Company's business, operating
results and financial condition. The Company's future
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financial performance will depend in significant part on the Company's
successful development and introduction, and customer acceptance, of new and
enhanced versions of ILOG Views and ILOG Solver plus other products. In
addition, to the extent that competitive pressures or other factors result in
significant price erosion on these products, the Company's results of operations
would be materially adversely affected. See "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations,"
"Business--Products" and "--Competition."
COMPETITION
The Company's present direct competitors include a number of private and
public companies such as Dash Associates Limited, Dynatech Corporation, IBM,
Neuron Data, Inc., SL Corporation and Template Software, Inc. In addition,
virtually all of the Company's customers have significant investments in their
existing solutions and have the resources necessary to enhance existing products
and to develop future products. These customers have or may develop and
incorporate competing technologies into their systems, thereby replacing the
Company's current or proposed components. This would eliminate their need for
the Company's services and components and limit future opportunities for the
Company. The Company therefore is required to persuade development personnel
within these customers' organizations to outsource the development of their
software and to provide products and solutions to these customers that
cost-effectively compete with their internally developed products. The Company
expects to face additional competition from other established and emerging
companies if the market for its components continues to develop and expand. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly gain significant market share. New or
enhanced products introduced by existing or future competitors could increase
the competition faced by the Company's products. Increased competition could
result in fewer customer orders, price reductions, reduced transaction size,
reduced gross margins and loss of market share, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
maintain prices for products at levels that will enable the Company to market
its products profitably. Any decrease in prices, as a result of competition or
otherwise, could have a material adverse effect on the Company's business,
operating results and financial condition.
Some of the Company's current, and many of the Company's potential,
competitors have longer operating histories, significantly greater financial,
technical, marketing, service and other resources, significantly greater name
recognition, broader product offerings and a larger installed base of customers
than the Company. In addition, the Company's current and potential competitors
may have well-established relationships with current and potential customers of
the Company. As a result, such competitors may be able to devote greater
resources to the development, promotion and sale of their products, may have
more direct access to corporate decision-makers based on previous relationships
and may be able to respond more quickly to new or emerging technologies and
changes in customer requirements. There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competitive pressures will not have a material adverse effect on the
Company's business, operating results and financial condition.
DEPENDENCE UPON DEVELOPMENT OF SALES AND MARKETING FORCE
The Company has made a significant investment in recent years in the
expansion of its sales and marketing force, primarily in the U.S. and Asia, and
plans to continue to expand its sales and marketing force. The Company's future
success will depend in part upon the productivity of its sales and marketing
force and the ability of the Company to continue to attract, integrate, train,
motivate and retain new sales and marketing personnel. There can be no assurance
that the Company's recent and planned investment in sales and marketing will
ultimately prove to be successful or that the incremental revenues generated
will
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exceed the significant incremental costs associated with these efforts. In
addition, there can be no assurance that the Company's sales and marketing
organization will be able to compete successfully against the significantly more
extensive and better funded sales and marketing operations of many of the
Company's current and potential competitors. The Company's inability to develop
and manage its sales and marketing force expansion effectively could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Sales and Marketing."
DEPENDENCE ON KEY PERSONNEL
The Company's future success will depend in significant part upon the
continued service of its key technical, sales and senior management personnel,
including the Company's President and Chief Executive Officer, Pierre Haren. The
Company is particularly dependent upon its technical personnel with expertise in
object oriented technology. The loss of the services of one or more of the
Company's key employees could have a material adverse effect on the Company's
business, operating results and financial condition. The Company's future
success will depend on its ability to attract, integrate, train, motivate and
retain highly qualified technical, sales and managerial personnel, and there can
be no assurance that the Company will be able to do so. Competition for such
personnel is intense, especially the competition for technical personnel with
expertise in object oriented technology. The Company expects that such
competition will continue for the foreseeable future, and may intensify. If the
Company is unable to hire qualified personnel on a timely basis in the future,
the Company's business, operating results and financial condition would be
materially adversely affected. Additions of new personnel and departures of
existing personnel, particularly in key positions, can be disruptive, might lead
to additional departures of existing personnel and could have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Business--Sales and Marketing," "--Employees" and "Management."
The addition and assimilation of new personnel may be made more difficult by
the fact that the Company's research and development personnel are located
primarily in France, and its sales and marketing activities are located on three
continents, thus requiring the coordination of organizations separated by
geography and time zones, and the interaction of personnel with disparate
business backgrounds, languages and cultures. See "--Risks Associated with
Worldwide Operations."
RISKS ASSOCIATED WITH WORLDWIDE OPERATIONS
The Company's engineering and research and development operations are
located in France except for the CPLEX products which are developed in Incline
Village, Nevada, and its sales and marketing operations are located on three
continents. The geographic distance between these locations has in the past led,
and could in the future lead, to logistical and communications difficulties.
There can be no assurance that the geographic, time zone, language and cultural
differences between the Company's French, North American and Asia personnel and
operations will not result in problems that materially adversely affect the
Company's business, operating results and financial condition. Further, the
Company's operations may be directly affected by economic and political
conditions in the countries where the Company does business.
The Company expects to commit additional time and resources to expanding its
worldwide sales and marketing activities, localizing its products for selected
markets and developing local sales and support channels. There can be no
assurance that such efforts will be successful. Failure to sustain or increase
worldwide revenue, especially in North America and Asia, could have a material
adverse effect on the Company's business, operating results and financial
condition. Worldwide operations are subject to a number of risks, including the
costs of localizing products for different countries, longer accounts receivable
collection periods in certain geographic regions, especially Europe, and greater
difficulty in accounts receivable collections, unexpected changes in regulatory
requirements, dependence on independent resellers and technology standards,
import and export restrictions and tariffs, difficulties and costs of staffing
and managing international operations, potentially adverse tax consequences,
political instability,
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the burdens of complying with multiple, potentially conflicting laws and the
impact of business cycles and regional economic instability. Approximately 28%
of the Company's sales in 1998 were denominated in French francs, with the
remainder in U.S. dollars and, to a lesser extent, Singapore dollars and other
currencies. An increase in the value of the French franc relative to foreign
currencies could make the Company's products more expensive and, therefore, less
competitive in other markets. See "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations" and "Business--
Sales and Marketing."
MANAGEMENT OF POTENTIAL GROWTH
The Company has recently experienced a period of growth in revenues that has
placed a significant strain on its management systems and resources. In
addition, the size of the Company's staff increased from 281 to 398 employees
during 1998. Further increases in the number of employees are anticipated in
1999. Much of this growth has occurred and will occur in North America and Asia,
thus increasing the Company's need for information and communication systems.
The Company's ability to manage any future growth effectively will require it to
continue to improve its operational, financial and management controls,
accounting and reporting systems and procedures and other internal processes,
and there can be no assurance that the Company will be able to make such
improvements in an efficient and timely manner or that such improvement will be
adequate. If the Company's management is unable to manage growth and change
effectively, the Company's business, operating results and financial condition
could be materially adversely affected.
ACQUISITIONS
In August 1997, the Company acquired the business of CPLEX Optimization,
Inc. ("CPLEX") which developed and marketed linear based optimization libraries
written in C, with operations in Incline Village, Nevada in exchange for
1,700,000 Company shares, $10 million cash and $5 million of promissory notes.
In 1998 the Company commenced the integration of the CPLEX business into the
Company's operations. The process of integrating CPLEX's business into the
Company's operations may result in unforeseen operating difficulties and could
absorb significant management attention and/or expenditures that would otherwise
be available for the ongoing development of the Company's business. In August
1998, the Company also acquired Compass Modeling Solutions, Inc. ("Compass") in
Reno, Nevada a small value added reseller of CPLEX products in exchange for
51,852 Company shares.
The Company may in the future pursue other acquisitions of complementary
product lines, technologies or businesses. Future acquisitions by the Company
could result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities and amortization expenses related
to goodwill and other intangible assets, which could materially adversely affect
any Company profitability. In addition, acquisitions, such as CPLEX, involve
numerous risks, including difficulties in the assimilation of the operations,
technologies and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company may have limited direct prior experience, operating
companies in different geographical locations with different cultures, and the
potential loss of key employees of the acquired company. There are currently no
agreements with respect to any acquisitions. In the event that such an
acquisition does occur, however, there can be no assurance as to the effect
thereof on the Company's business, financial condition or operating results.
RISK OF SOFTWARE DEFECTS; PRODUCT LIABILITY
As a result of their complexity, software products frequently contain
undetected errors or failures, especially when first introduced or when new
versions or enhancements are released. There can be no assurance that, despite
testing by the Company and testing and use by current and potential customers,
errors will not be found in new products and product enhancements released by
the Company in the future. The occurrence of such errors could result in
significant losses to the Company or a customer,
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especially if such errors occur in strategic applications. Such occurrence could
also result in reduced market acceptance of the Company's products, which would
have a material adverse effect on the Company's business, operating results and
financial condition. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability and other claims. It is possible, however, that the
limitation of liability provisions contained in the Company's license
agreements, especially unsigned "shrink-wrap" licenses, may not be effective
under the laws of certain jurisdictions. Consequently, the sale and support of
the Company's software by the Company entail the risk of such claims in the
future. The Company currently has limited insurance against product liability
risks or errors or omissions coverage, and there can be no assurance that
additional insurance will be available to the Company on commercially reasonable
terms or at all. A product liability claim or claim for economic loss brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.
CURRENCY FLUCTUATIONS
The Company publishes its financial statements in U.S. dollars. The Company
has historically recorded a majority of its expenses in French francs,
especially research and development expenses. A material portion of the
Company's revenues is denominated in French francs, with the remainder in U.S.
dollars and, to a lesser extent, Singapore dollars and other currencies.
Fluctuations in the value of the currencies in which the Company conducts its
business relative to the U.S. dollar have caused and will continue to cause
dollar-translated amounts to vary from one period to another. Due to the number
of currencies involved, the constantly changing currency exposures and the
volatility of currency exchange rates, the Company cannot predict the effect of
exchange rate fluctuations upon future operating results. To date, the Company
has not undertaken hedging transactions to cover its currency transaction
exposure but may undertake such transactions in a limited manner in the future.
See "Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations."
PROTECTION OF INTELLECTUAL PROPERTY
The Company's success is heavily dependent upon its proprietary technology.
The Company relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
its proprietary technology. For example, the Company licenses its software
pursuant to signed license agreements and, to a lesser extent, "shrink-wrap"
licenses displayed on product packaging, which impose certain restrictions on
the licensee's ability to use the software. In addition, the Company seeks to
avoid disclosure of its trade secrets, including requiring those persons with
access to the Company's proprietary information to execute confidentiality
agreements with the Company and restricting access to the Company's source
codes. The Company seeks to protect its software, documentation and other
written materials under the laws relating to trade secret and copyright, which
afford only limited protection. The Company has no patents or pending patent
applications.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products,
obtain or use information that the Company regards as proprietary or use or make
copies of the Company's products. Policing unauthorized use of the Company's
products is difficult. In addition, the laws of many jurisdictions do not
protect the Company's proprietary rights to as great an extent as do the laws of
France and the U.S. In particular, "shrink-wrap" licenses may be wholly or
partially unenforceable under the laws of certain jurisdictions, and copyright
and trade secret protection for software may be unavailable in certain
countries. Under French intellectual property laws, rights over software are not
patentable but are protected under copyright law and infringements by third
parties can be enjoined. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology.
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There can be no assurance that the Company will not receive communications
in the future from third parties asserting that the Company's products infringe,
or may infringe, on their proprietary rights. There can be no assurance that
licenses to disputed third-party technology would be available on reasonable
commercial terms, if at all. In addition, the Company may initiate claims or
litigation against third parties for infringement of the Company's proprietary
rights or to establish the validity of the Company's proprietary rights.
Litigation to determine the validity of any claims could result in significant
expense to the Company and divert the efforts of the Company's technical and
management personnel from productive tasks, whether or not such litigation were
determined in favor of the Company. In the event of an adverse ruling in any
such litigation, the Company might be required to pay substantial damages,
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to infringing
technology. In the event of a successful claim against the Company and the
failure of the Company to develop or license a substitute technology, the
Company's business, operating results and financial condition would be
materially adversely affected. As the number of software products in the
industry increases and the functionality of these products further overlaps, the
Company believes that software developers may become increasingly subject to
infringement claims. Any such claims against the Company, with or without merit,
as well as claims initiated by the Company against third parties, could be time
consuming and expensive to defend or prosecute and to resolve.
VOLATILITY OF SHARE PRICE
The market price of the Company's ADSs has experienced significant
fluctuation and may continue to fluctuate significantly. In particular, the
trading price of the ADSs could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, changes in
financial estimates by securities analysts, downturns in the economy of regions
in which the Company does business, and other events or factors, many of which
are beyond the Company's control. In some future quarters the Company's
operating results may be below expectations of public market analysts and
investors. In such event, or in the event that adverse conditions prevail or are
perceived to prevail generally or with respect to the Company's business, the
price of the Company's ADSs would likely be immediately materially adversely
affected. In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many technology
companies and that often has been unrelated or disproportionate to the operating
performance of such companies. These broad market fluctuations, as well as
general economic, political and market conditions such as recessions or
international currency fluctuations, have and may continue to adversely affect
the market price of the ADSs.
CONTROL BY OFFICERS AND DIRECTORS; FACTORS INHIBITING TAKEOVER
As of August 31, 1998, the Company's executive officers and directors and
their affiliates beneficially owned approximately 46% of the Company's Shares.
As a result, such persons and entities, acting together, will have the effective
ability to control the Company and direct its affairs and business. The
concentration of ownership of the Company's Shares may have the effect of
delaying, deferring or preventing a change in control of the Company.
Pursuant to the Company's charter or STATUTS, the members of the Company's
Board of Directors each serve for a three-year term. One-third of the directors
are elected every year, which may make it more difficult for the Company's
shareholders to replace the Board of Directors. The Board of Directors has also
been authorized by the shareholders of the Company to effect increases in the
Company's share capital in the context of a tender offer or exchange offer for
the securities of the Company, which could have an anti-takeover effect. See
"Directors and Executive Officers" and "Control of Registrant."
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ENFORCEABILITY OF U.S. JUDGMENTS AGAINST FRENCH CORPORATIONS, DIRECTORS AND
OFFICERS
Judgments of U.S. courts, including judgments against the Company or its
directors or officers, predicated on the civil liability provisions of the
federal securities laws of the U.S. may not be enforceable in the Republic of
France.
NO DIVIDENDS
The Company has not paid any cash dividends on its share capital to date.
The Company currently anticipates that it will retain any future earnings for
use in its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. Any dividend would be declared and paid in
French francs and under the French Company Law (the "French Law") and the
Company's STATUTS, may only be paid from pre-consolidated net income, as
increased or reduced, as the case may be, by any net income or loss of ILOG
carried forward from prior years.
CERTAIN MATTERS RELATED TO FRENCH COMPANIES
As a French SOCIETE ANONYME, the Company will be subject to certain
requirements not generally applicable to corporations organized in U.S.
jurisdictions. Among other things, holders of ADSs will be subject to voting
procedures that are more complicated than for U.S. jurisdictions. The Company's
ability to increase its share capital is subject to shareholder approval at an
extraordinary shareholders' meeting. Shareholder approval must in any event be
obtained for any issuances of share capital in connection with a merger even if
the Company is the surviving entity, or an acquisition of assets in exchange for
shares of the Company. In the case of an extraordinary general meeting, the
presence, in person or by proxy, of shareholders holding one-third of the Shares
upon first notice and one-quarter of the Shares upon second notice is required
for a quorum. The complicated voting procedures under French Law, coupled with
the increasing practice of ADS holders not to exercise their voting rights, may
prevent the Company from obtaining a quorum for future shareholders' meetings
and thereby impair the ability of the Company to take any action that requires
shareholder approval.
YEAR 2000 COMPLIANCE RISKS
The Company is aware that many currently installed information technology
("IT") systems, such as computer systems and software products, as well as
non-IT systems that include embedded technology, were not designed to correctly
process dates after December 31, 1999. The Company's own component products have
been determined by the Company to be "Year 2000" compliant, although the
customer applications into which they are integrated may not be Year 2000
compliant.
The Company is also assessing the impact of such Year 2000 issues on its
internal IT and non-IT systems as well as on its customers, suppliers and
service providers. The Company plans to implement a new internal IT and
enterprise accounting system in 1999 and believes that this will aid it in
ensuring that its own internal IT systems will be Year 2000 compliant. The
Company estimates that the expenses it has incurred to date to address Year 2000
issues have not been material and, although it has not completed its full
assessment of its Year 2000 readiness, it does not expect to incur material
expenses in connection with any required remediation efforts.
To date the Company has not identified any significant areas of
non-compliance with respect to its products or IT systems and expects that the
assessment and plans for remedial action for all of its products and non-IT
systems will be completed by the end of 1999. Further the Company anticipates
receiving assurances from its key suppliers and service providers in addressing
any Year 2000 issues which may affect the Company, in particular from utility
companies, telecommunication service companies and other mission critical
service providers that are outside the Company's control. Therefore, it may be
difficult for the Company to ensure Year 2000 readiness from such third parties.
Considering the complex interrelationships among Year 2000 issues both internal
and external to the Company, there can be no assurance that the Company will be
able to identify and accurately evaluate all Year 2000 issues and that
unresolved or undetected internal and external Year 2000 issues will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
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If any customers, suppliers or service providers fail to appropriately
address their Year 2000 issues, such failure could have a material adverse
effect on the Company's business, financial condition and results of operation.
For example, because a significant percentage of the purchase orders received
from the Company's customers are computer generated, a failure of one or more of
the computer systems of the Company's customers could have a significant adverse
effect on the level and timing of orders from such customers. Similarly, if Year
2000 problems are experienced by any of the Company's significant suppliers or
service providers, such problems could cause or contribute to delays or
interruptions in the delivery of products or services to the Company; such
delays or interruptions could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company may develop contingency plans in the event it has not completed
all of its remediation programs in a timely manner. Such contingency plans may
also address Year 2000 issues relating to third parties who provide goods or
services essential to the Company's business but fail to appropriately address
their Year 2000 issues. Even if these plans are completed on time and put in
place, their can be no assurance that unresolved or undetected internal and/or
external Year 2000 issues will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Finally, disruption in the economy generally resulting from Year 2000 issues
could also materially adversely affect the Company. The occurrence of one or
more of the risks described above could have a material adverse effect on the
Company's business, financial condition or results of operations.
INTRODUCTION OF THE EURO
The Euro is scheduled to be introduced on January 1, 1999 in eleven European
Monetary Union countries including France where the Company has its headquarters
and a significant part of its worldwide operations is based, and in Germany and
Spain where it has sales subsidiaries. Legacy currencies however will continue
to be used as legal tender through January 1, 2002. The Company believes that
the introduction of the Euro will simplify the conduct of its business in the
above countries over time, however changes and/or improvements will need to be
made to its accounting and related internal systems.
The Company has commenced planning and the training of its personnel to
handle the currency change and in addition the Company is also assessing the
impact of the Euro on its internal IT and non-IT systems. The Company plans to
implement a new internal IT and enterprise accounting system in 1999 and modify
certain existing systems to accommodate the introduction of the Euro. The
Company believes that such systems and system modifications will aid in ensuring
that it will be able to accommodate the accounting and reporting requirements of
the new currency.
The Company does not expect to have to make major investments, other than in
IT systems, to handle the changeover. There however can be no assurance that new
systems will be introduced or existing systems modified in a timely and/or
effective manner such that the Company will be able to properly handle the
changeover to the Euro without causing a disruption to its business processes
and operations, which in turn may result in a material adverse effect on the
Company's business, financial condition and results of operations.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
In accordance with French law governing a SOCIETE ANONYME, the Company's
affairs are managed by its Board of Directors and by its Chairman, President and
Chief Executive Officer, who has full executive authority to manage the affairs
of the Company, subject to the prior authorization of the Board of Directors or
of the Company's shareholders for certain decisions specified by law.
DIRECTORS AND EXECUTIVE OFFICERS
Under French law, the Board of Directors prepares and presents the year-end
accounts of the Company to the shareholders and convenes shareholders' meetings.
In addition, the Board of Directors reviews and monitors ILOG's economic,
financial and technical strategies. French law provides that the Board of
Directors be composed of no fewer than three and no more than 24 members. The
actual number
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of directors must be within such limits and may be provided for in the STATUTS
or determined by the shareholders at the annual general meeting of shareholders.
The number of members of the Board may be increased only by decision of the
shareholders. The Company's Board of Directors currently consists of eight
members. Each director must be a shareholder of the Company. Under French law a
director may be an individual or a corporation, but the Chairman must be an
individual. Each director is elected for a three year term. There is no
limitation, other than applicable age limits, on the number of terms that a
director may serve. Directors are elected by the shareholders and serve until
the expiration of their respective terms, or until their resignation, death or
removal, with or without cause, by the shareholders. Vacancies which exist in
the Board of Directors may be filled by the Board of Directors, pending the next
shareholders' meeting.
Meetings of the Board of Directors of ILOG are normally convened and
presided over by the Chairman, who is elected by the Board of Directors. A
quorum consists of one-half of the members of the Board of Directors and
decisions are generally taken by a vote of the majority of the members present
or represented by other members of the Board of Directors. The Chairman has the
ability to cast a deciding vote in the event of a tie vote. A director may give
a proxy to another director but a director cannot represent more than one other
director at any particular meeting. Members of the Board of Directors
represented by another member at meetings do not count for purposes of
determining the existence of a quorum. As required under French law, one
representative of the employees is entitled to be present at meetings of the
Board of Directors of the Company, but does not have any voting right.
Directors are required to comply with applicable law and ILOG's STATUTS.
Under French law, directors are liable for violations of French legal or
regulatory requirements applicable to SOCIETE ANONYMES, violation of the
Company's STATUTS or mismanagement. Directors may be held liable for such
actions both individually and jointly with the other directors.
The Board currently has two committees: the Audit Committee, currently
composed of Philippe Claude and Marc Fourrier, and a Compensation Committee,
currently composed of Fredric Harman and Marc Fourrier. The Audit Committee
primarily reviews with management and the Company's independent auditors the
internal accounting procedures and quarterly and annual financial statements of
the Company and consults with and reviews the services provided by the Company's
independent auditors. The Compensation Committee determines the compensation of
Pierre Haren, the Chairman and Chief Executive Officer of the Company, and the
other executive officers of the Company and makes recommendations as to the
implementation of the Company's stock option and other employee benefits plans.
Each of the Committees makes recommendations to the Board of Directors for final
decision by the Board.
Under French law, the Chairman and Chief Executive Officer has the broadest
powers to act on behalf of ILOG and to represent ILOG in dealings with third
parties, subject only to those powers expressly reserved by law to the Board of
Directors or the shareholders. The Chairman and Chief Executive Officer
determines, and is responsible for the implementation of, the goals, strategies
and budgets of ILOG, which are reviewed and monitored by the Board of Directors.
The Board of Directors has the power to appoint and remove, at any time, the
Chairman and Chief Executive Officer.
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The following table sets forth the names, ages and positions of the
directors and executive officers of ILOG:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- --------------------------------------- ----------- ----------------------------------------------------------------
<S> <C> <C>
Pierre Haren........................... 44 Chairman and Chief Executive Officer
Patrick Albert......................... 42 Chief Technology Officer
Stuart Bagshaw......................... 53 Chief Operating Officer
Dr. Robert Bixby....................... 52 Director and Technology Fellow
Edouard Efira.......................... 50 Executive Vice President, International Strategic Alliances
Roger Friedberger...................... 47 Chief Financial Officer
Todd Lowe.............................. 42 Director and Executive Vice President, CPLEX and ILOG Direct
Jean Pommier........................... 34 Vice President, Worldwide Professional Services
William Scull.......................... 45 Vice President of Worldwide Marketing
Jean-Francois Abramatic................ 48 Director
Pascal Brandys......................... 39 Director
Philippe Claude........................ 50 Director
Marc Fourrier.......................... 44 Director
Fredric Harman......................... 36 Director
</TABLE>
Pierre Haren is a founder of the Company and was the Managing Director from
April 1987 to December 1995, when he was appointed Chairman and Chief Executive
Officer of the Company. Prior to founding ILOG, Mr. Haren spent four years in
charge of the SMECI Expert System Shell Project with the Institut National de
Recherche en Informatique et en Automatique ("INRIA") following a three-year
term directing the investment department of the French Ministry of the Sea. Mr.
Haren received engineering degrees from Ecole Polytechnique in 1976 and Ecole
Nationale des Ponts et Chaussees in 1978. He received his M.S. from
Massachusetts Institute of Technology ("MIT") in 1978 and Ph.D. from MIT in
Civil Engineering in 1980. Mr. Haren's term on the Board of Directors expires in
1999.
Patrick Albert is a founder of the Company and has been Chief Technology
Officer of the Company since July 1996, having previously held the position of
Vice President of Research and Development from 1990. Mr. Albert was head of the
Expert System Shell Department of Groupe Bull prior to joining the Company in
April 1987. Mr. Albert received an M.S. in Information Technology from the
University of Paris VII in 1982.
Stuart Bagshaw has served as Chief Operating Officer of the Company since
January 1998. From April 1995 until December 1997, Mr. Bagshaw was at Gemplus,
Inc. holding a number of senior management positions where his most recent
position was as Executive Vice President, Corporate Strategy. From November 1991
to March 1995 he was at XEROX Corporation (Xsoft Division) initially as Vice
President International Operations and later as Vice President Worldwide
Operations.
Dr. Robert Bixby has served as a Director and Technology Fellow of the
Company since August 1997. Dr. Bixby was a founder of, and from 1988 until
August 1997, was Chairman of CPLEX Optimization, Inc. Dr. Bixby is a Noah
Harding Research Professor Emeritus of applied mathematics at Rice University
and is a member of the National Academy of Engineering. Dr. Bixby's term on the
Board of Directors expires in 2000.
Edouard Efira has served as the Company's Executive Vice President,
International Strategic Alliances and Business Development since January 1997.
From May 1996 to January 1997, he was Chief
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Operating Officer of the Company and, from January 1989 to May 1996, he was
Director of International Sales. Mr. Efira served on ILOG's Board of Directors
from August 1997 to September 1998.
Roger Friedberger has served as Chief Financial Officer of the Company since
May 1996. From March 1988 through March 1996, he served as Senior Vice
President, Chief Financial Officer and Secretary of Insignia Solutions plc, a
software company. Mr. Friedberger graduated from the University of Leeds,
England in 1972 with a Bachelor of Commerce degree in Accounting and Law. He is
a certified public accountant in California and a member of the Institute of
Chartered Accountants in England and Wales.
Todd Lowe has served as a Director since August 1997 and as the Company's
Executive Vice President, CPLEX and ILOG Direct since July 1998. From August
1997 until June 1998 he was the Company's Executive Vice President, CPLEX
business. From 1988 until 1997 he was President of CPLEX Optimization, Inc. He
received a Chemical Engineering degree from the University of California. Mr.
Lowe's term on the Board of Directors expires in 2000.
Jean Pommier has been Vice President, Worldwide Professional Services since
January 1997. From January 1995 to January 1997, he was Director of Consulting
and Quality and, from March 1991 to January 1995, he was Director of Consulting.
Mr. Pommier joined the Company in August 1987 as a software engineer. Mr.
Pommier received an Engineering degree from ENSAM in 1986 and received an M.S.
in Computer Science from the University of Nice in 1987.
William Scull has served as Vice President of Worldwide Marketing since
September 1997. From October 1993 until September 1997, Mr. Scull was president
of Catalyst Consultants, a strategic marketing consulting firm based in Los
Altos, California. From November 1988 until September 1993, Mr. Scull was at
Tandem Computers holding a number of management positions where his most recent
position was as Director of Corporate Development, New Ventures. Mr. Scull
received an M.B.A. from Stanford University in 1981 and a Master of Science
degree in Engineering from MIT in 1979.
Jean-Francois Abramatic has served as a director of the Company since
December 1994. Since 1992, Mr. Abramatic has been Director of Development at
INRIA which position was extended in September 1997 to Director of Development
and Industrial Relations. In September 1996, Mr. Abramatic was appointed
Chairman of the International World Wide Web Consortium and as an Associate
Director of the MIT Laboratory of Computer Science. Mr. Abramatic received an
Engineering degree from Ecole des Mines, Nancy in 1971 and a Ph.D. from the
University of Paris VI in 1980. Mr. Abramatic's term on the Board of Directors
expires in 2000.
Pascal Brandys has served as a director of the Company since September 1998.
Mr. Brandys has been Chairman of the Board of Directors and Chief Executive
Officer of Genset S.A. since he co-founded it in 1989. Since 1997, Mr. Brandys
has served as President of France Biotech, the association of French
biotechnology companies. Mr. Brandys graduated from the Ecole Polytechnique in
1980, received an M.S. in Economic Systems from Stanford University in 1982 and
an M.S. in Civil Engineering from the Ecole Nationale des Ponts et Chaussees in
1983. Mr. Brandys's term on the Board of Directors expires in 1998, but will be
extended to 2000 upon ILOG shareholder approval at its Ordinary General Meeting,
to be held on November 4, 1998.
Philippe Claude has served as the permanent representative of Atlas Venture
Europe Fund B.V., a director of the Company, since January 1995, and was
appointed a director of the Company in his individual capacity in September
1996. Mr. Claude has been a General Partner of Atlas Venture, a venture capital
firm, since January 1993. Prior to joining Atlas Venture Group, he had been a
general partner of Partech International since 1987. He is also a Director of
Business Objects S.A., a software company. Mr. Claude graduated from the
University of Brussels, Solvay School in 1971 and received an M.B.A. from Oregon
State University in 1973. Mr. Claude's term on the Board of Directors expires in
1999.
47
<PAGE>
Marc Fourrier has served as a director of the Company since April 1987. Mr.
Fourrier is President of Delphis, a holding company that specializes in the
creation and development of high technology companies. From 1988 to June 1997,
Mr. Fourrier was a principal of Cleversys S.A., a consulting firm which
specializes in information technology. Mr. Fourrier received engineering degrees
from Ecole Polytechnique in 1976 and Ecole Nationale des Ponts et Chaussees in
1978, and an M.S. from MIT in 1978. Mr. Fourrier's term on the Board of
Directors expires in 1998, but will be extended to 2001 upon ILOG shareholder
approval at its Ordinary General Meeting to be held on November 4, 1998.
Fredric Harman has served as the permanent representative of Oak Management
Corporation, a director of the Company, since December 1994, and was appointed a
director of the Company in his individual capacity in September 1996. Mr. Harman
is a General Partner of Oak Investment Partners, a venture capital firm. Mr.
Harman was formerly with Morgan Stanley where he was a General Partner of Morgan
Stanley Venture Partners, L.P., a venture capital firm. He is also a Director of
SPSS, Inc., International Manufacturing Services, and Inktomi Corporation. Mr.
Harman received his B.S. and an M.S. in Electrical Engineering from Stanford
University in 1983, and an M.B.A. from the Harvard Graduate School of Business
in 1987. Mr. Harman's term on the Board of Directors expires in 1998, but will
be extended to 2001 upon ILOG shareholder approval at its Ordinary General
Meeting to be held on November 4, 1998.
LIABILITY INSURANCE
French law prohibits the Company from entering into indemnification
agreements with its directors and officers providing for limitations on personal
liability for damages and other costs and expenses that may be incurred by
directors and officers arising out of or related to acts or omissions in such
capacity. French law also prohibits the statuts of the Company from providing
for the limitation of liability of a member of the Board of Directors. These
prohibitions may adversely affect the ability of the Company to attract and
retain directors. Generally, under French law, directors and officers will not
be held personally liable for decisions taken diligently and in the corporate
interest of the Company.
The Company has entered into an agreement with each of its directors, its
Chairman and Chief Executive Officer, its Chief Operating Officer, its Chief
Financial Officer and other members of senior management designated by the Board
of Directors pursuant to which the Company agreed to contract for and maintain
liability insurance against liabilities which may be incurred by such persons in
their respective capacities, including liabilities which may be incurred under
the U.S. federal and state securities laws, subject to certain limitations. The
Company believes that entering into such agreements and maintaining appropriate
liability insurance for its directors and officers will assist the Company in
attracting and retaining qualified individuals to serve as directors and
officers.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate amount of compensation of all executive officers of ILOG as a
group (8 persons) paid or accrued for services in all capacities for the year
ended June 30, 1998 was approximately $1.7 million. In accordance with French
law relating to commercial companies, only shareholders may determine directors
fees paid to the Board of Directors. The Board of Directors then has full and
discretionary authority to decide the allocation of the directors' fees
authorized by the shareholders among its members. The shareholders of the
Company have not authorized the payment of any directors fees for 1998.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
The Company has five employee stock option or purchase plans currently in
effect. The following is a summary description of each of the Company's plans.
THE 1989 STOCK OPTION PLAN. In a general meeting held in 1989, the
shareholders of the Company authorized the Board of Directors to grant options
with respect to an aggregate of 672,500 Shares at a fixed price during the first
year of grant and thereafter as determined by the Board of Directors on the
48
<PAGE>
date of grant, at a price based on the net assets of the Company (the "1989
Plan"). The Board of Directors was authorized to grant options under the 1989
Plan until January 1, 1994. Under the 1989 Plan, options become exercisable
during a four-year period from the date of grant, subject to vesting on the
basis of one-fourth of the Shares upon the date of grant, and one-fourth of the
Shares in each of the three following years. As of August 31, 1998 options with
respect to an aggregate of 5,625 Shares were outstanding under the 1989 Plan at
an exercise price of FF1.16 per share.
THE 1992 STOCK OPTION PLAN. In general meetings held in 1992 and in 1993,
the shareholders of the Company authorized the Board of Directors to grant
options with respect to an aggregate of 614,275 Shares at a price to be
determined by the Board of Directors on the date of grant based on the net
assets of the Company and increased by a reasonable estimate of the future
profitability of the Company (the "1992 Plan"). The Board of Directors were able
to grant options under the 1992 Plan until June 1998. Under the 1992 Plan,
options become exercisable for a period of five years following the date of
grant subject to vesting on the basis of one-fourth of the Shares upon the date
of grant, and one-fourth in each of the three following years. As of August 31,
1998, options with respect to an aggregate of 294,503 Shares were outstanding
under the 1992 Plan at exercise prices ranging from FF9.00 per share to FF32.00
per share.
THE 1996 STOCK OPTION PLAN. In 1994, the shareholders of the Company
authorized the Board of Directors to grant up to 500,000 options at a price to
be determined by the Board of Directors on the date of grant based on the net
assets of the Company, a reasonable estimate of its future profitability and its
future development prospects (the "1994 Plan"). The Board of Directors may grant
such options until November 23, 1999. In order to comply with the U.S. Internal
Revenue Code of 1986, as amended (the "Code") for the granting of incentive
stock options, the Company decided to adopt a new plan (the "1996 Plan"),
incorporating Shares authorized under the 1994 Plan. The 1996 Plan was approved
by the shareholders on May 30, 1996, and on that date 600,000 Shares, on October
17, 1996, 200,000 Shares, on August 20, 1997 1,600,000 Shares, on December 17,
1997 500,000 Shares and on August 31, 1998 1,000,000 Shares, were added to the
1996 Plan with respect to which options may also be granted by the Board of
Directors until November 23, 1999. On September 24, 1998 the Board adopted the
1998 Stock Option Plan, subject to ratification by shareholders, to succeed the
1996 Stock Option Plan. The 1998 Stock Option Plan is identical to the 1996
Stock Option Plan except that it expires in 2003. Under the 1996 Plan, optionees
are entitled to exercise options for ten years (or seven years less one day for
U.K. employees). Under the 1996 Plan, generally and unless otherwise specified,
one-fourth of the Shares subject to option vest 12 months after the date of
grant of options and 1/48 of the Shares vest each month thereafter provided the
optionee continues to render services to the Company. As of August 31, 1998,
options with respect to an aggregate of 2,900,509 Shares were outstanding at
exercise prices ranging from FF12.80 to FF88.79, and options to purchase
1,219,959 Shares remained available for grant under the 1996 Plan.
As of August 31, 1998, options to purchase an aggregate of 1,640,438 Shares
were held by executive directors and/or executive officers of the Company as a
group (8 persons). Under French Law, the Company cannot grant options to members
of the Board of Directors (other than the Chairman, Chief Executive Officer or
Managing Director) who are not employees.
All Options granted under the 1989, 1992 and 1996 Plans have a term of ten
years, other than options granted to employees in the United Kingdom which have
a term of seven years less one day. Generally, and unless otherwise specified,
if an optionee terminates his or her employment with the Company, the optionee
may exercise only those options vested as of the date of termination and must
effect such exercise within three months. In general, if an optionee dies during
his or her employment, or within three months after termination of employment,
such person's options may be exercised up to six months after his or her death
to the extent vested at the time of his or her death or termination. No option
may be transferred by the optionee other than by will or the laws of intestacy.
In December 1996, the French parliament adopted a law that requires French
companies to pay French social contributions and certain salary-based taxes,
which may represent, for the Company, up to 45% of the taxable salary, on the
difference between the exercise price of a stock option and the fair
49
<PAGE>
market value of the underlying shares on the exercise date, if the beneficiary
disposes of the shares before a five-year period following the grant of the
option. The new law is consistent with French personal income tax law pursuant
to which the difference between the option exercise price and the fair value of
the shares at the grant date is treated as salary income if the shares are sold
or otherwise disposed of within five years of the option grant. The law applies
to all options, whatever the grant date, exercised after January 1, 1997.
The Company has not recorded a liability for social charges which may be
assessed for options granted as of June 30, 1998 as the liability, being
dependent on future values of the Company's shares and the timing of employees'
decisions to exercise options and sell the related shares, cannot be estimated.
The Company also does not consider that the liability is probable due to the
income tax disincentives to employees of exercising options and selling the
shares in less than a five year period.
For options granted after the adoption of the new law, the Company has
decided to subject such options to a minimum holding period of the underlying
shares, whereby French optionees will not be allowed to sell or dispose of the
shares before the expiration of a 5-year period from the grant date.
1996 INTERNATIONAL EMPLOYEE STOCK PURCHASE PLAN. In October 1996, the
shareholders of the Company approved the Company's International Employee Stock
Purchase Plan (the "Purchase Plan") which reserves a total of 150,000 Shares for
issuance thereunder for a period of two years from the date of approval by the
Company's shareholders. The Purchase Plan permits eligible employees to acquire
Shares in the form of ADSs through payroll deductions. The Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Code. The Purchase Plan is implemented by consecutive offering periods.
Except for the initial offering, each offering under the Purchase Plan will be
for a period of six months (the "Offering Period") commencing on February 1 and
August 1 of each year. The first Offering Period began on February 14, 1997
being the date on which price quotations for the ADSs corresponding to the
Shares were first available on the Nasdaq National Market and ended on July 31,
1997. The Board of Directors has the power to set the beginning of any Offering
Period and to change the duration of Offering Periods without shareholder
approval, provided that the change is announced at least 15 days prior to the
scheduled beginning of the first Offering Period to be affected. Eligible
employees may select a rate of payroll deduction up to 10% of their
compensation, up to an aggregate total payroll deduction not to exceed $21,250
in any calendar year. The purchase price for ADSs purchased under the Purchase
Plan is 85% of the lesser of the fair market value of the Company's ADSs on the
first day of each applicable Offering Period and on the last day of such
Offering Period.
1996 FRENCH EMPLOYEE SAVINGS PLAN. The Company's 1996 French Employee
Savings Plan (the "Savings Plan"), which was approved by the Company's
shareholders in October 1996, reserves a total of 150,000 Shares for issuance
thereunder for a period of two years from the date of such approval. The Savings
Plan permits eligible employees primarily to make contributions for purposes of
purchasing shares in investment funds managed for the Company on behalf of
employees, or to acquire Shares issued by the Company itself. The Savings Plan
is intended to qualify as an Employee Savings Plan under Article 443-1 et. seq.
of the French Labor Code. The Savings Plan is funded by an annual contribution
made on behalf of employees from a special employee profit-sharing reserve, by
voluntary contributions made by employees, by discretionary supplemental
contributions made by the Company, and by the reinvestment of revenues and
capital gains from investments in the Savings Plan prior to distribution. In
accordance with the French Labor Code, voluntary contributions in any one
calendar year for an eligible employee may not exceed 25% of such employee's
gross annual salary. The price for Shares of the Company purchased under the
Savings Plan is 80% of the mean of the fair market value of the Company's ADSs
as quoted on the Nasdaq National Market in the twenty trading days preceding the
Board of Directors' decision to issue Shares to eligible employees under the
Savings Plan. Investments made on behalf of eligible employees may be
distributed on the first day of the fourth month of the fifth fiscal year
following the year in which investment fund shares or Shares of the Company were
purchased. The Savings Plan is automatically renewed each year unless otherwise
terminated by the Company.
50
<PAGE>
As of August 31, 1998 the Company had issued 83,097 and 55,403 Shares under
the Purchase Plan and Savings Plan, respectively.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Since July 1, 1995, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which the Company was or is to
be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer or holder of more than 5% of the share capital of
the Company had or will have a direct or indirect material interest other than
in the transactions described below.
The directors of the Company include a General Partner of an affiliate of
Atlas Venture Europe Fund B.V.
In February 1996, the Company entered into an agreement with INRIA with
respect to the porting of ILOG Views on Macintosh/PC in the context of the
implementation of Internet multimedia tools. Also in February 1996, Mr.
Jean-Francois Abramatic, a director of the Company, who is also a director of
INRIA, entered into a consulting agreement with the Company with respect to the
Company's internet strategy. Pursuant to the agreement, Mr. Abramatic provides
consulting services to the Company one day per month for a period of one year
with a remuneration of FF 7,000 per day.
In January 1997, the Company's U.S. subsidiary extended a loan in the amount
of $75,000 to Mr. Edouard Efira, the Executive Vice President, International
Strategic Alliances of the Company. The loan yielded interest at a rate of 5.63%
and was repaid on September 1, 1998.
In August 1997 the Company acquired the business of CPLEX Optimization,
Inc., ("CPLEX") for which it issued 1,700,000 shares, paid $15,000,000 in cash
and issued three promissory notes in an aggregate amount of $5,000,000 to CPLEX.
Of the 1,095 outstanding shares of CPLEX at the time of the acquisition Mr.
Robert Bixby, a director of the Company, held 558; Mr. Todd Lowe, a director of
the Company, held 215; and Ms. Janet Lowe, the spouse of Mr. Lowe, held 322.
In the context of the acquisition by the Company of the business of CPLEX,
the Company issued three promissory notes to CPLEX in an aggregate principal
amount of $5.0 million repayable in three annual equal installments commencing
on August 20, 1999 and incurring interest at a rate of 6.39% per annum.
Following the acquisition the promissory notes were assigned among Mr. Lowe, for
a principal amount of $981,735, Mr. Bixby, for a principal amount of $2,547,945
and Ms. Lowe, for a principal amount of $1,470,320.
In the context of the acquisition by the Company of CPLEX, the Company's
subsidiary ILOG, Inc., entered into employment agreements dated August 20, 1997
with each of Mr. Lowe, Mr. Bixby and Ms. Lowe. The Employment Agreement of each
of Mr. Lowe, Mr. Bixby and Ms. Lowe has a three year term. Although such
employment is in each case at will, if the Company terminates any of such
employees' employment other than for cause or if such employee dies or becomes
disabled, then such employee's stock options shall continue to vest and such
employee's salary and bonus will continue to be paid for the employment term.
Mr. Lowe was granted options for the purchase of 200,000 shares and his annual
salary is $150,000 plus a target bonus of $50,000. Ms. Lowe was granted options
for the purchase of 200,000 shares and her annual salary is $100,000 plus a
target bonus of $30,000. Mr. Bixby was granted options for the purchase of
400,000 shares and his annual salary is $135,000.
In the context of the acquisition by the Company of CPLEX, the Company,
pursuant to a Technology Access Letter granted to Mr. Bixby certain continued
access and rights to the CPLEX software and technology including personal access
to the source code for a limited period; the right to request the Company to
grant non-transferable object code licenses to academic institutions for
research promotions; the right to request the Company to grant non-transferable
object code licenses to Rice University with updates; and the right of perpetual
access to the problem test bed (the collection of proprietary problems existing
at the time of termination of Mr. Bixby's employment). Such access and rights
were granted
51
<PAGE>
subject to protection of the Company's confidential information and their being
for research and academic purposes only.
On August 31, 1998 the Company entered into an Agreement and Plan of
Reorganization whereby it acquired Compass Modeling Solutions, Inc., in exchange
for 51,852 Company shares of which Mr. and Ms. Lowe, as trustees of the Lowe
Family Trust received 20,514 Company shares and Mr. Bixby received 4,559 Company
shares.
The Company believes that the terms of each of the foregoing transactions
were as favorable to the Company as the terms that would have been available
from unaffiliated third parties.
52
<PAGE>
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
Not Applicable
PART IV
ITEM 17. FINANCIAL STATEMENTS
Not Applicable
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 through F-19.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(A) Financial Statements
The following financial statements and schedules, together with the report
of Ernst & Young Audit thereon, are filed as part of this annual report:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule II to Financial Statements (Financial statement schedules I,
III, IV and V are omitted as the information is not required, is not
applicable or the information is presented in the financial statements or
related notes thereto)
(B) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------------- ---------------------------------------------------------------------------------------------------------
<C> <S>
1 Amended Depositary Agreement, dated August 13, 1998*
1 Amended STATUTS (By-laws) of the Company (English Translation)*
2 Summary (in English) of Orsud Lease
3 Subscription Agreement between ILOG S.A. and SAP Aktiengesellschaft
</TABLE>
- ------------------------
* Original agreement incorporated by reference to the Registration Statement
(Registration Statement No. 333-6322) on Form F-1 effective on February 13,
1997.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
ILOG S.A.
By: /s/ Roger D. Friedberger
Roger D. Friedberger
Chief Financial Officer
</TABLE>
Dated: September 30, 1998
54
<PAGE>
ILOG S.A.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Shareholders' Equity............................................................ F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Directors and Shareholders
ILOG S.A.
We have audited the accompanying consolidated balance sheets of ILOG S.A.
and subsidiaries as of June 30, 1997 and 1998 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended June 30, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
and its subsidiaries as of June 30, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998, in conformity with accounting principles generally accepted in
the United States.
ERNST & YOUNG Audit
/s/ John Mackey
Represented by
John Mackey
Paris, France
July 31, 1998
F-2
<PAGE>
ILOG S.A.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
----------------------
<S> <C> <C>
1997 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 26,037 $ 20,052
Accounts receivable (less allowance for doubtful accounts of
$273 and $518 at June 30, 1997 and 1998, respectively................................. 9,740 15,185
Value-added tax collectible on accounts receivable...................................... 1,016 1,374
Other receivables....................................................................... 814 1,917
Prepaid expenses........................................................................ 657 1,078
---------- ----------
Total current assets.............................................................. 38,264 39,606
Property and equipment.................................................................... 6,746 8,312
Less accumulated depreciation and amortization.......................................... (3,978) (5,007)
---------- ----------
Property and equipment-net.............................................................. 2,768 3,305
Other assets.............................................................................. 276 507
---------- ----------
Total assets...................................................................... $ 41,308 $ 43,418
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit......................................................................... $ 1,300 $ 1,300
Accounts payable and accrued expenses................................................... 4,001 4,764
Accrued compensation.................................................................... 3,066 4,523
Value-added tax payable................................................................. 732 1,361
Current portion of long-term debt....................................................... 883 755
Deferred revenue........................................................................ 3,165 4,984
---------- ----------
Total current liabilities......................................................... 13,147 17,687
Long-term portion of interest-free loans.................................................. 841 591
Long-term portion of capitalized lease obligations........................................ 293 389
Notes payable issued on business acquisition.............................................. -- 5,000
---------- ----------
Total liabilities................................................................. 14,281 23,667
Commitments and contingencies
Shareholders' equity:
Shares, FF 4.00 nominal value; 10,959,622 and 13,740,677 shares issued and outstanding
at June 30, 1997 and 1998, respectively............................................... 7,838 9,678
Additional paid-in capital.............................................................. 30,560 50,392
Accumulated deficit..................................................................... (11,349) (39,384)
Cumulative translation adjustment....................................................... (22) (935)
---------- ----------
Total shareholders' equity........................................................ 27,027 19,751
---------- ----------
Total liabilities and shareholders' equity........................................ $ 41,308 $ 43,418
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
ILOG S.A.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ------------
Revenues:
License fees............................................................ $ 18,848 $ 22,553 $ 34,141
Services................................................................ 7,166 10,772 20,455
---------- ---------- ------------
26,014 33,325 54,596
Cost of revenues:
License fees............................................................ 1,050 801 1,107
Services................................................................ 4,458 5,962 10,821
---------- ---------- ------------
5,508 6,763 11,928
---------- ---------- ------------
Gross profit.............................................................. 20,506 26,562 42,668
Operating expenses:
Marketing and selling................................................... 17,227 21,451 26,949
Research and development................................................ 4,437 4,566 6,575
General and administrative.............................................. 3,554 4,292 6,013
Write-off of acquired intangible assets................................. -- -- 31,045
---------- ---------- ------------
Total operating expenses............................................ 25,218 30,309 70,582
---------- ---------- ------------
Loss from operations...................................................... (4,712) (3,747) (27,914)
---------- ---------- ------------
Interest expense.......................................................... (342) (246) (466)
Interest income........................................................... 47 334 283
Foreign exchange gain..................................................... 36 2 76
Other..................................................................... -- 1,034 (14)
---------- ---------- ------------
(259) 1,124 (63)
---------- ---------- ------------
Loss before income taxes.................................................. (4,971) (2,623) (28,035)
Income taxes.............................................................. -- -- --
---------- ---------- ------------
Net loss.................................................................. $ (4,971) $ (2,623) $ (28,035)
---------- ---------- ------------
---------- ---------- ------------
Net loss per share........................................................ $ (0.73) $ (0.31) $ (2.22)
---------- ---------- ------------
---------- ---------- ------------
Number of shares used in per share calculations........................... 6,855,181 8,376,411 12,612,868
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
ILOG S.A.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SHARES ADDITIONAL CUMULATIVE
----------------------- PAID-IN ACCUMULATED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
------------ --------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance July 1, 1995........................ 6,199,695 $ 4,445 $ 983 $ (3,755) $ 793 $ 2,466
Options exercised......................... 116,377 90 7 97
Issuance of shares........................ 631,577 489 2,810 3,299
Amortization of deferred stock
compensation............................ 141 141
Translation adjustment.................... 204 204
Net loss.................................. (4,971) (4,971)
------------ --------- ----------- ------------ ----------- -------------
Balance June 30, 1996....................... 6,947,649 5,024 3,941 (8,726) 997 1,236
Options exercised......................... 44,587 31 80 111
Conversion of bonds....................... 1,329,986 933 3,355 4,288
Issuance of shares........................ 2,637,400 1,850 23,089 24,939
Amortization of deferred stock
compensation............................ 95 95
Translation adjustment.................... (1,019) (1,019)
Net loss.................................. (2,623) (2,623)
------------ --------- ----------- ------------ ----------- -------------
Balance June 30, 1997....................... 10,959,622 7,838 30,560 (11,349) (22) 27,027
Options exercised......................... 336,471 224 448 672
Issuance of shares........................ 2,444,584 1,616 19,267 20,883
Amortization of deferred stock
compensation............................ 117 117
Translation adjustment.................... (913) (913)
Net loss.................................. (28,035) (28,035)
------------ --------- ----------- ------------ ----------- -------------
Balance June 30, 1998....................... 13,740,677 $ 9,678 $ 50,392 $ (39,384) $ (935) $ 19,751
------------ --------- ----------- ------------ ----------- -------------
------------ --------- ----------- ------------ ----------- -------------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
ILOG S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ----------
Cash flows from operating activities:
Net loss...................................................................... $ (4,971) $ (2,623) $ (28,035)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization of property and equipment..................... 1,053 933 1,571
Write-off of acquired intangible assets..................................... -- -- 31,045
Loss (gain) on sales of fixed assets........................................ 120 (5) 5
Increase (decrease) in cash from:
Accounts receivable....................................................... (3,988) (1,990) (5,764)
Value-added tax collectible on accounts receivable........................ (153) (182) 382
Other receivables......................................................... 394 1,024 (1,684)
Prepaid expenses.......................................................... (86) (192) (448)
Accounts payable and accrued expenses..................................... 1,799 396 1,088
Accrued compensation...................................................... 1,124 484 1,541
Deferred revenue.......................................................... 749 1,010 2,204
Value-added tax payable................................................... 280 (114) 656
Other..................................................................... 89 (117) (1,058)
--------- --------- ----------
Net cash provided by (used for) operating activities.................... (3,590) (1,376) 1,503
--------- --------- ----------
Cash flows from investing activities:
Acquisition of business including transaction costs........................... -- -- (15,600)
Purchases of property and equipment........................................... (1,500) (1,124) (1,862)
Proceeds from sale of property and equipment.................................. 2 -- 136
--------- --------- ----------
Net cash used for investing activities.................................. (1,498) (1,124) (17,326)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from loans........................................................... 1,143 768 --
Repayment of loans............................................................ (174) (810) (372)
Principal payments on capital lease obligations............................... (391) (516) (482)
Cash proceeds from issuance of shares......................................... 3,396 25,050 11,655
--------- --------- ----------
Net cash provided by financing activities............................... 3,974 24,492 10,801
--------- --------- ----------
Effect of exchange rate changes on cash and cash equivalents.................... 945 (930) (963)
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents............................ (169) 21,060 (5,985)
Cash and cash equivalents, beginning of period.................................. 5,146 4,977 26,037
--------- --------- ----------
Cash and cash equivalents, end of period........................................ $ 4,977 $ 26,037 $ 20,052
--------- --------- ----------
--------- --------- ----------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
ILOG S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
ILOG S.A. (the "Company") is organized as a SOCIETE ANONYME, or limited
liability company, under the laws of the Republic of France. The Company was
founded in 1987.
The Company develops, markets and supports advanced software components for
user interface, resource optimization and data services functions that are
fundamental to the development of business applications. The Company's object
oriented libraries are used in all development stages, from conceptual modeling
to final delivery, of C, C++ and Java compiled applications. The Company's
products are distributed through its direct sales force, ISVs, and VARs.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of financial statements requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying footnotes. Actual results could differ from those estimates.
The accompanying consolidated financial statements include the Company and
its subsidiaries in the United States, Germany, Japan, Singapore, Spain and the
United Kingdom after eliminating intercompany accounts and transactions.
FOREIGN CURRENCY TRANSLATION
The reporting currency of the Company and its subsidiaries is the United
States dollar.
All assets and liabilities in the balance sheets of entities whose
functional currency, which generally is the local currency, is other than the
United States dollar are translated into dollar equivalents at exchange rates as
follows: (1) asset and liability accounts at year-end rates, (2) income
statement accounts at weighted average exchange rates for the year, and (3)
shareholders' equity accounts at historical exchange rates.
Gains or losses resulting from the above translation process are recorded in
shareholders' equity. Gains and losses resulting from foreign currency
transactions are reflected in net loss. The Company has not undertaken hedging
transactions to cover its currency translation exposure.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' Statement of Position 91-1 on software revenue
recognition. In October 1997, the American Institute of Certified Public
Accountants issued Statement of Position No. 97-2 "Software Revenue Recognition"
(SOP 97-2). The Company is adopting SOP 97-2 commencing with the year ending
June 30, 1999. Because of the Company's current accounting policies management
does not anticipate that the adoption of SOP 97-2 will have a significant effect
on the Company's future revenues or earnings.
License fees are earned under software license agreements with end users and
distributors and are recognized upon shipment if no significant vendor
obligations remain and collection of the resulting receivable is deemed
probable.
F-7
<PAGE>
ILOG S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Services revenues are derived from consulting and training services and fees
earned under annual maintenance agreements for providing updates, on an "if and
when available" basis, for existing software products, user documentation and
technical support. Maintenance revenue is recognized ratably over the term of
such agreements. If such services are included in the initial licensing fee, the
value of the services is unbundled and recognized ratably over the related
service period.
CONCENTRATION OF RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents and trade
receivables.
The Company has cash investment policies that limit investments to
short-term low risk instruments. The Company's cash is held principally in
French francs and concentrated primarily in one major French bank.
The Company sells its products to customers in a variety of industries in
Europe, North America and Asia. The Company performs ongoing credit evaluations
of its customers and maintains allowances for potential credit losses. To date,
such losses have been within management's expectations. The Company generally
requires no collateral, but does request letters of credit in certain
circumstances.
CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments with insignificant
interest risk and purchased with an original maturity of three months or less to
be cash equivalents. Cash equivalents include marketable securities which are
principally money market funds certificates of deposits, and commercial paper.
The cost associated which such securities approximates fair market value.
Under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", investments classified as
available-for-sale are reported at fair-value. Unrecognized gain or losses on
available-for-sale securities are included, net of tax, in equity until their
disposition. Realized gains and losses and decline in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. The cost of securities sold is based on the specific identification
method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1997 and 1998, the carrying values of current financial
instruments such as cash, accounts receivable, accounts payable, other
receivables, accrued liabilities and the current portion of long-term debt
approximated their market values, based on the short-term maturities of these
instruments. At June 30, 1997 and 1998, the fair value of long-term debt was
$777,000 and $5,601,000 respectively, compared to book values of $841,000 and
$5,591,000 respectively. Fair value is determined based on expected future cash
flows, discounted at market interest rates, and other appropriate valuation
methodologies.
NET LOSS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standard
No.128 "Earning per Share" (SFAS 128). SFAS 128 requires the calculation of
basic earnings per share which excludes any dilutive effects of stock options
and warrants and diluted earnings per share. As net losses have been reported
for all periods presented, the dilutive effects of stock options and warrants
have been excluded from the calculation of net loss per share.
F-8
<PAGE>
ILOG S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization are
computed using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Computer equipment and purchased software....... 1-3 years
Furniture and other equipment................... 4-8 years
Leasehold improvements.......................... 10 years, or lease term if
less
</TABLE>
Amortization of capitalized leased equipment is included in depreciation
expense.
Long-lived assets are written-down when as a result of events and changes in
circumstances within the year, their recoverable value based on undiscounted
future cash flow appear to be permanently less than their carrying value.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed", the Company capitalizes eligible computer software costs upon
achievement of technological feasibility subject to net realizable value
considerations. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs require management's judgment
with respect to certain external factors, including, but not limited to,
anticipated future gross license revenues, estimated economic life and changes
in software and hardware technology. Research and development costs prior to the
establishment of technological feasibility are expensed as incurred. Because the
period between achievement of technological feasibility and the general release
of the Company's products has been of relatively short duration, costs
qualifying for capitalization were insignificant during the years ended June 30,
1996, 1997 and 1998, and accordingly, have been charged to research and
development expenses in the accompanying statements of operations.
RESEARCH AND DEVELOPMENT GRANTS
The Company receives financial support for various research projects from
public institutions. Such support is recorded as a reduction of research and
development expenses in the periods when the projects are undertaken, the
related expenses have been incurred and the funding has been definitively
acquired. Financial support of $2,549,000, $388,000 and $629,000 received in the
years ended June 30, 1996, 1997 and 1998, has been recorded as reductions to the
related research and development expenses in each such year.
INCOME TAXES
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. A valuation allowance is
established if, based on the weight of available evidence, it is more likely
than not that some portion or all of the deferred tax asset will not be
realized.
EMPLOYEE STOCK OPTION PLANS
In 1996, the Company adopted the disclosure provisions of Financial
Accounting Standard No.123 (SFAS 123), "Accounting for Stock Based
Compensation". As permitted by SFAS 123, the Company has
F-9
<PAGE>
ILOG S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
elected to continue to account for its employee stock option plans in accordance
with the provisions of the Accounting Principles Board opinion No.25 (APB 25),
"Accounting for Stock Issued to Employees", which requires that compensation
expense be recorded when the option exercise price is less than the market value
of the underlying share on the grant date. Differences between the exercise
price of the options and the estimated fair value of the underlying shares are
recorded as compensation expense and amortized over the vesting period, and
result in an increase in additional paid-in capital being recorded as the
expense is recognized.
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standard Board issued Statement No.
130, "Reporting Comprehensive Income". This statement requires that all items
that are to be required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
is effective for fiscal years beginning after December 15, 1997, and will be
adopted by the Company for the year ending June 30, 1999.
In addition, in June 1997, the Financial Accounting Standard Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information". This statement replaces Statement No. 14 and changes the way
public companies report segment information. This statement is effective for
fiscal years beginning after December 15, 1997, and will be adopted by the
Company for the year ending June 30, 1999.
In June 1998, the Financial Accounting Standard Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities". The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. This statement is effective for fiscal years beginning
after June 15, 1999, and will be adopted by the Company for the year ending June
30, 2000. Because of the Company's minimal use of derivatives, management does
not anticipate that the adoption of the new Statement will have a significant
effect on earnings or the financial position of the Company.
2. BUSINESS ACQUISITION
On August 20, 1997, the Company acquired the business of CPLEX Optimization,
Inc. (CPLEX), a software company based in Incline Village, Nevada in exchange
for $15.0 million cash, promissory notes of $5.0 million and 1,700,000 shares of
the Company. The acquisition was accounted for as a purchase with substantially
all of the purchase price being allocated to in-process technology and other
intangible assets with $31.0 million thereof being charged to operations during
the year.
Supplemental cash flow information regarding the acquisition:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Non-cash investing and financing activities
Details of acquisition:
Fair value of intangible assets acquired.................................... $ 31,800
Deferred revenues and liabilities assumed................................... (1,106)
Notes issued................................................................ (5,000)
Shares issued............................................................... (10,094)
--------------
Cash paid for acquisition including transaction costs......................... $ (15,600)
--------------
--------------
</TABLE>
F-10
<PAGE>
ILOG S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The operating results of the acquired company have been included in the
accompanying consolidated financial statements from its date of acquisition.
Unaudited pro-forma information of the Company for the year ended June 30, 1997
as if the acquisition had taken place on July 1, 1996 are (in thousands, except
per share information): net sales $38,983, loss from operations $31,703, net
loss $35,546 and net loss per share $3.03. Included in the pro-forma loss from
operations is $31,045 of expensed in-process technology and written-off
intangibles acquired in the acquisition.
Similar pro-forma information has not been presented for the year ended June
30, 1998 as the results of operations of CPLEX for substantially the entire year
have been included in the accompanying consolidated financial statements.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents, all of which are classified as available-for-sale
securities, include:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Cash held at bank....................................................... $ 1,617 $ 14,056
Cash equivalents........................................................ 24,420 5,996
--------- ---------
$ 26,037 $ 20,052
--------- ---------
--------- ---------
</TABLE>
Gross realized gains and losses on sales of available-for-sale securities
during 1996, 1997 and 1998 were immaterial. There was no unrealized gain or loss
at June 30, 1997 or 1998.
As of June 30, 1997 and 1998, all cash equivalents have contractual
maturities of less than three months.
4. PROPERTY AND EQUIPMENT
Property and equipment includes:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Computer equipment and purchased software............................... $ 5,035 $ 6,062
Furniture and other equipment........................................... 1,658 2,050
Leasehold improvements.................................................. 53 200
--------- ---------
6,746 8,312
Accumulated depreciation and amortization............................... (3,978) (5,007)
--------- ---------
$ 2,768 $ 3,305
--------- ---------
--------- ---------
</TABLE>
Equipment purchased under capital leases in the years ended June 30, 1997,
1998 totaled $393,000 and $510,000, respectively. The cost of such equipment
included in property and equipment at June 30, 1997 and 1998 totaled $2,447,000,
and $2,645,000, respectively. Accumulated amortization of this equipment totaled
$1,570,000 and $1,799,000 at June 30, 1997 and 1998, respectively.
F-11
<PAGE>
ILOG S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT
The following table presents a summary of the Company's debt:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
SHORT-TERM DEBT:
Lines of credit............................................. $ 1,300 $ 1,300
Current portion of interest-free loans from French
government agencies, denominated in French francs......... 362 331
Current portion of capital lease obligation................. 521 424
--------- ---------
$ 2,183 $ 2,055
--------- ---------
--------- ---------
LONG-TERM DEBT:
Long-term portion of interest-free loans from French
government agencies, denominated in French francs......... $ 841 $ 591
Long-term portion of capital lease obligation............... 293 389
Notes payable to stockholders............................... -- 5,000
--------- ---------
$ 1,134 $ 5,980
--------- ---------
--------- ---------
</TABLE>
The Company has lines of credit with a French bank allowing for a maximum
borrowing of FF 20,000,000 (approximately $3,300,000) at June 30, 1998. The
lines of credit bear interest at the Paris Interbank Offering Rate plus 1.5%
which corresponded to effective rates of 4.9% and 5.1% at June 30, 1997 and
1998, respectively. The amounts outstanding under these lines at June 30, 1998
were denominated in French francs, U.S. dollars, pounds sterling, Singapore
dollars and Spanish pesetas.
The Company has received interest-free loans from Anvar, an agency of the
French government that provides financing to French companies for research and
development, and the French Ministry of Trade and Industry. Repayment of the
loans, except for a required minimum payment of $331,000 which is due in March
1999, is contingent upon the technical and commercial success of the research
programs to which they relate.
Promissory notes for a total of $5,000,000 were issued on August 20, 1997,
in connection with the CPLEX acquisition. The note holders became stockholders
and directors of the Company following the acquisition. The notes bear interest
at a fixed rate of 6.39%. Repayment is in three annual equal installments
commencing on August 20, 1999.
Future payments of long-term debt, excluding capitalized lease obligations,
for the years ending June 30 are as follows (in thousands):
<TABLE>
<S> <C>
1999................................................................ $ 331
2000................................................................ 2,024
2001................................................................ 1,874
2002................................................................ 1,667
2003................................................................ 26
---------
$ 5,922
---------
---------
</TABLE>
F-12
<PAGE>
ILOG S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under capitalized lease obligations due for
the years ending June 30 are as follows (in thousands):
<TABLE>
<S> <C>
1999................................................................. $ 455
2000................................................................. 292
2001................................................................. 111
---------
Total minimum lease payments......................................... 858
Less amount representing interest.................................... (45)
---------
Present value of net minimum lease payments.......................... 813
Less current portion................................................. (424)
---------
Long-term portion.................................................... $ 389
---------
---------
</TABLE>
Interest paid in the years ended June 30, 1996, 1997 and 1998 totaled
$63,000, $48,000 and $51,000 respectively.
6. SHAREHOLDERS' EQUITY
GENERAL
At June 30 1998, the issued and outstanding share capital of the Company
consisted of 13,740,677 shares with a nominal value of FF 4.00.
In June 1998, 685,064 shares were issued for cash to a customer at $15.31
per share, resulting in total proceeds of approximately $10,500,000. In August
1997, 1,700,000 shares were issued as part of the purchase consideration in the
CPLEX acquisition. In February 1997, the Company issued 2,500,000 shares for
cash at $11.00 per share in connection with its initial public offering in the
United States. In June 1996, 631,577 shares were issued in a rights offering for
cash of FF27.00 ($5.22) per share, resulting in total proceeds of approximately
$3,299,000.
PREEMPTIVE SUBSCRIPTION RIGHTS
Shareholders have preemptive rights to subscribe on a pro rata basis for
additional shares issued by the Company for cash. Shareholders may waive such
preemptive subscription rights at an extraordinary general meeting of
shareholders under certain circumstances. Preemptive subscription rights, if not
previously waived, are transferable during the subscription period relating to a
particular offer of shares.
DIVIDEND RIGHTS
Dividends may be distributed from the statutory retained earnings, subject
to the requirements of French law and the Company's statuts. The Company has not
distributed any dividends since its inception. The accumulated deficit for
statutory purposes totaled approximately $2,300,000 at June 30, 1998. Dividend
distributions, if any, will be made in French francs.
STOCK OPTIONS
Stock options have been granted to employees under the Company's 1987, 1989,
1992, 1994 and 1996 stock option plans. Generally, options vest over four years
from, and expire between five to ten years after, the date of hire or grant..
During the years ended June 30, 1996, 1997 and 1998, the Company recorded
compensation expense related to options of $141,000, $95,000 and $117,000,
respectively. The Company
F-13
<PAGE>
ILOG S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
will record an aggregate compensation expense of approximately $172,000 over the
related vesting period of the options in future years.
A summary of activity under the option plans is as follows:
<TABLE>
<CAPTION>
SHARES OPTIONS WEIGHTED AVERAGE WEIGHTED AVERAGE
RESERVED FOR GRANTED AND EXERCISE PRICE IN EXERCISE PRICE IN
FUTURE GRANTS OUTSTANDING FRENCH FRANCS U.S. DOLLARS
------------- ------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Balances at July 1, 1995......................... 287,513 848,925 8.00 1.54
Options authorized............................. 600,000 -- -- --
Options granted................................ (417,531) 417,531 18.93 3.77
Options exercised.............................. -- (116,377) 4.17 0.83
Options canceled............................... 176,688 (176,688) 9.50 1.89
------------- ------------ ----- ---
Balances at June 30, 1996........................ 646,670 973,391 13.13 2.62
Options authorized............................. 200,000 -- -- --
Options granted................................ (397,385) 397,385 31.60 5.80
Options exercised.............................. -- (44,587) 13.63 2.50
Options canceled............................... 42,185 (42,185) 22.54 4.14
------------- ------------ ----- ---
Balances at June 30, 1997........................ 491,470 1,284,004 18.88 3.46
Options authorized............................. 2,100,000 -- -- --
Options granted................................ (2,195,789) 2,195,789 45.58 7.60
Options exercised.............................. -- (336,471) 12.01 2.00
Options canceled............................... 161,185 (161,185) 25.02 4.17
------------- ------------ ----- ---
Balances at June 30, 1998........................ 556,866 2,982,137 54.18 9.03
------------- ------------ ----- ---
------------- ------------ ----- ---
</TABLE>
At June 30, 1996, 1997 and 1998, 175,485, 335,514 and 361,322 respectively,
of the outstanding options were exercisable at weighted average exercise prices
of FF7.21 ($1.44), FF10.20 ($1.87) and FF18.37 ($3.06), respectively. Exercise
prices for options outstanding as of June 30, 1998 ranged from FF1.16 to FF88.79
($0.19 to $14.68). The weighted average remaining contractual life of those
options is 8.8 years.
The Company has elected to follow APB 25 in accounting for its employee
stock options because, as discussed below, the alternative fair value accounting
provided for under SFAS 123 requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25, when
the exercise price of the Company's employee stock options is less than the
market price of the underlying shares at the date of grant, compensation expense
is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if Company had accounted for
its employee stock options under the fair value method of SFAS 123. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following average assumptions for 1996, 1997 and
1998, respectively : Risk-free interest rates of 4%, dividend yield of 0%;
volatility factors of the expected market price of the Company's ordinary shares
of 0.47 for 1996 and 1997, and 0.98 for 1998; and a weighted-average expected
life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different form those of traded options,
F-14
<PAGE>
ILOG S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and because the changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options
For purposes of pro forma disclosures, the estimated fair value of the
options is expensed over the vesting period of the options. The Company's pro
forma information follows (in thousands except for loss per share information):
<TABLE>
<CAPTION>
1996 1997 1998
-- -- --
<S> <C> <C> <C>
Pro forma net loss................................ $(4,920) $(3,428) $(31,040)
Pro forma loss per share.......................... $(0.72) $(0.41) $(2.46)
-- -- --
</TABLE>
The weighted-average value of options granted during 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
-- -- --
<S> <C> <C> <C>
Options whose exercise price equaled market price
of the underlying shares on the grant date...... $3.42 $4.95 $5.48
Options whose exercise price was more than the
market price of the underlying shares on the
grant date...................................... -- -- $5.71
Options whose exercise price was less than the
market price of the underlying shares on the
grant date...................................... $4.92 $3.30 $7.21
-- -- --
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In March 1997, the Company implemented the 1996 International Employee Stock
Purchase Plan and the 1996 French Employee Savings Plan, as authorized by the
shareholders in October 1996. Under provisions of the Company's employee stock
purchase plans, employees can purchase the Company's common stock at a specified
price through payroll deductions during an offering period. Up to 150,000 shares
per Plan have been reserved for issuance to employees pursuant to the terms of
these Plans, of which 59,520 were issued under the Plans during the year ended
June 30, 1998.
F-15
<PAGE>
ILOG S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
For financial reporting purposes, income (loss) before income taxes
(benefit) includes the following components :
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
France........................................... $ (1,756) $ 952 $ (27,556)
United States.................................... (1,545) (2,622) (598)
Rest of the world................................ (1,670) (953) 119
--------- --------- ---------
Total........................................ $ (4,971) $ (2,623) $ (28,035)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Due to the Company's loss position in all countries, no current income tax
has been recorded.
A reconciliation of income taxes computed at the French statutory rate
(36.7% in 1996 and 1997, and 41.7% in 1998) to the income tax benefit is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense (benefit) computed at the
French statutory rate.......................... $ (1,822) $ (956) $ (11,655)
Operating losses not utilized.................... 1,822 956 11,480
Use of operating losses whose benefits were not
previously recognized.......................... -- -- 175
--------- --------- ---------
Total income taxes........................... $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 3,467 $ 4,300 $ 5,414
Acquired intangibles capitalized and amortized
for tax purposes............................. -- -- 24,772
Provisions and accruals not currently
deductible................................... 493 116 208
Other.......................................... 223 501 544
--------- --------- ---------
4,183 4,917 30,938
Valuation allowance.............................. (4,183) (4,917) (30,938)
--------- --------- ---------
Net deferred taxes........................... $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-16
<PAGE>
ILOG S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Due to its history of losses, the Company does not believe that sufficient
objective, positive evidence exists to conclude that recoverability of its net
deferred tax assets is more likely than not. Consequently, the Company has
provided valuation allowances covering 100% of its net deferred tax assets.
As of June 30, 1998, the Company had net operating loss carryforwards for
French tax purposes of approximately $4,348,000 of which $746,000 have no
expiration date. The remaining $3,602,000 of net operating loss carryforwards,
if not utilized, will expire in 2001. The Company also has U.S. net operating
loss carryforwards for federal and state tax purposes of approximately
$6,700,000 and $2,500,000, respectively, that expire in the years 1999 through
2012. The Company has U.K. net operating losses of approximately $2,100,000
which have no expiration date. The Company also has net operating loss
carryforwards totaling approximately $1,400,000 in various other jurisdictions.
The utilization of these net operating loss carryforwards is limited to the
future operations of the Company in the tax jurisdictions in which such
carryforwards arose.
8. EMPLOYEE RETIREMENT PLANS
The Company contributes to pensions for personnel in France in accordance
with French law by contributing based on salaries to the relevant government
agencies. There exists no actuarial liability in connection with these plans.
French law also requires payment of a lump sum retirement indemnity to employees
based upon years of service and compensation at retirement. Benefits do not vest
prior to retirement. The Company's obligation at June 30, 1997 and 1998 was
immaterial.
9. OPERATING LEASE COMMITMENTS
The Company leases its facilities and certain equipment under operating
leases that expire through 2007. Future minimum lease payments under operating
leases due for the fiscal years ending June 30 are as follows (in thousands):
<TABLE>
<S> <C>
1999................................................................... $ 2,212
2000................................................................... 1,686
2001................................................................... 1,500
2002................................................................... 1,331
2003 and thereafter.................................................... 2,581
</TABLE>
Rental expense for the years ended June 30, 1996, 1997 and 1998 was
approximately $1,479,000, $1,329,000 and $1,964,000, respectively.
10. OTHER INCOME (EXPENSE)
During the year ended June 30, 1997, the Company received a $1,096,000 grant
from an agency of the French government related to the Company's establishment
of subsidiaries outside of France which has been recorded in Other income
(expense).
F-17
<PAGE>
ILOG S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company and its subsidiaries operate in one industry segment: the
development, marketing and support of advanced software components for certain
user interface, resource optimization and data services functions that are
fundamental to the development of business applications.
Information about the Company's operations by geographic area is as follows
(in thousands):
<TABLE>
<CAPTION>
EUROPE,
UNITED EXCLUDING
FRANCE STATES ASIA FRANCE ELIMINATION CONSOLIDATED
--------- --------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996
Net revenues:
Customers............................................ 12,780 7,423 2,419 3,392 -- 26,014
Intercompany......................................... 3,565 -- -- -- (3,565) --
--------- --------- --------- ----------- ----------- ------------
16,345 7,423 2,419 3,392 (3,565) 26,014
--------- --------- --------- ----------- ----------- ------------
--------- --------- --------- ----------- ----------- ------------
Operating loss....................................... (1,567) (1,508) (396) (1,241) -- (4,712)
Identifiable assets.................................. 23,190 4,332 1,655 3,306 (13,398) 19,085
Capital expenditures................................. 349 507 7 637 -- 1,500
Depreciation and amortization........................ (778) (130) (49) (96) -- (1,053)
1997
Net revenues:
Customers............................................ 11,996 9,882 3,266 8,181 -- 33,325
Intercompany......................................... 4,371 -- -- -- (4,371) --
--------- --------- --------- ----------- ----------- ------------
16,367 9,882 3,266 8,181 (4,371) 33,325
--------- --------- --------- ----------- ----------- ------------
--------- --------- --------- ----------- ----------- ------------
Operating loss....................................... (374) (2,489) (797) (87) -- (3,747)
Identifiable assets.................................. 46,487 4,528 2,022 3,261 (14,990) 41,308
Capital expenditures................................. 107 442 486 89 -- 1,124
Depreciation and amortization........................ (337) (288) (111) (197) -- (933)
1998
Net revenues:
Customers............................................ 17,191 21,652 4,985 10,768 -- 54,596
Intercompany......................................... 7,437 -- -- -- (7,437) --
--------- --------- --------- ----------- ----------- ------------
24,628 21,652 4,985 10,768 (7,437) 54,596
--------- --------- --------- ----------- ----------- ------------
--------- --------- --------- ----------- ----------- ------------
Operating loss....................................... (25,579) (524) (58) (1,753) -- (27,914)
Identifiable assets.................................. 47,808 9,335 2,884 5,273 (21,882) 43,418
Capital expenditures................................. 270 881 232 479 -- 1,862
Depreciation and amortization........................ 509 703 140 219 -- 1,571
</TABLE>
Intercompany sales between geographic regions are accounted for at third
party selling price less a discount.
F-18
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ILOG S.A.
<TABLE>
<CAPTION>
COL. C
----------------------------------
COL. B ADDITIONAL
------------ ---------------------------------- COL. D COL. E
COL. A BALANCE AT CHARGED TO ------------ -------------
- ------------------------------------------ BEGINNING OF CHARGED TO COSTS OTHER ACCOUNTS - DEDUCTIONS - BALANCE AT
DESCRIPTION PERIOD AND EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- ------------------------------------------ ------------ ---------------- ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1996
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful accounts......... $ 39,000 $ 251,000 -- -- $ 290,000
YEAR ENDED JUNE 30, 1997
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful accounts......... $ 290,000 $ 27,000 -- $ 44,000 $ 273,000
YEAR ENDED JUNE 30, 1998
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful accounts......... $ 273,000 $ 294,000 -- $ 49,000 $ 518,000
</TABLE>
F-19
<PAGE>
AMENDMENT N0. 1 TO DEPOSIT AGREEMENT
AMENDMENT NO. 1 dated as of August 13, 1998 (the "Amendment") to the
Deposit Agreement dated as of February 13, 1997 (as so amended, the "Deposit
Agreement"), among ILOG S.A., incorporated under the laws of The Republic of
France (the "Company"), Morgan Guaranty Trust Company of New York, as
depositary (the "Depositary"), and all Holders from time to time of ADRs
issued thereunder.
W I T N E S S E T H:
WHEREAS, the Company and the Depositary executed the Deposit Agreement for
the purposes set forth therein; and
WHEREAS, pursuant to paragraph (16) of the form of ADR set forth as Exhibit
A of the Deposit Agreement, the Company and the Depositary desire to amend the
terms of the form of ADR.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Depositary
hereby agree to amend the Deposit Agreement and the form of ADR as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions. Unless otherwise defined in this Amendment, all
capitalized terms used, but not otherwise defined, herein shall have the meaning
given to such terms in the Deposit Agreement.
ARTICLE II
AMENDMENTS TO DEPOSIT AGREEMENT
SECTION 2.01. Deposit Agreement. All references in the Deposit Agreement to
the terms "Deposit Agreement" shall, as of the Effective Date (as herein
defined), refer to the Deposit Agreement, dated as of February 13, 1997, and as
amended by this Amendment.
ARTICLE III
AMENDMENTS TO THE FORM OF ADR
SECTION 3.01. Paragraph (12) of the form of ADR is amended to read as
follows:
(12) Voting of Deposited Securities. As soon as practicable after
receipt from the Company of notice of any meeting or solicitation of
consents or proxies of holders of Shares or other Deposited Securities,
the Depositary shall mail to Holders a notice stating (a) such
information as is contained in such notice and any solicitation
materials, (b) that each Holder on the record date set by the
Depositary therefor will be entitled to instruct the Depositary as to
the exercise of the voting rights, if any, pertaining to the Deposited
Securities represented by the ADSs evidenced by such Holder's ADRs and
(c) the manner in which such instructions may be given, including
instructions to give a discretionary proxy to a person designated by
the Company. Upon receipt of instructions of a Holder on such record
date in the manner and on or before the date established by the
Depositary for such purpose, the Depositary shall endeavor insofar as
practicable and permitted under the provisions of or governing
Deposited Securities to vote or cause to be voted (or to grant a
discretionary proxy to a person designated by the Company to vote) the
Deposited Securities represented by the ADSs evidenced by such Holder's
ADRs in accordance with such instructions. The Depositary will not
itself exercise any voting discretion in respect of any Deposited
Security.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties. The Company represents and
warrants to, and agrees with, the Depositary and the Holders, that:
(a) This Amendment, when executed and delivered by the Company, and the
Deposit Agreement and all other documentation executed and delivered by
the Company in connection therewith, will be and have been,
respectively, duly and validly authorized, executed and delivered by
the Company, and constitute the legal, valid and binding obligations of
the Company, enforceable against the Company in accordance with their
respective terms, subject to bankruptcy, insolvency, fraudulent
transfer, moratorium and similar laws of general applicability relating
to or affecting creditors' rights and to general equity principles; and
(b) In order to ensure the legality, validity, enforceability or
admissibility into evidence of this Amendment or the Deposit Agreement
as amended hereby, and any other document furnished hereunder or
thereunder in The Republic of France, neither of such agreements
2
<PAGE>
need to be filed or recorded with any court or other authority in The
Republic of France, nor does any stamp or similar tax need to be paid
in The Republic of France on or in respect of such agreements; and
(c) All of the information provided to the Depositary by the Company in
connection with this Amendment is true, accurate and correct.
ARTICLE V
MISCELLANEOUS
SECTION 5.01. Effective Date. This Amendment is dated as of the date set
forth above and shall be effective as of August , 1998. (the "Effective Date").
SECTION 5.02. New ADRs. From and after the Effective Date, the Depositary
may arrange to have new ADRs printed or the current form of ADRs amended that
reflect the changes to the form of ADRs effected by this Amendment. All ADRs
issued hereunder after the Effective Date, once such new ADRs are available,
whether upon the deposit of Shares or other Deposited Securities or upon the
transfer, combination or split-up of existing ADRs, shall be substantially in
the form of the specimen ADR attached as Exhibit A hereto. However, ADRs issued
prior or subsequent to the date hereof, which do not reflect the changes to the
form of ADR effected hereby, do not need to be called in for exchange and may
remain outstanding until such time as the Holders thereof choose to surrender
them for any reason under the Deposit Agreement. The Depositary is authorized
and directed to take any and all actions deemed necessary to effect the
foregoing.
SECTION 5.03. Indemnification. The parties hereto shall be entitled to the
benefits of the indemnification provisions of Section 16 of the Deposit
Agreement, as amended hereby in connection with any and all liability it or they
may incur as a result of the terms of this Amendment and the transactions
contemplated herein.
3
<PAGE>
IN WITNESS WHEREOF, the Company and the Depositary have caused this
Amendment to be executed by representatives thereunto duly authorized as of the
date set forth above.
ILOG S.A.
By /s/ Roger D. Friedberger
---------------------------
Name: Roger D. Friedberger
Title: Chief Financial Officer
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By /s/ Jordana Chutter
---------------------------
Name: Jordana Chutter
Title: Vice President
4
<PAGE>
ILOG
Societe anonyme
with a share capital of FF. 55,452,744
Registered office : 9 rue de Verdun, BP 85, 94253 Gentilly
R.C.S. Creteil B 340 852
----------------
----------------
UP-DATED BY-LAWS
August 31, 1998
certified as correct and accurate.
<PAGE>
MEMORANDUM AND ARTICLES OF ASSOCIATION
TITLE I
FORM - NAME - OBJECTS - REGISTERED OFFICE - DURATION
ARTICLE 1 - FORM
There is, between the owners of the shares hereinafter issued
and of those which could be subsequently issued, a corporation (societe
anonyme), governed by the law of July 24, 1966 on commercial companies and by
the present by-laws.
ARTICLE 2 - NAME
The name of the company is :
ILOG
In all deeds and documents emanating from the company and
addressed to third parties, this name must always be immediately preceded or
followed by the words "Societe anonyme" or the initials "S.A." and by the
mention of the amount of the capital.
ARTICLE 3 - OBJECTS
The corporate object of the company, whether directly or
indirectly, in France and its overseas territories and outside of France, is as
follows :
- the consultation and completion of research and studies
and generally all services relative to Intelligence Software;
- the development, running, distribution and maintenance of
hardware and software ;
- training in these areas of activity, including audiovisual
techniques and generally, all useful support tools ;
<PAGE>
all directly or indirectly on its own behalf or on behalf of
third parties, the sale or in conjunction with third parties, by means of the
setting-up of new companies, capital contributions, the purchase of securities,
mergers, alliances or investment companies or by lease or management lease of
any assets or rights or otherwise.
ARTICLE 4 - REGISTERED OFFICE
The registered office is at :
9 rue de Verdun, BP 85, 94253 Gentilly
It may be transferred to any other place within the same
district (departement) or any adjacent district by decision of the board of
directors subject to the ratification of this decision by the next ordinary
general meeting of the shareholders. It may be transferred to any other place
pursuant to a resolution of the extraordinary general meeting of the
shareholders.
In case of a transfer decided by the board of directors, the
board is authorized to complete the advertising and filing formalities resulting
therefrom upon the condition that it is indicated that such a transfer is
subject to the above mentioned approval.
ARTICLE 5 - DURATION
The duration of the company shall be of ninety nine (99) years
from the date of registration with the Register of Commerce and Companies,
except in the event of early dissolution or extension decided by the
extraordinary meeting of the shareholders.
*** *** ***
***
2
<PAGE>
TITLE II
CAPITAL AND SHARES
ARTICLE 6 - CAPITAL
The capital of the company is of FF.55,452,744.
It is divided into 13,863,186 shares of FF. 4 each, all
subscribed and entirely paid up.
ARTICLE 7 - FORM OF THE SHARES
Shares shall be held either in registered or bearer form, at
the shareholder' s discretion.
Shares shall be registered in an individual account opened by
the Company or any authorized intermediary, in the name of each shareholder and
hold under the terms and conditions provided under the applicable laws and
regulations.
The Company may, under the conditions provided by the
applicable regulatory and legal provisions, request to any authorized entity
communication of any information relating to the shareholders, the holders of
securities granting immediate or future voting rights, their identity and the
number of securities that they hold.
ARTICLE 8 - TRANSFER OF SHARES
Any transfer of the shares is carried out according to the
law. All costs resulting from the transfer shall be borne by the transferee.
ARTICLE 9 - RIGHTS AND OBLIGATIONS ATTACHED TO THE SHARES
The rights and obligations attached to a share follow the
share to any transferee to whom it may be transferred and the transfer includes
all the payable and unpaid dividends and dividends to be payable, as well as, as
the case may be, the corresponding share in the reserve funds and provisions.
The ownership of a share shall imply ipso facto the acceptance
of the present Memorandum and Articles of Association and of the decision of the
general meetings.
3
<PAGE>
In addition to the right to vote which is attached by law to
the shares, each share carries a right to a share of corporate assets, of
profits, and of liquidation surplus, proportional to the number and nominal
value of the existing shares.
Each time it shall be necessary to hold a certain number of
shares in order to exercise a right, it will up be to the shareholder(s) missing
such number to take the necessary actions to group a sufficient number of
shares.
The company may require the repurchase, subject to the
conditions set forth in article 269-8 of the law of 24th July 1966, either of
all of its shares with a preferential dividend and no voting right, or of a
category of such shares, each category being determined by the date at which it
has been issued.
ARTICLE 10 - PAYING UP OF THE SHARES
The amount to be paid in cash for the subscription of the
shares issued with respect to an increase of capital shall be payable according
to the terms stipulated by the extraordinary general meeting of the
shareholders.
The initial payment shall not be less than (i) one half at the
time of the subscription and (ii) one fourth of the nominal value of the shares
in case of increase in the share capital ; it shall include the whole issuing
premium, if any.
The remainder, which shall be paid-up in one or several times
within a period of five years as from the date of completion of such increase of
capital, shall be called upon by the board of directors.
Each shareholder shall be notified of the amount to be paid
and of the date at which this amount shall fall due fifteen days at least before
that date.
The shareholder who will not have paid at due date the amounts
due on his share(s) shall, automatically and without formal notice, owe to the
company an interest calculated day per day, on the basis of a year of 360 days,
commencing on due date at the legal rate in commercial matters increased by
three points, without prejudice to the personal proceedings that the company may
institute against the defaulting shareholder and to the acts of enforcement
provided by law.
*** *** ***
***
4
<PAGE>
TITLE III
MANAGEMENT OF THE COMPANY
ARTICLE 11 - BOARD OF DIRECTORS
The company is managed by a board of directors, the number of
members of which is determined by the ordinary general meeting of the
shareholders within the limits of the law.
A legal entity must, at the time of its appointment, designate
an individual who will be its permanent representative on the board of
directors. The term of office of a permanent representative is the same as that
of the director he represents. When a legal entity dismisses its permanent
representative, it must at the same time provide for its replacement. The same
applies in case of death or resignation of the permanent representative.
Each director must own at least one share during his term of
office.
If, at the time of his appointment, a director does not own
the required number of shares or if, during his term of office, he ceases to be
the owner thereof, he shall have a period of three months to purchase such
number of shares, in default of which he shall be automatically deemed to have
resigned.
The directors are appointed for a term of three years. A year
corresponds to the period of time between two successive annual ordinary general
meetings of shareholders. The duties of a director shall terminate at the close
of the ordinary general meeting of shareholders which acts on the accounts of
the preceding fiscal year and is held in the year during which the term of
office of said director comes to an end.
The members of the board are renewed in rotation so that the
renewal be as equal as possible and in any case complete for each period of
three years. Renewal takes place according to seniority. However, when required,
the ordinary general meeting may resolve that the order of renewal will be set
by a toss drawn in a board meeting.
The directors may always be re-elected ; they may be revoked
at any time by decision of the general meeting of the shareholders.
In case of death or resignation of one or several directors,
the board of directors may make provisional appointments between two meetings of
shareholders.
The appointment(s) so made have to be ratified by the next
general meeting of shareholders.
5
<PAGE>
Should the meeting of the shareholders not ratify these
provisional appointments, this shall not affect the validity of the prior
resolutions and acts of the board of directors.
When the number of directors falls below the minimum required
by law, the remaining director(s) must immediately convene the ordinary general
meeting of the shareholders, in order to complete the membership of the board of
directors.
The director appointed in replacement of another director,
whose term of office has not come to its end shall remain in office only for the
remaining term of office of his predecessor.
A salaried employee of the company may be appointed as a
director. His employment contract shall correspond to a position actually held.
In such case, he shall not lose the benefit of his employment contract.
The number of directors bound to the company by an employment
contract may not exceed one third of the directors in office.
The number of directors who are more than seventy-five (75)
years old may not exceed one third of the directors in office. Should such quota
be reached during the director's term of office, the appointment of the oldest
director would be automatically terminated at the close of the nearest general
meeting of the shareholders.
ARTICLE 12 - MEETING OF THE BOARD
12.1. The board of directors shall meet as often as required for the
interest of the company.
12.2. The meetings of the board of directors are convened by the
president. The convening may be made by any means, in oral or written form.
Moreover two directors may validly convene the board. In such
case, they shall indicate the agenda of the meeting.
When a work-committee (comite d'entreprise) has been formed,
the representatives of such committee, appointed in accordance with the
provisions of the Labor Code, shall be convened to all the meetings of the board
of directors.
The meetings of the board are held at the registered office or
at any other place, in France or abroad.
12.3. The board of directors may not transact business validly unless
at least half of its members are present.
6
<PAGE>
The resolutions of the board of directors shall be carried out
at a majority vote. In case of a split decision, the president should have a
casting vote.
It is specified that any and all decisions to grant options to
subscribe or to buy stock, pursuant to the provisions set forth in articles
208-1 et seq of the law of July 24, 1966 on commercial companies, to a director
holding an employment contract, to the President or to a general manager of the
Company, if this latter is a director, pursuant to authority granted by the
extraordinary general meeting shall be adopted by the affirmative vote of the
majority of the directors present or represented at the Board meeting, the
interested director, and any other director to whom options to subscribe or to
buy stock may be granted, being conclusively refrained from voting.
12.4. Any director may give to another director, by letter, cable or
telex, a proxy to be represented at a meeting of the board. However, each
director may only dispose of one proxy during each meeting.
12.5. The copies or abstracts of the minutes are certified by the
president of the board of directors, a general manager, the director temporarily
delegated in the duties of president or by a representative duly authorized for
that purpose.
ARTICLE 13 - POWERS OF THE BOARD
The board of directors is vested with the most extensive
powers to act under all circumstances on behalf of the company, and to make any
decisions relating to all acts of administration and disposition. The board
shall exercise these powers within the limits of the purposes of the company,
and of the powers expressly granted by law to the general meetings of the
shareholders.
ARTICLE 14 - GENERAL MANAGEMENT OF THE COMPANY
The board of directors shall elect a president, who must be an
individual, from among its members. It shall determine his term of office, which
cannot exceed that of his office as director and may dismiss him at any time.
The president of the board is responsible for the general
management of the company.
The president is vested with the most extensive powers to act
under all circumstances on behalf of the company within the limits of the goals
of the company, except for those powers expressly granted by law to the meetings
of shareholders and to the board of directors.
7
<PAGE>
The president of the board cannot be more than seventy (70)
years old. Should the president reach this age limit during his term of office
as president, his office would automatically terminate. This term may be
prolonged however until the next meeting of the board during which his successor
will be appointed. Subject to this provision, the president of the board may
always be reelected.
ARTICLE 15 - GENERAL MANAGER (Directeur General)
Upon proposal of the president, the board of directors may
appoint an individual to assist the president as general manager. The general
manager(s) may be revoked at any time by the board of directors upon proposal of
the president.
In agreement with the president, the board of directors shall
determine the scope and the duration of the powers delegated to the general
manager. When a general manager is a director, his term of office may not exceed
that of his directorship.
As regards third parties, general manager(s) have the same
powers as the president. The general manager(s) is, among others, vested with
the powers to bring a matter to court.
Any general manager cannot be more than seventy (70) years
old. Should a general manager reach this age limit during his term of office as
general manager, his duties would automatically terminate. This term may be
prolonged however until the next meeting of the board during which the new
general manager will be appointed.
The board may appoint two general managers should the share
capital be of at least five hundred thousand (500,000) francs. Five general
managers may be appointed should the share capital be of at least ten million
(10,000,000) francs, provided that at least three of them are directors.
ARTICLE 16 - AGREEMENTS SUBJECT TO AUTHORIZATION
16.1. Any sureties, endorsements and guarantees granted by the company
must be authorized by the board of directors as provided by law.
16.2. Any agreement to be entered into between the company and one of
its directors or general manager(s), whether directly or indirectly or through
an intermediary, must be submitted for the prior authorization of the board of
directors.
Such prior authorization is also required for agreements
between the company and another enterprise, should one of the directors or
general managers of the company be owner, partner with unlimited liability,
manager, director, general manager, member of the management committe
(directoire) or supervisory council (conseil de surveillance) of said
enterprise.
8
<PAGE>
Such prior authorization shall be sought as provided by law.
It is however specified that the relevant director(s) will be taken into account
to calculate the quorum but that their vote will not be taken into account to
determine the majority.
ARTICLE 17 - PROHIBITED AGREEMENTS
Directors, other than legal entities, are forbidden to
contract loans from the company in any form whatsoever, to secure an overdraft
from it, as a current account or otherwise, and to have the company guarantee or
secure their commitments toward third parties.
The same prohibition applies to general managers and to the
permanent representatives of legal entities which are directors. It also applies
to spouses, ascendants and descendants of the persons referred to in this
article, as well as to all interposed persons.
ARTICLE 18 - STATUTORY AUDITORS (Commissaires aux comptes)
Audits of the company shall be carried out, as provided by
law, by one or more statutory auditors legally entitled to be elected as such.
When the conditions provided by law are met, the company must appoint at least
two supervisory auditors.
The statutory auditor(s) shall be appointed by the ordinary
general meeting.
One or more deputy statutory auditors, who may be called to
replace the regular statutory auditors in the case of death, disability,
resignation or refusal to act of the latter, shall be appointed by an ordinary
general meeting.
Should the general ordinary meeting of the shareholders fail
to elect a statutory auditor, any shareholder can claim in court that one be
appointed, provided that the President of the board of directors be duly
informed. The term of office of the statutory auditor appointed in court will
end upon the appointment of the statutory auditor(s) by the general ordinary
meeting of the shareholders.
*** *** ***
***
9
<PAGE>
TITLE IV
MEETINGS OF SHAREHOLDERS
ARTICLE 19
The general meetings of shareholders shall be convened and
held as provided by law.
The meetings of shareholders are held at the registered office
or at any other place mentioned in the convening notices.
The right to take part in a general meeting of shareholders is
subject to the registration of the shareholder in the shareholders' accounts of
the Company at least one business day prior to the date of the meeting.
In accordance with the law, a shareholder who cannot attend
the meeting in person may choose either :
- to give a proxy to another shareholder or to his/her spouse,
or
- to vote by mail, or
- to send to the company a proxy without any indication of the
name of the representative;
within the terms and conditions provided by law.
A meeting of the shareholders is presided over by the
president of the board of directors or in his absence, by a director specially
authorized for that purpose by the board. If no president has been appointed,
the meeting elects its president.
The two members of the meeting having the greatest number of
votes and who accept that role, are appointed as scrutineers. The officers of
the meeting appoint a secretary, who may be a non-shareholder.
An attendance sheet is drawn up, in accordance with the law.
The ordinary general meeting of the shareholders, upon first
convening notice, may transact business validly only if the shareholders
present, or represented by proxy, hold at least one fourth of the voting shares.
Upon second convening notice, it may transact business validly whatever the
number of shareholders present or represented by proxy.
The resolutions shall be carried out at the majority vote of
the shareholders, present or represented.
10
<PAGE>
The extraordinary general meetings of the shareholders, upon
first convening notice, may transact business validly only if the shareholders
present, or represented by proxy, hold at least one third of the voting shares.
Upon second convening notice, it may transact business validly only if the
shareholders present or represented by proxy hold at least one fourth of the
voting shares.
The resolutions shall be carried out at a two third majority
vote of the shareholders, present or represented.
The copies or abstracts of the minutes of the meetings are
certified by the president of the board of directors, by a director acting as
general manager, or by the secretary of the meeting.
The ordinary and extraordinary meetings of shareholders
exercise their respective powers as provided by law.
*** *** ***
***
11
<PAGE>
TITLE V
RESULTS OF THE COMPANY
ARTICLE 20 - FINANCIAL YEAR
Each financial year is of one year beginning on 1st July and
ending on 30th June.
ARTICLE 21 - PROFITS - LEGAL RESERVE FUNDS
Out of the profit of a financial year, reduced by prior losses
if any, an amount equal to at least 5 % thereof is first deducted in order to
form the legal reserve fund provided by law. This deduction is no longer
required when the legal reserve fund amounts to one tenth of the capital of the
company.
Distributable profit is the profit of a financial year,
reduced by prior losses and by the deduction provided for in the preceding
paragraph and increased by the profits carried forward.
ARTICLE 22 - DIVIDENDS
If there results a distributable profit from the accounts of
the financial year, as approved by the general meeting, the general meeting may
decide to allocate it to one or several reserve funds, the appropriation or use
of which it shall determine, or to carry it forward or to distribute it as
dividends.
Furthermore, after having established the existence of
reserves which it may dispose of, the general meeting may decide the
distribution of amounts paid out of such reserves. In such case, the payments
shall be made. However, the dividends shall be set off by priority on the
distributable profit of the financial year.
The general meeting shall determine the terms of payment of
dividends ; failing such determination, these terms shall be determined by the
board of directors.
However, the dividends must be declared payable no more than
nine months following the close of the financial year.
The general meeting deciding upon the accounts of a financial
year will be entitled to grant to each shareholder, for all or part of the
distributed dividends, an option between payment in cash or in shares.
12
<PAGE>
Similarly, should the ordinary general meeting resolve the
distribution of interim dividends pursuant to article 347 of the law of 24th
July 1966, it will be entitled to grant to each shareholder an interim dividend
and, for whole or part of the said interim dividend, an option between payment
in cash or in shares.
The offer of payment in shares, the price and the conditions
as to the issuing of such shares, together with the request for payment in
shares and the conditions of the completion of the capital increase will be
governed by the law and regulations.
When a balance sheet, drawn up during, or at the end of the
financial year, and certified by the supervisory auditor, shows that the
company, since the close of the preceding financial year, after having made the
necessary depreciations and provisions and after deduction of the prior losses,
if any, as well as of the amounts which are to be allocated to the reserve fund
provided by law or by the by-laws, has made profits, the board of directors may
resolve the distribution of interim dividends prior to the approval of the
accounts of the financial year, and may determine the amount thereof and the
date of such distribution. The amount of such interim dividends cannot exceed
the amount of the profits as defined in this paragraph. In this case, the option
described in the preceding paragraph shall not be available.
*** *** ***
***
13
<PAGE>
TITLE VI
DISSOLUTION - LIQUIDATION
ARTICLE 23 - PREMATURE DISSOLUTION
An extraordinary general meeting may at any time declare the
dissolution of the company before the expiration of its stated duration under
the present Memorandum and Articles of Association.
ARTICLE 24 - LOSS OF ONE HALF OF THE CAPITAL OF THE COMPANY
If, as a consequence of losses showed by the company's
accounts, the net assets (capitaux propres) of the company are reduced below one
half of the capital of the company, the board of directors must, within four
months from the approval of the accounts showing this loss, convene an
extraordinary general meeting of shareholders in order to decide whether the
company ought to be dissolved before its statutory term.
If the dissolution is not declared, the capital must, at the
latest at the end of the second fiscal year following the fiscal year during
which the losses were established and subject to the legal provisions concerning
the minimum capital of societes anonymes, be reduced by an amount at least equal
to the losses which could not be charged on reserves, if during that period the
net assets have not been restored up to an amount at least equal to one half of
the capital.
In the absence of a meeting of shareholders, or in the case
where the company has not been able to validly act, any interested party may
institute legal proceedings to dissolve the company.
ARTICLE 25 - EFFECT OF THE DISSOLUTION OF THE COMPANY
The company is in liquidation as soon as it is dissolved for
any reason whatsover. It continues to exist as a legal entity for the needs of
this liquidation until the liquidation is completed.
During the period of the liquidation, the general meeting
shall retain the same powers it exercised during the life of the company.
The shares shall remain transferable until the completion of
the liquidation proceedings.
The dissolution of the company is only valid vis a vis third
parties as from the date at which it is published at the register of commerce.
14
<PAGE>
ARTICLE 26 - APPOINTMENT OF LIQUIDATORS - POWERS
Upon the expiration of the term of existence of the company or
in the case of its premature dissolution, the meeting of the shareholders shall
decide the method of liquidation and appoint one or several liquidators whose
powers it will determine. The liquidator(s) will exercise their duties according
to the law. The appointment of the liquidator(s) terminates the offices of the
directors.
ARTICLE 27 - LIQUIDATION - CLOSING
After payment of the liabilities, the remaining assets shall
be used first for the payment to the shareholders of the amount paid for their
shares and not amortized.
The balance, if any, shall be divided among all the
shareholders.
The shareholders shall be convened at the end of the
liquidation in order to decide on the final accounts, to discharge the
liquidator from liability for his acts of management and the performance of his
office, and to take notice of the closing of the liquidation.
The closing of the liquidation is published as provided by
law.
*** *** ***
***
15
<PAGE>
TITLE VII
NOTIFICATIONS
ARTICLE 28 - NOTIFICATIONS
All notifications provided for in the present Memorandum and
Articles of Associations shall be made either by registered mail with
acknowledgment of receipt or by process server. Simultaneously a copy of the
notification shall be sent to the recipient by ordinary mail.
*** *** ***
***
<PAGE>
EXHIBIT 2
Lease of Premises, Gentilly France
(English Summary of Principal Terms)
Parties: Caisse des Depots et Consignations (Lessor) and ILOG S.A. (Lessee).
Space: 18,000 square feet + 32 indoor parkings and 5 outdoor parkings
Date of Commencement: 10,000 square feet - February 1, 1998
8,000 square feet - October 1, 1998
Use: Administrative and commercial offices.
Rent: FF 1,814,500 per annum.
Incidental Charges: FF75,000 per quarter.
Guarantee: FF2,350,000
Term: Nine years, subject to notice of termination by Lessee at the end of
each three year period, six months prior to the end of the relevant period.
Lessee's right to give notice at the end of the first three year period is
waived.
Maintenance and Repairs: Responsibility of Lessee through term of lease.
Assignment: Consent of Lessor required except in the event of the
acquisition of the business of Lessee. Lessee to remain jointly and
severally liable with sub-lessee for fulfillment of terms and conditions of
lease.
Sub-Leasing: Consent of Lessor required and Lessee to remain jointly and
severally liable for fulfillment of terms and conditions of lease.
Cancellation: By Lessor in the event of non-fulfillment of any term of the
lease.
<PAGE>
SUBSCRIPTION AGREEMENT
Dated as of June 29, 1998
Between
ILOG S.A.
and
SAP Aktiengesellschaft
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C> <C>
SECTION 1................................................Subscription for Ordinary Shares 1
1.1 Sale of Ordinary Shares......................................................1
1.2 Closing Date.................................................................1
1.3 Delivery.....................................................................1
1.4 Legend.......................................................................2
SECTION 2...................................Representations and Warranties of the Company 2
2.1 Organization.................................................................2
2.2 Capitalization...............................................................2
2.3 Authorization................................................................3
2.4 No Conflict..................................................................3
2.5 Accuracy of Reports..........................................................4
2.6 Governmental Consents, etc...................................................4
2.7 Litigation...................................................................4
2.8 Disclosure...................................................................4
2.9 No Material Loss.............................................................4
2.10 Intellectual Property........................................................4
2.11 Title to Property............................................................5
2.12 Compliance with Law, etc.....................................................5
2.13 Material Agreements..........................................................5
SECTION 3.................................Representations and Warranties of the Purchaser 6
3.1 Subscription for Own Account.................................................6
3.2 Disclosure of Information....................................................6
3.3 Accredited-Investor Status...................................................6
3.4 Restricted Shares............................................................6
3.5 Organization.................................................................6
3.6 Authority....................................................................7
3.7 No Conflict..................................................................7
3.8 Governmental Consents, etc...................................................7
SECTION 4................................Conditions Precedent to Obligations of Purchaser 7
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
4.1 Closing.......................................................................7
SECTION 5...................................Conditions Precedent to Obligations of Company 8
5.1 Closing.......................................................................8
SECTION 6.........................................................Covenants of the Company 9
6.1 Other Strategic Investors.....................................................9
6.2 Right to Maintain............................................................11
6.3 Shareholder Meeting Approval.................................................11
6.4 Preemptive Rights............................................................11
6.5 Piggy Back Rights............................................................11
SECTION 7.......................................................Covenants of the Purchaser 12
7.1 Limitation on Ownership of Voting Stock......................................12
7.2 Voting.......................................................................12
7.3 Acts in Concert with Others..................................................13
7.4 Confidential Information.....................................................13
7.5 Approval of Supervisory Board................................................13
SECTION 8....................................................................Miscellaneous 14
8.1 Termination of Agreement.....................................................14
8.2 Governing Law................................................................14
8.3 Survival.....................................................................14
8.4 Successors and Assigns.......................................................14
8.5 Entire Agreement; Amendment..................................................14
8.6 Notice And Dates.............................................................15
8.7 Further Assurances...........................................................16
8.8 Counterparts.................................................................16
8.9 Severability.................................................................16
8.10 Captions.....................................................................17
8.11 Public Statements............................................................17
8.12 Brokers......................................................................17
8.13 Attorney's Fees..............................................................17
8.14 Costs and Expenses...........................................................17
8.15 No Third Party Rights........................................................17
8.16 Competing Business Interests.................................................17
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
iii
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
Exhibit A Bulletin de Souscription
Exhibit B Ordre de Mouvement
Exhibit C List of Documents Filed with the SEC
Exhibit D ILOG Press Releases Published from January 1997
Exhibit E Draft Form of SSMD&G's Opinion Letter
Exhibit F Draft Form of WSGR's Opinion Letter
</TABLE>
iv
<PAGE>
Exhibit 3
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this "Agreement") is made as of June 29,
1998, between ILOG S.A., a French societe anonyme ("ILOG" or the "Company"), and
SAP Aktiengesellschaft, a German corporation (the "Purchaser").
SECTION 1
Subscription for Ordinary Shares
1.1 Sale of Ordinary Shares. Subject to the terms and conditions and in
reliance on the representations and warranties set forth herein, the Company
agrees to issue 685,064 shares (the "Shares") of the Company's ordinary shares,
par value 4.00 French Francs per share to the Purchaser, and the Purchaser will
subscribe and pay for the Shares at a subscription price determined as set forth
below at the Closing, as defined below. The Shares will be deposited by and at
the expense of the Company pursuant to the Depositary Agreement referred to in
Section 4.1(g) below and delivered to the Purchaser in the form of American
Depositary Shares (the "ADSs"). The total subscription price shall be payable in
French Francs equivalent to U.S.$10,490,042.50, determined at the noon exchange
rate in effect on the business day preceding the Closing Date as quoted by the
Federal Reserve Bank of New York. The subscription price per share will be such
French Franc equivalent, divided by 685,064 and rounded up to the nearest
centime.
1.2 Closing Date. The closing of the subscription for the Shares (the
"Closing") will be held at the registered office of the Company, 9 rue de
Verdun, 94253 Gentilly, France, at 11:30 a.m. on June 29, 1998 following the
satisfaction of all closing conditions set forth in Sections 4 and 5 hereof, or
at such other time and place as the Company and the Purchaser shall mutually
agree but in no event later than June 30, 1998 (the date of the Closing is
hereinafter referred to as the "Closing Date").
1.3 Delivery. On the Closing Date, the Purchaser will execute a
subscription form ("bulletin de souscription") in the form provided under
Exhibit A and will pay by way of wire transfer to the account of the Company at
Societe Generale, Agence Paris Madeleine, 11 Boulevard Malesherbes, 75008 Paris,
France, to the attention of Madame Marie-Claire Caillez, Code Banque 30003, Code
Guichet 03030, Numero de Compte 00243090272, RIB 08, (the "Bank"), acting as
depositary in respect of the issue of the Shares, the total subscription price
in French Francs. Upon evidence of such wire transfer and issuance by the Bank
of the corresponding "certificat du depositaire des fonds," the Company will
register the Shares in book-entry form in the name of the Purchaser, and the
Purchaser by executing a transfer form provided under Exhibit B, and the
Company, as required, will take such actions to permit the Shares to be
deposited with the Depositary in the name of the Purchaser, in the form of ADSs.
The Company shall cause Morgan Guaranty Trust Company of New York (the
"Depositary") to furnish to the Purchaser on the Closing Date an ADR certificate
satisfactory to Purchaser evidencing the fact that the Shares have been
<PAGE>
deposited with it in the form of ADSs pursuant to the deposit agreement dated as
of February 13, 1997, between the Company and the Depositary (the "Depositary
Agreement").
1.4 Legend. The certificate for the ADSs representing the Shares shall
be subject to a legend restricting transfer under the United States' Securities
Act of 1933 (the "Securities Act"), such legend to be substantially as follows:
"The shares represented by this certificate have been
acquired for investment and have not been registered under the
Securities Act of 1933 (the "Securities Act") in reliance on
the exemption from registration provided by Section 4(2) of
the Securities Act and Regulation D promulgated thereunder.
Such shares may not be sold or transferred in the absence of
such registration or an opinion of counsel satisfactory to the
Company as to the availability of an exemption from
registration."
SECTION 2
Representations and Warranties of the Company
2.1 Organization. The Company and its subsidiaries are corporations
duly organized and validly existing under the laws of their jurisdictions of
organization and are in good standing under such laws. The Company and its
subsidiaries have requisite corporate power and authority to own, lease and
operate their properties and assets, and to carry on their businesses as
presently conducted and as presently proposed to be conducted. The Company and
its subsidiaries are qualified to do business as foreign corporations in each
jurisdiction in which the ownership of their properties or the nature of their
businesses require such qualification, except where failure to so qualify would
not have a material adverse effect on the Company and its subsidiaries taken as
a whole.
2.2 Capitalization. The issued and outstanding capital stock of ILOG
consists, as of the close of business on May 31, 1998, of 13,027,260 ordinary
shares, 4.00 French Francs par value per share. Since the close of business on
May 31, 1998, no ordinary shares of ILOG capital stock have been issued except
pursuant to the exercise of options outstanding under the ILOG Stock Option Plan
(as defined below) and except under the ILOG Employee Stock Plans (as defined
below). As of the close of business on May 31, 1998, there were no other
outstanding commitments to issue any shares of capital stock or voting
securities of ILOG or options, warrants, calls, rights, conversion privileges or
other similar contractual rights to purchase or otherwise acquire any ordinary
shares or other securities other than up to 200,000 ordinary shares which may be
issued in connection with two acquisitions currently under discussion and other
than pursuant to the exercise of options outstanding as of May 31, 1998 under
the 1996 Stock Option Plan of ILOG (the "ILOG Stock Option Plan") and pursuant
to the 1996 International Employee Stock Purchase Plan and the 1996 French
Employee Savings Plan (collectively, the "ILOG Employee Stock Plans"). All
outstanding ordinary shares of ILOG have been duly authorized, validly issued,
fully paid and are free of any liens or encumbrances other than any liens or
encumbrances imposed upon the holders thereof by operation of law. As of the
close of business on May 31, 1998, ILOG has reserved 3,567,356 shares for
issuance to employees, directors and independent contractors pursuant to the
ILOG Stock Option
2
<PAGE>
Plan, net of exercises, cancellations, repurchases and expiration of options of
which, as of the close of business on May 31, 1998, 2,976,741 ordinary shares
were subject to outstanding, unexercised options and 590,615 ordinary shares
remained available for future grant. Other than pursuant to this Agreement, the
ILOG Stock Option Plan and the ILOG Employee Stock Plans or with respect to the
acquisitions currently under discussion as set forth above, there are no other
options, warrants, calls, rights, commitments, conversion privileges or
agreements of any character to which ILOG is a party or by which ILOG is bound
obligating ILOG to issue, deliver, sell, repurchase or redeem, or cause to be
issued, delivered, sold, repurchased or redeemed directly or indirectly, any
ordinary shares of stock of ILOG or obligating ILOG to grant, extend or enter
into any such option, warrant, call, right, commitment or agreement.
2.3 Authorization. The Company has all corporate rights, power and
authority to enter into this Agreement and subject to the Shareholder Meeting
Approval and Acknowledgment (as defined below) to consummate the transactions
contemplated hereby. As of the date hereof, all corporate action on the part of
the Company, its directors and shareholders necessary for the authorization,
execution, delivery and performance of this Agreement by the Company, the
authorization, issuance and delivery of the Shares and the performance of the
Company's obligations hereunder has been taken other than (i) the authorization
to increase the share capital and to waive the shareholders' pre-emptive rights
(droits preferentiels de souscription) in favor of SAP and consequently to issue
the Shares, which authorization and waiver must be granted at a meeting of
shareholders (the "Shareholder Meeting Approval"), and (ii) the acknowledgment
of the final subscription price in French Francs by the Board of Directors (the
"Acknowledgment"). This Agreement has been duly executed and delivered by the
Company and, upon the obtaining of the Shareholder Meeting Approval and the
Acknowledgment, will constitute a legal, valid and binding obligation of the
Company enforceable in accordance with its terms, subject to laws of general
application relating to bankruptcy or insolvency. Upon receiving the Shareholder
Meeting Approval, the Acknowledgment and the "certificat du depositaire des
fonds," and the issuance and delivery of the Shares and the ADSs pursuant to
this Agreement, the Shares and the ADSs will be validly issued, fully paid and
free and clear of any liens or encumbrances other than the restrictions on
transfer provided for in Section 1.4 hereof. Upon obtaining the Shareholder
Meeting Approval and the Acknowledgment, the issuance of the Shares will not
violate or give rise to any preemptive rights or rights of first refusal on
behalf of any person.
2.4 No Conflict. The execution of this Agreement does not, and the
consummation of the transactions contemplated hereby will not, conflict with, or
result in any violation of, or default (with or without notice or lapse of time,
or both), or give rise to a right of termination, cancellation or acceleration
of any obligation or to a loss of a material benefit, under, any provision of
the Statuts of the Company or its subsidiaries or any mortgage, indenture, lease
or other agreement or instrument, license, judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to the Company or its
subsidiaries, or any of their respective properties or assets, the effect of
which would have a material adverse effect on the Company and its subsidiaries,
taken as a whole, or materially impair or restrict the Company's power to
perform its obligations as contemplated hereby.
3
<PAGE>
2.5 Accuracy of Reports. All reports required to be filed by the
Company on or after January 1, 1997 under the Securities Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), have been duly filed,
were in substantial compliance with the requirements of their respective forms,
were complete and correct in all material respects as of the dates at which the
information was furnished, and contained (as of such dates) no untrue statement
of a material fact nor omitted to state a material fact necessary in order to
make the statements made therein in light of the circumstances under which they
were made not misleading. The financial statements contained in such reports are
complete and correct, are in accordance with the books and records of the
Company, present fairly the financial condition and results of operations of the
Company and its subsidiaries, as at the dates and for the periods indicated, and
have been prepared in accordance with generally accepted accounting principles
in the United States of America, applied on a consistent basis throughout the
periods involved. Attached as Exhibit C is a list of all reports filed under the
Securities Act or the Exchange Act by the Company on or after January 1, 1997.
2.6 Governmental Consents, etc. No consent, approval or authorization
of or designation, declaration or filing with any governmental authority on the
part of the Company is required in connection with the valid execution and
delivery of this Agreement, or the offer or issuance of the Shares, or the
consummation of any other transaction contemplated hereby.
2.7 Litigation. There is not pending or, to the best of the Company's
knowledge, threatened, any lawsuit, administrative proceeding, arbitration,
labor dispute or governmental investigation ("Litigation") to which the Company
is a party or by which any material portion of its assets taken as a whole may
be bound, and which Litigation if adversely determined would have a material
adverse effect on the Company or which challenges or relates in any way to the
transactions contemplated by this Agreement.
2.8 Disclosure. No representation or warranty of the Company contained
in this Agreement or in any press release issued by the Company after January 1,
1997 and listed on Exhibit D attached hereto (the "Press Releases")
(individually or when read together and taken as a whole), contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein or therein in light of the
circumstances under which they were made not misleading.
2.9 No Material Loss. Other than as disclosed in its Press Releases, or
in reports filed by the Company under the Securities Act or the Exchange Act,
since June 30, 1997, neither the Company nor any of its subsidiaries has
sustained any material loss to or adverse change in its business, nor has there
occurred any development or event which involves or would involve a prospective
material adverse change in, or which affects or would affect the condition
(financial or otherwise), earnings, properties, shareholders' equity, results of
operations, business or prospects of the Company and its subsidiaries, taken as
a whole, since June 30, 1997.
4
<PAGE>
2.10 Intellectual Property. The Company and its subsidiaries each own,
or have the right to use under any licensing agreements and any confidentiality
agreements, all patents, patent applications, trademarks, service marks,
trademark and service mark applications, trade names and copyright registrations
presently used by the Company or any of its subsidiaries or necessary for the
conduct of the Company's or any of its subsidiaries' respective businesses as
conducted and as presently proposed to be conducted (the "Intellectual Property
Rights") and have taken, to the best of their knowledge, all actions reasonably
necessary to protect their Intellectual Property Rights. To the knowledge of the
Company, the businesses conducted by the Company or any of its subsidiaries have
not caused and do not cause the Company or any of its subsidiaries to infringe
or violate any of the patents, trademarks, service marks, trade names,
copyrights, licenses, trade secrets or other intellectual property rights of any
other person or entity. For purposes of this Section 2.10, the Purchaser
acknowledges that the Company's knowledge is based on current actual knowledge
after due inquiry.
2.11 Title to Property. The Company and its subsidiaries have good and
marketable title, as legal owner, to all real property and good and marketable
title to all personal property owned by them, except where the failure to have
good and marketable title to such real and personal property would not have a
material adverse effect on the financial position, shareholders' equity, results
of operations, business or prospects of the Company and its subsidiaries, taken
as a whole, in each case free and clear of all liens, encumbrances and defects
except such as do not materially affect the value of such property and do not
interfere in any material respect with the use made and proposed to be made of
such property by the Company or its subsidiaries, as the case may be; and any
real property and buildings held under lease by the Company or its subsidiaries
are held by them under valid, subsisting and enforceable leases with such
exceptions as are not material to the Company and its subsidiaries, taken as a
whole, and do not interfere in any material respect with the use made and
proposed to be made of such property and buildings by the Company or its
subsidiaries, as the case may be.
2.12 Compliance with Law, etc. The Company and each of its subsidiaries
have, in all material respects, complied with all material laws, regulations and
orders applicable to their respective present businesses and have all material
permits and licenses required thereby. There is no term or provision of any
mortgage, indenture, contract, agreement or instrument to which the Company or
any of its subsidiaries is a party or by which any of them is bound, or any
provision of any state or federal judgment, decree, order, statute, rule or
regulation applicable to or binding upon the Company or any of its subsidiaries,
which in their opinion materially adversely affects the business, assets or
condition, financial or otherwise, of the Company and its subsidiaries, taken as
a whole.
2.13 Material Agreements. Other than as already disclosed in reports
filed by the Company under the Securities Act, the Exchange Act or in the
Company's Press Releases, there is no: (a) agreement between the Company and any
stockholder, officer or director of the Company; (b) material agreement relating
to the Intellectual Property Rights; or (c) any other agreement which is
material to the businesses of the Company and its subsidiaries which would be
required to be disclosed in reports to be filed by the Company under the
Securities Act, the Exchange Act or in
5
<PAGE>
Press Releases. All of the agreements so disclosed are valid, binding and in
full force and effect, and the Company is not in default under, or in violation
of any material term of, any such agreement.
SECTION 3
Representations and Warranties of the Purchaser
The Purchaser hereby represents and warrants to the Company as follows:
3.1 Subscription for Own Account. The Shares to be subscribed for by
Purchaser hereunder will be subscribed for investment for such Purchaser's own
account, not as a nominee or agent, and not with a view to the public resale or
distribution thereof within the meaning of the Securities Act, and Purchaser has
no present intention of selling, granting any participation in, or otherwise
distributing the same. Purchaser also represents that it has not been formed for
the specific purpose of subscribing for the Shares.
3.2 Disclosure of Information. Purchaser has received or has had full
access to all the information it considers necessary or appropriate to make an
informed investment decision with respect to the Shares to be subscribed for by
Purchaser under this Agreement. Purchaser further has had an opportunity to ask
questions and receive answers from the Company regarding the terms and
conditions of the offering of the Shares and to obtain additional information
(to the extent the Company possessed such information or could acquire it
without unreasonable effort or expense) necessary to verify any information
furnished to Purchaser or to which Purchaser had access. The foregoing, however,
does not in any way limit or modify the representations and warranties made by
the Company in Section 2.
3.3 Accredited-Investor Status. Purchaser is an "accredited investor"
within the meaning of Regulation D promulgated under the Securities Act.
3.4 Restricted Shares. Purchaser understands that the Shares are
characterized as "restricted securities" under the Securities Act in that they
are being acquired from the Company in a transaction not involving a public
offering and that under the Securities Act and applicable regulations thereunder
such Shares may be resold without registration under the Securities Act only in
certain limited circumstances. Without limiting the foregoing, Purchaser
understands that the Shares are not being subscribed for by it in reliance on
Regulation S promulgated pursuant to the Securities Act, and that the resale
restrictions provided for in Regulation S will not be applicable to the resale
of the Shares. In this connection, Purchaser represents that it is familiar with
Rule 144 of the U.S. Securities and Exchange Commission, as presently in effect,
and understands the resale limitations imposed thereby and by the Securities
Act. Purchaser understands that the Company is under no obligation to register
any of the Shares sold hereunder except as set forth in Section 6.5 hereof.
3.5 Organization. The Purchaser is a corporation duly organized and
validly existing and in good standing under the laws of the jurisdiction of its
organization, with all requisite corporate
6
<PAGE>
power and authority to own, lease and operate its properties and assets and to
carry on its business as presently conducted and as proposed to be conducted.
3.6 Authority. The Purchaser has all corporate rights, power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. Subject to the approval of the Purchaser's Supervisory
Board, the execution and delivery of this Agreement by the Purchaser and the
consummation by the Purchaser of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on behalf of the Purchaser.
Subject to the approval of the Purchaser's Supervisory Board, this Agreement has
been duly executed and delivered by the Purchaser and constitutes a legal, valid
and binding obligation of the Purchaser, enforceable in accordance with its
terms, subject to laws of general application relating to bankruptcy, insolvency
and the relief of debtors and rules of law governing specific performance,
injunctive relief or other equitable remedies.
3.7 No Conflict. The execution and delivery of this Agreement does not,
and the consummation of the transactions contemplated hereby will not, conflict
with, or result in any violation of or default (with or without notice, lapse of
time or both) of any obligation under any provision of the articles of
incorporation or by-laws (or corresponding instruments) of the Purchaser or any
mortgage, indenture, lease or other agreement or instrument, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
Purchaser or its properties or assets.
3.8 Governmental Consents, etc. No consent, approval or authorization
of or designation, declaration or filing with any governmental authority on the
part of the Purchaser is required in connection with the valid execution and
delivery of this Agreement, or the purchase of the Shares, or the consummation
of any transaction contemplated hereby.
SECTION 4
Conditions Precedent to Obligations of Purchaser
4.1 Closing. The Purchaser's obligation to subscribe for the Shares at
the Closing is subject to the fulfillment on or prior to the Closing Date of the
following conditions:
(a) Representations and Warranties Correct. The representations
and warranties made by the Company in Section 2 hereof shall be true and
correct in all material respects when made, and shall be true and correct in
all material respects on the Closing Date with the same force and effect as
if they had been made on and as of said date.
(b) Covenants. All covenants, agreements and conditions
contained in this Agreement to be performed by the Company on or prior to the
Closing Date shall have been performed or complied with in all material
respects.
(c) Opinion of Company's Counsel. The Purchaser shall have
received from Stibbe Simont Monahan Duhot & Giroux, French counsel to the
Company, an opinion addressed to
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it, dated the Closing Date, in substantially the form of Exhibit E and from
Wilson Sonsini Goodrich & Rosati, United States counsel to the Company, an
opinion addressed to it, dated the Closing Date, in substantially the form of
Exhibit F.
(d) No Order Pending. There shall not then be in effect any
order enjoining or restraining the transactions contemplated by this
Agreement.
(e) No Law Prohibiting or Restricting the Subscription of the
Shares or Delivery of ADSs. There shall not be in effect any law, rule or
regulation prohibiting or restricting the subscription for the Shares or the
delivery thereof in the form of ADSs or requiring any consent or approval of
any person which shall not have been obtained to issue or purchase the Shares
or to deliver the ADSs.
(f) Compliance Certificate. The Company shall have delivered to
the Purchaser a certificate, executed on behalf of the Company by an officer
of the Company, dated the Closing Date, and certifying to the fulfillment of
the conditions specified in Sections 4.1(a) and 4.1(b).
(g) Shareholder Meeting Approval and Acknowledgment. The
Shareholder Meeting Approval shall have been obtained from the shareholders
of the Company at a meeting of the shareholders of the Company and the
Acknowledgment shall have been obtained from the Board of Directors of the
Company pursuant to the statuts of the Company and in accordance with French
law and the Purchaser shall have received a certified copy of each of the
following documents: (1) the minutes of the meeting of the Board of Directors
which decided to submit to the shareholders the proposed capital increase,
and call an extraordinary meeting of the shareholders, (2) the report of the
Board of Directors to the shareholders, (3) the report of the statutory
auditors to the shareholders, (4) the minutes of the extraordinary meeting of
the shareholders containing the Shareholder Meeting Approval, (5) the minutes
of the meeting of the Board of Directors held to acknowledge the final
subscription price in French Francs, (6) the complementary report of the
Board of Directors to the shareholders , and (7) the complementary report of
the statutory auditors to the shareholders.
(h) Supervisory Board Approval. The approval of the Supervisory
Board of the Purchaser of the transactions contemplated hereby shall have
been obtained.
(i) Constituent Documents. The Purchaser shall have received a
certified copy of (i) the articles of association (statuts) of the Company as
in effect on the Closing Date, and (ii) excerpts from the French register of
commerce (extraits K-bis) for the Company dated not more than three months
prior to the Closing Date.
SECTION 5
Conditions Precedent to Obligations of Company
5.1 Closing. The Company's obligation to issue the Shares at the
Closing is subject to the fulfillment on or prior to the Closing Date of the
following conditions:
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(a) Representations and Warranties Correct. The representations
and warranties made by the Purchaser in Section 3 hereof shall be true and
correct in all material respects on the Closing Date with the same force and
effect as if they had been made on and as of said date.
(b) Covenants. All covenants, agreements and conditions
contained in this Agreement to be performed by the Purchaser on or prior to
the Closing Date shall have been performed or complied with in all material
respects.
(c) No Order Pending. There shall not then be in effect any
order enjoining or restraining the transactions contemplated by this
Agreement.
(d) No Law Prohibiting or Restricting the Subscription of the
Shares or Delivery of the ADSs. There shall not be in effect any law, rule or
regulation prohibiting or restricting the subscription for the Shares or the
delivery thereof in the form of ADSs or requiring any consent or approval of
any person which shall not have been obtained to issue or purchase the Shares
or to deliver the ADSs.
(e) Compliance Certificate. The Purchaser shall have delivered
to the Company a certificate, executed on behalf of the Purchaser by an
officer of the Purchaser, dated the Closing Date, and certifying to the
fulfillment of the conditions specified in Sections 5.1(a) and 5.1(b) of this
Agreement.
(f) Shareholder Meeting Approval and Acknowledgment. The
Shareholder Meeting Approval shall have been obtained from the shareholders
of the Company at a meeting of the shareholders of the Company pursuant to
the statuts of the Company and in accordance with French law. The
Acknowledgment shall have been decided by the Board of Directors of the
Company pursuant to the statuts of the Company and in accordance with French
law.
(g) Supervisory Board Approval. The approval of the Supervisory
Board of the Purchaser of the transactions contemplated hereby shall have
been obtained.
SECTION 6
Covenants of the Company
6.1 Other Strategic Investors.
(a) Subject to Section 6.1(c), until the termination of this
Agreement in accordance with Section 8.1 hereof and so long as the Purchaser
holds at least two percent (2%) of the outstanding shares of the Company, in
the event that the Company receives or makes a proposal for a Covered
Transaction, the Company shall promptly and in any event at least ten (10)
calendar days prior to accepting such proposal or entering into any
agreement, letter of intent or similar
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understanding relating to a Covered Transaction, send a Covered Transaction
Notice to the Purchaser. During such ten (10) calendar day period, the Company
will (a) negotiate in good faith with the Purchaser in connection with any good
faith competing proposal that the Purchaser may determine to make, (b) make
available to the Purchaser, within three (3) calendar days following the
Purchaser's written request, such information relating to the Company and its
subsidiaries as the Purchaser shall reasonably request in connection with a good
faith competing proposal, which information shall include, without limitation,
all of the information furnished to any of the Other Parties, and (c) advise the
Purchaser promptly of any material changes in the financial terms of the Covered
Transaction with the Other Parties provided that such notification of material
changes shall not be deemed to trigger a new Covered Transaction Notice
requirement. The management and the Board of Directors of the Company will
consider the Purchaser's counter-proposal or counter-proposals in their
reasonable business judgment and in the exercise of their fiduciary duties
provided, however, that the provisions of this Section 6 shall not in any
respect be deemed to constitute a right of first refusal and the Company's
management and Board of Directors shall be free in their sole discretion to
accept whichever proposal they consider to be in the best interests of the
Company or not to accept any proposal. In addition, it is agreed that any
publicly announced take-over bid shall not constitute a proposal for a Covered
Transaction for the purposes of this Section 6 and that, consequently in such
circumstances, the Company will be under no obligation towards the Purchaser
pursuant to this Section 6.
(b) From and after the date that the Company sends the Covered
Transaction Notice, the provisions of Sections 6.2, 7.1(a) and 7.2 hereof may
be waived by the Company's Board of Directors in its sole discretion by
written notice to the Purchaser.
(c) Any information disclosed to the Purchaser under this
Section 6 shall be deemed strictly confidential and shall not be disclosed by
the Purchaser to any person except its directors, officers and professional
advisors and those of its subsidiaries who have been requested to evaluate
such information and who shall in turn be under the same obligations of
confidentiality as the Purchaser until the earlier of (i) the date upon which
such information becomes public knowledge through no fault of SAP, (ii) the
date such information is required to be disclosed by law or a court of
competent jurisdiction or rules of any stock exchange on which the securities
of ILOG or SAP are listed, or (iii) the fourth anniversary of the date of
disclosure. The Purchaser shall not and shall use its best endeavors to
ensure that the directors, officers or professional advisors to whom it has
disclosed information regarding the proposed Covered Transaction, as the case
may be, shall not trade directly or indirectly any shares or ADSs of the
Company as long as the relevant Covered Transaction is not public information
if applicable securities laws would prohibit such trading. Any material
breach of this Section 6.1(c) shall result in the immediate termination of
the provisions of this Section 6 and any rights the Purchaser has hereunder.
The Purchaser shall indemnify and hold each of the Company, its officers and
directors harmless in respect of any adverse consequence resulting for any of
the Company, its officers and directors from any such breach.
A "Covered Transaction" shall mean a transaction proposed directly by
or to or on behalf of an entity which (or whose affiliate) is a recognized
vendor of Enterprise Resource Planning Software ("ERP") or Advance Planning
Software ("APS") for an (a) acquisition of the Company's shares or
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<PAGE>
ADSs, and/or securities convertible or exercisable into shares or ADSs, and/or
other rights to acquire shares or ADSs, in each case whether from the Company,
or from shareholders of the Company such that such party or group owns or would
own upon conversion or exercise of any such right, directly or indirectly,
shares constituting 5% or more of the then outstanding shares and ADSs of the
Company, (b) an acquisition of all or substantially all of the assets or
business of the Company, or (c) a merger, consolidation or similar combination
with the Company in which the shareholders of the Company immediately prior to
such event do not own a majority of the outstanding shares of the surviving
corporation.
A "Covered Transaction Notice" shall mean a notice setting forth (a)
the name of each other party to the Covered Transaction, including the name of
each ERP or APS vendor with which any such party may be affiliated (collectively
the "Other Party") and (b) a description of the principal financial terms of the
proposed Covered Transaction.
6.2 Right to Maintain. After the date of this Agreement, and subject to
Section 7.1, the Purchaser shall be entitled to purchase on the open market or
otherwise from shareholders additional ordinary shares such that immediately
after such purchase, Purchaser's percentage ownership in the Total Voting Power
of the Company, as defined in Section 7.1(b) below, would not exceed 4.999% of
the Total Voting Power (the "Maximum Limit"), calculated based on the Total
Voting Power of the Company as disclosed in the most recent Company filing with
the SEC, provided that, prior to making any purchase pursuant to this Section
6.2, Purchaser obtains the prior written acknowledgment of the Company's Chief
Financial Officer, who shall respond promptly, that such purchase will not cause
the Purchaser's Total Voting Power (directly or indirectly, together with any
subsidiary or parent corporation) to exceed the Maximum Limit.
6.3 Shareholder Meeting Approval. Promptly following execution of this
Agreement, the Company shall take all steps necessary for the holding of a
shareholder's meeting for the purposes of authorizing the increase of the share
capital, waiving the pre-emptive rights (droits preferentiels de souscription)
of the shareholders, and consequently the issue of the Shares and the holding of
a meeting of the Board of Directors for the purposes of acknowledging the final
subscription price in French Francs of the Shares to be subscribed by the
Purchaser.
6.4 Preemptive Rights. Nothing in this Agreement shall be deemed to
constitute a waiver of any pre-emptive rights (droits preferentiels de
souscription) which the Purchaser has under applicable French law or under the
Company's Statuts.
6.5 Piggy Back Rights. Following the expiration of the period of one
(1) year from the date of closing of this Agreement, in the event that the
Company effects any registration of its shares in an offering involving the sale
of shares by holders of registration rights, the Company will use reasonable
efforts to seek the consent of the holders of registration rights to allow the
Purchaser proportional piggy back rights on the same terms and subject to the
same conditions as the holders in such registration of shares. The Purchaser
acknowledges that the Company may not be able to obtain the required consent of
the holders of registration rights in connection with this Section 6.5.
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<PAGE>
SECTION 7
Covenants of the Purchaser
7.1 Limitation on Ownership of Voting Stock.
(a) Except as permitted under Sections 6.1 and 6.2 hereof,
unless it obtains the prior written consent of the Company as approved by the
Company's Board of Directors, the Purchaser shall not (and shall not permit
any subsidiary or parent corporation to directly or indirectly) acquire
beneficial ownership of any Voting Stock, any securities convertible into or
exchangeable for Voting Stock, or any other rights to acquire Voting Stock
(except, in any case, by way of stock dividends or other distributions or
offerings made available to holders of any Voting Stock generally) or
authorize or make a tender, exchange or other offer, if the effect of such
acquisition would be to increase the voting power of all Voting Stock then
owned by the Purchaser or which it has a right to acquire to more than the
greater of the following: (i) Total Voting Power of the Company held by the
Purchaser immediately prior to such acquisition; and (ii) 4.999% of the Total
Voting Power of the Company.
(b) For purposes of this Agreement:
(i) The term "Total Voting Power of the Company" means the
total number of votes which may be cast in the election of directors of the
Company at any meeting of shareholders of the Company if all securities
entitled to vote in the election of directors of the Company were present and
voted at such meeting.
(ii) The term "Voting Stock" means the ordinary shares of
the Company and any other securities issued by the Company having the
ordinary power to vote in the election of directors of the Company.
(iii) Following written notification to the Purchaser of
the acquisition of Voting Stock which results in 5.0% or more of the Total
Voting Power of the Company being held by a third party (other than a
financial investor, the principal business of which is the purchase, sale and
trading of securities), the provisions of Section 6.2 and 7.1(a) shall not
apply for so long as such third party holds 5.0% or more of the Total Voting
Power of the Company and until written notice is sent by the Company pursuant
to the next clause; for purposes of this sub-clause, the Company's Chief
Financial Officer shall be required to promptly notify the Purchaser of any
investor (other than a financial investor, the principal business of which is
the purchase, sale and trading of securities), who after the date of this
Agreement holds 5.0% or more of the Total Voting Power of the Company and of
any subsequent sale of Voting Stock by such third party which results in a
reduction below 5.0% of the Total Voting Power of the Company.
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<PAGE>
7.2 Voting. In the event that another party proposes to acquire
directly or indirectly all of the Voting Stock of the Company in a transaction
which is consented to by the Board of Directors of the Company and such
transaction is consented to by persons holding a majority of the Total Voting
Power of the Company, Purchaser will consent to such transaction and will tender
its Voting Stock pursuant to the terms of such transaction.
7.3 Acts in Concert with Others. Except as permitted under Section 6.2,
the Purchaser shall not directly or indirectly join a partnership, limited
partnership, syndicate or other group, or otherwise act in concert with any
third person, for the purpose of acquiring or holding Voting Stock.
7.4 Confidential Information. The Company may from time to time
pursuant to this Agreement disclose to the Purchaser certain technical and
non-technical business information which the Company deems to be confidential.
Notwithstanding any other provision of this Agreement, including provisions
regarding the termination of this Agreement or particular terms of this
Agreement, the Purchaser shall not disclose information provided to it and
designated as confidential to third parties until the earliest of (i) the date
upon which such information becomes public knowledge through no fault of the
Purchaser, (ii) the date upon which the Company discloses such information to a
third party on an unrestricted basis, (iii) the date upon which such information
becomes available to the Purchaser on a non-confidential basis from a source
other than the Company, provided that such source is not known by the Purchaser
to be bound by a confidentiality agreement with or for the benefit of the
Company, (iv) the date upon which such information has been acquired or
developed by the Purchaser or its affiliates independently of, and not derived
from, any such information received from the Company or any other source known
by the Purchaser to be bound by a confidentiality agreement with or for the
benefit of the Company, (v) the date such information is required to be
disclosed by law or a court of competent jurisdiction or rules of any stock
exchange on which securities of the Purchaser or the Company are listed, or (vi)
the fourth anniversary of the date of disclosure; provided, however, that the
Purchaser may disclose such information (y) to its attorneys, accountants,
consultants and other professionals to the extent necessary to obtain their
services in connection with its investment in the Company, or (z) to any
affiliate or subsidiary of the Purchaser, or any of the officers or
representatives thereof; provided that such persons agree to be bound by this
Section 7.4. The Purchaser further acknowledges and understands that any
information so obtained which may be considered "inside" nonpublic information
will not be utilized by the Purchaser in connection with purchases and/or sales
of the Company's securities except in compliance with applicable state and
federal securities laws.
7.5 Approval of Supervisory Board. Promptly following execution of this
Agreement, the Purchaser shall use its reasonable best efforts to obtain the
approval of its Supervisory Board for the transactions contemplated by this
Agreement which require such Supervisory Board's approval.
SECTION 8
Miscellaneous
8.1 Termination of Agreement.
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<PAGE>
(a) This Agreement shall have a term of ten (10) years from the
Closing Date. The Company may terminate its obligation to perform or observe
any of its covenants and agreements hereunder if the Purchaser violates any
of the covenants or agreements of the Purchaser under this Agreement, and the
Purchaser may terminate its obligations to perform or observe any of its
covenants and agreements hereunder if the Company violates or fails to
perform any of the covenants or agreements of the Company under this
Agreement; provided, however the Company or the Purchaser, as the case may
be, may not terminate any of its obligations under this Agreement pursuant to
this sentence unless it shall have delivered written notice of such default
to the other party and such default shall not have been cured within thirty
(30) calendar days after the delivery of such notice.
(b) From and after the termination of this Agreement, the
covenants, obligations and agreements of the parties set forth herein shall
be of no further force or effect and the parties shall be under no further
obligation with respect thereto.
(c) Notwithstanding the provisions of this Section 8.1, the
respective obligations of the Company and the Purchaser under Section 7.4 of
this Agreement (Confidential Information) shall survive any termination of
this Agreement.
8.2 Governing Law. This Agreement shall be governed in all respects by
the laws of the Republic of France as applied to contracts entered into solely
between residents of, and to be performed entirely within, such Republic, except
that the provisions relating to the securities laws of the United States shall
be governed by the laws of the United States.
8.3 Survival. The representations and warranties in Sections 3 and 4 of
this Agreement shall survive any investigation made by the Purchaser or the
Company and the Closing; provided that such representations and warranties shall
not be construed so as to constitute representations and warranties concerning
circumstances existing after the Closing Date.
8.4 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. Except as otherwise provided in this Agreement, this Agreement may
not be assigned by a party without the prior written consent of the other party
except by operation of law, in which case the assignee shall be subject to all
of the provisions of this Agreement.
8.5 Entire Agreement; Amendment. This Agreement and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subject matter hereof and
thereof and supersede all prior agreements and understandings among the parties
relating to the subject matter hereof. No party shall be liable or bound to any
other party in any manner by any warranties, representations or covenants except
as specifically set forth herein. Except as set forth in Section 8.1(a), neither
this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument
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signed by the party against whom enforcement of any such amendment, waiver,
discharge or termination is sought.
8.6 Notice And Dates. Any notice or other communication given under
this Agreement shall be sufficient if in writing and delivered by hand, by
messenger or by courier, or transmitted by confirmed facsimile, to a party at
its address set forth below (or at such other address as shall be designated for
such purpose by such party in a written notice to the other party hereto):
(a) if to the Company, to it at;
ILOG S.A.
9 rue de Verdun,
Gentilly, 94253 France
Attention: President
(Facsimile) 331-49083535
with a courtesy copy to:
Stibbe Simont Monahan Duhot & Giroux
154 rue de l'Universite
75007, Paris, France
Attention: Olivier Edwards
(Facsimile) 331-40622062
and to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Francis S. Currie
(Facsimile) (650) 493-6811
(b) if to Purchaser, to it at:
SAP Aktiengesellschaft
Neurottstrasse 16
D-69190 Walldorf, Germany
Attention: Legal Department
(Facsimile) 49-6227-7-42060
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<PAGE>
with a courtesy copy to:
SAP America Legal Department
3999 Westchester Pike
Newton Square, PA 19073
Attention: General Counsel
(Facsimile) (610) 355-2506
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally, by messenger or by courier, or, if sent by facsimile, upon
confirmation of receipt by return facsimile.
8.7 Further Assurances. The parties hereto shall do and perform or
cause to be done and performed all such further acts and things and shall
execute and deliver all such other agreements, certificates, instruments or
documents as any other party may reasonably request from time to time in order
to carry out the intent and purposes of this Agreement and the consummation of
the transactions contemplated hereby. Neither the Company nor the Purchaser
shall voluntarily undertake any course of action inconsistent with the
satisfaction of the requirements applicable to them set forth in this Agreement
and each shall promptly do all such acts and take all such measures as may be
appropriate to enable them to perform as early as practicable the obligations
herein required to be performed by them.
8.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which may be executed by fewer than all of the parties,
each of which shall be enforceable against the parties actually executing such
counterparts, assuming that all parties have executed a counterpart, and all of
which together shall constitute one instrument.
8.9 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision which shall be replaced with an enforceable provision
closest in intent and economic effect as the severed provision.
8.10 Captions. Headings of the various sections of this Agreement have
been inserted for convenience of reference only and shall not be relied upon in
construing this Agreement. Use of any gender herein to refer to any person shall
be deemed to comprehend masculine, feminine, and neuter unless the context
clearly requires otherwise.
8.11 Public Statements. The Company and the Purchaser agree not to
issue any public statement with respect to their business relationship, or the
Purchaser's investment in the Company or the terms of any agreement or covenant
among them without the other party's reasonable prior written consent, which
consent shall not be unreasonably withheld, except such disclosures as may be
required under applicable law or under any applicable order, rule or regulation
or, in the case of the Company, except as necessary to pursue discussions with
other strategic investors.
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8.12 Brokers.
(a) The Company has not engaged, consented to or authorized
any bank, broker, finder or intermediary, to act on its behalf, directly or
indirectly, as a bank, broker, finder or intermediary in connection with the
transactions contemplated by this Agreement. The Company hereby agrees to
indemnify and hold harmless the Purchaser from and against all fees, commissions
or other payments owing to any person or firm acting on behalf of the Company
hereunder.
(b) The Purchaser has not engaged, consented to or authorized
any broker, finder or intermediary, to act on its behalf directly or indirectly,
as a broker, finder or intermediary in connection with the transactions
contemplated by this Agreement. The Purchaser hereby agrees to indemnify and
hold harmless the Company from and against all fees, commissions or other
payments owning to any such person or firm acting on behalf of the Purchaser
hereunder.
8.13 Attorney's Fees. The prevailing party in any litigation between
Purchaser and the Company involving this Agreement shall be entitled to recover
from the other party its reasonable attorneys' fees and costs.
8.14 Costs and Expenses. Each party hereto shall pay its own costs
and expenses incurred in connection herewith, including the fees of its
counsel, auditors and other representatives, whether or not the transactions
contemplated herein are consummated.
8.15 No Third Party Rights. Nothing in this Agreement shall create
or be deemed to create any rights in any person or entity not a party to this
Agreement.
8.16 Competing Business Interests. The Company hereby acknowledges
that the Purchaser, its affiliates and certain companies and other entities
in which the Purchaser and its affiliates currently have ownership interests
or may invest in, acquire or otherwise enter into strategic relationships
with, may presently or in the future have businesses or otherwise undertake
activities that may or may not directly or indirectly compete with or provide
a strategic fit with the business of the Company as such business is
presently conducted or may be conducted in the future and may presently or in
the future independently develop or sell products which may directly or
indirectly compete with products developed or sold by the Company.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective authorized officers as of the date first above
written.
ILOG S.A.
By:/s/Pierre Haren
___________________________
Name:Pierre Haren
_________________________
Title:Chief Executive Officer
________________________
SAP Aktiengesellschaft
By:/s/Claus Heinrich
___________________________
Name:Clause Heinrich
_________________________
Title:Member of the Board
________________________
By:/s/Mickael Junge
___________________________
Name:Mickael Junge
_________________________
Title:Head of Legal Department
________________________
18
