<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FUNDTECH LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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ISRAEL 7372 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
FUNDTECH LTD.
BEIT HABONIM
2 HABONIM STREET
RAMAT GAN 52462, ISRAEL
011-972-3-575-2750
FAX: 011-972-3-575-1725
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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FUNDTECH CORP.
30 MONTGOMERY STREET, SUITE 501
JERSEY CITY, NEW JERSEY 07302
201-946-1100
FAX: 201-946-1313
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
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COPIES OF ALL COMMUNICATIONS TO BE SENT TO:
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DAVID P. STONE, ESQ. MICHAEL S. HYMAN, ESQ. ALEXANDER D. LYNCH, ESQ.
WEIL, GOTSHAL & MANGES LLP FUNDTECH CORP. BROBECK, PHLEGER &
767 FIFTH AVENUE 30 MONTGOMERY STREET, HARRISON LLP
NEW YORK, NEW YORK 10153 SUITE 501 1633 BROADWAY
212-310-8000 JERSEY CITY, NEW JERSEY 07302 NEW YORK, NEW YORK 10019
FAX: 212-310-8007 201-946-1100 212-581-1600
CLIFFORD M.J. FELIG, ADV. FAX: 201-946-1313 FAX: 212-586-7878
HERZOG, FOX & NEEMAN AARON M. LAMPERT, ADV.
ASIA HOUSE NASCHITZ, BRANDES & CO.
4 WEIZMAN STREET 5 TUVAL STREET
TEL AVIV 64239, ISRAEL TEL AVIV 67897, ISRAEL
011-972-3-692-2020 011-972-3-623-5000
FAX: 011-972-3-696-6464 FAX: 011-972-3-623-5005
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) ORDINARY SHARE(2) PRICE(2) FEE
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Ordinary shares, NIS 0.01 per
share.............................. 2,875,000 $28.6875 $82,476,562 $22,929
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(1) Includes ordinary shares issuable upon exercise of the Underwriters'
over-allotment option.
(2) Pursuant to Rule 457 under the Securities Act of 1933, the proposed maximum
aggregate offering price and the registration fee are based upon the average
of the high and low prices per share of the Registrant's ordinary shares on
the Nasdaq National Market on March 24, 1999.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 29, 1999
[FUNDTECH LTD. LOGO]
2,500,000 ORDINARY SHARES
Fundtech Ltd. is offering 2,500,000 of its ordinary shares. Fundtech's
ordinary shares are traded on the Nasdaq National Market under the symbol
"FNDTF." The last reported sale price of the ordinary shares on the Nasdaq
National Market on March 25, 1999 was $30.19 per share.
------------------------
INVESTING IN OUR ORDINARY SHARES INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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PER SHARE TOTAL
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Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Fundtech........................................ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
WE WILL APPLY TO THE SECURITIES AUTHORITY OF THE STATE OF ISRAEL FOR AN
EXEMPTION FROM THE OBLIGATION TO PUBLISH THIS PROSPECTUS IN THE MANNER REQUIRED
PURSUANT TO ISRAELI LAW. NOTHING IN THE EXEMPTION, IF GRANTED, MAY BE CONSTRUED
AS APPROVING THE ADEQUACY OR RELIABILITY OF THE MATTERS CONTAINED IN THIS
PROSPECTUS OR AS ANY EXPRESSION OF OPINION AS TO US OR OUR SECURITIES.
Fundtech has granted the underwriters a 30-day option to purchase up to an
additional 375,000 ordinary shares to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the ordinary shares to purchasers on
, 1999.
------------------------
BANCBOSTON ROBERTSON STEPHENS SALOMON SMITH BARNEY
CIBC WORLD MARKETS
HAMBRECHT & QUIST
LEHMAN BROTHERS
The date of this prospectus is , 1999.
<PAGE> 3
[COLOR ARTWORK TO BE PROVIDED]
<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, ORDINARY SHARES ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED.
YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 3
Risk Factors................................................ 6
Use of Proceeds............................................. 17
Price Range of Ordinary Shares.............................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Unaudited Pro Forma Consolidated Combined Financial
Information............................................... 20
Selected Historical Consolidated Financial Data............. 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 32
Management.................................................. 47
Principal Shareholders...................................... 56
Certain Relationships and Related Party Transactions........ 58
Shares Eligible for Future Sale............................. 60
Description of Capital Stock................................ 61
Conditions in Israel........................................ 63
Taxation.................................................... 64
Underwriting................................................ 72
Legal Matters............................................... 74
Experts..................................................... 74
Where You Can Find More Information......................... 74
Enforceability of Civil Liabilities......................... 75
Index to Consolidated Financial Statements.................. F-1
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Our Consolidated Financial Statements are prepared in United States dollars
and in accordance with accounting principles generally accepted in the United
States. All references to "dollars" or "$" in this prospectus are to United
States dollars, and all references to "Shekels" or "NIS" are to New Israeli
Shekels. On March 25, 1999, the exchange rate between the NIS and the dollar, as
quoted by the Bank of Israel, was NIS 4.06 to $1.00.
In this prospectus, unless we indicate otherwise, "we," "us," "our," the
"Company" and "Fundtech" refer to Fundtech Ltd. and our wholly-owned
subsidiaries, Fundtech Corp. and Fundtech U.K. Limited. Historical information
relating to Fundtech does not give pro forma effect to Fundtech's acquisition of
certain businesses from CheckFree Holdings Corporation in April 1998. For pro
forma information, see "Unaudited Pro Forma Consolidated Combined Financial
Information."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary highlights information contained elsewhere in this
prospectus. This summary is not complete and does not contain all of the
information that you should consider before investing in the ordinary shares.
You should read the entire prospectus, including Risk Factors and Consolidated
Financial Statements and related Notes, before deciding to invest in our
ordinary shares.
FUNDTECH
Our Company................ We are a leading provider of software which enables
businesses and their banks to process payments,
transfer funds and manage cash positions
electronically. Our client/server software products
automate the process of transferring funds among
corporations, banks and clearance systems and
enable businesses to manage global cash positions
efficiently and in real-time.
Our Products............... Our suite of products and related services are
designed to integrate all elements of the
electronic payments cycle, including:
- Electronic funds transfer
-- interconnects financial institutions with
clearance systems such as FedWire and SWIFT
-- products include FEDplu$, PAY$tar and PAYplus
RTGS
- Cash management
-- interconnects financial institutions with
their business clients
-- products include Access Banking, webAccess and
Access.pro
- Treasury management
-- centralizes treasury management for large
financial institutions and corporations to
manage global cash positions
-- products include RECON$tar and Global CASHstar
Our Customers.............. Our solutions are used by thousands of corporate
end-users and have been sold to more than 220
financial institutions, including:
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Allied Irish Bank National Australia Group
Bank of Tokyo-Mitsubishi Republic National Bank
Fidelity Investments Sanwa Bank
Industrial Bank of Japan Swedbank
JP Morgan Private Bank Visa International
Merrill Lynch Washington Mutual
</TABLE>
3
<PAGE> 6
Our Market................. The increasing integration of global economies has
led to a dramatic increase in the number of
financial transactions consummated through
electronic payments and funds transfers. In 1997,
more than 145 million funds transfers, having an
approximate aggregate value of $650 trillion, took
place in the United States and more than three
times as many transactions occurred
internationally. Funds transfer constitute a
critical component of customer service in the
financial services industry. Businesses are
demanding cash management solutions that permit
real-time management of funds across multiple
accounts, currencies and international borders. To
service the emerging needs of their business
clients, financial institutions are seeking a more
cost-efficient method of offering funds transfer
and cash management services and are increasingly
migrating to all-electronic platforms.
Trends which continue to drive demand for our
products in this dynamic market environment
include:
- increasing need for centralized cash and treasury
management;
- global adoption of real-time settlement of funds
transfers;
- migration to client/server and Internet-based
solutions;
- growth in electronic commerce;
- consolidation in the financial services industry;
and
- ongoing changes in the regulatory environment.
Our Strategy............... We plan to address these trends by providing
technologically advanced and cost-effective
software and service solutions to financial
institutions and their clients. We will accomplish
this by:
- capitalizing on our experience in electronic
payments and cash and treasury management
solutions;
- expanding our product offerings into the high-end
of the market;
- penetrating into new geographic markets;
- offering new products and services to existing
customers;
- introducing an Internet-based platform for the
distribution of our solutions to both new and
existing customer segments;
- leveraging strategic alliances and distributor
relationships; and
- seeking to acquire complementary technologies and
products.
------------------------
Unless otherwise indicated, all information contained in this prospectus
assumes that the underwriters will not exercise their over-allotment option and
is based on the number of shares outstanding on March 24, 1999.
4
<PAGE> 7
THE OFFERING
Ordinary shares offered by
Fundtech...................... 2,500,000 shares
Ordinary shares outstanding
after the offering............ 13,397,968 shares
Use of proceeds............... We intend to use the net proceeds for the
continued growth of our product and
service offerings, the expansion of
worldwide sales channels, general
corporate purposes and possible
acquisitions.
Nasdaq National Market
symbol........................ FNDTF
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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PRO
FORMA
1994 1995 1996 1997 1998 1998(1)
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(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Total revenues............................. $ -- $ 469 $ 3,568 $8,019 $ 23,132 $26,071
Gross profit............................... -- 276 2,493 5,953 16,714 18,235
Operating income (loss).................... (1,233) (2,964) (1,489) 446 (11,963) 5,146
Net income (loss).......................... $(1,130) $(2,885) $(1,461) $ 636 $(11,392) $ 5,493
Basic earnings (loss) per share............ $ (0.29) $ (0.91) $ (0.50) $ 0.22 $ (1.12) $ 0.54
Diluted earnings (loss) per share.......... $ (0.29) $ (0.91) $ (0.50) $ 0.08 $ (1.12) $ 0.51
Shares used in computing:
Basic earnings (loss) per share.......... 3,945 3,180 2,925 2,837 10,151 10,151
Diluted earnings (loss) per share........ 3,945 3,180 2,925 7,935 10,151 10,824
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DECEMBER 31, 1998
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PRO FORMA
ACTUAL AS ADJUSTED(2)
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(UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $13,019 $ 82,642
Working capital............................................. 18,140 87,763
Total assets................................................ 32,717 102,340
Total long-term liabilities................................. 171 171
Shareholders' equity........................................ 25,048 94,671
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(1) The consolidated pro forma statements for the year ended December 31, 1998
are presented as if the acquisition of certain business from CheckFree
Holdings Corporation had been consummated at the beginning of the period
indicated. See "Unaudited Pro Forma Consolidated Combined Financial
Information."
(2) Pro forma to give effect to the exercise of warrants and options into
106,016 ordinary shares during the period from January 1, 1999 through March
24, 1999, and as adjusted to reflect the sale of 2,500,000 ordinary shares
offered by Fundtech at an assumed offering price of $30.19 per share after
deducting the estimated underwriting discount and offering expenses.
---------------
Fundtech was incorporated in Israel in 1993. Our principal executive
offices are located at Beit Habonim, 2 Habonim Street 52462, Ramat Gan, Israel.
Our telephone and fax numbers are 011-972-3-575-2750 and 011-972-3-575-1725,
respectively. The principal executive offices of our wholly-owned subsidiary,
Fundtech Corp., are located at 30 Montgomery Street, Jersey City, New Jersey
07302. Its telephone and fax numbers are 201-946-1100 and 201-946-1313,
respectively.
---------------
FUNDTECH, FEDplu$ and RECON$tar are registered trademarks of Fundtech.
Fundtech has filed or intends to file applications to register or is in the
process of transferring the following trademarks: Access Banking, Access.pro,
Global CASHstar, PayPlus RTGS, PAY$tar, webAccess and WireUp. Trade names,
service marks or trademarks of other companies appearing in this prospectus are
the property of their respective holders.
5
<PAGE> 8
RISK FACTORS
This offering involves a high degree of risk. You should consider carefully
the following risk factors in addition to the other information in this
prospectus before purchasing our ordinary shares. Some of the information in
this prospectus contains forward-looking statements within the meaning of the
federal securities laws. Forward-looking statements typically are identified by
use of terms such as "may," "will," "expect," "anticipate," "estimate" and
similar words, although some forward-looking statements are expressed
differently. You should be aware that our actual results could differ materially
from those contained in the forward-looking statements due to various factors,
many of which are beyond the scope of our control. You should also consider
carefully the statements under Risk Factors below and in other sections of this
prospectus, which address additional factors that could cause our actual results
to differ from those set forth in the forward-looking statements.
BUSINESS AND SHAREHOLDER RISKS
WE HAVE A LIMITED OPERATING HISTORY WHICH INCLUDES SUBSTANTIAL OPERATING LOSSES
We commenced operations in April 1993 and incurred operating and net losses
in each fiscal year through 1996 and in the first quarter of 1997. Specifically,
we incurred net losses of approximately $1.1 million for the year ended December
31, 1994, $2.9 million for the year ended December 31, 1995 and $1.5 million for
the year ended December 31, 1996. Although we operated profitably in each of the
last three fiscal quarters in 1997 and in each quarter of 1998 (before
non-recurring expenses resulting from the write-off recorded in the second
quarter of 1998 for research and development in progress acquired from
CheckFree), we cannot be certain that such profitability will continue in future
periods. We may fail to meet or exceed expectations of securities analysts or
investors. Specifically, due to the purchasing patterns of the users of our
products, the high level of competition that we encounter and rapid
technological change in the industry in which we operate, we cannot be certain
that our sales will continue to increase in future periods or that we will be
profitable on a quarterly or annual basis in the future. As of December 31,
1998, we had an accumulated deficit of approximately $16.4 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements.
WE MAY EXPERIENCE FLUCTUATIONS IN OUR FUTURE OPERATING RESULTS
Our quarterly revenues, margins and results of operations have fluctuated
significantly in the past as a result of various factors, many of which are
outside our control. These factors include:
- the size, timing and shipment of orders for our products and services;
- our customers' budget cycles;
- global economic conditions;
- the timing of the release of new product upgrades, enhancements or
introductions by us and our competitors;
- customer order deferrals in anticipation of new products, upgrades,
enhancements or year 2000 implications;
- the mix of product sales;
- software "bugs" or other product quality problems;
- product pricing; and
- effectively providing customer support.
If our sales in any quarter do not increase correspondingly with any
increase in operating expenses, our results of operations for that quarter would
be materially adversely affected.
6
<PAGE> 9
WE ANTICIPATE INCURRING SUBSTANTIAL EXPENSES TO FUND GROWTH PRIOR TO THE
GENERATION OF ASSOCIATED REVENUES
It is likely that we will incur substantial expenses to fund our growth and
expansion before we receive any associated revenues. As a result, growth and
expansion may initially have a material adverse effect on our business,
financial condition and results of operations.
For the reasons described in the preceding paragraph and the preceding Risk
Factor, we believe that quarter-to-quarter comparisons of our results of
operations are not necessarily meaningful and that our results of operations in
any particular quarter should not be relied upon as indicative of future
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Quarterly Results of Operations."
FUTURE EXPANSION OF OUR OPERATIONS MAY PLACE A STRAIN UPON OUR MANAGEMENT
PERSONNEL AND OTHER RESOURCES
Since 1993, the scope and the magnitude of our operations have grown
rapidly. This growth has placed a significant strain on our management,
operational, financial and other resources and systems. To manage future growth
effectively, it will be necessary for us to improve our financial management and
controls, reporting systems and procedures on a timely basis, implement new
systems as necessary, and recruit, retain, train, motivate and manage our
employees. There is great demand and increasing competition for qualified
engineers and software development personnel. We may be unsuccessful in
attracting or retaining, on a timely basis and at reasonable costs, all the
personnel we may require. If our management team is unable to manage growth
effectively, there could be a material adverse effect on our business, financial
condition and results of operations. See "-- Our success depends on our ability
to retain key personnel and attract other highly qualified personnel as needed."
WE MAY NOT BE ABLE TO ACHIEVE THE ANTICIPATED BENEFITS OF THE CHECKFREE
ACQUISITION
In April 1998, we purchased two businesses from CheckFree. We believe that
we have substantially completed the integration of our products and the products
of these businesses. We had no previous experience in acquiring a business and
we may be unable to manage successfully the acquired CheckFree businesses, the
former employees of CheckFree who joined us, customers of the acquired CheckFree
businesses, or the development of products originated by the acquired CheckFree
businesses.
WE MAY BE UNABLE TO SUCCESSFULLY UNDERTAKE AND INTEGRATE STRATEGIC ACQUISITIONS
IN THE FUTURE
If appropriate opportunities present themselves, we intend to acquire
businesses, technology or product lines that we believe are strategic.
Currently, we do not have any understandings, commitments or agreements with
respect to any acquisition. We may be unable to successfully identify, negotiate
or finance acquisitions, or integrate acquisitions with our current business.
The process of integrating an acquired business, technology or product into our
business may result in unforeseen operating difficulties and expenditures and
may absorb significant management attention that would otherwise be available
for ongoing internal development of our business. Moreover, we may not realize
the anticipated benefits of any acquisition. Acquisitions 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 our business,
operating results and financial condition. Any such future growth and any
acquisitions of other businesses, technologies or products may require us to
obtain additional equity or debt financing, which may not be available on
commercially acceptable terms, if at all.
OUR PRODUCTS COULD BECOME OBSOLETE OR UNMARKETABLE
Changes in technologies, industry standards, the regulatory environment,
and customer requirements and new product introductions by our existing
competitors or by new market entrants could render our existing products
obsolete and unmarketable or require us to develop new products.
7
<PAGE> 10
IN ORDER TO COMPETE EFFECTIVELY IN THE MARKETS FOR OUR PRODUCTS, WE MUST ENHANCE
OUR EXISTING PRODUCTS AND DEVELOP NEW PRODUCTS THAT ARE ACCEPTABLE TO OUR
CUSTOMERS
Our timely access to information concerning changes in technology, industry
standards, the regulatory environment and customer requirements, as well as our
ability to develop, manufacture and market new and enhanced products
successfully and on a timely basis, will be significant factors in our ability
to remain competitive. We may encounter technical or other difficulties that
could delay the introduction of new or enhanced products in the future. New
products developed by us may not be successful or profitable. In addition,
substantially all of our client/server products currently operate on the Windows
NT and UNIX operating systems. If client/server solutions, Windows NT or UNIX do
not continue to enjoy market acceptance, or should acceptance occur at a slower
rate than we anticipate, our business, financial condition and results of
operations could be materially adversely affected. See "Business -- Strategic
Alliances."
OUR SOFTWARE PRODUCTS ARE SUBJECT TO SUBSTANTIAL RISKS OF PRODUCT DEFECTS
Products as complex as ours sometimes contain undetected software errors or
failures, especially when first introduced or when new versions are released.
These errors or failures can cause delays in product introductions or require
design modifications before or after the product is introduced. We have
experienced these delays and the need for design modifications in the past. Our
products are intended for use in applications that are critical to our
customers' operations. As a result, our customers and potential customers have a
greater sensitivity to product defects than do customers of software products
generally.
WE MAY EXPERIENCE INSTALLATION DIFFICULTIES WITH OUR SOFTWARE
To date, we have had limited experience installing our funds transfer
software in financial institutions that process a very high volume of electronic
payments. We cannot be certain that, despite testing by us and by current and
potential customers, errors will not be found in new products or releases after
the products are installed or that installation difficulties of a technical or
other nature will not occur. These errors or other difficulties could result in
the following:
- loss of revenue or delay in market acceptance;
- diversion of development resources;
- damage to our reputation;
- increased service requirements;
- warranty costs; and
- other damage.
Any of these factors could have a material adverse effect on our business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business -- Products," "-- Sales and Marketing" and "-- Customer Support and
Maintenance."
WE EXPECT TO BE DEPENDENT UPON THE SUCCESS OF A LIMITED NUMBER OF PRODUCTS FOR A
SIGNIFICANT PORTION OF OUR FUTURE REVENUES
To date, a significant amount of our revenues has been derived from
licenses and maintenance of our Access Banking, FEDplu$, PAY$tar, PAYplus RTGS
and Global CASHstar software products and related services. Our future results
of operations will depend, in large part, on achieving broader market acceptance
of these products and related services. A reduction in the sales of any of these
products or services could have a material adverse effect on our business,
financial condition and results of operations.
8
<PAGE> 11
WE EXPECT TO BE DEPENDENT UPON A LIMITED NUMBER OF CUSTOMERS FOR A SIGNIFICANT
PORTION OF OUR FUTURE REVENUES
We believe that the market for our treasury management software products
and services consists of a relatively small number of customers with very large
potential accounts. These accounts may from time to time comprise a significant
percentage of our revenues in a specific fiscal period. If we fail to attract
and retain these accounts, our business, financial condition and results of
operations may be materially adversely effected.
We have entered into a contract with one particular customer for the sale
of one of our treasury management products. This customer represented 8% of our
revenue in 1998. The contract may be terminated by the customer upon short
notice. The cancellation of a project of this size could have a material adverse
effect on our business, financial condition and results of operations and could
negatively impact the market acceptance of this product. See
"Business -- Customers and Markets."
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN THE VERY COMPETITIVE MARKETS FOR
OUR PRODUCTS
We believe there are several principal competitive factors in the industry
in which we operate, including:
- product performance;
- technical features;
- compatibility with existing operating systems;
- reliability;
- security;
- relational database power;
- price;
- customer service and support; and
- ease of use.
We may be unable to differentiate our products from the products of our
competitors or to develop or introduce successfully new products that are less
costly than, or superior to, those of our competitors. In addition, existing and
new competitors may establish relationships with our existing and potential
customers. This could have a material adverse effect on our ability to compete.
The industry in which we operate is highly competitive and evolving. Our
competitors include BankServ, Credo Group Limited, FICS Group N.V., ICM
Electronic Banking Services, Inc., Logica PLC, Magnet Communications, Inc.,
Politzer & Haney, Transaction Software Technologies, Inc. ("TST") and
Transaction Systems Architects, Inc. ("TSAI"). Furthermore, several large banks
have developed solutions internally which they have then marketed to other banks
or implemented in banks that they have acquired.
In addition to our current competitors, we expect substantial competition
from both established and emerging companies. Many of our existing and potential
competitors have or are likely to have more extensive engineering, development,
marketing, distribution, financial, technological and personnel resources than
we have. Increased competition could materially adversely affect our revenues
and profitability through loss of market share, pricing pressure and other
factors. Any of these factors could have a material adverse effect on our
business, financial condition and results of operations. See
"Business -- Competition."
9
<PAGE> 12
OUR BUSINESS IS AFFECTED BY CONDITIONS IN THE FINANCIAL SERVICES INDUSTRY
Our customers are highly concentrated in the financial services industry.
Our business is therefore susceptible to a downturn in that industry. For
example, a decrease in spending for software and related services within this
industry could result in a decrease in the number of potential customers for our
products and a decrease in demand by existing customers for additional products.
U.S. financial institutions are continuing to consolidate, increasing our
customers' ability to negotiate price and decreasing the overall potential
market for our products and services. These factors, as well as other changes
occurring in the financial services industry, could have a material adverse
effect on our business, financial condition and results of operations.
GOVERNMENT REGULATORY POLICY FOR THE FINANCIAL SERVICES INDUSTRY AFFECTS OUR
BUSINESS
Our current and prospective customers, which include state and federally
chartered banks and savings and loan associations, operate in markets that are
subject to extensive and complex regulation. While we are not ourselves directly
subject to this regulation, our products and services must be designed to work
within the regulatory constraints under which our customers operate. If our
products and services fail to do so (currently or in the future), our business,
financial condition and results of operations could be materially adversely
affected. See "Business--Government Regulation."
OUR SUCCESS DEPENDS UPON THE DEVELOPMENT AND MAINTENANCE OF STRATEGIC ALLIANCES
AND DISTRIBUTOR RELATIONSHIPS AND THE SUCCESS OF THESE COMPANIES
A principal element of our strategy is to develop and maintain strategic
alliances and distributor relationships that maximize our access to potential
customers. We believe that these alliances and relationships enable us to offer
our software products and related services to a larger customer base than could
be reached solely through independent marketing efforts. We have strategic
alliances with the following companies:
- Compaq;
- Microsoft; and
- the Society for Worldwide Interbank Financial Telecommunications
S.C. ("SWIFT").
We also have distributor relationships with the following companies:
- Compaq;
- EDS Japan;
- Fiserv Solutions;
- Marshall and Illsley ("M&I"); and
- Sterling Commerce
Our success depends on the successful marketing of our products and
services by these partners and distributors. If our key strategic partners or
distributors fail to successfully develop and/or sustain a market for our
products and related services, our business, financial condition and results of
operations could be materially adversely affected. Additionally, if our
strategic partners or distributors fail to generate new customers, we would need
to increase our direct marketing expenditures as well as develop new strategic
alliances with other parties.
We view our alliances and distributor relationships as key factors in our
overall business strategy and in the commercialization of our software products
and related services. Our strategic partners and distributors
10
<PAGE> 13
may not view their relationship with us as significant for their own businesses
and they may reassess their commitment to us at any time in the future.
One of our strategic alliance and distribution agreements establishes
minimum performance requirements for the distributor. Our other distribution and
strategic alliance agreements rely on the voluntary efforts of the partners and
distributors to pursue joint goals. We attempt to limit our liability under our
distribution agreements and our agreements with end-users. In certain
circumstances, however, misrepresentations made by distributors relating to our
products could result in a claim for substantial damages against us. The
provisions set forth in our distribution agreements purporting to insulate us
from claims premised on the statements or actions of a distributor, or to limit
our liability, may not be enforceable and may not otherwise protect us from
liability for damages. In addition, our strategic partners and distributors are
generally not prohibited, contractually or otherwise, from selling competing
products. We cannot be certain that any of them will give or continue to give a
high priority to marketing and supporting our products.
One of our distribution agreements includes a provision granting exclusive
distribution rights for our electronic payments products in specific countries
in the Pacific region. These exclusive rights are conditioned on the
distributor's attainment of specified revenue targets. Another of our
distribution agreements includes a provision granting exclusive distribution
rights for our electronic payments and banking products in Japan.
Our strategic partners' and distributors' ability to incorporate our
software products and related services into successful commercial ventures will
depend, in part, on our ability to continue to enhance our existing software
products and related services and to develop new products and services. An
inability to do so may delay the ongoing development of software products and
related services and could cause our strategic partners and distributors to seek
alternative providers of software products and related services. This would have
a material adverse effect on our business, financial condition and results of
operations. Our results of operations could also be materially adversely
affected by changes in the financial condition of a strategic partner or
distributor (which could occur rapidly) or by other changes in the business or
marketing strategies of the strategic partner or distributor. We may be unable
to retain our current strategic partners or distributors. If our relationship
with any of our strategic partners or distributors is terminated by either
party, we may not be successful in replacing the strategic partner or
distributor on a timely basis or at all with another suitable strategic partner
or distributor. Any change in our distribution channels could have a material
adverse effect on our business, financial condition and results of operations.
See "Business -- Strategy," "-- Sales and Marketing," "-- Strategic Alliances"
and "-- Customer Support and Maintenance."
FAILURE OF OUR PRODUCTS OR CUSTOMERS TO BE YEAR 2000 COMPLIANT COULD NEGATIVELY
IMPACT OUR BUSINESS
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
must accept four digit entries to distinguish 21st century dates from 20th
century dates. As a result computer systems and/or software used by many
companies may need to be upgraded to comply with Year 2000 requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with compliance. Most of our software products were designed
to be Year 2000 compliant, although several products that we acquired from
CheckFree were designed before Year 2000 issues became widely perceived as a
risk. We are putting these latter products through extensive testing to discover
the extent of the Year 2000 compliance problems, if any, associated with these
products. We cannot be certain that our software contains all necessary date
code changes.
We and our customers may be affected by Year 2000 issues. Customer's
purchasing plans could be affected by Year 2000 issues as they may need to
expend significant resources to correct their existing systems. This situation
may result in reduced funds available to purchase our products and services.
Compliance with Year 2000 requirements may disrupt our ability to continue
developing and marketing our products and services. We and our customers may
also incur unexpected expenditures in connection with Year 2000 compliance.
While uncertainty exists concerning these expenditures, we do not believe that
Year 2000 compliance will result in a material adverse effect on our business,
financial condition or results of operations. Even if our products and services
are Year 2000 compliant, however, the electronic funds transfer products and
services used by funds-transferring parties not using our products may not be
Year 2000 compliant,
11
<PAGE> 14
thereby disrupting the ability of our customers to use our products for funds
transfer transactions with these parties. Furthermore, if funds transfers are
unable to be processed by our customers because of Year 2000 compliance
problems, third parties may commence litigation against us for the funds
transfer failures.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO A NUMBER OF RISKS
We currently market our products in several countries and are subject to
many risks associated with international sales, including:
- limitations and disruptions resulting from the imposition of government
controls;
- national standardization and certification requirements;
- export license requirements;
- economic or political instability;
- trade restrictions;
- changes in tariffs; and
- difficulties in managing international operations.
To date, we have not encountered significant difficulties in connection
with the sale of our products and services in international markets. However,
any of these risks could have a material adverse effect on our ability to
deliver our products and services and on our business, financial condition and
results of operations. In addition, as we expand internationally, we may
contract in local currency, thus potentially exposing us to fluctuations in
foreign currency exchange rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Impact of Inflation and
Currency Fluctuations" and Note 13c to the Consolidated Financial Statements.
OUR PRODUCTS EMPLOY PROPRIETARY TECHNOLOGY WHICH IS DIFFICULT TO PROTECT AND MAY
INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES
Our success depends in significant part upon our proprietary software
technology. We rely on a combination of contractual rights, trade secrets,
copyright law, technical measures, non-disclosure agreements and trademarks to
establish and protect our proprietary rights in our products and technologies.
We sometimes enter into non-disclosure and confidentiality agreements with our
employees and distributors with access to sensitive information. However, there
is always the risk that:
- these agreements will be breached;
- we would not have adequate remedies for any breach;
- others will acquire substantially equivalent proprietary technologies;
- others will otherwise gain access to our proprietary technologies; or
- any particular technology will not be regarded as a trade secret under
applicable law.
As a result of the reliance that we place on our trade secrets, loss of our
trade secret protection could have a material adverse effect on our business,
financial condition and results of operations. We have no registered patents or
pending patent applications. The steps taken by us to protect our proprietary
rights may be inadequate to prevent misappropriation of our technology or
independent development or sale by others of our technology or of products with
features based upon, or otherwise similar to, our products.
12
<PAGE> 15
Although we believe that our technology has been independently developed
and that none of our technology or intellectual property infringes on the rights
of others, we cannot be certain that we do not and will not so infringe the
rights of others or that third parties will not assert infringement claims
against us in the future. If infringement were found to exist, we would, under
certain circumstances, be required to modify our products or technologies or
obtain a license to permit their continued use. We may be unable to do so in a
timely manner or upon acceptable terms and conditions. Any failure to do so
could have a material adverse effect on our business, financial condition and
results of operations.
In addition, if future litigation were to become necessary to protect trade
secrets, know-how or other proprietary rights owned by us, to defend us against
claimed infringement of the rights of others or to determine the scope and
validity of the proprietary rights of others, the litigation, whether successful
or unsuccessful, could result in substantial cost to us and a diversion of our
efforts. Adverse determinations in any litigation or proceedings could also
subject us to significant liabilities to third parties and prevent us from
producing, selling or using our products or technologies, any of which could
have a material adverse effect on our business, financial condition and results
of operations. We may not have the resources to defend or prosecute a
proprietary rights infringement or other action.
Moreover, the laws of some countries may not protect our contractual
rights, trade secrets, copyrights, technical measures, non-disclosure
agreements, trademarks, products, processes or technologies to the same extent
as in the U.S. See "Business -- Proprietary Rights."
OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN KEY PERSONNEL AND ATTRACT OTHER
HIGHLY QUALIFIED PERSONNEL AS NEEDED
Our success is, and will continue to be, dependent on the efforts of the
members of our senior management team (including, in particular, Reuven
Ben-Menachem, our Chairman, Chief Executive Officer and President), and on our
ability to attract and retain additional engineering, marketing, financial and
other technical personnel. Certain of our key personnel do not have employment
contracts with us and may terminate their employment with us on short notice. We
do not maintain "key man" life insurance policies for Mr. Ben-Menachem. If we
lose any of our key personnel or are unable to attract or retain such
engineering or software development personnel as we may from time to time
require, our business, financial condition and results of operations may be
materially adversely affected. See "Business -- Employees" and "Management."
OUR MANAGEMENT HAS BROAD DISCRETION TO USE THE PROCEEDS OF THIS OFFERING AS THEY
DETERMINE
We have not designated any specific use for the net proceeds from our sale
of the ordinary shares that we are offering hereby. Rather, we intend to use the
net proceeds from this offering to finance the continued growth of our business
worldwide and the expansion of our sales channels and for general corporate
purposes, including the potential acquisition of one or more complementary
businesses. Any acquisition might utilize a significant portion of the net
proceeds of this offering. Consequently, our management and our Board of
Directors will have significant flexibility in applying the net proceeds of this
offering. Our failure to apply such funds effectively could have a material
adverse effect on our business, financial condition and results of operations.
See "-- Growth through Acquisitions" and "Use of Proceeds."
A SMALL GROUP OF SHAREHOLDERS CONTROL A SIGNIFICANT PORTION OF OUR ORDINARY
SHARES
Upon completion of this offering, our directors, executive officers,
shareholders who owned greater than 5% of the outstanding ordinary shares prior
to the offering and their respective affiliates will beneficially own
approximately 32.9% of the outstanding ordinary shares (32.0% if the
Underwriters' over-allotment option is exercised in full). As a result, these
shareholders, if they act as a group, will be able to influence significantly
the outcome of those matters requiring shareholder approval, including the
election of directors and approval of significant corporate transactions. This
share ownership may have the effect of delaying or preventing a change in
control. In addition, after this offering one shareholder will own approximately
16.2% of the ordinary shares. Under Israeli law, a holder of more than 25% of
the ordinary shares has the right to block certain significant corporate
changes, including mergers and consolidations. See "Description of Capital
Stock -- Voting, Shareholders' Meetings and Resolutions" and "Principal
Shareholders."
13
<PAGE> 16
THE MARKET PRICE OF OUR ORDINARY SHARES MAY DECREASE IF A LARGE NUMBER OF SHARES
ARE SOLD FOLLOWING THIS OFFERING
No prediction can be made as to the effect, if any, that market sales of
ordinary shares or the availability of ordinary shares for sale will have on the
market price of the ordinary shares prevailing from time to time. Sales of a
substantial number of ordinary shares in the public market following this
offering, or the perception that such sales could occur, could have a material
adverse effect on the market price of our ordinary shares. Upon consummation of
this offering, we will have 13,397,968 ordinary shares issued and outstanding.
Of these shares, the 2,500,000 shares sold in this offering (plus any shares
issued upon exercise of the Underwriters' over-allotment option), in addition to
the 3,450,000 shares sold in our initial public offering and an additional
3,234,472 shares previously sold in compliance with the Securities Act, will be
freely tradeable without restriction under the Securities Act. The remaining
4,213,496 outstanding ordinary shares will be eligible for sale in the public
market immediately following this offering, subject to compliance with the
volume and manner of sale limitations of Rule 144 under the Securities Act
("Rule 144") or pursuant to another exemption from the registration requirements
of the Securities Act and in certain cases to 90-day lock-up agreements with the
Representatives. Certain shareholders holding an aggregate of 4,096,780 ordinary
shares have agreed not to offer, sell, contract to sell or otherwise dispose of
any ordinary shares without the consent of BancBoston Robertson Stephens for a
period of 90 days after the date of this prospectus.
The holders of 2,000,787 ordinary shares have the right in some
circumstances to require us to register their shares under the Securities Act
for resale to the public. If these holders, by exercising their demand
registration rights, cause a large number of shares to be registered and sold in
the public market, the sales could have a material adverse effect on the market
price for our ordinary shares. If we were required to include in a
company-initiated registration statement shares held by these holders pursuant
to the exercise of their piggyback or demand registration rights, the sales
could have an adverse effect on our ability to raise needed capital. See
"Management -- Stock Option Plans," "Shares Eligible for Future Sale" and
"Underwriting."
THE MARKET PRICE OF OUR ORDINARY SHARES MAY FLUCTUATE SIGNIFICANTLY
The market price and marketability of the ordinary shares may from time to
time be significantly affected by a large number of factors, including many over
which we have no control and that may not be directly related to us. These
factors include the following:
- extreme price and volume fluctuations in the stock market from time to
time, which have often been unrelated to the operating performance of
particular companies;
- significant volatility in the market price and trading volume of
securities of both high-technology and Israeli companies, which is not
necessarily related to the operating performance of these companies;
- announcements of technological innovations or new and enhanced commercial
products by us or our competitors;
- market conditions in the industry;
- developments or disputes concerning proprietary rights;
- changes in earnings;
- economic and other external factors;
- political and other developments in the State of Israel; and
- period-to-period fluctuations in our financial results.
Fluctuations in the trading price of the ordinary shares may adversely
affect the liquidity of the trading market for the ordinary shares and, in the
event that we seek to raise capital through future equity financing, our ability
to raise such equity capital.
14
<PAGE> 17
WE MAY BE CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY
Under certain circumstances, we may be characterized as a passive foreign
investment company for U.S. federal income tax purposes. This characterization
could result in adverse U.S. tax consequences to our shareholders. U.S.
shareholders should consult with their own U.S. tax advisors with respect to the
U.S. tax consequences of investing in the ordinary shares. See "Taxation
Regulation -- United States Federal Income Tax Considerations."
WE DO NOT EXPECT TO PAY CASH DIVIDENDS
We have not declared or paid cash dividends on our ordinary shares in the
past and we intend to retain all future earnings, if any, to finance the
operation and expansion of our business. We therefore, do not expect to pay any
dividends on our ordinary shares in the foreseeable future. In addition, under
Israeli law, we may only pay cash dividends in any fiscal year from profits, as
determined under Israeli law. See "Dividend Policy" and "Taxation."
RISKS RELATING TO OUR LOCATION IN ISRAEL
CONDITIONS IN ISRAEL AFFECT OUR OPERATIONS
We are incorporated under the laws of the State of Israel. Our principal
offices and some of our software development facilities are also located in the
State of Israel. Although most of our sales currently are made to customers
outside Israel, we are nonetheless directly influenced by the political,
economic and military conditions affecting Israel. Since the establishment of
the State of Israel in 1948, a number of armed conflicts have taken place
between Israel and its Arab neighbors and a state of hostility, varying from
time to time in intensity and degree, has led to security and economic problems
for Israel. Any major hostilities involving Israel, the interruption or
curtailment of trade between Israel and its trading partners or a significant
downturn in the economic or financial condition of Israel could have a material
adverse effect on our operations. Despite the progress towards peace between
Israel and its Arab neighbors and the Palestinians, we cannot be certain that
ongoing or revived hostilities or other factors related to Israel will not
materially adversely affect us or our business. See "Conditions in Israel."
THE RATE OF INFLATION IN ISRAEL MAY NEGATIVELY IMPACT OUR BUSINESS
A portion of our expenses are incurred in Israel, particularly salaries and
other employee costs, which are paid in NIS and are affected by changes in the
Israeli Consumer Price Index (the "CPI"). The dollar cost of our operations in
Israel is influenced by the extent to which any increase in the rate of
inflation in Israel is not offset by the devaluation of the NIS in relation to
the dollar. In recent years, as inflation in Israel has generally exceeded the
devaluation of the NIS against the dollar, we have experienced increases in the
dollar cost of our operations in Israel. During 1995 and 1996, the rate of
inflation in Israel was 8.1% and 10.6%, respectively, and the devaluation of the
NIS against the dollar was 3.9% and 3.7%, respectively. This trend was reversed
during 1997 and 1998 when the rate of inflation was 7.0% and 8.6%, respectively,
and the rate of devaluation was 8.8% and 17.6%, respectively. However, we cannot
be certain that the reversal will continue, that recent devaluations will not be
followed by an increased rate of inflation or that we will not be materially
adversely affected in the future if inflation in Israel exceeds the devaluation
of the NIS against the dollar or if the timing of any devaluation lags behind
increases in inflation in Israel. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Impact of Inflation and
Currency Fluctuations."
15
<PAGE> 18
IN ORDER TO REMAIN ELIGIBLE FOR GOVERNMENT PROGRAMS AND TAX BENEFITS THAT WE
CURRENTLY RECEIVE, WE MUST CONTINUE TO MEET SEVERAL CONDITIONS. THESE PROGRAMS
AND TAX BENEFITS MAY BE TERMINATED OR REDUCED IN THE FUTURE
We have benefitted from grants from the Government of Israel through the
Office of the Chief Scientist of the Ministry of Industry and Trade (the "OCS")
for the financing of a significant portion of our software development
expenditures in Israel, and from the Government of Israel Fund for the
Encouragement of Marketing Activities (the "Marketing Fund") for the financing
of specific marketing expenses. We expect that the percentage of expenditures
financed using grants from the OCS and the Marketing Fund will decline, and that
the terms of the grants (particularly the level and timing of royalties payable
with respect thereto) will become less favorable to us in the future. In
addition, as a recipient of grants from the OCS, we are obligated to perform all
manufacturing activities in Israel, unless we receive an express exemption from
the OCS to perform these manufacturing activities abroad. We also benefit from
other Government of Israel grants, programs and tax benefits, especially
benefits available as a result of our "Approved Enterprise" status. Termination
or reduction of any one or more of these grants, programs or benefits could have
a material adverse effect on us.
In order to meet the conditions of the grants and programs of the OCS, we
have made representations to the Government of Israel about our future plans.
From time to time our actual operations have differed from these plans. If there
were any material deviation from our plans as represented and our actual
operations, we could be required to refund to the Government of Israel benefits
previously received and would likely be denied receipt of the grants or
benefits, and participation in programs, thereafter. In addition, because
Fundtech has received benefits under the law relating to Approved Enterprises,
if we were to pay dividends while receiving these benefits, we would be subject
to Israeli taxes to which we would not otherwise be subject. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Effective Corporate Tax Rate," "Business -- Software Development,"
"Taxation" and Notes 9 and 12 to the Consolidated Financial Statements for a
more complete discussion of these grants, programs and tax benefits.
IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND
DIRECTORS AND SOME OF THE EXPERTS NAMED IN THIS PROSPECTUS
A substantial number of our executive officers and directors, as well as
the Israeli experts named herein, are non-residents of the United States, and a
significant portion of the assets of such persons are located outside of the
United States. For further information regarding enforceability of civil
liabilities against us and other related persons, see "Enforceability of Civil
Liabilities."
16
<PAGE> 19
USE OF PROCEEDS
We will receive net proceeds of approximately $68.9 million from the sale
of the 2,500,000 ordinary shares offered by us, or approximately $79.6 million
if the underwriters' over-allotment option is exercised in full, in each case at
an assumed public offering price of $30.19 (the last reported sale price of our
ordinary shares on March 29, 1999) and after deducting the estimated
underwriting discounts and commissions and offering expenses payable by us.
We currently intend to use the net proceeds of this offering as follows:
- continued growth of our product and service offerings;
- expansion of worldwide sales channels; and
- general corporate purposes.
In addition, we may utilize a portion of the net proceeds of this offering
to acquire one or more complementary businesses. From time to time we have been
engaged in preliminary discussions with third parties concerning possible
acquisitions by us of one or more businesses. However, we have not entered into
any agreements with respect to any acquisitions (other than the CheckFree
acquisition). There can be no assurance that we will come to any agreement with
respect to any other acquisition, as to the terms of any other acquisition or
that any other acquisition would ultimately be consummated. Any other
acquisition might utilize a significant portion of the net proceeds of this
offering.
Pending these uses, we currently intend to invest the net proceeds in
short-term, interest-bearing investments, or bank deposits. The investment
policy that we intend to pursue pending the investment of the net proceeds of
this offering in our business may result in a less favorable return for the
investments compared to other investments.
17
<PAGE> 20
PRICE RANGE OF ORDINARY SHARES
The ordinary shares have been quoted on the Nasdaq National Market under
the symbol "FNDTF" since Fundtech's initial public offering. The following table
sets forth, for the periods indicated, the high and low closing sales prices for
the ordinary shares:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
First Quarter (commencing March 13, 1998)................. 18 5/8 16 3/4
Second Quarter............................................ 24 5/8 15 3/4
Third Quarter............................................. 19 1/8 10 9/6
Fourth Quarter............................................ 20 11/16 8 3/4
1999
First Quarter (through March 29, 1999).................... 31 19
</TABLE>
On March 29, 1999, the last closing sale price of the ordinary shares, as
reported by the Nasdaq National Market, was $30.19 per share. As of March 23,
1999, Fundtech had 42 shareholders of record. Fundtech believes that the number
of beneficial owners of the ordinary shares is in excess of 400.
DIVIDEND POLICY
Fundtech intends to retain all future earnings for use in the development
of its business and does not anticipate paying cash dividends in the foreseeable
future. If cash dividends are declared by Fundtech, the cash dividends could be
taxable to the recipients of the dividends. Because Fundtech has received
benefits under the Law for the Encouragement of Capital Investments, 1959, as
amended (the "Investment Law"), payment of cash dividends during the exemption
period will subject that portion of Fundtech's income derived from the Approved
Enterprise to Israeli taxes to which the income would not otherwise be subject.
Fundtech has decided to reinvest the amount of the tax-exempt income derived
from its "Approved Enterprises" permanently and not to distribute such income as
dividends. See "Taxation."
Cash dividends may be paid by an Israeli company only out of profits as
determined under Israeli law. The declaration of any final annual cash dividends
requires shareholder approval. Shareholders may reduce, but not increase,
dividends from the amount proposed by the Board of Directors. See "Description
of Capital Stock" and "Taxation."
It is anticipated that any dividends paid to non-residents of Israel would
be paid in NIS. See "Taxation -- Taxation of Non-Israeli Shareholders" and
"-- United States Federal Income Tax Considerations -- Taxation of Ordinary
Shares -- Dividends."
18
<PAGE> 21
CAPITALIZATION
The following table sets forth, as of December 31, 1998, the capitalization
of Fundtech at December 31, 1998 and on a pro forma as adjusted basis to give
effect to the exercise, during the period January 1, 1999 through March 24,
1999, of options and warrants to purchase 106,016 ordinary shares and to the
sale of the 2,500,000 ordinary shares offered by us in the offering and our
receipt of the net proceeds therefrom, based on an assumed offering price of
$30.19 per share (the last reported price of Fundtech's ordinary shares on March
29, 1999) and after deducting the estimated underwriting discount and offering
expenses. The capitalization information set forth in the table below is
qualified by the more detailed Consolidated Financial Statements and Notes
thereto appearing elsewhere in this prospectus and should be read in conjunction
with the Consolidated Financial Statements and Notes.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long term debt.............................................. $ -- $ --
-------- -------
Shareholder's equity(1):
Ordinary shares:
Authorized -- 19,949,998 of NIS 0.01 par value; Issued
and outstanding -- 10,791,952 actual, 13,397,968 pro
forma as adjusted..................................... 34 40
Deferred shares:
50,002 of NIS 0.01 par value shares authorized, issued
and outstanding actual and pro forma as adjusted...... -- --
Additional paid-in capital.................................. 41,664 111,281
Deferred compensation....................................... (219) (219)
Accumulated deficit......................................... (16,431) (16,431)
-------- -------
Total shareholders' equity........................ 25,048 94,671
-------- -------
Total capitalization......................... $ 25,048 $94,671
======== =======
</TABLE>
- ---------------
(1) Excludes (i) 1,045,705 ordinary shares issuable upon exercise of stock
options and warrants outstanding as of March 24, 1999 at a weighted average
exercise price of $8.99 per share and (ii) 50,002 Deferred Shares. An
additional 181,717 ordinary shares have been reserved for issuance pursuant
to stock options. See "Management -- Stock Option Plans," "Certain
Relationships and Related Party Transactions" and "Description of Capital
Stock."
19
<PAGE> 22
UNAUDITED PRO FORMA CONSOLIDATED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma consolidated combined information gives
pro forma effect to the CheckFree acquisition, combining the consolidated
historical statement of operations of Fundtech and of the acquired CheckFree
businesses as if the CheckFree acquisition had been completed on January 1,
1998. This pro forma information should be read in conjunction with the
respective consolidated historical financial statements (including notes
thereto) of Fundtech and the acquired CheckFree businesses appearing elsewhere
herein. The pro forma adjustments reflecting the consummation of the CheckFree
acquisition are based on the purchase method of accounting, available financial
information and the estimates and assumptions described in the notes to the
Unaudited Pro Forma Consolidated Combined Financial Information. For purposes of
preparing its Consolidated Financial Statements, Fundtech has established a new
basis for the assets and liabilities of the acquired CheckFree businesses based
upon the fair values thereof and Fundtech's purchase price therefor, including
the costs of the CheckFree acquisition. The Unaudited Pro Forma Consolidated
Combined Financial Information reflects Fundtech's best estimates. However, the
actual financial position and results of operations may differ significantly
from the pro forma amounts reflected herein due to various factors, including,
without limitation, access to additional information and changes in value. The
pro forma adjustments do not reflect any operating efficiencies or cost savings
that may be achievable with respect to the combined businesses. The following
information is not necessarily indicative of the future financial position or
operating results of the combined businesses or the financial position or
operating results of the combined businesses had the CheckFree acquisition
occurred at the beginning of 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------
FUNDTECH ACQUIRED PRO FORMA PRO FORMA
HISTORICAL BUSINESSES(1) ADJUSTMENT COMBINED
---------- ------------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $ 23,132 $3,177 $ (238)(2) $26,071
Cost of revenues...................................... 6,418 1,656 (238)(2) 7,836
-------- ------ ---------- -------
Gross profit.......................................... 16,714 1,521 -- 18,235
-------- ------ ---------- -------
Operating expenses:
Software development, net........................... 6,636 382 (118)(3) 6,900
Selling and marketing, net.......................... 2,970 272 (58)(3) 3,184
General and administrative.......................... 2,471 514 20(3) 3,005
In-process research and development write-off....... 16,600 -- (16,600)(4) --
-------- ------ ---------- -------
Total operating expenses..................... 28,677 1,168 (16,756) 13,089
-------- ------ ---------- -------
Operating income (loss)............................... (11,963) 353 (16,756) 5,146
Financial income (loss), net.......................... 571 (20) (204)(5) 347
-------- ------ ---------- -------
Net income (loss)..................................... $(11,392) $ 333 $ 16,552 $ 5,493
======== ====== ========== =======
Basic earnings (loss) per share....................... $ (1.12) $ 0.54
======== =======
Diluted earnings (loss) per share..................... $ (1.12) $ 0.51
======== =======
Shares used in computing:
Basic earnings (loss) per share..................... 10,151 10,151
======== =======
Diluted earnings (loss) per share................... 10,151 10,824
======== =======
</TABLE>
- ---------------
(1) Data reflects period from January 1, 1998 until the date of the acquisition
(the "1998 Period").
(2) Reflects eliminating entries for consolidation purposes (intercompany
transactions prior to acquisition).
(3) Reflects pro forma increase in amortization expenses associated with the
acquired intangible assets of approximately $3 million over their estimated
useful lives of up to 10 years resulting from the application of purchase
accounting (the increases was $78,000 in the 1998 period and the decrease in
amortization expenses due to reversal of the amortization of intangible
assets by CheckFree (the decreases was $234,000 in the 1998 period.
(4) The total purchase price paid in connection with the CheckFree acquisition
has been allocated in the accompanying pro forma information to the tangible
and identifiable intangible assets and liabilities ($3,116,000 goodwill) of
the CheckFree businesses based upon Fundtech's estimates of their fair
values. In connection with the allocation of the purchase price, the pro
forma combined condensed statement of operations information includes the
write-off of $16.6 million representing the estimated value of the in-
process research and development of software acquired from CheckFree for
which technological feasibility has not yet been established and for which
no alternative future use exists. This write-off is not reflected in the
Unaudited Pro Forma Consolidated Combined Statement of Operations since Pro
Forma adjustments are limited to those events that are expected to have a
continuing impact.
(5) Reflects pro forma adjustments in the amount of $204,000 for the year ended
December 31, 1998 for interest expenses (which have been assumed to be 5.5%
per annum) on $18,824,000 of loans assumed to finance the CheckFree
acquisition.
20
<PAGE> 23
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of Fundtech presented below as of
December 31, 1997 and 1998 and for each of the years ended December 31, 1996,
1997 and 1998 are derived from Fundtech's Consolidated Financial Statements set
forth elsewhere in this prospectus which have been prepared in accordance with
U.S. GAAP. The selected consolidated financial data of Fundtech as of December
31, 1995 and for each of the years ended December 31, 1993 and 1994 have been
derived from audited consolidated financial statements of Fundtech not included
in this prospectus. All of the financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees............................ $ -- $ 284 $ 2,403 $4,997 $ 14,007
Maintenance and services fees.................... -- 68 498 2,313 7,116
Hardware sales................................... -- 117 667 709 2,009
------- ------- ------- ------ --------
Total revenues............................ -- 469 3,568 8,019 23,132
------- ------- ------- ------ --------
Cost of revenues:
Software license costs........................... -- 58 163 334 238
Maintenance and services costs................... -- 36 316 1,086 4,549
Hardware costs................................... -- 99 596 646 1,631
------- ------- ------- ------ --------
Total cost of revenues.................... -- 193 1,075 2,066 6,418
------- ------- ------- ------ --------
Gross profit....................................... -- 276 2,493 5,953 16,714
------- ------- ------- ------ --------
Operating expenses:
Software development, net........................ 1,033 1,158 1,595 2,468 6,636
Selling and marketing, net....................... 67 1,319 1,424 1,750 2,970
General and administrative....................... 133 763 963 1,289 2,471
In-process research and development write-off.... -- -- -- -- 16,600
------- ------- ------- ------ --------
Total operating expenses.................. 1,233 3,240 3,982 5,507 28,677
------- ------- ------- ------ --------
Operating income (loss)............................ (1,233) (2,964) (1,489) 446 (11,963)
Financial income (loss), net....................... 103 79 28 190 571
------- ------- ------- ------ --------
Net income (loss).................................. $(1,130) $(2,885) $(1,461) $ 636 $(11,392)
Basic earnings (loss) per share.................... $ (0.29) $ (0.91) $ (0.50) $ 0.22 $ (1.12)
======= ======= ======= ====== ========
Diluted earnings (loss) per share.................. $ (0.29) $ (0.91) $ (0.50) $ 0.08 $ (1.12)
======= ======= ======= ====== ========
Shares used in computing:
Basic earnings (loss) per share.................. 3,945 3,180 2,925 2,837 10,151
======= ======= ======= ====== ========
Diluted earnings (loss) per share................ 3,945 3,180 2,925 7,935 10,151
======= ======= ======= ====== ========
</TABLE>
<TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term bank
deposits......................................... $ -- $ 660 $ 1,314 $4,267 $ 13,019
Working capital.................................... 554 390 779 6,645 18,140
Total assets....................................... 1,125 1,732 3,847 9,658 32,717
Short-term bank credits, including current
maturities of long-term debt..................... -- 9 962 255 --
Long-term debt..................................... 230 247 271 261 --
Shareholders' equity............................... 552 684 1,475 7,404 25,048
</TABLE>
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements which are
subject to risks and uncertainties. Fundtech's actual results could differ
materially from those discussed. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below, as well as
those discussed elsewhere in this prospectus. Fundtech undertakes no obligation
to disclose publicly the result of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
OVERVIEW
Fundtech was incorporated in 1993. Fundtech is a leading provider of
software which enables businesses and their banks to process payments, transfer
funds and manage cash positions electronically. Fundtech's client/server
software products automate the process of transferring funds among corporations,
banks and clearance systems and enable businesses to manage global cash
positions efficiently in real-time. Fundtech introduced its FEDplu$ product in
May 1995, its PAY$tar product in January 1997 and its PAYplus RTGS product in
December 1997. To date, Fundtech has derived substantially all of its revenues
from licenses of its Access Banking, FEDplu$, PAY$tar, PAYplus RTGS and Global
CASHstar products, and related services and third-party hardware sales.
Fundtech's revenues are derived from software license fees, maintenance and
services fees and hardware sales. Revenues from software license fees are
recognized upon delivery of the software product to a customer, when collection
is probable, all license payments are due within one year, the license fee is
otherwise fixed or determinable and vendor-specific evidence exists to allocate
the total fee to the elements of the arrangement and persuasive evidence of an
arrangement exists. Revenues from certain of Fundtech's contracts are recognized
on a percentage-of-completion basis. Revenues from maintenance and services fees
are recognized over the life of the maintenance agreement or at the time when
services are rendered. Revenues from hardware sales are recognized upon
shipment.
Fundtech has received approximately $1.1 million in product development
grants from the Government of Israel through the OCS. These grants are credited
against software development expenses in the periods in which they are earned
and received. Fundtech is obligated to repay these product development grants
through the payment of royalties ranging from 3% to 5% (depending on the length
of time to repayment) of revenues generated from the products until such time as
the grants are repaid in full (and in some instances until 150% of the grant has
been repaid). Fundtech is not obligated to repay the grants if Fundtech does not
generate sufficient revenues to do so. The royalty payments are included in cost
of sales in the periods in which they are accrued. In addition, Fundtech has
received approximately $0.4 million in marketing grants from the Government of
Israel's Fund for the Encouragement of Marketing Activities. Fundtech is
obligated to repay approximately $0.2 million of the marketing grants through
payment of royalties equal to 3% of Fundtech's total increase in export sales in
comparison to 1995, from the end of the second year of implementation of the
marketing plan until such date as the grants have been fully repaid.
Fundtech records software development costs in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 86. Due to the immaterial
amount of time between technological feasibility and the time that the software
is generally available for sale, Fundtech has expensed software development
costs as incurred.
As a result of the need to develop new and enhanced products, Fundtech
expects to continue making significant investments in software development
before and after product introductions. Fundtech expects that the level of such
continued investments will be at least comparable to the level of such
investments in the past.
The currency of the primary economic environment in which the operations of
Fundtech are conducted is the dollar. Thus, Fundtech uses the dollar as its
functional and reporting currency. Transactions and balances in other currencies
are remeasured into dollars in accordance with the principles set forth in FASB
Statement
22
<PAGE> 25
No. 52. Exchange gains and losses arising from remeasurement are recorded in
income or expense as applicable. See "-- Impact of Inflation and Currency
Fluctuations."
Israeli companies, such as Fundtech, are generally subject to income tax at
the corporate rate of 36%. However, Fundtech is eligible for certain tax
benefits which should result in its income being taxed at a significantly lower
rate for some time after it begins to report taxable income and exhausts its net
operating loss carry-forwards. See "-- Effective Corporate Tax Rate."
The following table presents Fundtech's consolidated revenues according to
the geographical regions to which such revenues are attributable:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------- --------------------- ---------------------
TOTAL TOTAL TOTAL
REVENUES PERCENTAGE REVENUES PERCENTAGE REVENUES PERCENTAGE
-------- ---------- -------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Israel.................... $ 50 1.4% $ 204 2.5% $ 693 3.0%
U.S.A..................... 3,518 98.6 7,471 93.2 19,190 83.0
Australia................. -- -- 332 4.2 262 1.1
Europe.................... -- -- 12 0.1 1,801 7.8
Other..................... -- -- -- -- 1,186 5.1
------ ---- ------ ---- ------- ----
$3,568 100% $8,019 100% $23,132 100%
====== ==== ====== ==== ======= ====
</TABLE>
ACQUISITION OF THE CHECKFREE BUSINESSES
In April 1998, Fundtech acquired from CheckFree two businesses engaged
primarily in the design and development of cash management software products and
the development and sale of wire transfer products. Fundtech paid $18,824,000 in
cash (including acquisition expenses) for the acquired CheckFree businesses. The
software products acquired, including Access Banking and InfoVue, and the
corresponding technology under development, such as webACCESS, provide
sophisticated cash management functionality and serve as a foundation for
Fundtech to provide a next generation of cash management products. As a result
of the CheckFree acquisition, Fundtech's new product suite will address all
aspects of the payments cycle -- beginning with cash management and payment
initiation at the user end and moving to funds transfer and reconciliation on
the banking and settlement end. Further, the CheckFree acquisition enables
Fundtech to continue developing more advanced, comprehensive electronic payments
and banking solutions, while eliminating duplicative product development costs
which would have been incurred had the CheckFree acquisition not occurred.
Customers using the acquired technology include Bank of Tokyo, Mitsubishi
Information Services, Banco Popular de Puerto Rico, Dai-Ichi Kangyo Bank of
California, Key Services Corporation, National Australia Group, Republic
National Bank and SouthTrust Bank. These clients provide Fundtech with a
significant opportunity to sell complementary or upgraded products to such
customers, and to derive cost savings by rationalizing its FEDplu$ distribution
channel. Fundtech will no longer be required to share its maintenance revenue
stream with CheckFree and can eliminate costs that were associated with
CheckFree's operations. Fundtech also enhanced its existing employee base
through the CheckFree acquisition by adding approximately 60 employees,
primarily involved in service, software development and sales. The offices of
the acquired CheckFree businesses are located in Norcross, Georgia. See
"Unaudited Pro Forma Consolidated Combined Financial Information" and "Risk
Factors--Integration of CheckFree Businesses."
23
<PAGE> 26
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by each of the items in Fundtech's statement of operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenues:
Software license fees..................................... 67.3% 62.3% 60.6%
Maintenance and service fees.............................. 14.0 28.8 30.8
Hardware sales............................................ 18.7 8.9 8.6
----- ----- -----
Total revenues..................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Software license costs.................................... 4.6 4.2 1.0
Maintenance and service costs............................. 8.9 13.5 19.7
Hardware costs............................................ 16.7 8.1 7.1
----- ----- -----
Total cost of revenues............................. 30.2 25.8 27.8
----- ----- -----
Gross profit................................................ 69.8 74.2 72.2
----- ----- -----
Operating expenses:
Software development, net................................. 44.7 30.8 28.7
Selling and marketing, net................................ 39.9 21.8 12.8
General and administrative................................ 27.0 16.1 10.7
In-process research and development write-off............. -- -- 71.8
----- ----- -----
Total operating expenses........................... 111.6 68.7 124.0
----- ----- -----
Operating income (loss)..................................... (41.8) 5.5 (51.8)
Financial income, net....................................... 0.8 2.4 2.5
----- ----- -----
Net income (loss)........................................... (41.0)% 7.9% (49.3)%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Software License Fees. Software license fees consist of revenues derived
from software license agreements entered into between Fundtech and its
customers. Software license fees increased by $9,010,000 to $14,007,000 in the
year ended December 31, 1998 from $4,997,000 for the year ended December 31,
1997, an increase of 180%. This increase was attributable to the sale of new
product offerings such as Global CASHstar and PAYplus RTGS, Fundtech's
international payment system and due to the revenue generated from the new
products of the acquired CheckFree businesses such as ACCESS.pro, webACCESS,
InfoVue and MicroACH. Additionally, this increase was due to an increase of
sales throughout Fundtech's distribution channels, such as Sterling Commerce,
and Fiserv.
Maintenance and Services Fees. Maintenance and services fees include
revenues derived from maintenance contracts, installation and training revenue,
consulting fees, certification fees and related items. Fundtech generally
receives a contract for maintenance and services at the time of the sale of the
system. Maintenance and services fees increased by $ 4,803,000 to $7,116,000 in
the year ended December 31, 1998 from $2,313,000 in the year ended December 31,
1997, an increase of 208%. The increase is commensurate with the increase in
systems sold during this period and due to the revenue generated from
maintenance and services fees related to products of the acquired CheckFree
businesses.
Hardware Sales. Hardware sales consist of revenues received from resales
of third-party hardware in connection with the license and installation of
Fundtech's software. Hardware sales increased by $1,300,000 to $2,009,000 in the
year ended December 31, 1998 from $709,000 in the year ended December 31, 1997,
an increase of 183%. Hardware sales increased due to the increase in number of
systems sold with hardware due
24
<PAGE> 27
to revenues generated by the acquired CheckFree businesses. Fundtech currently
requests that its customers purchase hardware on their own and send it to
Fundtech for testing with the software.
Software License Costs. Software license costs consist primarily of the
royalty payments related to grants from the Government of Israel, product media,
duplication, manuals and shipping. Software license costs decreased by $96,000
to $238,000 in the year ended December 31, 1998 from $334,000 in the year ended
December 31, 1997, a decrease of 29%. The gross margin on software license fees
increased from 93% in the year ended December 31, 1997 to 98% in the year ended
December 31, 1998. The increase in gross margin is attributable to the decrease
in royalty payments as a percentage of total sales as certain of Fundtech's
product offerings are not royalty bearing.
Maintenance and Services Costs. Maintenance and services costs consist
primarily of personnel costs, telephone support costs and other costs related to
the provision of maintenance and consulting services. Maintenance and services
costs increased by $3,463,000 to $4,549,000 in the year ended December 31, 1998
from $1,086,000 in the year ended December 31, 1997, an increase of 319%. The
gross margin on maintenance and services fees decreased from 53% for the year
ended December 31, 1997 to 36% for the year ended December 31, 1998. The
decrease in gross margin was primarily due to an increased in personnel
associated with the acquired CheckFree businesses.
Hardware Costs. Hardware costs consist primarily of Fundtech's cost of
computer hardware resold to its customers. Cost of hardware sales increased by
$985,000 to $1,631,000 in the year ended December 31, 1998 from $646,000 in the
year ended December 31, 1997, an increase of 152%. This increase is commeasurate
with the increase in hardware sales by Fundtech in 1998.
Software Development Expenses, Net. Software development expenses consist
principally of expenses related to the development and testing of new products
and product enhancements. Software development expenses increased by $4,168,000
to $6,636,000 in the year ended December 31, 1998 from $2,468,000 in the year
ended December 31, 1997, an increase of 169%. The increase in software
development costs related to the development of new product offerings by
Fundtech such as the PAYplus RTGS system and Global CASHstar as well as
enhancements to certain of Fundtech's existing products. ln the years ended
December 31, 1997 and 1998, Fundtech did not receive grants from the Government
of Israel.
Selling and Marketing Expenses, Net. Gross selling and marketing expenses
increased by $1,167,000 to $3,015,000 in the year ended December 31, 1998 from
$1,848,000 in the year ended December 31, 1997, an increase of 63%. However,
gross selling and marketing expenses as a percentage of revenues decreased to
13% in December 31, 1998 from 23% in the year ended December 31, 1997 due to the
increase in sales attributable to each salesperson. In the year ended December
31, 1997 and 1998, Fundtech accrued $98,000 and $45,000 respectively for
marketing grants from the Government of Israel. These grants were recorded as a
reduction to selling and marketing expenses resulting in net selling and
marketing expenses of $1,750,000 and $2,970,000 in 1997 and 1998 respectively.
General and Administrative Expenses. General and administrative expenses
increased by $1,182,000 to $2,471,000 in the year ended December 31, 1998 from
$1,289,000 in the year ended December 31, 1997, an increase of 92%. As a
percentage of total revenues, general and administrative expenses declined to
11% compared with 16% in the same period for 1997. This decrease is primarily
attributed to efficiencies attained through the elimination of duplicate
functions of the acquired CheckFree businesses.
In-Process Research and Development Write-Off. In April 1998, Fundtech
acquired from CheckFree assets and liabilities of certain businesses engaged
primarily in the design and development of cash management software products and
the development and sale of wire transfer products. Fundtech paid $18,824,000
for the acquired CheckFree businesses.
The CheckFree acquisition has been accounted for using the purchase method
of accounting and, accordingly, the purchase price has been allocated to the
assets acquired and the liabilities assumed based on the their estimated fair
value at the date of acquisition. The excess of the purchase price over the
estimated fair value of the net assets acquired has been recorded, as goodwill,
which is amortized on a straight-line basis over 10 years. Fundtech recorded,
according to FASB interpretation No. 4 (FIN 4), an expense in the amount
25
<PAGE> 28
of $16,600,000 which represents the estimated value of software acquired from
CheckFree for which technological feasibility has not yet been established and
for which no alternative future use exists (in-process research and
development).
Financial Income, Net. Net financial income increased by $381,000 to
$571,000 in the year ended December 31, 1998 from $190,000 in the year ended
December 31, 1997. The increase in the financial income is due mainly to
interest earned on cash received from our initial public offering in March 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Software License Fees. Software license fees increased by $2,594,000 to
$4,997,000 in the year ended December 31, 1997 from $2,403,000 for the year
ended December 31, 1996, an increase of 108%. This increase is primarily due to
the increased demand for Fundtech's FEDplu$ product. The majority of the
increase in 1997 was the result of sales by Fundtech's distributors, including
CheckFree and Sterling Commerce.
Maintenance and Services Fees. Maintenance and services fees increased by
$1,815,000 to $2,313,000 in the year ended December 31, 1997 from $498,000 in
the year ended December 31, 1996, an increase of 364%. The increase is
commensurate with the increase in systems sold during 1997. In addition, this
increase was attributable to the increase in the number of large systems sold
during 1997 to customers that required protocol certification by the Federal
Reserve, which in turn increased the need for on-site consulting services.
Hardware Sales. Hardware sales increased by $42,000 to $709,000 in the
year ended December 31, 1997 from $667,000 in the year ended December 31, 1996,
an increase of 6%. Although hardware sales increased in total dollars, they
decreased as a percentage of revenue to 9% for the year ended December 31, 1997
from 19% for the year ended December 31, 1996. Fundtech currently requests that
its direct-sales customers and distributors purchase and resell hardware on
their own and send it to Fundtech for testing with the software.
Software License Costs. Software license costs increased by $171,000 to
$334,000 in the year ended December 31, 1997 from $163,000 in the year ended
December 31, 1996, an increase of 105%. The gross margin on software license
fees was 93% for each of the years ended December 31, 1997 and 1996. The
increase in the dollar amount of the cost of license fees resulted from the
increase in the number of software licenses sold.
Maintenance and Services Costs. Maintenance and services costs increased
by $770,000 to $1,086,000 in the year ended December 31, 1997 from $316,000 in
the year ended December 31, 1996, an increase of 244%. The gross margin on
maintenance and services fees increased from 37% for the year ended December 31,
1996 to 53% for the year ended December 31, 1997. The increase in gross margin
was primarily due to an increased percentage of maintenance and services fee
revenue being derived from maintenance contracts associated with the sales of
software licenses in the period, which revenue typically has a higher gross
margin than service-based revenue, as well as from an increase in the rates
charged for consulting services.
Hardware Costs. Cost of hardware sales increased by $50,000 to $646,000 in
the year ended December 31, 1997 from $596,000 in the year ended December 31,
1996, an increase of 8%. Gross margin on hardware sales decreased to 9% in the
year ended December 31, 1997 from 11% in the year ended December 31, 1996. This
decrease in gross margin is due to the reduced prices of such hardware.
Software Development Expenses, Net. Software development expenses
increased by $674,000 to $2,468,000 in the year ended December 31, 1997 from
$1,794,000 in the year ended December 31, 1996, an increase of 38%. In the year
ended December 31, 1996, Fundtech received $199,000 in development grants from
the Government of Israel, while in the year ended December 31, 1997, Fundtech
received no such grants. The grants were recorded as a reduction to software
development expenses resulting in a net software development expense in 1996 of
$1,595,000. Consequently, software development expenses, net increased by
$873,000 to $2,468,000 in the year ended December 31, 1997 from $1,595,000 in
the year ended December 31, 1996, an increase of 55%. The increase in software
development costs was related to the increase in the
26
<PAGE> 29
development of Fundtech's product offerings. During 1997, Fundtech released its
PAY$tar and PAYplus RTGS product offerings for U.S. and non-U.S. financial
institutions, respectively.
Selling and Marketing Expenses, Net. Gross selling and marketing expenses
increased by $184,000 to $1,848,000 in the year ended December 31, 1997 from
$1,664,000 in the year ended December 31, 1996, an increase of 11%. However,
gross selling and marketing expenses as a percentage of revenues decreased to
23% in 1997 from 47% in 1996 due to Fundtech's shift towards selling through
distributors in 1997. In the year ended December 31, 1996, Fundtech accrued
$240,000 in marketing grants from the Government of Israel and in the year ended
December 31, 1997 Fundtech accrued $98,000 in such grants. These grants were
recorded as a reduction to selling and marketing expenses resulting in net
selling and marketing expenses of $1,750,000 and $1,424,000 in 1997 and 1996,
respectively. As a result, net selling and marketing expenses increased by 23%.
General and Administrative Expenses. General and administrative expenses
increased by $326,000 to $1,289,000 in the year ended December 31, 1997 from
$963,000 in the year ended December 31, 1996, an increase of 34%. This increase
was attributable to the growth of Fundtech, including an increase in
administrative staff support expenses from $630,000 in the year ended December
31, 1996 to $809,000 in the year ended December 31, 1997, an increase in
occupancy costs from $87,000 in the year ended December 31, 1996 to $153,000 in
the year ended December 31, 1997, and an increase in communications costs from
$10,000 in the year ended December 31, 1996 to $46,000 in the year ended
December 31, 1997. There was also an increase in other related items from
$236,000 in the year ended December 31, 1996 to $281,000 in the year ended
December 31, 1997.
Financial Income, Net. Net financial income increased by $162,000 to
$190,000 in the year ended December 31, 1997 from $28,000 in the year ended
December 31, 1996, an increase of 579%. The increase in the financial income is
due mainly to an increase in the interest earned on cash and short-term bank
deposits raised in a private placement of equity consummated by Fundtech in
March 1997.
27
<PAGE> 30
SELECTED UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly data for each of
Fundtech's last eight quarters. Such data are expressed both in dollar amounts
and as a percentage of total revenues for each quarter. The data have been
prepared on a basis consistent with Fundtech's audited financial statements
included elsewhere in this prospectus and include all necessary adjustments,
consisting only of normal recurring adjustments, that Fundtech's management
considers necessary for a fair presentation of such information. Such
information should be read in conjunction with Fundtech's annual audited
consolidated financial statements and notes thereto appearing elsewhere in this
prospectus. The operating results for any quarter are not necessarily indicative
of results for any future quarter or year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees............... $ 415 $1,101 $1,506 $1,975 $2,018 $ 2,926 $4,267 $4,796
Maintenance and services fees....... 295 478 698 842 685 1,783 2,291 2,357
Hardware sales...................... 172 114 107 316 325 691 396 597
------ ------ ------ ------ ------ -------- ------ ------
Total revenues.................. 882 1,693 2,311 3,133 3,028 5,400 6,954 7,750
------ ------ ------ ------ ------ -------- ------ ------
Cost of revenues:
Software license costs.............. 41 60 115 118 67 91 40 40
Maintenance and services costs...... 137 284 226 439 294 1,162 1,427 1,666
Hardware costs...................... 176 105 85 280 277 561 322 471
------ ------ ------ ------ ------ -------- ------ ------
Total cost of revenues.......... 354 449 426 837 638 1,814 1,789 2,177
------ ------ ------ ------ ------ -------- ------ ------
Gross profit............................ 528 1,244 1,885 2,296 2,390 3,586 5,165 5,573
------ ------ ------ ------ ------ -------- ------ ------
Operating expenses:
Software development, net........... 527 435 692 814 1,267 1,592 2,002 1,775
Selling and marketing, net.......... 425 311 384 630 545 664 881 880
General and administrative.......... 299 301 372 317 425 474 712 860
In-process research and development
write-off......................... -- -- -- -- -- 16,600 -- --
------ ------ ------ ------ ------ -------- ------ ------
Total operating expenses........ 1,251 1,047 1,448 1,761 2,237 19,330 3,595 3,515
------ ------ ------ ------ ------ -------- ------ ------
Operating income (loss)................. (723) 197 437 535 153 (15,744) 1,570 2,058
Financial income (loss), net............ 3 (40) 176 51 78 168 166 159
------ ------ ------ ------ ------ -------- ------ ------
Net income (loss)....................... $ (720) $ 157 $ 613 $ 586 $ 231 $(15,576) $1,736 $2,217
====== ====== ====== ====== ====== ======== ====== ======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees............... 47.1% 65.1% 65.2% 63.0% 66.7% 54.2% 61.4% 61.9%
Maintenance and services fees....... 33.4 28.2 30.2 26.9 22.6 33.0 32.9 30.4
Hardware sales...................... 19.5 6.7 4.6 10.1 10.7 12.8 5.7 7.7
------ ------ ------ ------ ----- ------ ------ ------
Total revenues.................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ----- ------ ------ ------
Cost of revenues:
Software license costs.............. 4.6 3.5 5.0 3.8 2.2 1.7 0.6 0.5
Maintenance and services costs...... 15.5 16.8 9.8 14.0 9.7 21.5 20.5 21.4
Hardware costs...................... 20.0 6.2 3.6 8.9 9.2 10.4 4.6 6.1
------ ------ ------ ------ ----- ------ ------ ------
Total cost of revenues.......... 40.1 26.5 18.4 26.7 21.1 33.6 25.7 28.0
------ ------ ------ ------ ----- ------ ------ ------
Gross profit............................ 59.9 73.5 81.6 73.3 78.9 66.4 74.3 72.0
------ ------ ------ ------ ----- ------ ------ ------
Operating expenses:
Software development, net........... 59.8 25.7 29.9 26.0 41.8 29.5 28.8 22.9
Sales and marketing, net............ 48.2 18.4 16.6 20.1 18.0 12.3 12.7 11.3
General and administrative.......... 33.8 17.7 16.2 10.1 14.1 8.8 10.2 11.1
In-process research and development
write-off......................... -- -- -- -- -- 307.4 -- --
------ ------ ------ ------ ----- ------ ------ ------
Total operating expenses........ 141.8 61.8 62.7 56.2 73.9 358.0 51.7 45.3
------ ------ ------ ------ ----- ------ ------ ------
Operating income (loss)................. (81.9) 11.7 18.9 17.1 5.0 (291.6) 22.6 26.7
Financial income (loss), net............ 0.3 (2.4) 7.6 1.6 2.6 3.2 2.4 2.0
------ ------ ------ ------ ----- ------ ------ ------
Net income (loss)....................... (81.6)% 9.3% 26.5% 18.7% 7.6% (288.4)% 25.0% 28.7%
====== ====== ====== ====== ===== ====== ====== ======
</TABLE>
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<PAGE> 31
Fundtech's quarterly results of operations may be subject to significant
fluctuations due to several factors, including the size, timing and completion
of orders; customer budget cycles; the timing of the release of new product
upgrades, enhancements or introductions by Fundtech and its competitors;
customer order deferrals in anticipation of new products, upgrades or
enhancements; the mix of product sales; software "bugs" or other product quality
problems; product pricing; the effective provision by Fundtech of customer
support; and other factors. Fundtech anticipates that its operating expenses
will continue to increase significantly. If Fundtech's sales in any quarter do
not increase correspondingly, Fundtech's results of operations for that quarter
could be materially adversely affected. For the foregoing reasons, Fundtech
believes that quarter-to-quarter comparisons of Fundtech's results of operations
are not necessarily meaningful and that Fundtech's results of operations in any
particular quarter should not be relied upon as necessarily indicative of future
performance. Moreover, there can be no assurance that the profitability attained
in 1998 will continue.
LIQUIDITY AND CAPITAL RESOURCES
Fundtech has financed its operations primarily through the sale of equity
securities to its shareholders in the amount of approximately $42,000,000,
including net proceeds from the IPO in the amount of approximately $29,000,000,
grants from the Government of Israel and borrowings from banks.
As of December 31, 1998, Fundtech's working capital was $18,140,000. Cash
and cash equivalents and short-term bank deposits were $13,019,000 and
$4,267,000 at December 31, 1998 and 1997, respectively. Fundtech utilized net
cash from operations amounting to $2,180,000 for the year ended December 31,
1998 and utilized $1,056,000 for the year ended December 31, 1997.
In April 1998, Fundtech acquired the CheckFree businesses for approximately
$18,824,000 in cash, including expenses.
Fundtech believes that cash on hand and cash flow from operations, together
with the proceeds from this offering, will provide adequate financial resources
to finance Fundtech's current operations and the planned expansion of its
operations for the foreseeable future. However, in the event that Fundtech were
to make one or more acquisitions for consideration consisting, in whole or in
part of cash, Fundtech might be required to seek external debt or equity
financing for such acquisition or acquisitions or to fund subsequent operations.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS; MARKET RISK
The dollar cost of Fundtech's operations in Israel is influenced by the
extent to which any increase in the rate of inflation in Israel is (or is not)
offset (or is offset on a lagging basis) by the devaluation of the NIS in
relation to the dollar. Inflation in Israel will have a negative effect on the
profitability to Fundtech of contracts under which Fundtech is to receive
payment in dollars or dollar-linked NIS while incurring expenses in NIS linked
to the Israeli CPI, unless such inflation is offset by a devaluation of the NIS.
In 1995 and 1996, the rate of inflation in Israel was 8.1% and 10.6%,
respectively, and the devaluation of the NIS against the dollar was 3.9% and
3.7%, respectively. This imbalance was reversed during 1997 and 1998 when the
rate of inflation was 7.0% and 8.6%, respectively, and the rate of devaluation
was 8.8% and 17.6%, respectively, resulting in increasing the dollar cost of
operating in Israel. However, there can be no assurance that the reversal will
continue, that the recent devaluations will not be followed by an increased rate
of inflation or that Fundtech will not be materially adversely affected in the
future if inflation in Israel exceeds the devaluation of the NIS against the
dollar or if the timing of any such devaluation lags behind increases in
inflation in Israel.
A devaluation of the NIS in relation to the dollar would have the effect of
decreasing the dollar value of any asset of Fundtech which consists of NIS or
receivables payable in NIS (unless such receivables are linked to the dollar).
Such a devaluation would also have the effect of reducing the dollar amount of
any expenses or liabilities of Fundtech which are payable in NIS (unless such
expenses or payables are linked to the dollar). Conversely, any increase in the
value of the NIS in relation to the dollar would have the effect of increasing
the dollar value of any unlinked NIS assets of Fundtech and the dollar amounts
of any unlinked NIS liabilities and expenses of Fundtech.
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<PAGE> 32
Because exchange rates between the NIS and the dollar fluctuate
continuously (albeit with a historically declining trend in the value of the
NIS), exchange rate fluctuations and especially larger periodic devaluations
will have an impact on Fundtech's profitability and period-to-period comparisons
of Fundtech's results. Such impact is recorded in Fundtech's financial
statements as financial income or expense. To date, Fundtech has not engaged in
currency-hedging transactions intended to reduce the effect of fluctuations in
foreign currency exchange rates on Fundtech's results of operations.
Fundtech does not utilize financial instruments for trading purposes and
holds no derivative financial instruments which could expose Fundtech to
significant market risk.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits (rather than four) to identify a given year. Computer programs that
have time-sensitive software may interpret the date code "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in other normal business activities. We maintain a significant number of
computer software programs and operating systems across our entire organization,
including various administrative and billing functions, all of which are
potentially subject to Year 2000 problems.
Fundtech's Year 2000 compliance program is divided into two sections:
software programs licensed to Fundtech's customers and internal information
technology systems. Phases common to both sections include preparing inventory
of all software and hardware items affected by the Year 2000 issue, assessing
the Year 2000 compliance of identified items, repairing or replacing items that
are determined not to be Year 2000 compliant, testing items, and creating
contingency plans.
The software product section of Fundtech's compliance program includes all
Fundtech software products licensed by Fundtech's customers. As of March 24,
1999 substantially all of Fundtech's software products had been assessed for
Year 2000 compliance. The software repair and testing phases began in June 1997.
The assessment phase will be repeated periodically through January 2000 to
verify that any changes made to Fundtech's existing software do not bring any of
Fundtech's software components out of Year 2000 compliance. The repair and
testing steps will be repeated as necessary depending on the outcome of the
periodic assessments. Both phases are dependent on the availability of Year 2000
compliant versions of software from some external vendors. If Fundtech's testing
uncovers any material Year 2000 compliance issues in any widely-used versions of
our software, it may be necessary for Fundtech to upgrade all affected customers
to a newer version of Fundtech's software which is Year 2000 compliant.
The infrastructure section of our compliance program consists of hardware
and software used by Fundtech's staff in the course of operating its business.
We estimate that as of March 25, 1999 this phase was 95% complete. The
repair/replacement phase and testing phase are both expected to be completed by
June 1999, although both phases are dependent on the availability of Year 2000
compliant versions of certain software and hardware.
In its review process, Fundtech confirmed that a substantial majority of
all of its customers, the disruption of whose operations could have a material
adverse impact on Fundtech's operations, are subject to regulations promulgated
by the Federal Reserve mandating Year 2000 compliance. Fundtech expects that
substantially all such customers will comply with such regulations prior to
January 1, 2000.
Fundtech expects that its employees will perform all significant work for
the Year 2000 project described above. Fundtech does not anticipate hiring any
additional employees, nor does Fundtech anticipate incurring any significant
consulting expenses for the Year 2000 project. The cost of software tools and
consulting expenses used for detection of Year 2000 compliance problems and
repair of affected software is not currently expected to exceed $500,000.
Contingency planning has not yet begun for either section, but Fundtech
expects preliminary contingency plans to be completed by June 1999.
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<PAGE> 33
Compliance with Year 2000 requirements may disrupt Fundtech's ability to
continue developing and marketing its electronic payments and funds transfers
and cash and treasury management solutions. Fundtech may also incur certain
unexpected expenditures in connection with Year 2000 compliance. While
uncertainty exists concerning such expenditures, Fundtech does not believe that
Year 2000 compliance will result in a material adverse effect on its business,
financial condition or results of operations. Even if Fundtech's products and
services are Year 2000 compliant, the electronic funds transfer products and
services used by funds-transferring parties not using Fundtech's products may
not be Year 2000 compliant, thereby disrupting the ability of Fundtech's
customers to use Fundtech's products for funds transfer transactions with these
parties. Furthermore, if funds transfers were unable to be processed by
Fundtech's customers because of Year 2000 compliance problems, there can be no
assurance that third parties will not commence litigation against Fundtech for
such funds transfer failure.
EFFECTIVE CORPORATE TAX RATE
Fundtech's development facility in Israel has been granted "Approved
Enterprise" status under Israel's Law for the Encouragement of Capital
Investments. Fundtech has derived, and expects to continue to derive, a portion
of its income from Approved Enterprise investments. Under the Approved
Enterprise program, Fundtech is entitled to reductions in the tax rate normally
applicable to Israeli companies with respect to income generated from its
Approved Enterprise investments. Fundtech is entitled to a tax exemption for a
period of two years commencing in the first year in which such income is earned,
subject to certain time restrictions. The first year of tax exemption for
Fundtech Ltd. was 1998. At December 31, 1998, Fundtech had net operating loss
carryforwards in the U.S. of approximately $4.7 million. See "Taxation
Regulation" and Note 12 to the Consolidated Financial Statements.
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<PAGE> 34
BUSINESS
We are a leading provider of software which enables businesses and their
banks to process payments, transfer funds and manage cash positions
electronically. Our client/server software products automate the process of
transferring funds among corporations, banks and clearance systems and enable
businesses to manage global cash positions efficiently and in real-time. Our
suite of products and related services are designed to integrate all elements of
the electronic payments cycle, including electronic funds transfer, cash
management and treasury management. Our solutions are used by thousands of
corporate end-users and have been sold to more than 220 financial institutions,
including Allied Irish Bank, Bank of Tokyo-Mitsubishi, Fidelity Investments,
Industrial Bank of Japan, JP Morgan Private Bank, Merrill Lynch, National
Australia Group, Republic National Bank, Sanwa Bank, Swedbank, Visa
International and Washington Mutual.
INDUSTRY BACKGROUND
The increasing integration of global economies has led to a dramatic
increase in the number of financial transactions consummated each day through
electronic payments and funds transfers. In 1997, 90 million funds transfers
having an approximate aggregate value of $288 trillion took place in the United
States over the Federal Reserve's FedWire system. The Clearing House Interbank
Payments System (CHIPS) handled 59 million transactions at a total aggregate
dollar amount exceeding $360 trillion. More than three times as many
transactions occurred internationally with SWIFT payments message transfer
volumes at 540 million, making funds transfer a critical component of customer
service in the financial services industry.
National and multinational financial institutions and businesses must
facilitate this ever-increasing volume of electronic payments and funds
transfers. The transfer and settlement of funds has traditionally been
error-prone, inefficient and costly due to a significant manual back-office
component on both sides of the transfer. In addition, the integration of global
economies has increased both the complexity and the importance of managing the
flow of a corporation's funds on a daily basis. Businesses are demanding from
their financial institutions cash management solutions that permit real-time
management of funds across multiple accounts, currencies and international
borders. To service the emerging needs of their business clients, financial
institutions are seeking a more cost-efficient method of offering funds transfer
and cash management services and are increasingly migrating to electronic
intranet and client/server based platforms.
Electronic payments enable businesses to transfer funds in a rapid and
secure manner, and permit the financial institutions which implement such
transfers to do so accurately, rapidly and cost-effectively. Electronic payments
and funds transfers are made through: (1) a financial institution at which the
transferring party has an account; (2) a financial institution at which the
receiving party has an account; and (3) a clearing bank at which the financial
institutions of both parties have their own accounts. Linking all these parties
is a network comprised of financial institutions which serve as intermediaries,
receiving payment instructions and transmitting them to the next appropriate
institution along the payment route. In the United States, the primary funds
transfer network is the FedWire, which connects more than 10,000 financial
institutions. Internationally, the primary funds transfer network is SWIFT,
which connects approximately 6,000 financial institutions and related
enterprises in more than 178 countries. In contrast to the FedWire, SWIFT is a
message-carrying network that carries only payment instructions. Such
instructions are processed throughout the day, but require interbank settlement
of funds that typically takes place at the end of the day (a "net settlement
basis").
Electronic banking provides a link between banks and their business
clients, enabling such clients to manage their cash, debt and other accounts in
a real time comprehensive and secure manner, and permit the financial
institutions with which such businesses have accounts to implement, record and
report the financial transactions conducted by such businesses rapidly and
cost-effectively. Some of the features that comprise an electronic banking
solution include: (1) facilitating the transfer of cash within an organization;
(2) enabling control of cash movement through interfacing with financial
institutions; and (3) providing the capability to report on the status of all
types of accounts, including lines of credit, and on the availability of funds.
To provide their business clients with a competitive level of customer service,
financial institutions are increasingly seeking to offer sophisticated
electronic banking solutions.
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MARKET TRENDS
Increasing Need for Centralized Cash and Treasury Management
Large business enterprises have recognized the need to control the movement
of funds within their organizations through the final settlement process, which
is typically performed by banks. Without an effective solution, such
corporations must rely on expensive, manually intensive processes, and remain
exposed to non-payment, fraud, credit and foreign exchange risks. Consequently,
these companies are demanding increasingly sophisticated treasury management
solutions which provide an automated, efficient and cost-effective network for
managing their internal cash flows and reconciliations.
Global Adoption of Real-Time Settlement of Funds Transfers
A real-time gross settlement ("RTGS") payments system allows payment
instructions between financial institutions to be processed and settled
individually and continuously throughout the trading day, enabling financial
institutions and their customers to use the transferred funds immediately and
reducing the risk of non-payment. The rapid liberalization of financial markets
across the globe has created a critical need for a solution to facilitate the
clearing of electronic payments and funds transfers on an RTGS basis, replacing
the traditional net settlement basis. For example, on January 1, 1999, the
member countries of the European Union began implementing a single monetary
policy and currency, the "Euro." To support the creation of an integrated money
market and the administration of a Euro-denominated, unified monetary policy,
the central banks of the member countries are developing an electronic payments
system, the Trans-European Automated Real Time Gross Settlement Express Transfer
("TARGET") system. Governments in many other countries are also encouraging
financial institutions within their regulatory regimes to adopt RTGS. In
addition, recent economic turmoil in Asia has demonstrated the need for tighter
control of payment systems and to make such systems more efficient and reliable.
Fundtech believes that the introduction of TARGET, the international trend
toward the adoption of RTGS and the desire of financial institutions to
significantly reduce non-payment, credit and fraud risks by shortening the time
from the initiation of an electronic funds transfer to its completion, will
generate increased demand for electronic payments solutions that offer RTGS
capabilities.
Migration to Client/Server and Internet-Based Solutions
In lieu of traditional mainframe solutions, financial institutions are
increasingly implementing client/server information systems, predominantly based
on Windows NT and UNIX platforms, which allow for standardization of their
operating and computing environments. These flexible information systems have
expanded the capability of financial institutions to service their customers at
many locations. The trend of financial institutions migrating to advanced
client/server solutions will likely increase the demand for compatible
electronic payments and banking solutions.
We believe that banks see the Internet and related technologies (such as
Web browsers) as added delivery channels, new customer interfaces that can be
used not just for cash management information reporting and transaction
initiation, but also for delivering comprehensive corporate banking products.
Growth in Electronic Commerce
The Internet and its unique capacity for the remote distribution of
information continues to expand its role as a powerful global communications
medium enabling millions of people to share information and conduct business
electronically. International Data Corporation ("IDC") estimates that the number
of World Wide Web users will grow from approximately 97 million in 1998 to
approximately 319 million by 2002. The Web is emerging as a medium for global
electronic commerce. A growing number of consumers and businesses have begun to
transact business over the Web, such as paying bills, booking airline tickets,
trading securities, and purchasing financial and consumer products. Moreover,
online transactions can be faster, less expensive and more convenient than
transactions requiring human interaction. As corporations and consumers
increasingly engage in electronic commerce, financial institutions are seeking
solutions that provide their clients with the ability to electronically purchase
goods and services. Similarly, these financial institutions are
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<PAGE> 36
implementing technological solutions that enable the electronic distribution of
their products, such as on-line banking and bill payment.
Consolidation in the Financial Services Industry
The financial services industry is undergoing significant consolidation,
forcing financial institutions to handle larger volumes of electronic funds
transfers at more locations. Consequently, financial institutions are more
likely to require an electronic payments solution that can handle complex
transactions at multiple locations, and an electronic banking solution that can
provide current, comprehensive account and other information to corporate
clients. For example, acquiring banks are seeking to improve internal liquidity
management and reporting among their distinct acquired banking entities. These
factors are increasingly driving financial institutions to consider purchasing
third-party-provided software solutions to achieve cost-effective and reliable
electronic payments and banking processing. Scaleable solutions based on
client/server architecture, and versatile solutions based on intranet
architecture capable of accepting multiple server formats and requiring little
investment in new hardware, meet these emerging needs of financial institutions.
Ongoing Changes in the Regulatory Environment
Electronic payments and funds transfers are subject to extensive worldwide
government regulation. For example, the United States Federal Reserve recently
converted the network linking its computer systems to a unified communications
network with common standards and equipment. In addition, heightened stringency
of reporting requirements for funds transfer (for example, the Bank Secrecy Act
of 1996) has been employed to mitigate, among other concerns, illegal funds
transfers, such as money-laundering. Banks are also required to comply with the
Office of Foreign Asset Control provisions which include restrictions on persons
or entities that can be recipients of funds transfers originating in the United
States. These types of regulations increase the need for comprehensive
Electronic payments solutions that can be easily modified to reflect changes in
the regulatory environment.
CURRENT SITUATION
Currently, most large banks use mainframe-based automated payments
processing systems. The majority of other financial institutions and large
business enterprises employ paper-based payments processing systems that do not
provide reliable centralized or real-time control of funds. These manual,
paper-based systems lack the flexibility to cost-effectively scale to handle the
dramatic growth in funds traffic and are prone to human error, non-payment,
fraud and credit risks. These paper-based and legacy mainframe systems cannot be
easily modified to meet the rapid changes in regulatory requirements, formats or
Year 2000 issues.
Similarly, corporations feeling increased competitive pressure and seeking
to do business globally are increasingly finding the traditional systems
provided by their financial institutions inadequate to meet their cash
management requirements. These systems are often inefficient and costly to
maintain. Financial institutions need the ability to provide their corporate
clients with robust, innovative cash management solutions that offer a wide
range of functionalities and can operate across hardware types, multiple web and
software formats and multiple currencies.
THE FUNDTECH SOLUTION
Fundtech's software products offer a comprehensive electronic payments and
banking solution that addresses the entire payment cycle -- from the efficient
transfer of funds to the real-time management of cash positions -- through
secure interfacing across multiple banking systems and currencies. Most of these
products are based on an object-oriented software architecture that utilizes the
Windows NT and UNIX operating systems. Fundtech develops products, such as
FEDplu$, PAY$tar, PAYplus RTGS, Global CASHstar and Access Banking, that are
scaleable, affordable, regulatory-compliant, easy to use and that offer
additional security beyond that associated with the Windows NT and UNIX
operating systems. Fundtech offers its customers both standard packages that are
easily implemented within their existing operating systems, and add-on product
modules to meet their specific needs. Recognizing the mission-critical nature of
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<PAGE> 37
the functions handled by its applications, Fundtech also offers its customers a
high level of technical support, training and consulting services to achieve
maximum customer productivity gains and to assure customer satisfaction.
Fundtech's products deliver the following benefits to its customers:
Affordability. Fundtech's products have made electronic payments and
banking technology available to a wide range of financial institutions and
their corporate customers at an affordable price, due to the products'
underlying architecture and overall design. Fundtech's solutions also
enable its customers to improve their operational efficiency, thus further
lowering the operating costs related to funds transfer and cash management
services. These cost savings are derived from the reduction of manual back
office support and the minimization of time-consuming, expensive user
training.
Client/Server Compatibility. Fundtech's solutions are built for the
Windows NT and UNIX platforms, which provide flexible client/server
solutions to its customers' payments processing and cash management needs.
This technological design enables users to standardize their operating and
computing environments and to utilize network connectivity.
Web Accessibility. Many of Fundtech's solutions are being developed
to operate on business intranets or the Internet.
Centralized Control of Funds. Fundtech's solutions provide its
customers with centralized control over the flow of funds, by conveying
graphical representations of critical data from all relevant databases to
the manager's computer desktop via the client/server architecture.
Regulatory Compliance. Fundtech's solution assists customers in
complying with changing worldwide regulatory environments. Fundtech's
products allow customers not only to maintain a high level of customer
service, but also to avoid costly penalties associated with non-compliance.
Risk Reduction. Fundtech's solution reduces the exposure of financial
institutions and their corporate clients to non-payment, fraud, credit and
foreign exchange risks by supporting on-line and real-time account
determination, balance validation and funds memo posting.
Scaleability. Fundtech's products utilize an open, scaleable
architecture that allows them to meet the needs of growing organizations
and to be implemented in organizations of varying sizes. As financial
institutions and their corporate clients expand their operations,
Fundtech's products accommodate increases in the number of users within an
enterprise, the addition of users at multiple sites and increases in the
number of transactions, without requiring modification of the underlying
software.
STRATEGY
Fundtech's objective is to be the leading provider of electronic payments
and banking software utilizing the client/server and Internet platforms. To
achieve this objective, Fundtech has adopted a strategy which includes the
following key elements:
Capitalize on Electronic Payments and Banking Industry
Experience. Fundtech was founded by veterans of the electronic payments
and banking industry, who dedicated Fundtech to bringing technologically
advanced, cost-effective solutions to the market. Fundtech intends to
capitalize on this industry expertise by continuing to identify the needs
of the electronic payments and banking industry and to develop
technologically advanced solutions to meet those needs. In this regard,
Fundtech leverages its core capabilities in visual programming tools and
object-oriented software development to improve the functionality,
ease-of-use, scaleability, flexibility and cost-effectiveness of its
products. Fundtech has translated its collective employee knowledge into a
comprehensive, integrated suite of technologically advanced software
products designed to meet the needs of financial institutions and their
corporate clients.
Expand into High-End of the Market. Fundtech intends to identify and
target new market segments for its products. For example, Fundtech plans to
build upon the successes of its products in the
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<PAGE> 38
market for mid-sized financial institutions to design solutions for larger
financial institutions. Additionally, Fundtech believes that current
industry trends are creating a demand for electronic payments and banking
systems among large business enterprises. Fundtech intends to use its
product and industry expertise to develop products that address this new,
evolving market segment. For example, Fundtech is developing its Global
CASHstar product to provide large corporations with sophisticated internal
cash flow and reconciliation capabilities.
Penetrate into New Geographic Markets. Fundtech intends to build upon
the success of its software products in the United States to penetrate
markets in Europe and the Asia Pacific regions. Specifically, Fundtech
believes that its RTGS product capabilities position it to capitalize on
international trends as regulatory authorities in those regions
increasingly demand real-time settlement of funds transfers. Fundtech
intends to expand its direct sales and marketing efforts in Europe and in
the Asia Pacific region and to utilize its existing distributors and
establish new alliances to further increase its sales in those regions.
Fundtech recently opened a sales and marketing office in London, England.
Fundtech may also pursue other geographic areas, through distributor
relationships or direct sales efforts.
Offer New Products and Services to Existing Customers. Fundtech seeks
to leverage its existing customer base by selling licenses for
complementary products and modules. For example, Fundtech has developed
PhoneWire, an add-on product which provides secure telephone initiation and
recording of Electronic payments transactions. Fundtech plans to continue
to develop new products to complement its core products.
Introduce an Internet-Based Platform. Fundtech believes that the
Internet will provide an attractive new platform for delivery of electronic
payment and cash and treasury management solutions. Fundtech intends to
offer clients the ability to perform a wide variety of cash and treasury
management functions over an Internet connection to Fundtech's treasury
management services system, which will enable them to interface with banks
and clearance systems.
Leverage Strategic Alliances and Distributor Relationships. Fundtech
has developed marketing and advisory alliances with Compaq, Microsoft and
SWIFT, and distributor relationships with Compaq, EDS Japan, Fiserv, M&I,
and Sterling Commerce. These strategic partners and distributors provide
Fundtech with enhanced market position and marketing resources and large,
well-trained work forces. Fundtech believes that its strategic alliances
and distributor relationships will enable Fundtech to achieve broader
market acceptance for its products by capitalizing on the existing client
relationships and ongoing sales and marketing efforts of its strategic
partners and distributors in various markets.
Grow through Strategic Acquisitions. Fundtech may acquire
complementary technologies and products both to enhance the features and
functionality of, and to add new products and services to, its existing
product line. In addition, Fundtech may enter into acquisitions the primary
target of which is a developed client base which would afford Fundtech with
a significant opportunity to sell products which are complementary to or
upgrades of the products currently used by such customers.
PRODUCTS AND SERVICES
Fundtech's suite of products and related services are designed to integrate
all elements of the electronic payments cycle, including: (1) electronic funds
transfer; (2) cash management; and (3) treasury management. Fundtech believes
that its products are among the most technologically advanced and cost-effective
solutions in the electronic payments and banking industry. Fundtech's products
facilitate all aspects of the electronic payments and banking cycle including
payment initiation, electronic balance reporting, account reconciliation,
real-time account balance verification, and other sophisticated auditing and
reporting functionality. Fundtech's products offer exceptional graphical user
interfaces, enabling its customers to easily receive accurate and focused
information concerning the status of electronic payment transactions and other
cash management data.
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<TABLE>
<CAPTION>
PRODUCT NAME DESCRIPTION RELEASE DATE
------------ ----------- ------------
<S> <C> <C>
ELECTRONIC FUNDS TRANSFERS SOLUTIONS
FEDplu$........................ Supports payment processing, risk May 1995
management and regulatory compliance for
U.S. FedWire payments
PAY$tar........................ Supports payment processing, risk January 1997
management and regulatory compliance for
international multi-currency payments
PAYplus RTGS................... Supports payment processing, risk December 1997
management and regulatory compliance for
payments systems of countries other than
the U.S.
CASH MANAGEMENT SOLUTIONS
Access Banking................. Access Banking allows financial March 1995
institutions to deliver a complete set of
cash management services to their clients
through a full range of delivery channels,
including the Internet.
InfoVue........................ Windows-based cash management software October 1995
suite for interfacing with Access Banking
webAccess...................... HTML browser-based cash management September 1998
interface to Access Banking server at the
bank
Access.pro..................... Internet-based cash management across Under development
global accounts in multiple currencies.
TREASURY MANAGEMENT SOLUTIONS
RECON$tar...................... Automated reconciliation of payments and February 1996
other electronic transactions
Global CASHstar................ Multicurrency treasury management system Under development
for large financial institutions and large
business enterprises
SERVICES
WireUP......................... Contingency recovery for Fundtech's December 1997
clients
Treasury Service............... Global Internet/intranet for Cash Under development
Management
</TABLE>
ELECTRONIC FUNDS TRANSFER SOLUTIONS
FEDplu$
Fundtech's FEDplu$ product is a client/server funds transfer solution used
to connect a financial institution's wire room to the Federal Reserve's FedWire
system. FEDplu$ enhances and improves productivity and customer service for
financial service institutions in what has long been an area of manually
intensive back-office operations. FEDplu$, which can interface with many
different bank accounting packages while automating the wire transfer process,
made an immediate impact on the targeted market of midsized financial
institutions. Since Fundtech released FEDplu$ in May 1995, it has been sold to
more than 150 financial institutions.
FEDplu$ interconnects with branches and customers using LAN/WAN
architecture and relational databases. FEDplu$ provides financial institutions
with complete funds transfer capacity at substantially lower cost than other
technologies. At the same time, FEDplu$ both reduces payments risk (through
real-time updates of account balances by means of an on-line interface with the
host computer) and improves customer service (through its comprehensive database
containing all the information about a transfer -- from its creation to
accounting and memo posting).
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PAY$tar
Fundtech's PAY$tar product is a fully integrated domestic and international
multi-currency payments solution that enables the handling of transactions and
the processing of various network message systems such as SWIFT, local clearing
and settlement networks, internal bank accounting systems, and remote
customer/branch workstations. Since Fundtech released PAY$tar in January 1997,
it has been sold to six banks in New York and London.
PAY$tar supports high-value payments with initiation from customers and
branches via LAN/WAN, telephone or fax. Based on Windows NT client/server
technology, PAY$tar provides comprehensive funds transfer automation, regulatory
compliance and management of non-payment, fraud, credit and foreign exchange
risks. In addition, PAY$tar reduces payment risk for the financial institution
initiating the transfer through on-line verification of customer balances.
PAY$tar enhances customer service by providing immediate confirmation and
advising of payments; a comprehensive electronic audit trail on each payment
from its creation through account posting; and on-line access to a database for
historical research and investigations. PAY$tar supports multi-banking,
anticipated-funds monitoring, Nostro account management, and regulatory
reporting, making it among the most advanced and flexible funds transfer
solutions on the market today.
PAYplus RTGS
Fundtech's PAYplus RTGS solution is a client/server funds transfer software
product that is used to connect the wire room of financial institutions outside
the United States with the applicable real-time gross settlement system. PAYplus
RTGS enhances the functionality of SWIFT's Computer-Based Terminal ("CBT") by
providing full payment processing based on SWIFT's CBT message formats. PAYplus
RTGS enables: (1) management of a financial institution's cash reserves at a
central bank; (2) forecasting of end-of-day funds availability; (3)
reconciliation of transactions performed by customers of the financial
institution directly with the central bank; and (4) management of non-payment,
fraud, foreign exchange and credit risks. Since Fundtech released Payplus RTGS
in December 1997, it has been sold to 11 institutions.
Other Products
Fundtech also has add-on products that supplement its banking funds
transfer solutions by automatic processing of faxed wire transfer requests,
storage and the retrieval of transactions by wire and phone.
CASH MANAGEMENT SOLUTIONS
Access Banking
Fundtech's Access Banking solution is a UNIX-based client/server product
that enables banks and other financial institutions to provide cash management
services to their corporate clients. To date, Access Banking has been sold to
approximately 60 financial institutions. Through Access Banking, clients can
obtain balance history and intra-day reporting, manage check payments, originate
ACH transactions and initiate wire transfer payments. Access Banking consists of
a server located in the back office of a bank and a remote access module located
at the premises of the bank's corporate client. Clients can interact with the
bank's Access Banking server remotely via touch-tone telephone with voice
response, teletype terminal emulation, or facsimile transmission. Internet-based
access methods are under development.
InfoVue
Fundtech's InfoVue product is a Windows-based cash management software
suite for interfacing with Access Banking. The InfoVue suite includes balance
reporting of current and previous-day balances, ACH
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origination, wire initiation, book transfers and check management. New modules
developed within the past twelve months include:
- InfoVue Loans -- reports previous-day loan balances, payments due and
interest rate information; facilitates the initiation of loan payments
and advances; allows management of the entire line of credit or specific
notes;
- InfoVue Positive Pay -- provides daily reporting of exception items
requiring verification before final payment, especially unmatched
exceptions from ARP/SMS or other account reconciliation systems,
including imaging of exception items such as photographic images of
excepted checks.
To date, InfoVue has been sold to more than 50 financial institutions, and
is used by thousands of their corporate clients.
webACCESS
webACCESS employs an HTML browser-based cash management interface to the
Access Banking server at the bank. Financial institutions can use webACCESS to
provide low-cost, branded banking services via Internet, intranet or extranet.
Access.pro
Fundtech's Access.pro product, an Internet-based product currently under
development, will enable corporations to perform sophisticated cash management
functions across accounts at multiple branches, in multiple currencies, and in
multiple countries and regulatory environments. Like Global CASHstar, Access.pro
is Internet-based. Access.pro will reduce the cost of delivering remote banking
services through universal access and simplified maintenance and distribution of
remote software.
TREASURY MANAGEMENT SOLUTIONS
RECON$tar
Fundtech's RECON$tar solution is a client/server system based on Windows NT
and SQL Server software that enables financial institutions to reconcile
automatically various types of transactions, such as incoming/outgoing wire
transfer transactions. Flexibility was incorporated into the product to cover a
wide range of reconciliation requirements and to permit tailoring of the product
to meet specific processing, accounting and reporting needs.
Global CASHstar
Fundtech is currently developing Global CASHstar, a treasury management
system for large financial institutions and industrial companies. Global
CASHstar will facilitate the transfer of cash to and from an institution's
branches worldwide; control cash movement by providing audatibility, accounting,
and reconciliation for the related activities; report on funds availability,
cash balance management and risk management; and make immediate notification of
pertinent financial information. In September 1997, Fundtech entered into an
agreement with Merrill Lynch & Co., Inc. for the creation of a software solution
for worldwide treasury operations. Pursuant to the agreement, Fundtech retains
proprietary rights in this system and expects that it will apply these rights to
the needs of other large financial institutions and industrial companies.
SERVICES
WireUp--Contingency Processing Centers
Fundtech's WireUp--Contingency Processing Centers were developed to respond
to the need expressed by many of Fundtech's customers for a contingency back-up
system for wire transfer operations (in accordance with government regulations),
and to realize Fundtech's objective of entering a niche market within the client
base of Fundtech and its partners. Fundtech established its first
WireUp--Contingency Processing Center service center in San Leandro, California,
and anticipates establishing two additional service
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centers to provide services effectively to Fundtech's geographically dispersed
customer base. The recently released WireUp Contingency Processing Service has
been sold to four banks.
Treasury Services
Fundtech's Treasury Services will provide global treasury management
capabilities on a service bureau basis. Through the Internet, Fundtech will
provide its clients with a virtual private network which replaces the need for
an intranet and allows for distributed treasury workflow throughout an
organization. The Treasury Service Internet connection will then allow the
virtual private network to interface with numerous banks, enabling advanced cash
management functionality.
CUSTOMERS AND MARKETS
Fundtech's scaleable products are sold to a wide array of financial
institutions and large business enterprises. Representative customers which have
purchased at least $50,000 of Fundtech's products during the last three fiscal
years include the following:
U.S. BANKS -- OVER $5 BILLION IN ASSETS
Bankers Trust
Chase Manhattan Bank
Comerica Bank
Imperial Bank
JP Morgan Private Bank
Michigan National Bank
Republic National Bank of NY
Washington Mutual
AGENCY BANKS
ABN-Amro
Banco Atlantico, S.A.
Banco De Credito Del Peru
Bank of Tokyo -- Mitsubishi
Fuji Bank and Trust
Dai-Ichi Kangyo Bank
Merita Bank
U.S. BANKS -- $1-$5 BILLION IN ASSETS
California Commerce Bank
Central Pacific Bank
Citizens Business Bank
East-West Bank
General Bank
Manufacturers Bank
NON-U.S. BANKS
Allied Irish Bank
Banco Popular, Puerto Rico
DG Bank
Israel Discount Bank Ltd.
National Australia Group
Sanwa Bank (Japan)
State Bank NSW Ltd. (Australia)
Swedbank (U.K., Sweden)
U.S. BANKS -- LESS THAN $1 BILLION
City National Bank
Foothill Independent Bank
International Bank of Commerce
Mega Bank
MTB Bank
National City Bank of Minneapolis
Texas Independent Bank
LARGE BUSINESS ENTERPRISES
Fidelity Investments
Merrill Lynch & Co.
Visa International
The markets for Fundtech's products consist of the following end-users:
U.S. Banks -- This group of customers may be divided into three tiers.
The top tier consists of over 100 banks each with more than $5 billion in
assets. These banks process a high volume of wire transfers both in the
U.S. and internationally and generally utilize highly customized systems.
The second tier consists of approximately 3,000 banks with over $100
million in assets. The institutions in this market require standardized
payments processing products so that they may provide competitive payments
processing services to their customers. The third tier consists of
approximately 7,000 small banks with less than $100 million in assets,
which seek regulatory compliance solutions.
Agency Banks and Branches of Foreign Banks Located in the United
States -- These banks, located mainly in financial centers such as New York
City, San Francisco, Los Angeles and Dallas, process both international and
domestic U.S. payments at various volume levels both for their own
activities and for their parent organizations. Depending on the specific
needs of the bank, Fundtech markets the appropriate combination of FEDplu$,
PAY$tar and complementary products.
Banks Located Outside of the U.S. -- The payments systems of both
developed and developing countries are undergoing a major conversion to
RTGS, spawning a great demand for wholesale payments applications that
support real-time posting and immigration of financial data. Fundtech
intends to pursue the worldwide market for electronic payments systems with
a version of PAYplus RTGS modified for each country's RTGS model.
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Corporate Clients of Banks -- The largest segment of end-users of
Fundtech's products consists of the corporate clientele of banks and other
financial institutions. These corporations access Fundtech's solutions
remotely via Wire$tar, InfoVue and other remote access modules for Access
Banking.
Large Business Enterprises -- These enterprises consist of: (1)
financial institutions which provide regular treasury management services
to large corporations; (2) large non-bank financial institutions, primarily
brokerage houses, bond dealers, and insurance firms, which need to conduct
their own internal treasury management and risk management activities; and
(3) Fortune 500 companies with significant multinational operations which
require a real-time view of their cash position.
CASE STUDIES
American Savings Bank, based in Stockton, California, was manually
processing Fedwire messages daily. Specifically, bank employees were keying in
the data at least twice for each wire transfer and the bank had no automated
procedures to comply with federal regulations restricting the transfer of funds
to specified individuals and entities. In January 1995, American Savings Bank
installed FEDplu$, which enabled it to dramatically increase the number of wire
transfers electronically processed per day. In 1996, American Savings Bank was
acquired by Washington Mutual of Seattle, Washington, which chose Fundtech's
Windows NT-based software for the combined multi-bank operation. Washington
Mutual, with assets of approximately $100 billion, selected FEDplu$ based on its
ease of use and user-friendly features.
Banco Atlantico, headquartered in Barcelona, Spain, previously utilized a
Unisys-based system to process the daily volume of U.S. domestic and
international funds transfers at its New York branch office. In 1997, Banco
Atlantico selected Fundtech's PAY$tar funds transfer solution to replace the
Unisys system after a thorough evaluation of the alternatives. Some of the key
factors which led Banco Atlantico to select PAY$tar included its functionality,
connectivity, client/server architecture and Fundtech's professional support
organization. Banco Atlantico is installing PAY$tar at its Miami branch.
Citizens Business Bank of Ontario, California is a 20-branch bank. In 1995,
the bank installed FEDplu$, which enabled the bank to reduce its operating
costs, enhance its customer service and ensure compliance with applicable
banking regulations. Special features of FEDplu$ which influenced Citizens
Business Bank's decision to license FEDplu$ included: (1) laser disk storage of
previous transactions, which reduces research requests and eliminates paper
storage costs; (2) the Remote Entry Unit feature, which allows wire transfers to
be initiated by the bank's customers directly (following a built-in test key
authentication) rather than through the bank's wire room operators; and (3) the
high level of security offered by Fundtech's products.
SouthTrust Bank of Birmingham, Alabama, with over $32 billion in assets,
selected the Access Banking server as its cash management solution. The initial
solution provided its corporate clients with balance reporting, wire initiation,
check management and stop payments functionality. In 1998 SouthTrust upgraded
its cash management solution by adding webACCESS, Access Banking's browser-based
delivery channel, and InfoVue, Access Banking's Windows-based delivery channel.
In 1997, SouthTrust added ACH origination and Positive Pay modules to its Access
Banking platform. These new additions allow SouthTrust to offer a broader, more
comprehensive electronic offering to its corporate clients. In particular, ACH
origination allows its corporate clients to electronically transmit payroll
files to the bank for processing, which saves time and reduces errors. Positive
Pay, which provides daily reporting capability, speeds the flow of information
between the bank and its clients, which helps reduce the risk of check fraud. To
date, SouthTrust Bank has established electronic connections to over 2,000 of
its corporate clients.
SALES AND MARKETING
Fundtech sells its products through its direct sales force and through
distributors including EDS Japan, Fiserv, M&I, Sterling Commerce and Compaq.
Fundtech's sales and marketing department is comprised of 12 individuals located
throughout the United States, three individuals located in Israel, one located
in Australia and four individuals located in the United Kingdom. Because the
sale of electronic payments and banking products is highly technical, the sales
cycle can be as long as six months, varying by product and customer.
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Fundtech's distributors serve as an integral part of Fundtech's marketing
and service network worldwide. They have contributed significantly to Fundtech's
growth through cross-selling Fundtech products to their current client/product
bases and extensive marketing and promotion of Fundtech's name and products.
Compaq is a manufacturer of computer hardware used for on-line transaction
processing worldwide, and has assembled a consortium of companies (the "NPF
Consortium") whose combined offering, The Non-Stop Payments Factory ("NPF"),
which is based on the Windows NT platform, is designed to comprehensively
address the wholesale banking needs of major international financial
institutions. Fundtech has been selected as the NPF Consortium's funds transfer
software provider. Fundtech recently entered into a marketing agreement with
Compaq which grants Compaq exclusive distribution rights to PAYplus RTGS in
Australia and New Zealand, where Compaq has already contracted with one bank,
and non-exclusive distribution rights globally. Compaq's worldwide sales force
markets Fundtech's products.
EDS Japan, a subsidiary of Electronic Data Systems Corporation, is a
professional consulting services firm engaging in systems development and data
center and network management and offering special expertise in cash management,
risk management and customer relationship banking. EDS Japan's clients include
Citibank N.A., Fujitsu Ltd., General Motors, Yamaha Motor Co., Ltd. and
Mitsubishi Motor Co., Ltd. Fundtech has entered into contracts with EDS Japan
for the distribution in Asia of its cash management products.
Fiserv is an independent producer of financial data processing systems and
related information management services and products which it markets to
financial institutions worldwide. Fundtech has entered into contracts with two
divisions of Fiserv, Fiserv Pittsburgh and Fiserv CBS. Fiserv Pittsburgh is
selling Fundtech's products to its client base through two sales
representatives. Fiserv's out-sourcing division, Fiserv CBS, sells PAY$tar to
its substantial customer base. Fiserv has two sales representatives marketing
Fundtech's products.
M&I provides financial data processing, out-sourcing, systems integration,
and a range of software products to more than 600 financial institutions in
North America, Europe, and the Pacific Rim. M&I provides exclusive referrals to
Fundtech for funds transfer systems within its customer base. Fundtech provides
all sales and technical support for a percentage of the license fee.
Sterling Commerce is a banking/financial software company with a strong
presence in the EDI (Electronic Data Interchange) and cash management software
marketplace. Sterling Commerce is private-labeling FEDplu$ under the name
"Vector: Fedwire."
Fundtech focuses a significant amount of its sales and marketing resources
on its distributors, communicates with them regularly and provides them with
ongoing support. In addition, Fundtech, in conjunction with its distributors,
participates in exhibitions of its products worldwide, places advertisements in
local publications, encourages exposure in the form of articles and editorials
in communications journals and other periodicals and prepares direct mailings of
flyers and advertisements focusing on Fundtech's products. Fundtech also markets
its products directly through our World Wide Web home page.
STRATEGIC ALLIANCES
The material strategic alliances formed by Fundtech to date include:
Compaq
Compaq has funded the initial development and integration of the NPF
Consortium's software products. Compaq's sales and marketing program for NPF
uses worldwide sales and systems integration resources to promote the integrated
offering. In addition, Fundtech and Compaq participate together in trade shows,
banking industry advertising and other joint marketing activities.
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Microsoft
Fundtech is a Microsoft Independent Software Vendor and is also a Microsoft
Solution Provider. In the context of this strategic relationship, Fundtech
develops its software solutions to operate on Microsoft operating systems, such
as Windows, Windows NT and BackOffice. Microsoft provides Fundtech with
marketing support such as including Fundtech in Microsoft's regional banking
seminars, advertising some of Fundtech's products in Microsoft Solution Provider
directories (including the World Wide Web page), and jointly participating with
Fundtech in trade shows, banking industry advertising and other public relations
opportunities. In addition, Microsoft provides Fundtech with technical and
software development support.
SWIFT
Another strategic partner of Fundtech is SWIFT, a global information
network that links approximately 6,000 banks, securities firms and stock
exchanges in more than 160 countries. Member financial institutions exchange
payment instructions and funds and securities transfer details using standard
message formats. SWIFT signed a strategic partnership agreement with Fundtech
during 1996 for the integration of SWIFT's CBT product (based on Windows NT).
SWIFT's CBT product is in the process of replacing SWIFT's ST200 message
terminal, which is currently in use by more than 600 North American members. As
of December 31, 1998, Fundtech was one of approximately 15 SWIFT strategic
partners in the world and the only such partner that is a provider of integrated
Electronic payments software. In May 1998, SWIFT awarded Fundtech with the SWIFT
Gold Medal Award for excellence in electronic payments solutions.
SOFTWARE DEVELOPMENT
Fundtech believes that its software development team provides a significant
competitive advantage. The team is comprised of developers with experience in
visual programming design and object-oriented software development of
mission-critical applications. Fundtech believes this assembly of diverse
technical expertise contributes to the highly integrated functionality of its
products. Fundtech's ability to attract and retain highly qualified employees
will be the principal determinant of its success in maintaining technological
leadership. The total software development staff consisted of 126 full-time
employees, as of March 18, 1999. All of Fundtech's products have been developed
internally by its product development staff. Fundtech believes significant
investments in product development are required to remain competitive.
To ensure that its products are developed successfully, within their
budgets and according to schedule, Fundtech sends its products through four
distinct design and testing stages: (1) specifications are developed through
consultation with prospective users to ensure that the product matches the
user's requirements; (2) an internal quality assurance team verifies the
integrity of the product at each stage of development prior to beta testing; (3)
beta testing data is used to evaluate the functionality of the products and
their ability to perform under realistic conditions; and (4) a controlled group
of users is polled regularly to identify any modifications that may be
necessary. In addition, Fundtech works closely with current and potential
end-users, Fundtech's strategic partners and leaders in certain industry
segments to identify market needs and define appropriate product specifications.
Company employees also participate in numerous user focus groups to review
product design. Fundtech has software development sites in Israel, New Jersey,
Massachusetts and Georgia. Fundtech believes that separating development by
geographic region both allows for development to be close to the targeted market
and increases Fundtech's opportunity to attract development talent.
CUSTOMER SUPPORT AND MAINTENANCE
Fundtech believes that effective customer support and maintenance in the
software industry begins with rapid, efficient and comprehensive installation of
the product. Upon installation, Fundtech strives to provide superior customer
support by solving problems quickly and providing customers with consistent,
accurate and understandable technical information. Fundtech employs test scripts
and bank production data to test its solutions and its products are shipped with
back-up procedures installed. Fundtech recognizes that, in the event problems do
arise, timely solutions are essential for mission-critical solutions like
FEDplu$, PAY$tar, PAYplus RTGS and Access Banking. Fundtech's policy is to
emphasize responsiveness to customer inquiries
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and to provide telephonic support twenty-four hours a day. Customer inquiries
range from production problems to user questions and hardware issues. In
addition, Fundtech utilizes Remote Access Services (RAS-Windows NT service) to
enhance remote customer support. Certain of Fundtech's distributors also provide
sales, service and technical support functions for Fundtech's products to
end-users in the distributors' respective territories.
COMPETITION
Fundtech believes that the principal competitive factors in the industry in
which it operates are product performance, technical features, compatibility
with existing operating systems, reliability, security, relational database
powers, price, customer service and support, ease of use and Year 2000
compliance. Fundtech believes that its products and related services compete
favorably with respect to these factors. However, there can be no assurance that
Fundtech will be able to differentiate its products from the products of its
competitors or to develop or introduce successfully new products that are less
costly than or superior to those of its competitors. In addition, existing and
new competitors of Fundtech may have established relationships with Fundtech's
existing and potential customers, which could have a material adverse effect on
Fundtech's ability to compete.
The industry in which Fundtech operates is highly competitive and evolving.
Competing providers of Electronic payments and Banking solutions include, but
are not limited to, BankServe, Credo Group Limited, FICS Group N.V., ICM
Electronic Banking Services, Inc., Logica PLC, Magnet Communications, Inc.,
Politzer & Haney, Transaction Software Technologies, Inc. and Transaction
Systems Architects, Inc. Furthermore, certain large banks have developed
solutions internally which they have then marketed to other banks or implemented
in banks that they have acquired. In addition to its current competitors,
Fundtech expects substantial competition from both established and emerging
companies. Many of Fundtech's existing and potential competitors have or are
likely to have more extensive engineering, development, marketing, distribution
(particularly with respect to direct sales forces), financial, technological and
personnel resources than Fundtech.
Increased competition could materially adversely affect Fundtech's revenues
and profitability through loss of market share, pricing pressures and other
factors, any of which could have a material adverse effect on Fundtech's
business, financial condition and results of operations.
PROPRIETARY RIGHTS
Fundtech relies upon a combination of contractual rights, trade secrets,
copyrights, technical measures, non-disclosure agreements and trademarks to
establish and protect its proprietary rights in its products and technologies.
In addition, although Fundtech sometimes enters into non-disclosure and
confidentiality agreements with its employees and distributors with access to
sensitive information, there can be no assurance that these agreements will not
be breached, that Fundtech would have adequate remedies for any breach, that
others will not acquire substantially equivalent proprietary technologies, that
others will not otherwise gain access to Fundtech's proprietary technologies, or
that any particular technology will be regarded as a trade secret under
applicable law. As a result of the reliance that Fundtech places on its trade
secrets, loss of Fundtech's trade secret protection could have a material
adverse effect on Fundtech's business, financial condition and results of
operations. Fundtech has no registered patents or pending patent applications.
There can be no assurance that the steps taken by Fundtech to protect its
proprietary rights will be adequate to prevent misappropriation of Fundtech's
technology or independent development or sale by others of software products
with features based upon, or otherwise similar to, those of Fundtech's products.
Although Fundtech believes that its technology has been independently
developed and that none of its technology or intellectual property infringes on
the rights of others, there can be no assurance that Fundtech does not and will
not so infringe or that third parties will not assert infringement claims
against Fundtech in the future. If such infringement were found to exist,
Fundtech would, under certain circumstances, be required to modify its products
or technologies or obtain a license to permit their continued use. There can be
no assurance that Fundtech would be able to do either in a timely manner or upon
acceptable terms and
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conditions, and any failure to do so could have a material adverse effect on
Fundtech's business, financial condition and results of operations. In addition,
if future litigation were to become necessary to protect trade secrets, know-how
or other proprietary rights owned by Fundtech, to defend Fundtech against
claimed infringement of the rights of others or to determine the scope and
validity of the proprietary rights of others, such litigation, whether
successful or unsuccessful, could result in substantial cost to, and diversion
of efforts by, Fundtech. Adverse determinations in any such litigation or
proceedings also could subject Fundtech to significant liabilities to third
parties and could prevent Fundtech from producing, selling or using certain of
its products or technologies, any of which could have a material adverse effect
on Fundtech's business, financial condition and results of operations. There can
be no assurance that Fundtech will have the resources to defend or prosecute a
proprietary rights infringement or other action. In addition, the laws of
certain countries may not protect Fundtech's contractual rights, trade secrets,
copyrights, technical measures, non-disclosure agreements, trademarks, products,
processes or technologies to the same extent as in the U.S.
GOVERNMENT REGULATION
Fundtech's current and prospective customers, which include financial
institutions such as state and federally chartered banks and savings and loan
associations as well as customers in other industries that Fundtech may target
in the future, operate in markets that are subject to extensive and complex
regulation. While Fundtech is not itself directly subject to such regulation,
Fundtech's products and services must be designed to work within the extensive
and evolving regulatory constraints under which its customers operate. The
failure of Fundtech's products and services to support customers' compliance
with current regulations and to address changes in customers' respective
regulatory environments, or to adapt to such changes in an efficient and
cost-effective manner, could have a material adverse effect on Fundtech's
business, results of operations and financial condition.
EMPLOYEES
As of March 18, 1999, Fundtech had 45 employees in Israel, four employees
in the United Kingdom, and 177 employees in the United States (including 67
employees added through the CheckFree acquisition). Of the 177 employees in the
United States, 76 were employed in software development, 63 in operations, 14 in
sales and marketing, and 24 in administration. Of the 45 employees in Israel, 30
were employed in software development, five in operations, four in sales and
marketing and six in administration. Fundtech considers its relations with its
employees to be good and has never experienced a labor dispute, strike or work
stoppage. Fundtech's employees are not represented by a labor union.
None of Fundtech's employees is a party to a collective bargaining
agreement with Fundtech. However, Fundtech is subject to certain provisions of
collective bargaining agreements among the Government of Israel, the Histadrut
(General Federation of Labor in Israel) and the Coordinating Bureau of Economic
Organizations (including the Industrialists' Association) that are applicable to
Fundtech's Israeli employees by virtue of expansion orders of the Israeli
Ministry of Labor and Welfare. In addition, Israeli labor laws are applicable to
all of Fundtech's employees in Israel. Those provisions and laws principally
concern the length of the work day, minimum daily wages for workers, procedures
for dismissing employees, determination of severance pay and other conditions of
employment.
A general practice followed by Fundtech, although not legally required, is
the contribution of funds on behalf of most of its full-time employees in Israel
to an individual insurance policy known as "Managers' Insurance." This policy
provides a combination of savings plan, insurance and severance pay benefits to
the insured employee; it provides for payments to the employee upon retirement
or death and secures the severance pay, if any, to which the employee is legally
entitled upon termination of employment. The remaining part of this obligation
is presented on the balance sheet of Fundtech as provision for severance pay.
See Note 8 to the Consolidated Financial Statements.
All Israeli employers, including Fundtech, are required to provide certain
increases in wages as partial compensation for increases in the CPI. The
specific formula for such increases varies according to agreements reached among
the Government of Israel, the Manufacturers' Association and the Histadrut.
Israeli employees and employers also are required to pay pre-determined sums
(which include a contribution to
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national health insurance) to the Israel National Insurance Institute, which
provides a range of social security benefits.
PROPERTIES
Fundtech does not own any real property. As of March 18, 1999, Fundtech
leased an aggregate of approximately 260 square meters of office space in Ramat
Gan, Israel and an aggregate of approximately 6,000, 10,000, 2,000 and 22,000
square feet of office space in Lexington, Massachusetts, Jersey City, New
Jersey, San Leandro, California and Norcross, Georgia, respectively. In 1998,
aggregate annual lease payments for Fundtech's facilities were approximately
$605,000.
LEGAL PROCEEDINGS
Fundtech is not a party to any material litigation, either in Israel or
abroad, and is not aware of any pending or threatened litigation that would have
a material adverse effect on Fundtech or its business.
46
<PAGE> 49
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table lists the names and ages of the current directors,
executive officers and key employees of Fundtech:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Reuven Ben-Menachem....................... 38 Chief Executive Officer, President and Chairman
Ariu Levi................................. 51 President of Fundtech Corp.
Joseph P. Mazzetti........................ 58 Executive Vice President, Sales and Marketing
Michael Carus............................. 33 Executive Vice President and Chief Financial
Officer
Gil Gadot................................. 37 Executive Vice President, Head of Israeli
Operations
Isaac Yaniv............................... 37 Senior Vice President, Head of RTGS Technology
Paul J. Citarella......................... 41 Senior Vice President, Electronic Banking
Michael S. Hyman.......................... 41 Vice President, General Counsel and Secretary
George M. Lieberman....................... 56 Director
Boaz Misholi.............................. 47 Director
Jay B. Morrison........................... 52 Director
Rina Shainski............................. 39 Director
Eddy Shalev............................... 51 Director
Rimon Ben-Shaoul.......................... 54 Director
</TABLE>
Reuven Ben-Menachem, a co-founder of Fundtech, has served as Fundtech's
Chief Executive Officer and President, as a director of Fundtech since its
inception in April 1993 and as Chairman of the Board of Directors since August
1998. Before founding Fundtech, Mr. Ben-Menachem was employed at Logica Data
Architects, a funds transfer software provider, most recently as a Technical
Director and a Product Manager. From January 1984 until June 1986, Mr.
Ben-Menachem served as Director of Banking Systems at Manof Communications
Systems, a middleware software provider. Prior thereto, Mr. Ben-Menachem served
as a senior programmer/analyst in the Israeli Air Force.
Ariu Levi, a co-founder of Fundtech, has been President of Fundtech Corp.
since it commenced operations in 1993. Before founding Fundtech, from 1991 to
1993, Mr. Levi was the Vice President of West Coast Sales at Winter Partners, an
international banking software company. From 1981 to 1991, Mr. Levi was employed
in the payments systems consultancy and sales and marketing divisions at TMI,
Inc. and Logica USA. From 1973 to 1981, Mr. Levi was Vice President at the
Cashiers Division of Bank America, and was responsible for the management of
Bank America's consolidated cash flow and payment systems policy. Mr. Levi has
24 years of experience in the wholesale payments industry.
Joseph P. Mazzetti has served as Executive Vice President, Sales and
Marketing of Fundtech since December 1997 and served as Senior Vice President,
Sales and Marketing of Fundtech since joining Fundtech in 1994. From 1992 to
1994, Mr. Mazzetti was employed as an Executive Vice President at PRT Corp., a
Year 2000 solution company. From 1984 to 1992, Mr. Mazzetti was employed at
Logica Data Architects, most recently as Executive Vice President of the
Financial Products Group, where he had responsibility for funds transfer,
message switching, and asset/liability product lines. Mr. Mazzetti has more than
30 years of experience in information technology in the public and private
sectors with concentration in the banking and financial institutions market.
Michael Carus has served as Executive Vice President and Chief Financial
Officer of Fundtech since May 1998, and as Senior Vice President and Chief
Financial Officer from September 1997 to May 1998. From May 1995 to August 1997,
Mr. Carus was employed by Geotek Communications Inc., a wireless communications
solution provider, most recently as Vice President and Acting Chief Financial
Officer, Corporate Controller and Chief Accounting Officer. From 1988 to 1995,
Mr. Carus was employed by Coopers & Lybrand as a Certified Public Accountant,
most recently in the position of Manager - Business Assurance.
47
<PAGE> 50
Gil Gadot has served as Executive Vice President and Head of Israeli
Operations of Fundtech since September 1998. From 1995 until September 1998, Mr.
Gadot was Senior Vice President of Operations -- Technology, and served as Vice
President of Research and Development of Fundtech since it commenced operations
in 1993 until 1995. From 1987 to 1993, Mr. Gadot was a senior project manager of
DSSI, a leading systems and software supplier with operations in Israel and the
United States. Mr. Gadot has more than 15 years of software development
experience, particularly in advanced graphical user interface, operating and
real-time systems.
Isaac Yaniv has served as a Senior Vice President and Head of RTGS
Technology since September 1998. From 1995 until September 1998, Mr. Yaniv was
Senior Vice President and Head of Israeli Operations. From 1993 to 1995, Mr.
Yaniv was Managing Director of 2001 Systems and Services Ltd., a software
development and systems integration firm. Mr. Yaniv has more than ten years of
design and development experience in technical and management positions in the
financial industry.
Paul J. Citarella has served as Senior Vice President and General Manager
of the Electronic Banking Division of Fundtech since April 1998. Mr. Citarella
held the same position at CheckFree Corporation where he was employed from 1996
to April 1998. From 1985 to 1995, Mr. Citarella was employed by Unisys
Corporation, an information technology solutions provider, where he held
management and sales positions with that company's Financial Services Division.
Michael S. Hyman has served as Vice President, General Counsel and
Secretary of Fundtech since September 1998. From January until September 1998,
Mr. Hyman worked as a special counsel to the law firm of Wilson Sonsini Goodrich
and Rosati. In 1996 and 1997, Mr. Hyman worked in Israel as an associate at the
law firm of Leshem, Brandwein & Co. In 1994 and 1995, Mr. Hyman worked as a
foreign expert at the law firm of Dankner -- Lusky & Co. Mr. Hyman was admitted
as a member of the bar of the State of Illinois in 1982 and the State of Israel
in 1986.
George M. Lieberman has served as a Director of Fundtech since December
1998. Mr. Lieberman has been with WIT Capital, a pioneer online investment
banking firm, as Senior Vice President and CIO since February 1998. Prior to
February 1998, Mr. Lieberman held a number of positions at Merrill Lynch
including First Vice President of Technology Strategy and Planning and was a
member of the Merrill Lynch Technology Advisory Board. Mr. Lieberman has more
than 30 years of information technology management and development experience
across a broad spectrum of industries. He holds two computer related patents.
Mr. Lieberman was also responsible for the development of major systems projects
at many financial industry companies including Citibank and ADP. Mr. Lieberman
holds advanced degrees in Industrial Engineering and Operations Research.
Boaz Misholi has served as a director of Fundtech since its inception in
1993, and was co-Chairman of the Board of Directors until August 1998. Since
1992, Mr. Misholi has served as the Chairman of the Board and CEO of Aura
Investments Ltd. ("Aura"), a company listed on the Tel Aviv Stock Exchange
("TASE"), whose primary business is the development of high-tech companies. In
addition, Mr. Misholi has served as Chairman of the Board of MAGMA Industries
(an Israeli company listed on TASE) since 1993, and as Chairman of the Board of
Directors of VersaMed Ltd. since 1996. From 1982 to 1988, Mr. Misholi was the
founder, CEO and Chairman of Comverse Technology and its subsidiaries in Israel,
EFRAT and TeleMesser. Mr. Misholi has more than 20 years of involvement in
founding, managing and investing in high-tech companies in the United States and
Israel. Mr. Misholi received his B.Sc. in Computer Engineering from the
Technion, Israel Institute of Technology (the "Technion").
Jay B. Morrison has served as a director of Fundtech since 1995 and was
co-Chairman of the Board of Directors until August 1998. Dr. Morrison has been a
General Partner of Newbury Ventures, Inc., a venture capital investment firm,
since 1992. Prior thereto, Dr. Morrison held a number of positions with Govett &
Co. Ltd., a European international fund management company, including Chief
Financial Officer and President of its venture capital subsidiary from 1990 to
1991. Dr. Morrison holds B.Ie. and M.S. degrees from Ohio State University and a
Ph.D. from the University of California, Berkeley, and has more than 14 years of
experience in investing in and working with emerging growth companies.
48
<PAGE> 51
Rina Shainski was recently appointed to serve as a director of Fundtech
after serving as an alternate director of Fundtech since August 1998. Ms.
Shainski has served as Vice President Business Development of Clal Industries
and Investments Ltd., one of Israel's largest investment and holding companies,
which is invested primarily in the industrial and technology sectors, since
September 1997. From 1989 until 1996 Ms. Shainski was employed by Tecnomatix
Technologies Ltd., most recently as Director Research & Development and Vice
President Business Development. Ms. Shainski has more than 17 years of
experience in management of high-tech software companies. Ms. Shaninski holds an
M.Sc. degree in Computer Science from Weizmann Institute and a B.Sc. degree in
Physics from Tel Aviv University.
Eddy Shalev has served as a Director of Fundtech since 1996, and has been
affiliated with Fundtech since 1993. Since 1985, Mr. Shalev has served as Chief
Executive Officer of E. Shalev Ltd., an affiliate of CIBC Oppenheimer Corp., in
charge of the Tel Aviv office. Since 1992, Mr. Shalev has participated in many
private equity investments in emerging growth and technology companies. Mr.
Shalev also co-founded Mofet Israel Technology Fund, a venture capital fund, in
1992 and is a general partner of Genesis Partners LLP. Previously, Mr. Shalev
worked in the Computer Center of the Israeli Ministry of Defense. Mr. Shalev
earned an M.Sc. degree in Information Systems Management and a B.A. degree in
Statistics from Tel Aviv University.
Rimon Ben-Shaoul has served as a director of Fundtech since August 1998. He
has also served as President of Clal Industries and Investments Ltd., one of
Israel's largest holding companies, which is invested primarily in the
industrial and technology sectors, since May 1997. From 1985 until 1997, Mr.
Ben-Shaoul served as President and as a member of the board of directors of Clal
Insurance Company Ltd. Mr. Ben-Shaoul also serves as the chairman or a member of
the boards of directors of several other companies in which Clal Industries and
Investments Ltd. has interests. Mr. Ben-Shaoul earned a B.A. in Economics as
well as an M.B.A. from Tel Aviv University.
The Amended and Restated Articles of Association of Fundtech (the "Articles
of Association"), provide that, unless otherwise resolved by an ordinary
resolution of the General Meeting of Fundtech, the number of directors of
Fundtech shall be between five and seven directors. The minimum number of
directors is four. Officers of Fundtech serve at the discretion of the Board of
Directors. Directors may be removed at any time by an ordinary resolution of the
shareholders, provided the shareholders are given 21 days' notice.
Prior to every annual ordinary meeting of Fundtech, the Board of Directors
of Fundtech is to select between five and seven persons to be proposed to the
shareholders of Fundtech for election as directors of Fundtech until the next
annual ordinary meeting. Except for such nominees, no candidate for the office
of a director may be proposed at an annual ordinary meeting of Fundtech unless
not less than 72 hours and not more than 42 days prior to the date appointed for
the annual ordinary meeting, a notice in writing, signed by members holding at
least 10% of Fundtech's issued and outstanding shares who are entitled to attend
a meeting in respect of which notice has been sent and who are entitled to vote
thereat, is delivered to Fundtech stating that such members intend to propose
candidates for the office of directors instead of the nominees proposed by the
Board of Directors. The directors are elected by an ordinary resolution at every
annual ordinary meeting, for a term of office which shall end upon the convening
of the first annual ordinary meeting held after the date of their election.
The Articles of Association provide that a director may appoint, by written
notice to Fundtech, any individual to serve as an alternate director. Any
alternate director shall have all of the rights and obligations of the
appointing director except the power to appoint an alternate for himself. Unless
the period or scope of any such appointment is limited by the appointing
director, such appointment is effective for all purposes and for a period of
time concurrent with the term of the appointing director. Currently, no
alternate directors have been appointed.
INDEPENDENT DIRECTORS
Under the requirements for quotation on Nasdaq, Fundtech is required to
have at least two independent directors on its Board of Directors and to
establish an audit committee, a majority at least of whose members are
independent of management. Fundtech is in compliance with this requirement.
49
<PAGE> 52
DUTIES UNDER THE COMPANIES ORDINANCE
Fundtech is subject to the provisions of the Israeli Companies Ordinance
(New Version), 1983, as amended (the "Companies Ordinance"). The Companies
Ordinance codifies the duty of care and fiduciary duties that an "Office Holder"
has to a company. An Office Holder is defined in the Companies Ordinance as a
director, managing director, chief business manager, president, executive vice
president, vice president, other manager directly subordinate to the managing
director or any other person who fills one of the above positions in the
company, even if he or she carries a different title. Each person listed in the
table under "Management" set forth above (other than Mr. Ariu Levi, who is an
officer of Fundtech Corp.) is an Office Holder of Fundtech Ltd.
Under the Companies Ordinance, an Office Holder's duty of care and
fiduciary duty include, among other things, avoiding any conflict of interest
between the Officer Holder's position in the company and his personal or other
affairs, avoiding any competition with the company, avoiding exploiting any
business opportunity of the company in order to receive personal advantage for
himself or herself or others and revealing to the company any information or
documents relating to the company's affairs which the Office Holder has received
due to his or her position as an Office Holder. Under the Companies Ordinance,
all arrangements as to compensation by Fundtech of Office Holders who are not
directors require approval of the Board of Directors and when the majority of
the members of the Board have a personal interest, approval by the shareholders
is required. Shareholder approval is also required for all arrangements relating
to the compensation of directors in any capacity.
APPROVAL OF CERTAIN TRANSACTIONS UNDER THE COMPANIES ORDINANCE; AUDIT COMMITTEE
The Companies Ordinance requires that certain transactions, actions and
arrangements be approved as provided for in a company's Articles of Association.
In certain circumstances, shareholder, audit committee or board of directors
approval is also required. The vote required by the Audit Committee and the
Board for approval of such matters, in each case, is a majority of the
disinterested directors participating in a duly convened meeting.
The Companies Ordinance's disclosure provisions require that an Office
Holder of a company promptly disclose any direct or indirect "personal interest"
(including a personal interest of certain relatives or of a corporation in which
the Office Holder or such relative is an interested party) that he or she may
have and all related material information known to him or her, in connection
with any existing or proposed transaction (whether extraordinary or regular) by
the company in which he or she has a personal interest. An extraordinary
transaction is a transaction other than in the ordinary course of business,
otherwise than on market terms or likely to have a material impact on the
company's profitability, assets or liabilities. If the Office Holder's personal
interest derives only from the personal interest of his relative in a regular
transaction, then the Office Holder would be exempt from the above mentioned
disclosure obligations.
Once the Office Holder complies with the above disclosure requirement, the
company may approve the transaction in accordance with the provisions of its
Articles of Association. If the transaction is with the Office Holder or a third
party in which the Office Holder has a personal interest, the approval must
confirm that the transaction is not adverse to the company's interest and, in
the case of a transaction with an Office Holder, the approval must also confirm
that the Office Holder acted in good faith. Furthermore, if the transaction is
an extraordinary transaction, then, in addition to any approval stipulated by
the Articles of Association, it also must be approved by the company's Audit
Committee and then by the Board of Directors (in each case, without the
participation of the interested Office Holder), and, under certain
circumstances, by a majority of the shareholders of the Company at a general
meeting.
The Articles of Association of Fundtech provide that the Board may delegate
all of its powers to such committees of the Board as it deems appropriate,
subject to the provisions of the Companies Ordinance.
For information concerning the direct and indirect personal interests of
certain Office Holders and principal shareholders of Fundtech in certain
transactions with Fundtech, see "Certain Relationships and Related Party
Transactions."
50
<PAGE> 53
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Companies Ordinance provides that an Israeli company cannot exempt an
officer from liability with respect to a breach of his duty of care or his
fiduciary responsibilities. However, the Articles of Association of Fundtech
provide that, subject to the provisions of the Companies Ordinance, Fundtech may
enter into a contract for the insurance of the liability, in whole or in part,
of any of its Office Holders with respect to: (i) a breach of his duty of care
to Fundtech or to another person; (ii) a breach of his fiduciary duty to
Fundtech, provided that the Office Holder acted in good faith and had reasonable
cause to assume that his act would not prejudice the interests of Fundtech; or
(iii) a financial liability imposed upon him in favor of another person in
respect of an act performed by him in his capacity as an Office Holder of
Fundtech. In addition, Fundtech may indemnify an Office Holder against: (i) a
financial liability imposed on him in favor of another person by any judgment,
including a compromise judgment or an arbitrator's award approved by a court in
respect of an act performed in his capacity as an Office Holder of Fundtech, and
(ii) reasonable litigation expenses, including attorneys' fees, incurred by such
Office Holder or charged to him by a court in proceedings instituted against him
by Fundtech or on its behalf or by another person, or in a criminal charge from
which he was acquitted, all in respect of an act performed in his capacity as an
Office Holder of Fundtech. The Articles of Association of Fundtech state that an
Office Holder of Fundtech, for purposes of this Article, includes a director, a
general manager, the chief executive officer, an executive vice president, a
vice president, other managers directly subordinate to the general manager and
any person who fills one of the above positions in Fundtech, even if he carries
a different title. Fundtech has obtained directors and officers liability
insurance for the benefit of Fundtech's Office Holders.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has formed an Audit and Control Committee (the
"Audit Committee") and a Compensation Committee. The Audit Committee, which
consists of Dr. Jay Morrison and Ms. Rina Shainski, exercises the powers of the
Board of Directors with respect to the accounting, reporting and financial
control practices of Fundtech. The Compensation Committee, which consists of
Messrs. Boaz Misholi and Eddy Shalev, Dr. Jay Morrison and Ms. Rina Shainski,
administers Fundtech's stock option plans and Fundtech's overall compensation
practices.
DIRECTOR COMPENSATION
Pursuant to its directors' stock option plan, Fundtech granted or will
grant options to purchase up to 6,000 ordinary shares to each member of the
board of directors.
We do not otherwise currently compensate directors for attending meetings
of the board of directors or committee meetings of the board of directors, but
we do reimburse directors for their reasonable travel expenses incurred in
connection with attending these meetings.
51
<PAGE> 54
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid or distributed during
the years ended December 31, 1998, 1997 and 1996 by Fundtech for services
rendered by (i) Fundtech's chief executive officer and (ii) Fundtech's four most
highly compensated executive officers (the "Named Executive Officers") other
than the chief executive officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME & PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
- ------------------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Reuven Ben-Menachem.................. 1998 $165,417 $140,000 21,000(2) 2,954
Chief Executive Officer, President 1997 141,246 5,000 -- 2,866
and Chairman 1996 125,000 25,000 -- 43,245
Ariu Levi............................ 1998 90,000 22,545 -- 2,954
President of Fundtech Corp. 1997 90,000 6,380 -- 2,866
1996 90,000 -- -- 3,300
Joseph P. Mazzetti................... 1998 146,875 25,000 15,000 2,954
Executive Vice President -- Sales
and 1997 110,000 10,000 10,500 2,866
Marketing 1996 110,000 -- 27,000 3,300
Michael Carus........................ 1998 145,833 40,000 15,000 2,954
Executive Vice President and Chief 1997 40,833 -- 60,000 716
Financial Officer 1996 -- -- -- --
Gil Gadot............................ 1998 115,000 20,000 10,000 2,954
Executive Vice
President -- Operations 1997 90,000 20,000 -- 2,866
and Technology 1996 90,000 -- 30,002 30,798
</TABLE>
- ---------------
(1) Represents relocation, housing and health insurance premiums.
(2) Includes 6,000 options granted pursuant to the Director's Option Plan and
15,000 options granted pursuant to Fundtech's employee option plans.
No other annual compensation, stock appreciation rights, long-term
restricted stock awards, or long-term incentive plan payouts were awarded to,
earned by, or paid to the named executive officers during any of Fundtech's last
three fiscal years.
52
<PAGE> 55
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding options granted to the
Named Executive Officers during the fiscal year ended December 31, 1998. We have
never granted any stock appreciation rights.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
NUMBER POTENTIAL REALIZABLE VALUE
OF PERCENTAGE OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(4)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR(2) SHARE(3) DATE 5% 10%
- ---- ---------- -------------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Reuven Ben-Menachem............ 15,000(1) 2.4% $11.625 10/19/03 $48,176 $106,458
6,000(5) 1.0% 16.750 8/12/03 27,766 61,356
Ariu Levi...................... -- -- -- -- -- --
Joseph Mazzetti................ 15,000(1) 2.4% 11.625 10/19/03 48,176 106,458
Michael Carus.................. 15,000(1) 2.4% 11.625 10/19/03 48,176 106,458
Gil Gadot...................... 10,000(1) 1.6% 11.625 10/19/03 32,117 70,972
</TABLE>
- ---------------
(1) Each option represents the right to purchase one ordinary share. These
options were granted pursuant to Fundtech's employee option plans on October
20, 1998. All of the options vest at a rate of 12.5% every six months.
(2) In the year ended December 31, 1998, we granted options to employees and
directors to purchase an aggregate of 624,438 ordinary shares, including
options to purchase an aggregate of 42,000 ordinary shares granted to
Fundtech's directors.
(3) The exercise price on the date of grant was equal to 100% of the fair market
value of the ordinary shares on the date of grant.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The 5% and
10% assumed annual rates of compounded stock price appreciation are mandated
by the rules of the Securities and Exchange Commission and do not represent
an estimate or projection of our future ordinary share prices. These amounts
represent certain assumed rates of appreciation in the value of our ordinary
shares from the fair market value on the date of grant. Actual gains, if
any, on stock option exercises are dependent on the future performance of
the ordinary shares and overall stock market conditions. The amounts
reflected in the table may not necessarily be achieved.
(5) Each option represents the right to purchase one ordinary share. These
options were granted to Reuven Ben-Menachem as a director on August 13, 1998
pursuant to the Directors' Option Plan. The options vest at a rate of 25%
every three months.
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<PAGE> 56
OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table summarizes for each of the Named Executive Officers
option exercises during fiscal 1998, including the aggregate value of gains on
the date of exercise, the total number of unexercised options for ordinary
shares, if any, held at December 31, 1998 and the aggregate dollar value of
unexercised in-the-money options for ordinary shares, if any, held at December
31, 1998. Value of unexercised in-the-money options at fiscal year-end is the
difference between the exercise or base price of such options and the fair
market value of the underlying ordinary shares on December 31, 1998, which was
$20.625 per share. These values have not been, and may never be, realized, as
these options have not been, and may never be, exercised. Actual gains, if any,
upon exercise will depend on the value of ordinary shares on the date of any
exercise of options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
SHARES ACQUIRED VALUE --------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Reuven Ben-Menachem..... -- -- 1,500 19,500 $ 5,813 $152,438
Ariu Levi............... -- -- -- -- -- --
Joseph Mazzetti......... -- -- 24,187 28,313 438,564 371,998
Michael H. Carus........ 10,000 $79,200 5,000 60,000 86,475 913,275
Gil Gadot............... -- -- 22,501 17,501 411,656 227,231
</TABLE>
EMPLOYMENT AGREEMENTS
On November 25, 1997, Fundtech entered into an employment agreement with
Reuven Ben-Menachem engaging him as the Chairman of the Board and Chief
Executive Officer of Fundtech and of Fundtech Corporation. The initial term of
Mr. Ben-Menachem's employment commenced on January 1, 1998 and continues until
December 31, 1999, unless renewed. Mr. Ben-Menachem's agreement sets forth his
annual base salary ($160,000) and eligibility for bonuses based on Fundtech's
achievement of certain performance goals. Fundtech may terminate Mr.
Ben-Menachem without cause, in which case Mr. Ben-Menachem would receive
severance payment in the amount equal to his then current base salary for a
period of six (6) months, plus the pro-rata portion of his bonus for such year.
Mr. Ben-Menachem's base salary is reviewed annually and any increases to his
base salary require the approval of the compensation committee. Mr.
Ben-Menachem's employment agreement incorporates a non-competition and
confidentiality agreement entered into on February 2, 1995.
Fundtech does not currently have any written employment contracts in effect
with any of the Named Executive Officers other than Reuven Ben-Menachem, its
chief executive officer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee for the fiscal year ended
December 31, 1998 were Messrs. Boaz Misholi and Eddy Shalev and Dr. Jay
Morrison. None of the members of the Compensation Committee is an officer or
employee of Fundtech. The responsibilities of the Compensation Committee include
administering Fundtech's stock plans and approving the base compensation of Mr.
Reuven Ben-Menachem.
STOCK OPTION PLANS
Pursuant to a resolution of Fundtech's Board of Directors, a total of
1,300,000 ordinary shares have been reserved for the granting of options to
employees of Fundtech Ltd. and Fundtech Corp. As of March 24, 1999, 1,005,705
options were outstanding, 112,578 options have been exercised and 181,717
options are available to be issued. These options have been reserved and granted
pursuant to the following plans:
1996 Stock Option Plans
In April 1996, the Board of Directors adopted a resolution to reserve
423,003 ordinary shares for the exercise of options which Fundtech intends to
grant to employees of Fundtech Ltd. and employees of Fundtech Corp. pursuant to
two separate plans.
54
<PAGE> 57
The first plan for the employees of Fundtech Ltd., the 1996 Employee Stock
Option Plan for Employees of Fundtech Ltd. (the "102 Plan"), adopted in May
1996, provides for the granting of up to 150,753 ordinary shares under Section
102 of the Israel Income Tax Ordinance ("Section 102"). Pursuant to Section 102
and the rules promulgated thereunder (including the requirement that the options
and/or the resulting shares be deposited with a trustee for at least two years),
the tax on the benefit arising to the employee from the grant and exercise of
options as well as from the allotment of ordinary shares under these options is
deferred until the transfer of the options and/or ordinary shares to the
employee's name or upon sale of those options and/or ordinary shares. Fundtech
will be allowed to claim as an expense for tax purposes the amounts credited to
the employees as a benefit upon sale of the shares allotted under the plan at a
price exceeding the exercise price, when the related capital gains tax is
payable by the employee. The options granted under the 102 Plan vest over a
period of four years and expire five years from the date of grant. Options with
respect to 34,500 ordinary shares originally authorized under the 102 Plan
became subject to a resolution adopted by the Board of Directors on December 31,
1997 (the "December 1997 Resolution"), discussed more fully below.
The second plan for the employees of Fundtech Corp. and employees of
Fundtech Ltd., the 1996 Stock Option Plan for Employees at Fundtech Ltd. and
Employees of Fundtech Corp. (the "1996 U.S. Plan"), adopted in October 1996,
provides for the granting of up to 272,250 ordinary shares. The options granted
under the U.S. Plan vest over a period of four years and expire five years from
the date of grant. Options with respect to 36,750 ordinary shares originally
authorized under the U.S. Plan became subject to the December 1997 Resolution,
discussed more fully below.
1997 Stock Option Plans
On September 2, 1997, the Board of Directors adopted a resolution to
reserve 225,000 ordinary shares for the exercise of options which Fundtech
intends to grant to its employees pursuant to the Fundtech 1997 Stock Option
Plan (the "1997 U.S. Plan"). In April and July 1998, the Board of Directors
adopted resolutions to reserve an aggregate of an additional 240,000 ordinary
shares for the exercise of options to be granted under the 1997 U.S. Plan. The
options under the 1997 U.S. Plan vest over a period of four years and expire
five years from the date of grant.
On December 31, 1997, the Board of Directors adopted the December 1997
Resolution. The December 1997 Resolution governs the method by which a total of
71,150 options reserved by prior plans are to be granted (the "1997 Israel
Plan"). The 71,150 options governed by the December 1997 Resolution consist of:
(i) 34,500 options which previously had been reserved under the 102 Plan, but
which had not vested in employees as well as (ii) 36,750 options which
previously had been reserved under the U.S. Plan. In July 1998, the Board of
Directors adopted a resolution to reserve an additional 40,000 ordinary shares
for the exercise of options to be granted under the 1997 Israel Plan.
The Board of Directors has reserved an additional 329,997 ordinary shares
for the exercise of options to be allocated among the 1997 U.S. Plan and the
1997 Israel Plan.
On October 20, 1998, the Board of Directors repriced all stock options
(other than those held by Directors or the Named Executive Officers) with an
exercise price of more than $11.625 to an exercise price of $11.625 (the then
current market price of the ordinary shares).
Directors' Stock Option Plan
On May 18, 1998, Fundtech agreed to grant options to purchase an aggregate
of 42,000 ordinary shares to members of the Board of Directors. The options were
granted following the election of a Board of Directors at Fundtech's annual
general meeting of the shareholders in August 1998. These options vest over a
period of one year.
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<PAGE> 58
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the ordinary shares as of March 24, 1999, and as adjusted to
reflect the sale of the ordinary shares in this offering, by (i) all directors,
(ii) all executive officers, (iii) all directors and executive officers as a
group, and (iv) each person who is known by Fundtech to own beneficially more
than 5% of its outstanding ordinary shares. Unless otherwise indicated, the
address of each beneficial owner listed below is c/o Fundtech Ltd., Beit
Habonim, 2 Habonim Street, Ramat Gan, Israel.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
NUMBER OF SHARES ---------------------------
BENEFICIALLY OWNED BEFORE AFTER
NAME OF BENEFICIAL OWNER PRIOR TO OFFERING(1) OFFERING(2) OFFERING(2)
- ------------------------ -------------------- ----------- -----------
<S> <C> <C> <C>
DIRECTORS
Aura Investments Ltd.(3)........................... 1,144,590 10.5% 8.5%
Boaz Misholi(4).................................... 1,149,090 10.5% 8.6%
Clal Industries and Investments(5)................. 2,168,297 19.9% 16.2%
Rina Shainski(6)................................... 2,168,297 19.9% 16.2%
Rimon Ben-Shaoul(7)................................ 2,172,297 19.9% 16.2%
Reuven Ben-Menachem(8)............................. 365,243 3.3% 2.7%
Jerusalem Pacific Ventures(9)...................... 111,325 1.0% *%
Jay B. Morrison(10)................................ 115,825 1.0% *%
Eddy Shalev(11).................................... 62,764 * *
George M. Lieberman................................ -- -- --
EXECUTIVE OFFICERS
Ariu Levi(12)...................................... 414,150 3.8% 3.1%
Gil Gadot(13)...................................... 127,955 1.2% *
Joseph Mazzetti(14)................................ 17,750 * *
Michael Carus(15).................................. 9,375 * *
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (10
PERSONS)......................................... 4,434,994 40.4% 32.9%
</TABLE>
- ---------------
* Less than one percent.
(1) Except as otherwise noted and pursuant to applicable community property
laws, each person or entity named in the table has sole voting and
investment power with respect to all ordinary shares listed as owned by
such person or entity. Shares beneficially owned included shares that may
be acquired pursuant to the exercise of fully vested options that are
exercisable through May 23, 1999.
(2) Based on 10,897,968 ordinary shares outstanding prior to this offering. The
percentage of shares beneficially owned after the offering gives effect to
the sale of 2,500,000 ordinary shares offered hereby by Fundtech, assuming
no exercise of the underwriters' over-allotment option. Ordinary shares
deemed beneficially owned by virtue of the rights of any person or group to
acquire such shares within 60 days of the date of this prospectus are
treated as outstanding only for purposes of determining the percent owned
by such person or group.
(3) Consists of 1,144,590 ordinary shares held by Aura Investments Ltd.
("Aura"), of which Mr. Misholi is Chairman of the Board and Chief Executive
Officer. Mr. Misholi disclaims beneficial ownership of such shares, except
to the extent of his proportionate pecuniary interest therein.
(4) Includes 1,144,590 ordinary shares held by Aura, of which Mr. Misholi is
Chairman of the Board and Chief Executive Officer. Mr. Misholi disclaims
beneficial ownership of such shares, except to the extent of his
proportionate pecuniary interest therein. Also includes options to purchase
4,500 ordinary shares granted pursuant to the Directors' Option Plan.
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<PAGE> 59
(5) Consists of 2,168,297 ordinary shares held by Clal Industries and
Investments Ltd. ("Clal"), of which Mr. Ben-Shaoul is President. The
address of Clal is Clal Atidim Tower, Building No. 4, Tel Aviv 61581,
Israel. Mr. Ben-Shaoul disclaims beneficial ownership of the shares held by
Clal.
(6) Consists of 2,168,297 ordinary shares owned by Clal. Ms. Shainski disclaims
beneficial ownership of the shares held by Clal.
(7) Includes 2,168,297 ordinary shares owned by Clal, of which Mr. Ben-Shaoul
is President. Mr. Ben-Shaoul disclaims beneficial ownership of the shares
held by Clal. Also includes options to purchase 4,500 ordinary shares
granted pursuant to the Directors' Option Plan.
(8) Includes options to purchase 4,500 ordinary shares granted pursuant to the
Directors' Option Plan. Also includes 1,593 ordinary shares issuable upon
the exercise of options held by Mr. Ben-Menachem's spouse, who is an
employee of Fundtech.
(9) Consists of 111,325 ordinary shares held by Jerusalem Pacific Ventures,
which is affiliated with Newbury Ventures, Inc., of which Dr. Morrison is a
General Partner. Mr. Morrison disclaims beneficial ownership of such shares
except to the extent of his proportionate pecuniary interest therein.
(10) Includes 111,325 ordinary shares held by Jerusalem Pacific Ventures, which
is affiliated with Newbury Ventures, Inc., of which Dr. Morrison is a
General Partner. Mr. Morrison disclaims beneficial ownership of such shares
except to the extent of his proportionate pecuniary interest therein. Also
includes options to purchase 4,500 ordinary shares granted pursuant to the
Directors' Option Plan.
(11) Consists of 11,621 ordinary shares held by Mr. Shalev and options to
purchase 4,500 ordinary shares granted pursuant to the Directors' Option
Plan and 14,963 and 31,680 ordinary shares owned by Genesis Partners I
(Cayman) L.P. and Genesis Partners I L.P., respectively, of which Mr.
Shalev is a general partner. Mr. Shalev disclaims beneficial ownership of
the shares held by Genesis Partners I (Cayman) L.P. and Genesis Partners I
L.P., except to his proportionate pecuniary interest therein.
(12) The address of Ariu Levi is c/o Fundtech Corporation, 428 McCormick Street,
San Leandro, California 94577.
(13) Includes 22,001 and 2,625 ordinary shares issuable upon the exercise of
options held by Mr. Gadot and his wife, respectively.
(14) Consists of options to purchase 17,750 ordinary shares.
(15) Consists of options to purchase 9,375 ordinary shares.
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<PAGE> 60
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
PRIVATE PLACEMENTS
Since the inception of Fundtech in April 1993, Fundtech has issued, in
private placement transactions, shares of Preferred Stock as follows: 945,000
shares of Series A Preferred Stock at $2.00 per share in January 1994; 1,210,614
shares of Series B Preferred Stock at $1.74 and 499,998 shares of Series B
Preferred Stock at $2.00 per share between April 1995 and June 1996; 1,007,157
shares of Series C Preferred Stock at $2.33 per share as well as warrants to
purchase an aggregate of 167,859 ordinary shares at an exercise price of $2.57
per share in March 1996 and 1,389,752 shares of Series D Preferred Stock at
$4.00 per share in March 1997. All shares of Preferred Stock were converted on a
one-for-one basis upon the closing of the IPO. The holders of such converted
ordinary shares are entitled to certain registration rights with respect to the
ordinary shares issued upon conversion thereof. See "-- Registration Rights."
The following table sets forth the series of Preferred Stock and number of
shares purchased by Fundtech's directors and their respective affiliates at the
time that such directors were in office:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
PREFERRED PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK STOCK
- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Aura Investments Research and Development
Ltd.(1)................................... 270,000 125,000 -- 62,501
Jerusalem Pacific Ventures(2)............... -- 575,936 64,290 62,501
Eddy Shalev(3).............................. -- -- 21,429 --
Genesis Partners(3)......................... -- -- -- 375,000
</TABLE>
- ---------------
(1) Mr. Misholi is Chairman of the Board and Chief Executive Officer of Aura.
Mr. Misholi disclaims beneficial ownership of the shares held by Aura except
to the extent of his proportionate pecuniary interest therein.
(2) Dr. Morrison is a general partner of Newbury Ventures, Inc., which is
affiliated with Jerusalem Pacific Ventures. In connection with its
acquisition of Series C Preferred Stock, Jerusalem Pacific Ventures also
acquired warrants to purchase 10,714 ordinary shares. Dr. Morrison disclaims
beneficial ownership of the shares held by Jerusalem Pacific Ventures except
to the extent of his proportionate pecuniary interest therein.
(3) In connection with his acquisition of Series C Preferred Stock, Mr. Shalev
also acquired warrants to purchase 3,572 ordinary shares. Eddy Shalev is a
general partner of Genesis Partners I-Cayman L.P. and Genesis Partners I
L.P. Mr. Shalev disclaims beneficial ownership of the shares held by Genesis
Partners I L.P. and Genesis Partners I-Cayman L.P. except to the extent of
his proportionate pecuniary interest therein.
OPTION GRANTS
Between May 15, 1996 and October 7, 1996, Fundtech granted to certain
executive officers options to purchase an aggregate of 117,004 ordinary shares
at an exercise price of $2.33 per share. Such options vest over four years and
expire five years following the date of grant.
Between May 22, 1997 and September 17, 1997, Fundtech granted to certain
executive officers options to purchase an aggregate of 93,000 ordinary shares at
an exercise price of $3.33 per share. Such options vest over four years and
expire five years from the date of grant.
Between September 18, 1997 and May 1, 1998, Fundtech granted to certain
executive officers options to purchase an aggregate of 50,000 ordinary shares at
an exercise price of $21.00 per share. In October 1998, these options were
repriced at the then current market price for the ordinary shares of $11.625.
Such options vest over four years and expire five years from the date of grant.
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<PAGE> 61
On May 18, 1998, Fundtech agreed to grant options to purchase an aggregate
of 42,000 ordinary shares to members of the Board of Directors. These grants
were made following the election of a Board of Directors at Fundtech's annual
general meeting of the shareholders in August 1998. The options vest over a
period of one year.
On October 20, 1998, Fundtech granted certain executive officers options to
purchase an aggregate of 98,750 ordinary shares at an exercise price of $11.625
per share. Such options vest over four years and expire five years from the date
of grant.
ARRANGEMENTS WITH AURA
Pursuant to an agreement entered into between Reuven Ben-Menachem, Boaz
Misholi and Aura, dated as of March 17, 1993 (the "Founders Agreement"), Aura
loaned Fundtech $200,000. The loan was repaid in full in April 1998 out of the
proceeds to Fundtech from the IPO.
Pursuant to the Founders Agreement, Fundtech paid to Aura $87,000, $80,000
and $21,000 in 1994, 1995 and 1996, respectively, for management services. These
management services were terminated by agreement on December 31, 1996. Fundtech
also paid to Aura $31,000, $68,000 and $50,000, in 1994, 1995 and 1996,
respectively, for the lease and maintenance of Fundtech's office premises in
Israel. This lease has been terminated.
In addition, Fundtech paid $60,000 to Aura in consideration for advisory
services provided to Fundtech in connection with a private placement effected by
Fundtech in March 1996 (the "1996 Private Placement").
EMPLOYMENT AGREEMENTS
In November 1997, Fundtech entered into an employment agreement with Reuven
Ben-Menachem. See "Management -- Employment Agreements."
REGISTRATION RIGHTS
Fundtech has entered into agreements with some of its existing shareholders
entitling them to certain registration rights (relating to 2,000,787 ordinary
shares). Pursuant to such agreements, Fundtech's existing shareholders will each
have the right, exercisable at any time within four years from the date of IPO,
to demand one registration of their shares under the Securities Act. In
addition, each of the parties to such agreements (other than Fundtech) will have
the right to have its shares included in certain registration statements of
Fundtech.
OTHER ARRANGEMENTS
CIBC Oppenheimer Corp. is one of the representatives of the underwriters in
this offering. Mr. Shalev, a director of Fundtech, is affiliated with CIBC
Oppenheimer Corp. See "Underwriting."
Reuven Ben-Menachem, Boaz Misholi and Aura have also provided guarantees to
the OCS for the performance of Fundtech's obligations under the Research Law.
See "Taxation Regulation -- Law for the Encouragement of Industrial Research and
Development, 1984."
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<PAGE> 62
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, Fundtech will have 13,397,968 ordinary
shares issued and outstanding (assuming no exercise of the Underwriters'
over-allotment option). Of these shares, the 2,500,000 shares sold in this
offering (plus any shares issued upon exercise of the Underwriters'
over-allotment option), in addition to the 3,450,000 shares sold in our initial
public offering and an additional 3,234,472 shares sold in compliance with the
Securities Act, will be freely tradable without restriction under the Securities
Act. The remaining 4,213,496 outstanding ordinary shares will be eligible for
sale in the public market, compliance with the volume and manner of sale
limitations of Rule 144 or pursuant to another exemption from the registration
requirements of the Securities Act. Holders of 2,000,787 ordinary shares are
entitled to registration rights. Certain shareholders holding an aggregate of
4,096,780 ordinary shares have agreed not to offer, sell, contract to sell or
otherwise dispose of any ordinary shares without the consent of BancBoston
Robertson Stephens for a period of 90 days after the date of this Prospectus.
Sales of substantial amounts of any of the ordinary shares referred to in this
paragraph, or the prospect of such sales, could adversely affect the market
price of the ordinary shares and Fundtech's ability to raise capital through an
offering of securities. See "Management -- Compensation of Directors and
Officers," "-- Stock Option Plans" and "Underwriting."
In general, under Rule 144, as in effect on the date of this prospectus, a
person who has beneficially owned restricted securities for at least one year,
will be entitled to sell in any three-month period a number of shares that does
not exceed the greater of (i) 1% of the then outstanding number of ordinary
shares (approximately 133,980 shares immediately after this offering) or (ii)
the average weekly trading volume of the ordinary shares on Nasdaq during the
four calendar weeks immediately preceding the date on which notice of the sale
is filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are subject to certain requirements relating to manner of sale, notice and
availability of current public information about Fundtech. In addition,
affiliates of Fundtech must comply with the restrictions and requirements of
Rule 144, other than the one-year holding period requirement, in order to sell
ordinary shares that are not "restricted securities" (such as ordinary shares
acquired by affiliates in this offering). Under Rule 144(k), if at least two
years have elapsed since the ordinary shares were issued by Fundtech or acquired
from an affiliate of Fundtech, the holder of those ordinary shares is permitted
to sell them without restriction, so long as such holder is not an affiliate of
Fundtech and has not been an affiliate for at least 90 days prior to the date of
sale.
Any employee, officer or director of or consultant to Fundtech who
purchased his or her shares prior to the date of the consummation of the IPO or
holds vested options as of that date pursuant to a written compensatory plan or
contract (such as the option plans of Fundtech) is entitled to rely on the
resale provisions of Rule 701, which permits non-affiliates to sell their Rule
701 shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with Rule 144's holding
period restrictions, in each case commencing 90 days after the date of the
consummation of the IPO.
Fundtech has registered on Form S-8 under the Securities Act the 970,003
ordinary shares reserved for issuance pursuant to its Stock Option Plans are
eligible for resale in the public market without restriction, subject to Rule
144 limitations applicable to affiliates. Fundtech also intends to register on
Form S-8 under the Securities Act up to an additional 330,000 ordinary shares
reserved for issuance to its employees. The Form S-8 registration statement
would become effective immediately upon filing. Shares issued upon the exercise
of these stock options after the effective date of the Form S-8 registration
statement would be eligible for resale in the public market without restriction,
subject to Rule 144 limitations applicable to affiliates.
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of certain information concerning Fundtech's
capital stock and a brief description of certain provisions contained in
Fundtech's Articles of Association. Copies of the Memorandum of Association and
the Articles of Association have been filed as exhibits to the Registration
Statement. Such summary and description do not purport to be complete statements
of these provisions and are qualified in their entirety by reference to such
exhibits.
Fundtech is authorized to issue 20,000,000 shares, par value NIS 0.01 per
share, including 50,002 Deferred Shares (the "Deferred Shares") of which
10,897,968 ordinary shares and 50,002 Deferred Shares were outstanding as of
March 24, 1999.
Under Israeli law, a company may not repurchase or cancel its own shares
without prior court approval. Shares that would be otherwise repurchased by an
Israeli company and held by the company as treasury shares are converted into
deferred shares, which are non-transferable and entitle their holders to no
voting, dividend or other rights except the right to receive the par value of
the shares upon liquidation of Fundtech. Fundtech had issued shares subject to
certain vesting requirements. When these requirements were not met such shares
were converted into 50,002 Deferred Shares.
Upon consummation of this offering, all outstanding ordinary shares,
including the ordinary shares issued in this offering, will be validly issued,
fully paid and non-assessable. The ordinary shares do not have preemptive
rights. The ownership or voting of ordinary shares by non-residents of Israel,
except by citizens of countries in a state of war with Israel, is not restricted
in any way by the Memorandum of Association or the Amended Articles of
Association of Fundtech or by the laws of the State of Israel.
Transfer of Shares and Notices. Fully paid ordinary shares are issued in
registered form and may be freely transferred pursuant to the Articles unless
such transfer is restricted or prohibited by another instrument. Each
shareholder of record is entitled to receive at least fourteen days' prior
notice of an ordinary shareholders' meeting and at least 21 days' prior notice
of any shareholders' meeting in which a special resolution is to be adopted or
in which a resolution to dismiss a director is to be adopted.
Election of Directors. The ordinary shares do not have cumulative voting
rights in the election of directors. As a result, the holders of ordinary shares
that represent more than 50% of the voting power have the power to elect all the
directors. See "Principal Shareholders."
Dividend and Liquidation Rights. Fundtech may declare a dividend to be
paid to the holders of ordinary shares according to their rights and interests
in the profits of Fundtech. It is anticipated that any dividends paid to
non-residents of Israel would be paid in dollars, because, under current Israeli
regulations, any dividends or other distributions paid in respect of ordinary
shares may be paid in non-Israeli currencies and may be freely repatriated,
provided that Israeli income taxes have been paid with respect to (or withheld
from) such payments. In the event of the liquidation of Fundtech, after
satisfaction of liabilities to creditors, the assets of Fundtech will be
distributed to the holders of ordinary shares in proportion to the nominal value
of their respective holdings. Such right may be affected by the grant of
preferential dividend or distribution rights to the holders of a class of shares
with preferential rights that may be authorized in the future. Declaration of a
final dividend (not exceeding the amounts proposed by the Board) requires
shareholder approval by adoption of an ordinary resolution. Failure to obtain
such shareholder approval does not affect previously paid interim dividends. See
"Taxation."
Voting, Shareholders' Meetings and Resolutions. Holders of ordinary shares
have one vote for each ordinary share held on all matters submitted to a vote of
shareholders. Such voting rights may be affected by the grant of any special
voting rights to the holders of a class of shares with preferential rights that
may be authorized in the future. The quorum required for an ordinary meeting of
shareholders consists of at least two shareholders present in person or by proxy
who hold or represent between them at least 33 1/3% of the issued ordinary share
capital. A meeting adjourned for lack of a quorum is adjourned to the next week
at the same time and place unless such day shall fall on a statutory holiday (in
Israel or in the United States), in which case the meeting is adjourned to the
first business day which follows such statutory holiday. At such reconvened
meeting a quorum is required that consists of two members present in person or
by proxy.
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An ordinary resolution (such as a resolution for the approval of the
financial reports or the declaration of dividends) requires approval by the
holders of a majority of the voting rights represented at a meeting, in person
or by proxy, and voting thereon. A special or extraordinary resolution (such as
a resolution amending the Memorandum of Association or Articles of Fundtech or
approving any change in capitalization, merger, consolidation, winding-up, or
other changes as specified in the Companies Ordinance) requires approval of the
holders of 75% of the voting rights represented at the meeting, in person or by
proxy, and voting thereon. A special or extraordinary resolution can only be
considered if shareholders receive at least 21 days' prior notice of the meeting
at which such resolution will be considered.
Upon consummation of this offering, Fundtech's directors, officers,
shareholders who owned greater than 5% of the outstanding ordinary shares prior
to the offering and their respective affiliates will beneficially own
approximately 32.9% of the outstanding ordinary shares (32.0% if the
Underwriters' over-allotment option is exercised in full).
Modification of Class Rights. The rights attached to any class (unless
otherwise provided by the terms of issue of such class), such as voting,
dividends and the like, may be varied with the consent in writing of the holders
of three-fourths of the issued shares of the class, or with the adoption of a
special resolution passed at a separate general meeting of the holders of the
shares of such class.
ISRAELI SECURITIES LAW REQUIREMENTS
Fundtech intends to apply to the Israel Securities Authority for an
exemption from the obligation to publish Fundtech's prospectus in Israel.
Fundtech has also received from the Israel Securities Authority an exemption
from the reporting obligations as specified in Chapter Six of the Israel
Securities Law 5728-1968, provided that a copy of each report submitted in
accordance with applicable United States law shall be available for public
review at Fundtech's offices.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the ordinary shares is American Stock
Transfer & Trust Company of New York, New York, United States of America.
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CONDITIONS IN ISRAEL
Fundtech is incorporated under the laws of, and our principal offices and
one of our software development facilities are located in, the State of Israel.
Accordingly, we are directly affected by economic, political and military
conditions in that country. Our operations would be materially adversely
affected if major hostilities involving Israel should occur or if trade between
Israel and its present trading partners should be curtailed.
POLITICAL CONDITIONS
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. However, a peace agreement between
Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan
was signed in 1994 and, since 1993, several agreements between Israel and
Palestinian representatives have been signed. As of the date hereof, Israel has
not entered into any peace agreement with Syria or Lebanon. There can be no
assurance as to how the "peace process" will continue or what effect it may have
upon Fundtech.
Despite the progress towards peace between Israel and its Arab neighbors
and the Palestinians, certain countries, companies and organizations continue to
participate in a boycott of Israeli firms and others doing business in Israel or
with Israeli companies. Although we are precluded from marketing our products to
such countries, we believe that in the past the boycott has not had a material
adverse effect on us. There can be no assurance that restrictive laws, policies
or practices directed towards Israel or Israeli businesses will not have an
adverse impact on the expansion of our business.
Generally, all male adult citizens and permanent residents of Israel under
the age of 50 are, unless exempt, obligated to perform up to 39 days of military
reserve duty annually. Additionally, all such residents are subject to being
called to active duty at any time under emergency circumstances. Some of the our
officers and employees are currently obligated to perform annual reserve duty.
While we have operated effectively under these requirements since we began
operations, no assessment can be made as to the full impact of such requirements
on our workforce or business if conditions should change, and no prediction can
be made as to the effect on us of any expansion or reduction of such
obligations.
ECONOMIC CONDITIONS
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli government has, for these and other reasons,
intervened in all sectors of the economy by utilizing, among other means, fiscal
and monetary policies, import duties, foreign currency restrictions and control
of wages, prices and exchange rates. The Israeli government has periodically
changed its policies in all these areas.
TRADE AGREEMENTS
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is a signatory to the General Agreement on Tariffs
and Trade, which provides for reciprocal lowering of trade barriers among its
members. In addition, Israel has been granted preferences under the Generalized
System of Preferences from the United States, Australia, Canada and Japan. These
preferences allow Israel to export the products covered by such programs either
duty-free or at reduced tariffs.
Israel and the EEC (known now as the "European Union") concluded a Free
Trade Agreement in July 1975, which confers certain advantages with respect to
Israeli exports to member countries of the European Union and obligates Israel
to lower its tariffs with respect to imports from these countries over a number
of years. In 1985, Israel and the United States entered into an agreement to
establish a Free Trade Area ("FTA"). The FTA has eliminated all tariff and
certain non-tariff barriers on most trade between the two countries were
ultimately eliminated. On January 1, 1993, an agreement between Israel and the
EFTA,
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which includes Norway, Switzerland, Iceland and Liechtenstein, established a
free-trade zone between Israel and the EFTA nations. In recent years, Israel has
established commercial and trade relations with a number of other nations,
including Russia, China and nations in Eastern Europe, with which Israel had not
previously had such relations.
TAXATION
The following is a summary of the current tax structure applicable to
companies in Israel, with special reference to its effect on Fundtech. The
following also contains a discussion of certain Israeli and United States tax
consequences to persons purchasing the ordinary shares offered hereby and
certain Israeli government programs benefiting Fundtech. To the extent that the
discussion is based on tax legislation which has not been subject to judicial or
administrative interpretation, there can be no assurance that the views
expressed in the discussion will be accepted by the tax authorities in question.
The discussion is not intended, and should not be construed, as legal or
professional tax advice and is not exhaustive of all possible tax
considerations.
PROSPECTIVE PURCHASERS OF ORDINARY SHARES SHOULD CONSULT THEIR OWN TAX
ADVISORS AS TO THE UNITED STATES, ISRAELI OR OTHER TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES, INCLUDING, IN
PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.
GENERAL CORPORATE TAX STRUCTURE
The general corporate tax rate in Israel is 36%. However, the effective tax
rate payable by a company which derives income from an Approved Enterprise (as
further discussed below) may be considerably less.
At December 31, 1998, Fundtech had net operating loss carryforwards in the
U.S. of approximately $4.7 million.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
In November 1995, Fundtech's software development facility in Israel was
granted Approved Enterprise status under the Law for the Encouragement of
Capital Investments, 1959, as amended (the "Investment Law").
The Investment Law provides that a capital investment in eligible
facilities may, upon application to the Investment Center of the Ministry of
Industry and Commerce of the State of Israel (the "Investment Center"), be
designated as an Approved Enterprise. Each certificate of approval for an
Approved Enterprise relates to a specific investment program delineated both by
its financial scope, including its capital sources, and by its physical
characteristics, e.g., the equipment to be purchased and utilized pursuant to
the program. The tax benefits derived from any such certificate of approval
relate only to taxable income attributable to the specific Approved Enterprise.
Fundtech's taxable income derived from an Approved Enterprise is subject to
a reduced corporate tax rate of 25% until the earlier of (i) seven consecutive
years (or ten in the case of an FIC (as defined below) such as Fundtech)
commencing in the year in which the Approved Enterprise first generates taxable
income, (ii) 12 years from the year of commencement of production or (iii) 14
years from the year of approval of Approved Enterprise status (collectively, the
"benefit period"). Such income is eligible for further reductions in tax rates
if the company qualifies as a Foreign Investors' Company ("FIC"), depending on
the percentage of the foreign investment, as described below. Subject to certain
conditions, an FIC is a company more than 25% of whose share capital (in terms
of shares, rights to profits, voting and appointment of directors) and of whose
combined share and loan capital is owned by non-Israeli residents. The tax rate
is 20% if the foreign investment is 49% or more but less than 74%; 15% if the
foreign investment is 74% or more but less than 90%; and 10% if the foreign
investment is 90% or more. The determination of foreign ownership is made on the
basis of the lowest level of foreign ownership during the tax year. Fundtech
anticipates that following this offering it will qualify as an FIC with foreign
investments of between 49% and 73%.
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Fundtech completed its investments according to its first program under
this program on November 27, 1997. A new program of investments in an amount of
$110,000 has been approved.
As Fundtech has selected the Alternative Package of Benefits for its
program, Fundtech will be entitled to a tax exemption with respect to the
additional income derived from that program for two years (the "exemption
period"). The exemption period is included in the benefit period.
Expenditures supported under other incentive programs of the State of
Israel are not eligible for grants and certain other incentives in accordance
with the Investment Law.
In the event that a company is operating under more than one approval, or
that not all of its capital investments are approved, its effective corporate
tax rate is the result of a weighted combination of the various applicable
rates.
A company that has elected the Alternative Package of Benefits and that
subsequently pays a dividend out of income derived from the Approved
Enterprise(s) during the tax-exemption period will be subject to Company Tax in
respect of the amount distributed (including the tax thereon) at the rate which
would have been applicable had the company not elected the Alternative Package
of Benefits (10% to 25%, depending on the extent of foreign shareholders holding
Fundtech's ordinary shares). The dividend recipient is taxed at the reduced rate
applicable to dividends from Approved Enterprises (15%), if the dividend is
distributed out of income derived during the benefit period and if, in the case
of companies which do not qualify as FICs, the dividend is paid at any time up
to 12 years thereafter; or if, in the case of FICs, the dividend is paid at any
time thereafter. This tax must be withheld by Fundtech at the source, regardless
of whether the dividend is converted into foreign currency. See "-- United
States Federal Income Tax Considerations -- Taxation of Ordinary
Shares -- Dividends" and Note 10 to the Consolidated Financial Statements.
However, Fundtech is not obliged to distribute exempt retained profits
under the Alternative Package of Benefits, and Fundtech may generally decide
from which year's profits to declare dividends. Fundtech currently intends to
permanently reinvest the amount of its tax-exempt income and not to distribute
such income as a dividend.
The Investment Law also provides that an Approved Enterprise is entitled to
accelerated depreciation on its property and equipment that are included in an
approved investment program. Fundtech has not utilized this benefit.
Grants and certain other incentives received by a company in accordance
with the Investment Law remain subject to final ratification by the Investment
Center, such ratification being conditional upon fulfillment of all terms of the
approved program.
Each application to the Investment Center is reviewed separately, and a
decision as to whether or not to approve such application is based, among other
things, on the then-prevailing criteria set forth in the Investment Law, on the
specific objectives of the applicant company set forth in such application and
on certain financial criteria of the applicant company. Accordingly, there can
be no assurance that any such application will be approved. In addition, the
benefits available to an Approved Enterprise are conditional upon the
fulfillment of certain conditions stipulated in the Investment Law and its
regulations and the criteria set forth in the specific certificate of approval,
as described above. In the event that these conditions are violated, in whole or
in part, Fundtech would be required to refund the amount of tax benefits, with
the addition of the CPI linkage adjustment and interest. Fundtech believes its
Approved Enterprise operates in substantial compliance with all such conditions
and criteria.
LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND DEVELOPMENT, 1984
Under the Law for the Encouragement of Industrial Research and Development,
1984 (the "Research Law") and the Instructions of the Managing Director of the
Ministry of Industry and Trade No. 4.4 of January 2, 1994 ("Managing Director's
Instructions"), research and development programs and the plans for the
intermediate stage between research and development, and manufacturing and sales
approved by a governmental committee of the OCS (the "Research Committee") are
eligible for grants of up to 50% of the
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project's expenditure if they meet certain criteria, in return for the payment
of royalties from the sale of the product developed in accordance with the
program as follows: 3% of revenues during the first three years, 4% of revenues
during the following three years, and 5% of revenues in the seventh year and
thereafter, the total royalties not to exceed 100% of the dollar value of the
OCS grant (or, in some cases, 150%). Following the full payment of such
royalties, there is no further liability for payment.
The terms of the Israeli government participation also require that the
manufacture of products developed with government grants be performed in Israel,
unless approval is received from the OCS. However, in the event that any portion
of the manufacturing is not performed in Israel, if approval is received from
the OCS, Fundtech would be required to pay royalties that are adjusted in
proportion to manufacturing outside of Israel as follows: when the manufacturing
is performed outside of Israel by Fundtech or an affiliated company, the
royalties are to be paid as described above with the addition of 1%, and when
the manufacturing outside of Israel is not performed by Fundtech or an
affiliate, the royalties paid shall be equal to the ratio of the amount of grant
received from the OCS (linked to the CPI) divided by the amount of grant
received from the OCS (linked to the CPI) and the investment(s) made by Fundtech
in the project (approximately 33% or higher). The payback sum is also adjusted
to 120%, 150% or 300% of the grant if the manufacturing volume that is supposed
to be performed outside of Israel is up to 50%, between 50% and 90%, or more
than 90%, respectively. The technology developed pursuant to the terms of these
grants may not be transferred to third parties without the prior approval of a
governmental committee under the Research Law. Such approval is not required for
the export of any products resulting from such research or development. Approval
of the transfer of technology may be granted only if the recipient abides by all
of the provisions of the Research Law and the regulations promulgated
thereunder, including the restrictions on the transfer of know-how and the
obligation to pay royalties in an amount that may be increased.
Fundtech also benefits from certain other Israeli government grants,
programs and tax benefits, especially benefits available as a result of
Fundtech's "Approved Enterprise" status. Termination or reduction of any one or
more of such grants, programs or benefits could have a material adverse effect
on Fundtech. In order to meet certain conditions in connection with the grants
and programs of the OCS, Fundtech has made certain representations to the
Israeli government about Fundtech's future plans for its Israeli operations.
From time to time the extent of Fundtech's Israeli operations has differed and
may in the future differ, from Fundtech's representations. If, after receiving
tax or other benefits under certain of such programs, Fundtech fails to meet
certain conditions to those benefits, including, with respect to grants received
from the OCS, the maintenance of a material presence in Israel, or if there is
any material deviation from the representations made by Fundtech to the Israeli
government, Fundtech could be required to refund to the Government of Israel tax
or other benefits previously received (including interest and CPI linkage
difference) and would likely be denied receipt of such grants or benefits, and
participation in such programs, thereafter.
During the last five years, Fundtech has participated in programs sponsored
by the OCS for the support of research and development activities. As of
December 31, 1998, Fundtech had received grants in the aggregate amount of
approximately $1.1 million in respect of four research and development programs
and two programs for the intermediate stage between research and development and
manufacturing and selling. In respect of the income derived from the products
developed pursuant to the Approved Programs, Fundtech paid royalties to the
Ministry of the Treasury, at a rate of 3% of its sales, in the aggregate amount
of $384,000. For purposes of calculating royalties, all of the Approved Programs
are related back to the first Approved Research and Development Program by the
Research Committee (in the case of Fundtech, this first Approved Program is the
program for development of FEDplu$). Aura, Mr. Boaz Misholi and Mr. Reuven
Ben-Menachem provided guarantees for the performance of the obligations of
Fundtech under the Research Law.
Each application to the OCS is reviewed separately, and grants are based on
the program approved by the Research Committee. Expenditures supported under
other incentive programs of the State of Israel are not eligible for OCS grants.
As a result, there can be no assurance that applications to the OCS will be
approved or, if approved, what the amounts of the grants will be. In addition,
Fundtech could also be required to refund the OCS benefits previously received.
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FUND FOR THE ENCOURAGEMENT OF MARKETING ACTIVITIES
Pursuant to the Managing Director's Instruction No. 5.9, as amended from
time to time, marketing programs approved by the Fund for the Encouragement of
Marketing Activities (the "Marketing Fund") are eligible for grants at the rate
of the Approved Marketing Expenses up to a participation ceiling determined
according to the definition of an exporter as a "small exporter," "medium
exporter," etc. Any party other than a "small exporter" who receives grants is
obligated to return such funds to the Marketing Fund, up to the cumulative sum
which is equivalent to the amount of the grant that is linked to the dollar,
through royalties at a rate determined from time to time in the Managing
Director's Instructions from the additional level of export performed and which
shall be performed by Fundtech in each year in comparison to the year in which
the approved marketing plan was submitted.
Over the last five years, Fundtech has received grants from the Marketing
Fund, in the total amount of $404,000 in respect of four marketing programs.
Fundtech expects to receive the additional sum of $33,000 (the balance promised
in respect of the marketing program for the year 1998). Pursuant to the Managing
Director's Instruction No. 5.9 of 1997, the performance of less than 50% of an
Approved Program prevents Fundtech from being able to receive the assistance of
the Marketing Fund promised for that year (except for an advance in the sum of
33% of the promised amount), and the performance of less than 60% of the
Approved Program prevents Fundtech from being able to seek assistance from the
Marketing Fund for 1999. In addition, if Fundtech does not perform the marketing
program as approved or performs less than 33% of the approved program, the
approval of the Marketing Fund shall be canceled and Fundtech shall be required
to return the advance that it received together with linkage differentials and
interest. Fundtech estimates that it shall perform at least 60% of the Approved
Plan and shall be eligible to receive the full grant and to approach the
Marketing Fund for additional assistance in 1999. Fundtech was defined as a
"medium exporter" for 1995 only, and therefore only the sum of the grant
received for that year ($242,273) shall be required to be returned to the
Marketing Fund. As of December 31, 1998, Fundtech accrued Marketing Fund
royalties in the amount of approximately $164,983.
TAX BENEFITS AND GRANTS FOR RESEARCH AND DEVELOPMENT
Israeli tax law allows, under certain conditions, a tax deduction in the
year incurred for expenditures (including depreciation on capital expenditures)
in scientific research and development projects, if the expenditures are
approved by the relevant Israeli government ministry (determined by the field of
research) and the research and development is for the promotion of the
enterprise and is carried out by or on behalf of the company seeking such
deduction. Expenditures not so approved are deductible over a three-year period.
However, expenditures made out of proceeds made available to Fundtech through
Government grants are not deductible.
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
Fundtech currently qualifies as an "Industrial Company" within the
definition of the Law for the Encouragement of Industry (Taxes), 1969 (the
"Industry Encouragement Law"). According to the Industry Encouragement Law, an
"Industrial Company" is a company resident in Israel, at least 90% of the income
of which, in any tax year, determined in Israeli currency (exclusive of income
from defense loans, capital gains, interest and dividends), is derived from an
"Industrial Enterprise" owned by it. An "Industrial Enterprise" is defined as an
enterprise whose major activity in a given tax year is industrial production
activity.
The following preferred corporate tax benefits are available to Industrial
Companies (including Fundtech):
(a) deduction of purchases of know-how and patents over an eight-year
period for tax purposes;
(b) deduction of expenses incurred in connection with a public
issuance of shares over a three-year period; and
(c) an election under certain conditions to file a consolidated tax
return with additional related Israeli Industrial Companies.
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In addition, the tax laws and regulations dealing with the adjustment of
taxable income for inflation in Israel provide that Industrial Enterprises, such
as those of Fundtech, are eligible for special rates of depreciation deductions.
These rates vary in the case of plant and machinery according to the number of
shifts in which the equipment is operated and range from 20% to 40% on a
straight-line basis, or from 30% to 50% on a declining balance basis for
equipment first put into operation on or after June 1, 1989 (instead of the
regular rates, which are applied on a straight-line basis).
In calculating depreciation, a company that engages in the production of
software is entitled to choose between the rates referred to above and a rate of
150% of the rates referred to above, provided that the depreciation does not
exceed the original price.
Moreover, Industrial Enterprises which are Approved Enterprises can choose
between (a) the special rates referred to above and (b) accelerated rates of
depreciation applied on a straight-line basis in respect of property and
equipment, generally ranging from 200% (in respect of equipment) to 400% (in
respect of buildings) of the ordinary depreciation rates (in respect of
buildings) during the first five years of service of the assets, provided that
the depreciation does not exceed 20% per annum.
Eligibility for the benefits under the Industry Encouragement Law is not
subject to receipt of prior approval from any governmental authority. No
assurance can be given that Fundtech will continue to qualify as an "Industrial
Company" or that the benefits described above will be available in the future.
See Note 12 to the Consolidated Financial Statements.
TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax Law (Inflationary Adjustments), 1985 (the "Inflationary
Adjustments Law") represents an attempt to overcome the problems presented to a
traditional tax system by an economy undergoing rapid inflation. The
Inflationary Adjustments Law is characterized by a high degree of complexity.
Its salient features can be described generally as follows:
(a) A special tax adjustment for the preservation of equity whereby
certain corporate assets are classified broadly into Fixed (inflation
resistant) Assets and Non-Fixed (soft) Assets. Where a company's equity, as
defined in such law, exceeds the depreciated cost of Fixed Assets, a
deduction from taxable income that takes into account the effect of the
applicable annual rate of inflation on such excess is allowed (up to a
ceiling of 70% of taxable income in any single tax year, with the unused
portion permitted to be carried forward on a linked basis). If the
depreciated cost of Fixed Assets exceeds a company's equity, then such
excess multiplied by the applicable annual rate of inflation is added to
taxable income.
(b) Subject to certain limitations, depreciation deductions on Fixed
Assets and losses carried forward are adjusted for inflation based on the
increase in the CPI (from the beginning of the 1982 fiscal year and, as of
the 1985 fiscal year, with respect to equipment).
(c) Taxable gains on the sale and the increase in value of certain
traded securities during the tax year are taxable in certain circumstances,
even if such gains have not been realized. However, dealers in securities
are subject to the regular tax rules applicable to business income in
Israel.
TAXATION OF NON-ISRAELI SHAREHOLDERS
Non-residents of Israel are subject to income tax on income accrued or
derived from sources in Israel or received in Israel. Such sources of income
include passive income such as dividends, royalties and interest, as well as
non-passive income from services rendered in Israel. On distributions of
dividends other than bonus shares (stock dividends), income tax at the rate of
25% (15% for dividends generated by an Approved Enterprise) is withheld at
source, unless a different rate is provided in a treaty between Israel and the
shareholder's country of residence. Under the tax treaty between the United
States and Israel, the maximum rate of tax on dividends paid to a holder of
ordinary shares who is a United States resident (as defined in such treaty) is
25%.
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Israeli law imposes a capital gains tax on the sale of capital assets.
Under current law, however, sales of the ordinary shares offered by this
prospectus are exempt from Israeli capital gains tax for so long as (i) the
shares are quoted on Nasdaq or listed on a stock exchange recognized by the
Israeli Ministry of Finance and (ii) the Company qualifies as an Industrial
Company or Industrial Holding Company. There can be no assurance that Fundtech
will maintain such qualification or its status as an Industrial Company. See
"Taxation -- Law for Encouragement of Industry (Taxes), 1969" and "-- Taxation
Under Inflationary Conditions."
For information with respect to the applicability of Israeli capital gains
taxes on the sale of ordinary shares by United States residents, see "-- Capital
Gains Tax."
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Subject to the limitations described in the next paragraph, the following
discussion describes the material United States federal income tax consequences
to a holder of ordinary shares that is (i) a citizen or resident of the United
States, (ii) a corporation created or organized in the United States or under
the laws of the United States or of any state, (iii) an estate the income of
which is includible in gross income for United States federal income tax
purposes regardless of its source or (iv) a trust, if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more U.S. persons has authority to control all substantial
decisions of the trust (a "U.S. Holder"). This summary is for general
information purposes only and does not purport to be a comprehensive description
of all of the tax considerations that may be relevant to a decision to purchase
ordinary shares. This summary generally considers only U.S. Holders that will
own ordinary shares as capital assets.
This discussion is based on current provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), current and proposed Treasury regulations
promulgated thereunder, and administrative and judicial decisions as of the date
hereof, all of which are subject to change, possibly on a retroactive basis.
This discussion does not address all aspects of United States federal income
taxation that may be relevant to any particular shareholder based on such
shareholder's particular circumstances (including potential application of the
alternative minimum tax), United States federal income tax consequences to
certain shareholders that are subject to special treatment (such as taxpayers
who are broker-dealers, insurance companies, tax-exempt organizations, financial
institutions, holders owning directly, indirectly or by attribution at least 10%
of the ordinary shares of Fundtech, non-United States corporations, non-resident
aliens of the United States, holders of securities held as part of a straddle,
"hedge" or "conversion transaction" with other investments, taxpayers who have
elected mark-to market accounting, or taxpayers whose functional currency is not
the dollar) or any aspect of state, local or non-United States tax laws.
Additionally, the discussion does not consider the tax treatment of persons who
hold ordinary shares through a partnership or other pass-through entity or
possible application of United States federal gift or estate taxes.
EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT SUCH PERSON'S OWN TAX
ADVISOR WITH RESPECT TO THE SPECIFIC UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES TO SUCH PERSON OF PURCHASING, HOLDING OR DISPOSING OF THE ORDINARY
SHARES, AS WELL AS WITH RESPECT TO THE APPLICATION OF THE LAWS OF ANY STATE,
LOCAL OR FOREIGN TAXING JURISDICTION AND OF ANY RELEVANT TAX TREATY TO THEIR
PARTICULAR CIRCUMSTANCES.
TAXATION OF ORDINARY SHARES
Dividends
In general, for United States federal income tax purposes, a U.S. Holder
will be required to include in gross income as ordinary dividend income the
amount of any distribution paid with respect to ordinary shares, including the
amount of foreign taxes, if any, withheld therefrom, to the extent that such
distributions are paid out of Fundtech's current or accumulated earnings and
profits as determined for United States federal income tax purposes.
Distributions in excess of such earnings and profits will be applied against and
will reduce a U.S. Holder's tax basis on the ordinary shares and, to the extent
in excess of such tax basis, will be treated as gain from the sale or exchange
of ordinary shares. See "-- Disposition of Ordinary Shares." Dividends generally
will not be eligible for the dividends-received deduction allowed to
corporations under the Code. Dividends
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paid in NIS will be includible in the income of a U.S. Holder in a dollar amount
calculated by reference to the exchange rate in effect on the day they are
considered to be received by the U.S. Holder, without reduction for any Israeli
taxes withheld at the source. A U.S. Holder that receives a foreign currency
distribution and converts the foreign currency into U.S. dollars subsequent to
receipt generally will have foreign exchange gain or loss based on any
appreciation or depreciation in the value of the foreign currency against the
U.S. dollar, which will generally be U.S. source ordinary income or loss.
Generally, U.S. Holders will have the option of claiming the amount of any
Israeli income taxes withheld at source either as a deduction from gross income
or as a dollar-for-dollar credit against their United States federal income tax
liability. Individuals who do not claim itemized deductions, but instead utilize
the standard deduction, may not claim a deduction for the amount of the Israeli
income taxes withheld, but such amount may be claimed as a credit against the
individual's United States federal income tax liability. The amount of foreign
income taxes which may be claimed as a credit in any year is subject to certain
complex limitations and restrictions, which must be determined on an individual
basis by each shareholder. The limitations set out in the Code include, among
others, rules which limit foreign tax credits allowable with respect to specific
classes of income to the United States federal income taxes otherwise payable
with respect to each such class of income. Dividends paid by Fundtech generally
will be foreign source "passive income" for United States foreign tax credit
purposes or, in the case of a financial services entity, financial services
income. Foreign income taxes exceeding a U.S. Holder's credit limitation for the
year of payment or accrual of such tax can be carried back for two taxable years
and forward for five taxable years, subject to the credit limitation applicable
in each of such years. Additionally, the foreign tax credit in any taxable year
may not offset more than 90% of a U.S. Holder's liability for United States
individual or corporate alternative minimum tax. The total amount of allowable
foreign tax credits in any year generally cannot exceed regular U.S. tax
liability for the year attributable to foreign source taxable income. However,
this limitation on the use of foreign tax credits generally will not apply to
electing individual U.S. Holders whose creditable foreign taxes during the year
do not exceed $300 ($600 for joint filers) if such individual's gross income for
the tax year from non-U.S. sources consists solely of certain "passive income."
A U.S. Holder will be denied a foreign tax credit with respect to Israeli income
tax withheld from dividends received on the ordinary shares to the extent such
U.S. Holder has not held the ordinary shares for at least 16 days of the 30-day
period beginning on the date which is 15 days before the ex-dividend date or to
the extent such U.S. Holder is under an obligation to make certain related
payments with respect to substantially similar or related property. Any days
during which a U.S. Holder has substantially diminished its risk of loss on the
ordinary shares are not counted toward meeting the 16-day holding period
required by the statute.
Disposition of Ordinary Shares
Upon the sale, exchange or other disposition of ordinary shares, a U.S.
Holder generally will recognize capital gain or loss in an amount equal to the
difference between such U.S. Holder's basis in the ordinary shares and the
amount realized on the disposition. Gain realized on the sale, exchange or other
disposition of ordinary shares held more than one year is long-term capital gain
eligible for reduced rates of taxation. Gains realized by a U.S. Holder on a
sale, exchange or other disposition of ordinary shares generally will be treated
as United States source income for United States foreign tax credit purposes.
However, pursuant to the U.S.-Israel Tax Treaty, such gain may be foreign source
income in certain circumstances. A loss realized by a U.S. Holder on the sale,
exchange or other disposition of ordinary shares generally is allocated to U.S.
source income under recently finalized regulations. However, those regulations
require such a loss to be allocated to foreign source income to the extent
certain dividends were received by the taxpayer within the 24 month period
preceding the date on which the taxpayer recognized the loss. Limitations apply
to the deductibility of a capital loss realized on the sale, exchange or other
disposition of ordinary shares. A U.S. Holder that receives a foreign currency
distribution and converts the foreign currency into U.S. dollars subsequent to
receipt generally will have foreign exchange gain or loss based on any
appreciation or depreciation in the value of the foreign currency against the
U.S. dollar, which will generally be U.S. source ordinary income or loss.
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Passive Foreign Investment Company
Fundtech will be a PFIC if 75% or more of its gross income (including the
pro rata share of the gross income for any company (United States or foreign) in
which Fundtech is considered to own 25% or more of the shares by value) in a
taxable year is passive income. Alternatively, Fundtech will be considered to be
a PFIC if at least 50% of the assets (averaged over the year) of Fundtech
(including the pro rata share of the assets of any company of which Fundtech is
considered to own 25% or more of the shares by value) in a taxable year are held
for the production of, or produce, passive income. Passive income includes
amounts derived by reason of the temporary investment of funds raised in this
offering. If Fundtech becomes a PFIC, each shareholder who is a U.S. person, in
the absence of an election by such shareholder to treat Fundtech as a "qualified
electing fund" (a "QEF" election), as discussed below, would, upon certain
distributions by Fundtech and upon disposition of Fundtech shares at a gain, be
liable to pay tax at the highest tax rate on ordinary income in effect for each
period to which the income is allocated plus interest on the tax, as if the
distribution or gain had been recognized ratably over the taxpayer's holding
period for the ordinary shares while Fundtech was a PFIC. Additionally, were
Fundtech to become a PFIC, U.S. Holders who acquire ordinary shares from
decedents would be denied the normally available step-up of the income tax basis
for such ordinary shares to fair market value at the date of death and, instead,
would have a tax basis equal to the decedent's basis, if lower.
If a U.S. Holder has made a QEF election for all taxable years that such
holder held the ordinary shares and Fundtech was a PFIC, distributions and gain
will not be taxed as if recognized ratably over the taxpayer's holding period or
subject to an interest charge, gain on the sale of ordinary shares will be
characterized as capital gain and the denial of basis step-up at death described
above would not apply. Instead, a shareholder of a qualified electing fund is
required for each taxable year to include in income a pro rata share of the
ordinary earnings of the qualified electing fund as ordinary income and a pro
rata share of the net capital gain of the qualified electing fund as long-term
capital gain, subject to a separate election to defer payment of taxes, which
deferral is subject to an interest charge.
A U.S. Holder of certain publicly traded PFIC stock could elect to mark the
stock to market annually, recognizing as ordinary income or loss each year an
amount equal to the difference as of the close of the taxable year between the
holder's fair market value of the PFIC stock and the adjusted basis in the PFIC
stock. Losses would be allowed only to the extent of net mark-to-market gain
previously included by the U.S. Holder under the election for prior taxable
years. If the mark-to-market election were made, then the rules set forth above
would not apply for periods covered by the election.
Fundtech believes that it was not a PFIC for 1998. However, the tests for
determining PFIC status are applied annually and it is difficult to make
accurate predictions of future income and assets, which are relevant to this
determination. Accordingly, there can be no assurance that Fundtech will not
become a PFIC. Furthermore, Fundtech does not assume any obligation to make
timely disclosure with respect to such status, and Fundtech does not undertake
to provide U.S. Holders with the necessary information to make a QEF election.
Consequently, as a practical matter, U.S. Holders should assume that they will
not be able to make a QEF election. U.S. Holders who hold ordinary shares during
a period when Fundtech is a PFIC will be subject to the foregoing rules, even if
Fundtech ceases to be a PFIC.
INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. Holders are generally subject to information reporting requirements
with respect to dividends paid on ordinary shares. Under existing regulations,
such dividends are not subject to back-up withholding. U.S. Holders generally
will be subject to back-up withholding at 31% on proceeds paid from the
disposition of ordinary shares and, under regulations generally effective
January 1, 2000 on dividends paid on ordinary shares, unless the U.S. Holder
provides an Internal Revenue Service Form W-9, a taxpayer identification number,
or otherwise establishes an exemption. Holders generally will be entitled to
credit any amounts withheld under the back-up withholding rules against their
United States federal income tax liability and/or to a refund, provided the
requisite information is forwarded to the Internal Revenue Service.
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UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Salomon Smith Barney Inc., CIBC Oppenheimer
Corp., Hambrecht & Quist LLC and Lehman Brothers Inc., have severally agreed
with Fundtech, subject to the terms and conditions set forth in the underwriting
agreement, to purchase from Fundtech the number of ordinary shares set forth
opposite their names below. The underwriters are committed to purchase and pay
for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ----------
<S> <C>
BancBoston Robertson Stephens Inc. .........................
Salomon Smith Barney Inc. ..................................
CIBC Oppenheimer Corp. .....................................
Hambrecht & Quist LLC.......................................
Lehman Brothers Inc. .......................................
----------
Total............................................. 2,500,000
==========
</TABLE>
The representatives have advised us that the underwriters propose to offer
the ordinary shares to the public at the public offering price set forth on the
cover page of this prospectus and to certain dealers at such price less a
concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After this offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
such reduction shall change the amount of proceeds to be received by Fundtech as
set forth on the cover page of this prospectus. The ordinary shares are offered
by the underwriters as stated herein, subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Fundtech has granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to 375,000
additional ordinary shares at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. To the
extent that the underwriters exercise this option, each of the underwriters will
have a firm commitment to purchase approximately the same percentage of such
additional shares that the number of ordinary shares to be purchased by it shown
in the above table represents as a percentage of the shares offered hereby. If
purchased, such additional shares will be sold by the underwriters on the same
terms as those on which the ordinary shares offered hereby are being sold.
Fundtech will be obligated, pursuant to the option, to sell shares to the extent
the option is exercised. The underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the ordinary shares offered
hereby. If such option is exercised in full, the total public offering price,
underwriting discounts and commissions and proceeds to Fundtech will be
$ , $ and $ , respectively.
The following table summarized the compensation to be paid to the
underwriters by Fundtech assuming both no exercise and full exercise of the
underwriters' over-allotment option:
<TABLE>
<CAPTION>
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts and Commissions
payable by Fundtech.................................
</TABLE>
Fundtech estimates expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will be
approximately $2,000,000.
72
<PAGE> 75
The underwriting agreement contains covenants of indemnity among the
underwriters and Fundtech against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Pursuant to the terms of lock-up agreements, the holders of 4,096,780
ordinary shares have agreed with the representatives of the underwriters, for a
period of 90 days after the date of this prospectus, subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any ordinary shares, any
options or warrants to purchase any ordinary shares, or any securities
convertible into or exchangeable for ordinary shares owned as of the date of
this prospectus or thereafter acquired directly by such holders or with respect
to which they have or hereafter acquire the power of disposition, without the
prior written consent of BancBoston Robertson Stephens Inc. However, BancBoston
Robertson Stephens Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to the lock-up
agreements. There are no agreements between the representatives and any of
Fundtech's shareholders providing consent by the representatives to the sale of
shares prior to the expiration of the lock-up period.
In addition, Fundtech has agreed that it will not, until 90 days after the
date of this prospectus, without the prior written consent of BancBoston
Robertson Stephens Inc., subject to certain exceptions, offer, sell, contract to
sell or otherwise dispose of any ordinary shares, any options or warrants to
purchase ordinary shares or any securities convertible into, exercisable for or
exchangeable for ordinary shares other than Fundtech's sale of ordinary shares
in this offering, the issuance of ordinary shares upon the exercise of
outstanding options and warrants and the granting of options to purchase
ordinary shares under Fundtech's existing stock option plans; provided, however,
that Fundtech may offer or contract to sell ordinary shares in connection with a
proposed acquisition and may file a registration statement on Form S-8 to
register up to 330,000 ordinary shares for issuance of options to employees
during such 90 day period without seeking the consent of BancBoston Robertson
Stephens Inc.
The representatives of the underwriters have advised Fundtech that,
pursuant to Regulation M under the Securities Act, certain persons participating
in this offering may engage in transactions, including stabilizing bids,
syndicate covering transactions or the imposition of penalty bids, that may have
the effect of stabilizing or maintaining the market price of the ordinary shares
at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the ordinary shares on behalf
of the underwriters for the purpose of fixing or maintaining the price of the
ordinary shares. A "syndicate covering transaction" is the bid for or the
purchase of the ordinary shares on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with this offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with this offering if the ordinary shares originally sold by such
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The representatives have advised Fundtech
that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
The Underwriters have agreed that they will coordinate with Fundtech any
offer and/or sale of the ordinary shares to any offered in Israel. The
Underwriters have undertaken that (a) they will not offer the ordinary shares in
Israel to more than 35 offerees in the aggregate, (b) they will deliver to
Fundtech and the Israel Securities Authority the names and addresses of such
offerees within seven days of the consummation of this offering and (c) they
will obtain a representation from each offeree that he or she is purchasing the
ordinary shares for investment purposes only, and not for purposes of resale.
An officer of E. Shalev Ltd., an affiliate of CIBC Oppenheimer Corp., owns
in the aggregate 11,621 ordinary shares of Fundtech and options to purchase
6,000 ordinary shares of Fundtech. Additionally, Genesis Partners I (Cayman
L.P.) and Genesis Partners I L.P., each an affiliate of CIBC Oppenheimer Corp.
and a shareholder of Fundtech, own 14,963 and 31,680 ordinary shares of
Fundtech, respectively.
73
<PAGE> 76
The offering is being conducted in accordance with Rule 2720 ("Rule 2720")
of the National Association of Securities Dealers, Inc. (the "NASD") which
provides that, among other things, when an NASD member firm participates in the
offering of equity securities of a company with whom such member has a "conflict
of interest" (as defined in Rule 2720), the initial public offering price can be
no higher than that recommended by a "qualified independent underwriter" (as
defined in Rule 2720) (a "QIU"). BancBoston Robertson Stephens Inc. is serving
as the QIU in the offering and will recommend a price in compliance with the
requirements of Rule 2720. BancBoston Robertson Stephens Inc. has performed due
diligence investigations and reviewed and participated in the preparation of
this prospectus and the Registration Statement of which this prospectus forms a
part. BancBoston Robertson Stephens Inc., in its capacity as QIU, will receive
no additional compensation as such in connection with this offering.
LEGAL MATTERS
The validity of the ordinary shares being offered hereby and certain other
legal matters in connection with this offering with respect to Israeli law will
be passed upon for Fundtech by Herzog, Fox & Neeman, Tel Aviv, Israel. Certain
legal matters in connection with this offering with respect to United States law
will be passed upon for Fundtech by Weil, Gotshal & Manges LLP, New York, New
York. Certain legal matters in connection with this offering will be passed upon
for the Underwriters by Brobeck, Phleger & Harrison LLP, New York, New York with
respect to matters of United States law, and by Naschitz, Brandes & Co., Tel
Aviv, Israel, with respect to matters of Israeli law.
EXPERTS
The Consolidated Financial Statements of Fundtech at December 31, 1997 and
1998 and for each of the three years in the period ended December 31, 1998,
appearing in this prospectus and Registration Statement have been audited by
Kost Forer & Gabbay, a member of Ernst & Young International, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
are included in reliance upon such report given on the authority of such firm as
experts in auditing and accounting.
The combined financial statements of the Cash Management and Wire Transfer
Divisions (the "Divisions") of CheckFree as of June 30, 1996 and 1997 and the
related combined statements of operations and divisions' equity and of cash
flows for the eight months ended February 29, 1996 (Predecessor), the four
months ended June 30, 1996, and the year ended June 30, 1997, included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein (which report expresses an unqualified
opinion and includes an explanatory paragraph referring to the inclusion in the
financial statements of the Divisions of allocations of certain accounts and
balances of CheckFree which are common to the other divisions of CheckFree, and
an explanatory paragraph relating to the sale of certain assets and liabilities
of the Divisions to Fundtech Ltd. in April 1998), and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
Statements concerning Israeli law included under the captions
"Enforceability of Civil Liabilities," "Dividend Policy," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Effective Corporate Tax Rate," "Business -- Software Development"
and "-- Employees," "Management," "Description of Capital Stock," "Conditions in
Israel," and "Taxation" have been examined by Herzog, Fox & Neeman, and have
been included upon the authority of such counsel as an expert in the laws of the
State of Israel. Statements included under the caption "Taxation -- United
States Federal Income Tax Considerations" have been examined by Weil, Gotshal &
Manges LLP, and have been included upon the authority of such firm as expert in
such matters.
WHERE YOU CAN FIND MORE INFORMATION
Fundtech has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-l under the Securities Act
(together with all amendments and exhibits thereto, the "Registration
Statement"), with respect to the securities offered hereby. This prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. Statements made in this prospectus as to the contents of
74
<PAGE> 77
any contract, agreement or other document referred to are not necessarily
complete and are qualified by reference to each such contract, agreement or
other document which is filed as an exhibit to the Registration Statement. The
Registration Statement, including the exhibits thereto, may be inspected without
charge at the principal office of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at the Regional Office of the Commission at Citicorp
Center, 5000 West Madison Street, Suite 1400, Chicago, Illinois 60601, and 75
Park Place, 14th Floor, New York, New York 10007. Copies of such material may be
obtained by mail from the Public Reference Branch of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
Fundtech is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files periodic
reports and other information with the Commission. You may read and copy any
document we file at the Commission's public reference rooms as indicated above.
You may obtain information on the operation of the public reference rooms at
1-800-SEC-0330. You may also read and copy our Commission filings at the Nasdaq
National Market offices located in Washington, D.C.
ENFORCEABILITY OF CIVIL LIABILITIES
Service of process upon directors and officers of Fundtech and the Israeli
experts named herein, a substantial number of whom reside outside the United
States, may be difficult to obtain within the United States. Furthermore,
because a significant portion of Fundtech's assets and a substantial number of
Fundtech's directors and officers are located outside the United States, any
judgment obtained in the United States against Fundtech or such directors and
officers predicated upon the civil liability provisions of the federal
securities laws of the United States may not be collectible within the United
States.
There are no treaties between the United States and Israel relating to the
reciprocal enforcement of foreign court judgments. Fundtech has been informed by
its legal counsel in Israel, Herzog, Fox & Neeman, that there is doubt as to the
enforceability of civil liabilities under the Securities Act and the Exchange
Act in original actions instituted in Israel. However, subject to certain time
limitations, Israeli courts may enforce United States final executory judgments
for liquidated amounts in civil matters, obtained after due trial before a court
of competent jurisdiction (according to the rules of private international law
currently prevailing in Israel) that enforces similar Israeli judgments,
provided that (i) due service of process has been effected and the defendant has
had a reasonable opportunity to be heard, (ii) such judgments or the enforcement
thereof are not contrary to the law, public policy, security or sovereignty of
the State of Israel, (iii) such judgments were not obtained by fraud and do not
conflict with any other valid judgment in the same matter between the same
parties, and (iv) an action between the same parties in the same matter is not
pending in any Israeli court at the time the lawsuit is instituted in the
foreign court. Fundtech has irrevocably appointed Fundtech Corp., a wholly-owned
subsidiary of Fundtech, as Fundtech's agent to receive service of process in any
action against Fundtech in any federal court or state court in the State of New
York arising out of this offering or any purchase or sale of securities in
connection therewith. Consent has not been given by Fundtech for such agent to
accept service of process in connection with any other claim. These appointments
are irrevocable provided that Fundtech shall have the right to appoint a
successor agent for service if such successor is acceptable to the
representatives of the Underwriters, in their reasonable judgment.
Foreign judgments enforced by Israeli courts will generally be payable in
Israeli currency, which may be converted into foreign currency and repatriated
out of Israel. See "Taxation."
The usual practice in an action before an Israeli court to recover an
amount in a non-Israeli currency is for the Israeli court to render judgment for
the equivalent amount in Israeli currency at the rate of exchange in force on
the date thereof. Under existing Israeli law, a foreign judgment payable in
foreign currency may be paid in Israeli currency at the rate of exchange of such
foreign currency on the date of payment, but the judgment debtor may also make
payment in foreign currency. Pending collection, the amount of the judgment of
an Israeli court stated in Israeli currency ordinarily will be linked to the CPI
plus interest at the annual statutory rate (set by Israeli regulations)
prevailing at such time. Judgment creditors must bear the risk that they will be
unable to convert their award into foreign currency that can be transferred out
of Israel and the risk of unfavorable exchange rates.
75
<PAGE> 78
FUNDTECH LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS FOR FUNDTECH
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1998............... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the three year period ended December 31, 1998......... F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998............... F-6
Notes to Consolidated Financial Statements.................. F-7
COMBINED FINANCIAL STATEMENTS FOR CASH MANAGEMENT AND WIRE
TRANSFER DIVISIONS OF CHECKFREE HOLDINGS CORPORATION
Independent Auditors' Report................................ F-22
Combined Balance Sheets as of June 30, 1996 and 1997 and
unaudited combined Balance Sheet as of March 31, 1998..... F-23
Combined Statements of Operations and Divisions' Equity for
the year ended June 30, 1997, the four months ended June
30, 1996, and the eight months ended February 29, 1996
(Predecessor) and unaudited combined Statements of
Operations for the nine months ended March 31, 1998 and
1997...................................................... F-24
Combined Statements of Cash Flows for the year ended June
30, 1997, the four months ended June 30, 1996, and the
eight months ended February 29, 1996 (Predecessor) and
unaudited combined Statement of Cash Flows for the nine
months ended March 31, 1998 and 1997...................... F-25
Notes to Combined Financial Statements...................... F-26
</TABLE>
F-1
<PAGE> 79
[ERNST & YOUNG KOST FORER & GABBAY LOGO]
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
FUNDTECH LTD.:
We have audited the accompanying consolidated balance sheets of Fundtech
Ltd. as of December 31, 1997 and 1998, and the related consolidated statements
of operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 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 generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance as to 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 the 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 consolidated financial position of
Fundtech Ltd. as of December 31, 1997 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles in the United States.
KOST, FORER and GABBAY
Certified Public Accountants (Israel)
A Member of Ernst & Young
International
Tel Aviv, Israel
March 26, 1999
F-2
<PAGE> 80
FUNDTECH LTD.
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,573 $ 13,019
Short-term bank deposits.................................. 2,694 --
Trade receivables (net of allowance -- $100 in 1997 and
$301 in 1998).......................................... 2,152 7,244
Unbilled receivables...................................... 1,583 4,796
Other receivables and prepaid expenses (Note 3)........... 589 579
------- --------
Total current assets................................... 8,591 25,638
------- --------
SEVERANCE PAY FUND (Note 8)................................. 37 113
------- --------
LONG-TERM TRADE RECEIVABLES (Note 4)........................ 189 244
------- --------
FIXED ASSETS, NET (Note 5).................................. 841 3,759
------- --------
OTHER ASSETS (net of amortization of $153 in 1998).......... -- 2,963
------- --------
$ 9,658 $ 32,717
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit, including current maturities of
long-term debt......................................... $ 255 $ --
Trade payables............................................ 746 1,386
Deferred revenues......................................... 276 3,933
Other payables and accrued expenses (Note 7).............. 669 2,179
------- --------
Total Current Liabilities.............................. 1,946 7,498
------- --------
LONG-TERM LIABILITIES:
Loan payable.............................................. 15 --
Loan payable to related party (Note 6).................... 246 --
Other liabilities......................................... -- 36
Accrued severance pay (Note 8)............................ 47 135
------- --------
Total long-term liabilities............................ 308 171
------- --------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 9)
SHAREHOLDERS' EQUITY: (Note 10)
Preferred Shares:
Authorized: 5,821,011 of NIS 0.01 par value as of
December 31, 1997;
Issued and outstanding: 5,202,521 as of December 31,
1997 and none as of December 31, 1998................. 10 --
Ordinary Shares:
Authorized: 19,949,998 of NIS 0.01 par value;
Issued and outstanding: 2,774,997 as of December 31,
1997 and 10,791,952 as of December 31, 1998........... 7 34
Deferred Shares:
Authorized, issued and outstanding:
50,002 of NIS 0.01 par value shares as of December
31, 1997 and 1998................................... -- --
Additional paid-in capital................................ 12,623 41,664
Deferred compensation..................................... (197) (219)
Accumulated deficit....................................... (5,039) (16,431)
------- --------
Total shareholders' equity........................... 7,404 25,048
------- --------
$ 9,658 $ 32,717
======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 81
FUNDTECH LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------ --------
<S> <C> <C> <C>
Revenues:
Software licenses fees.................................... $ 2,403 $4,997 $ 14,007
Maintenance and services fees............................. 498 2,313 7,116
Hardware sales............................................ 667 709 2,009
------- ------ --------
Total revenues.................................... 3,568 8,019 23,132
------- ------ --------
Cost of revenues:
Software licenses costs................................... 163 334 238
Maintenance and services costs............................ 316 1,086 4,549
Hardware costs............................................ 596 646 1,631
------- ------ --------
Total cost of revenues............................ 1,075 2,066 6,418
------- ------ --------
Gross profit................................................ 2,493 5,953 16,714
------- ------ --------
Operating expenses:
Software development, net................................. 1,595 2,468 6,636
Selling and marketing, net (Note 9)....................... 1,424 1,750 2,970
General and administrative................................ 963 1,289 2,471
In-process research and development write-off (Note 1b)... -- -- 16,600
------- ------ --------
Total operating expenses.......................... 3,982 5,507 28,677
------- ------ --------
Operating income (loss)..................................... (1,489) 446 (11,963)
Financial income, net (Note 13c)............................ 28 190 571
------- ------ --------
Net income (loss)........................................... $(1,461) $ 636 $(11,392)
======= ====== ========
Basic earnings (loss) per share............................. $ (0.50) $ 0.22 $ (1.12)
======= ====== ========
Diluted earnings (loss) per share........................... $ (0.50) $ 0.08 $ (1.12)
======= ====== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 82
FUNDTECH LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED SHARES ORDINARY SHARES DEFERRED SHARES ADDITIONAL
------------------- ------------------- --------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
---------- ------ ---------- ------ ------ ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1,
1996....................... 2,655,612 $ 6 2,924,997 $ 7 50,002 $-- $ 4,885 $ --
Issuance of Preferred "C"
Shares, net of issuance
costs...................... 1,007,157 2 -- -- -- -- 2,250 --
Net loss..................... -- -- -- -- -- -- -- --
---------- ---- ---------- --- ------ --- ------- -----
Balance as of December 31,
1996....................... 3,662,769 8 2,924,997 7 50,002 -- 7,135 --
Issuance of Preferred "D"
Shares net of issuance
costs...................... 1,389,752 2 -- -- -- -- 5,287 --
Conversion of Ordinary Shares
to Preferred "D" Shares.... 150,000 -- (150,000) -- -- -- -- --
Deferred compensation related
to grant options........... -- -- -- -- -- -- 201 (201)
Amortization of deferred
compensation............... -- -- -- -- -- -- -- 4
Net income................... -- -- -- -- -- -- -- --
---------- ---- ---------- --- ------ --- ------- -----
Balance as of December 31,
1997....................... 5,202,521 10 2,774,997 7 50,002 -- 12,623 (197)
Stock dividend............... -- -- -- 8 -- -- (8) --
Exercise of stock options,
net........................ -- -- 42,325 -- -- -- 159 --
Exercise of warrants, net.... -- -- 184,609 1 -- -- 130 --
Conversion of Preferred
Shares into Ordinary
Shares..................... (5,202,521) (10) 5,202,521 10 -- -- -- --
Issuance of Ordinary Shares,
net........................ -- -- 2,587,500 8 -- -- 28,667 --
Deferred compensation related
to grant options........... -- -- -- -- -- -- 93 (93)
Amortization of deferred
compensation............... -- -- -- -- -- -- -- 71
Net loss..................... -- -- -- -- -- -- -- --
---------- ---- ---------- --- ------ --- ------- -----
Balance as of December 31,
1998....................... -- $ -- 10,791,952 $34 50,002 $-- $41,664 $(219)
========== ==== ========== === ====== === ======= =====
<CAPTION>
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
----------- -------------
<S> <C> <C>
Balance as of January 1,
1996....................... $ (4,214) $ 684
Issuance of Preferred "C"
Shares, net of issuance
costs...................... -- 2,252
Net loss..................... (1,461) (1,461)
-------- --------
Balance as of December 31,
1996....................... (5,675) 1,475
Issuance of Preferred "D"
Shares net of issuance
costs...................... -- 5,289
Conversion of Ordinary Shares
to Preferred "D" Shares.... -- --
Deferred compensation related
to grant options........... --
Amortization of deferred
compensation............... -- 4
Net income................... 636 636
-------- --------
Balance as of December 31,
1997....................... (5,039) 7,404
Stock dividend............... -- --
Exercise of stock options,
net........................ -- 159
Exercise of warrants, net.... -- 131
Conversion of Preferred
Shares into Ordinary
Shares..................... -- --
Issuance of Ordinary Shares,
net........................ -- 28,675
Deferred compensation related
to grant options........... -- --
Amortization of deferred
compensation............... -- 71
Net loss..................... (11,392) (11,392)
-------- --------
Balance as of December 31,
1998....................... $(16,431) $ 25,048
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 83
FUNDTECH LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(1,461) $ 636 $(11,392)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 102 155 529
In-process research and development write-off............. -- -- 16,600
Amortization of deferred compensation..................... -- 4 71
Capital loss (gain) on sale of fixed assets............... 5 (1) 4
Increase in trade receivables and unbilled receivables.... (1,658) (1,989) (5,008)
Decrease (increase) in other receivables and prepaid
expenses............................................... 98 (498) 120
Increase in trade payables................................ 165 324 615
Increase in other payables and accrued expenses........... 190 316 645
Other..................................................... 15 (3) (4)
------- ------- --------
Net cash provided by (used in) operating activities......... (2,544) (1,056) 2,180
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of CheckFree(a)................................. -- -- (18,824)
Investment in short-term bank deposits...................... (1,209) (6,460) --
Proceeds from short-term bank deposits...................... -- 4,975 2,694
Purchase of fixed assets.................................... (184) (574) (3,069)
Proceeds from sale of fixed assets.......................... 168 13 12
------- ------- --------
Net cash used in investing activities....................... (1,225) (2,046) (19,187)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of share capital and exercise of
stock options and warrants, net of expenses............... 2,252 5,289 28,965
Proceeds from long-term bank loans.......................... 25 -- --
Short-term bank credit, net................................. 950 (705) (250)
Principal payment of long-term loan to a related party...... -- -- (242)
Principal payment of long-term loans........................ (13) (14) (20)
------- ------- --------
Net cash provided by financing activities................... 3,214 4,570 28,453
------- ------- --------
Increase (decrease) in cash and cash equivalents............ (555) 1,468 11,446
Cash and cash equivalents at the beginning of the year...... 660 105 1,573
------- ------- --------
Cash and cash equivalents at the end of the year............ $ 105 $ 1,573 $ 13,019
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITIES:
Cash paid during the period for:
Interest.................................................. $ 14 $ 24 $ 16
======= ======= ========
- ---------------
(a) Payment for acquisition of CheckFree: (see Note 1b)
Estimated fair value of assets acquired and liabilities
assumed
Working capital deficiency............................. $ (1,133)
Fixed assets........................................... 241
Goodwill............................................... 3,116
In-process research and development.................... 16,600
--------
$ 18,824
========
</TABLE>
The accompanying notes are an integral part of the consolidated statements.
F-6
<PAGE> 84
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1 -- GENERAL
a. Overview
Fundtech Ltd. was incorporated in Israel in April 1993, and commenced
operations approximately at that time. Fundtech Ltd., together with its wholly
owned U.S. subsidiary, Fundtech Corporation, ("the Company") designs, develops,
markets and supports a suite of client/server software products which enables
businesses and their banks to process payments, transfer funds and manage cash
positions electronically.
On December 29, 1998, the Company established a wholly owned subsidiary in
England. This subsidiary commenced its operations on January 6, 1999.
As to geographical destinations and customers, see Notes 13a and 13b.
b. Acquisitions
In April 1998, the Company acquired from CheckFree Holdings Corporation
("CheckFree") assets and liabilities of certain businesses ("the Acquired
Businesses") engaged primarily in the design and development of cash management
software products and the development and sale of wire transfer products ("the
Acquisition").
The Company paid $18,824 for the Acquired Businesses.
The Acquisition has been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on the estimated fair value at the
date of acquisition. The excess of the purchase price over the estimated fair
value of the net assets acquired has been recorded as goodwill, which is
amortized on a straight-line basis over 10 years. The Company recorded an
expense in the amount of $16,600 which represents the estimated value of the
software acquired from CheckFree for which technological feasibility has not yet
been established and for which no alternative future use exists ("in-process
research and development").
CheckFree's financial statements are included with those of the Company
commencing with the second quarter of 1998.
The estimated fair value of the assets and liabilities acquired are
summarized as follows:
<TABLE>
<S> <C>
Working capital deficiency.................................. $(1,133)
Fixed assets................................................ 241
In-process research and development......................... 16,600
Goodwill.................................................... 3,116
-------
$18,824
=======
</TABLE>
The following represents the unaudited pro forma results of operations
assuming the acquisition occurred on January 1, 1997, excluding the write-off of
the acquired in-process research and development.
F-7
<PAGE> 85
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1 -- GENERAL (CONTINUED)
c. Statement of operations data
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Revenues.................................................... $16,718 $26,071
======= =======
Net income.................................................. $ 31 $ 5,493
======= =======
Basic earnings per share.................................... $ 0.01 $ 0.54
======= =======
Diluted earnings per share.................................. $ 0.01 $ 0.51
======= =======
</TABLE>
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States.
a. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
b. Financial statements in United States dollars
A majority of the revenues of Fundtech Ltd. and its subsidiary are
generated in United States dollars. In addition, a substantial portion of the
costs of Fundtech Ltd. and its subsidiary are incurred in dollars. Since the
dollar is the primary currency in the economic environment in which the Company
operates, the dollar is its functional currency and, accordingly, monetary
accounts maintained in currencies other than the dollar are remeasured using the
foreign exchange rate at the balance sheet date. Operational accounts and
non-monetary balance sheet accounts are measured and recorded at the rate in
effect at the date of the transaction. The effects of foreign currency
remeasurement are reported in current operations.
c. Principles of consolidation
The consolidated financial statements include the accounts of Fundtech Ltd.
and its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
d. Cash equivalents
Cash equivalents are short-term, highly liquid investments that are readily
convertible to cash, and purchased with maturities of three months or less.
e. Short-term bank deposits
Bank deposits with maturities of more than three months but less than one
year, are included in short-term deposits. The short-term deposits are presented
at cost, including accrued interest.
f. Allowance for doubtful accounts
The allowance for doubtful accounts is determined with respect to specific
debts that are doubtful of collection.
F-8
<PAGE> 86
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
g. Fixed assets
Fixed assets are stated at cost. Depreciation is calculated by the
straight-line method over the estimated useful lives of the assets, at the
following annual depreciation rates:
<TABLE>
<CAPTION>
%
-------
<S> <C>
Office furniture and equipment.............................. 6 - 15
Computers and software...................................... 20 - 33
Motor vehicles.............................................. 15
</TABLE>
Leasehold improvements are depreciated over the related lease periods.
h. Other assets
Other assets are stated at amortized cost. Amortization is calculated using
the straight-line method over the estimated useful lives, at the following
annual rates:
<TABLE>
<CAPTION>
%
---
<S> <C>
Goodwill.................................................... 10
</TABLE>
i. Deferred taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) 109, Accounting for Income Taxes. This
Statement prescribes the use of the liability method whereby deferred tax asset
and liability account balances 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. The Company provides a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated realizable value.
j. Revenue recognition
The Company generates revenues from licensing the rights to use its
software products directly to end-users and indirectly through sub-license fees
from resellers. The Company also generates revenues from sales of professional
services, including consulting, implementation, training and maintenance.
Revenues from software license agreements are recognized, in accordance
with Statement Of Position (SOP) 97-2 "Software Revenue Recognition", upon
delivery of the software when collection is probable; all license payments are
due within one year, the license fee is otherwise fixed or determinable,
vendor-specific evidence exists to allocate the total fee to the elements of the
arrangement and persuasive evidence of an arrangement exists.
Revenues from software licenses that require significant customization,
integration and installation are recognized using contract accounting on a
percentage of completion methods based on the relationship of actual costs
incurred to total estimated costs.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are first determined, in the amount of the estimated
loss on the entire contract.
Revenues from maintenance and services are recognized over the life of the
maintenance agreement or at the time that services are rendered.
Revenues from hardware sales are recognized upon shipment.
F-9
<PAGE> 87
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred revenues include unearned amounts received under maintenance and
support contracts and amounts billed to customers but not recognized as
revenues.
k. Advertising expenses
Advertising expenses are charged to the statement of operations as
incurred. Advertising expenses for the years ended 1996, 1997 and 1998 were $30,
$59 and $144, respectively.
l. Software development
Software development costs incurred in the process of developing product
improvements or new products, are charged to expenses as incurred, net of
participation of the Office of the Chief Scientist.
SFAS No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," requires capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred by
the Company between completion of the working model and the point at which the
product is ready for general release have been insignificant. Therefore, all
research and development costs have been expensed.
m. Concentration of credit risks
SFAS No. 105, "Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk", requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no significant off-balance sheet concentration
of credit risk, such as foreign exchange contracts, option contracts or other
foreign hedging arrangements.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents,
short-term bank deposits and accounts receivable. The Company's cash and cash
equivalents and short-term bank deposits are invested in deposits with major
banks in Israel and in the United States. Management believes that the financial
institutions holding the Company's investments are financially sound, and
accordingly, minimal credit risk exists with respect to these investments. The
Company's accounts receivable are derived from sales to customers located mainly
in the United States. The Company generally does not require collateral;
however, in certain circumstances, the Company may require letters of credit,
other collateral or additional guarantees. The Company performs ongoing credit
evaluations of its customers and to date has not experienced any material
losses.
n. Basic and diluted earnings (loss) per share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("Statement 128"), which replaced the
provision of Accounting Principles Board Opinion No. 15, "Earnings per Share."
Statement 128, which establishes the standards for computing and reporting
earnings per share, requires the presentation of basic and diluted earnings per
share. Basic earnings per share excludes dilution and is computed by dividing
income available to holders of Ordinary Shares by the weighted average number of
ordinary shares outstanding for the period. Diluted earnings per share reflect
the dilution that could occur if securities or other contracts to issue ordinary
shares were exercised or converted into ordinary shares (see Note 11).
F-10
<PAGE> 88
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o. Accounting for stock-based compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25") in accounting for its
employee stock options plans. Under APB 25, when the exercise price of the
Company's employee stock options equals or is above the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The pro forma information with respect to the fair value of options granted is
provided in accordance with the provisions of Statement No. 123 (see Note 10c).
In accounting for options granted to persons other than employees and
directors, the provisions of SFAS 123 were applied.
p. Fair value of financial instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents and short-term bank deposits -- The carrying
amounts of these items approximate their fair value due to the short-term
maturity of such instruments.
Short-term bank credit and long-term loans -- The carrying amounts of the
Company's borrowing arrangements approximate their fair value. Fair values were
estimated using discounted cash flow analyses, based on the Company's
incremental borrowing rates for similar types of borrowing arrangements.
q. Comprehensive income
As of January 1, 1998, the Company adopted Statement, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. The adoption of this
Statement had no impact on the Company's net income or shareholders' equity for
the years ended December 31, 1996, 1997 and 1998.
r. Future adoption of new accounting standard
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
This Statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement also requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999 and cannot be applied retroactively. The Company does not expect
that this new Statement will have any material impact on the Company's
consolidated balance sheets or results of operations.
F-11
<PAGE> 89
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 3 -- OTHER RECEIVABLES AND PREPAID EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Prepaid expenses............................................ $233 $249
Accrued income.............................................. 189 224
Employees................................................... 19 34
Government authorities...................................... 35 42
Other....................................................... 113 30
---- ----
$589 $579
==== ====
</TABLE>
NOTE 4 -- LONG-TERM TRADE RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Maturity dates -- long-term trade receivables:
First year (current maturities)........................... $444 $189
Second year............................................... 132 131
Third year................................................ 36 75
Fourth year............................................... 17 26
Fifth year................................................ 4 12
---- ----
633 433
Less -- current maturities.................................. 444 189
---- ----
$189 $244
==== ====
</TABLE>
NOTE 5 -- FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ ------
<S> <C> <C>
Cost:
Office furniture and equipment............................ $ 211 $ 798
Computers and software.................................... 910 3,494
Motor vehicles............................................ 46 156
Leasehold improvements.................................... 10 16
------ ------
1,177 4,464
------ ------
Accumulated depreciation:
Office furniture and equipment............................ 28 106
Computers and software.................................... 289 567
Motor vehicles............................................ 14 20
Leasehold improvements.................................... 5 12
------ ------
336 705
------ ------
Depreciated cost............................................ $ 841 $3,759
====== ======
</TABLE>
Depreciation expenses for the years ended December 31, 1996, 1997 and 1998
are $ 73, $ 155 and $ 337, respectively.
F-12
<PAGE> 90
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6 -- LOAN PAYABLE TO RELATED PARTY
The loan is linked to the Israeli CPI and does not bear interest. Under the
terms of the agreement, the loan was repaid upon the initial public offering of
the Company's shares.
NOTE 7 -- OTHER PAYABLES AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
---- ------
<S> <C> <C>
Employees and payroll accruals.............................. $224 $ 514
Accrued expenses............................................ 269 1,365
Office of the Chief Scientist and the Fund for the
Encouragement of Marketing Activities (see Note 9)........ 139 214
Others...................................................... 37 86
---- ------
$669 $2,179
==== ======
</TABLE>
NOTE 8 -- ACCRUED SEVERANCE PAY, NET
The Company's liability for severance pay, pursuant to Israel law, is fully
provided by an accrual. Part of the liability is funded through insurance
policies. The cash value of these policies is recorded as an asset in the
Company's balance sheets.
Severance expenses for the years ended December 31, 1996, 1997 and 1998
amounted to approximately $60, $37 and $104, respectively.
NOTE 9 -- COMMITMENTS AND CONTINGENT LIABILITIES
a. The Company participates in programs sponsored by the Israeli
Government for the support of research and development activities. Through
December 31, 1996, 1997 and 1998, the Company had obtained grants from the
Office of the Chief Scientist in the Israeli Ministry of Industry and Trade
("the OCS") aggregating to $1,115 for certain of the Company's software
development projects. The Company is obligated to pay royalties to the OCS,
amounting to 3%-5% of the sales of the products and other related revenues
generated from such projects, up to an amount equal to 100%-150% of the grants
received.
Through December 31, 1998, the Company has paid or accrued royalties to OCS
in the amount of $500. As of December 31, 1998, the aggregate contingent
liability to OCS was $753. The amounts of grants earned from the OCS for the
years ended 1996, 1997 and 1998 were $199, $0 and $0, respectively.
b. The Israeli Government, through the Fund for the Encouragement of
Marketing Activities, awarded the Company grants for participation in expenses
for overseas marketing.
The Company received an accumulated amount of grants of $404 for the years
up to and including 1998.
The Company is committed to pay royalties at the rate of 3% of the increase
in export sales, up to the amount of $228 as of December 31, 1998.
F-13
<PAGE> 91
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 9 -- COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The following table sets forth the amounts of net selling and marketing
expenses, the amounts of grants earned and the related gross selling and
marketing expenses.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Gross selling and marketing expenditures................. $1,664 $1,848 $3,015
Total participations of the Fund for Encouragement of
Marketing Activities................................... (240) (98) (45)
------ ------ ------
Selling and marketing expenses, net...................... $1,424 $1,750 $2,970
====== ====== ======
</TABLE>
c. The Company rents its facilities under various operating lease
agreements, which expire on various dates, the latest of which is in 2004. The
minimum rental payments under non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1999................................................ $ 618
2000................................................ 617
2001................................................ 427
2002................................................ 395
2003................................................ 280
2004................................................ 227
------
$2,564
======
</TABLE>
Total rent expenses for the years ended December 31, 1996, 1997 and 1998,
were approximately $242, $193 and $605, respectively.
NOTE 10 -- SHARE CAPITAL
a. General
1. The Ordinary Shares of the Company are traded on Nasdaq National
Market.
2. In March 1998, the Company completed an initial public offering
(the "IPO") of 2,587,500 Ordinary Shares, which raised net proceeds in the
amount of approximately $29,000.
3. In December 1997, the Company's shareholders approved a stock
dividend of one Ordinary Share for every two Ordinary Shares outstanding to
be effected immediately prior to the completion of the IPO. All Ordinary
shares, Preferred Shares and per share data included in these financial
statements have been retroactively adjusted to reflect this issuance of
stock dividend. In connection with the IPO, all of the Company's Preferred
Shares outstanding as of December 31, 1997 were converted into 5,202,521
Ordinary Shares.
Prior to the IPO, the Company increased its authorized share capital
to 20,000,000 shares NIS 0.01 par value each. The increase in authorized
share capital is presented as of December 31, 1997.
F-14
<PAGE> 92
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 10 -- SHARE CAPITAL (CONTINUED)
b. Composition of share capital
<TABLE>
<CAPTION>
AUTHORIZED ISSUED AND OUTSTANDING
------------------------ -----------------------
DECEMBER 31, DECEMBER 31,
------------------------ -----------------------
1997 1998 1997 1998
---------- ---------- --------- ----------
(NUMBER OF SHARES)
<S> <C> <C> <C> <C>
Shares of NIS 0.01 par value:
Ordinary Shares(1)................. 14,128,987 19,949,998 2,774,997 10,791,952
Deferred Shares(2)................. 50,002 50,002 50,002 50,002
Preferred "A" Shares............... 945,000 -- 945,000 --
Preferred "B" Shares............... 2,050,995 -- 1,710,612 --
Preferred "C" Shares............... 1,175,016 -- 1,007,157 --
Preferred "D" Shares............... 1,650,000 -- 1,539,752 --
---------- ---------- --------- ----------
20,000,000 20,000,000 8,027,520 10,841,954
========== ========== ========= ==========
</TABLE>
1. The Ordinary Shares confer upon the holders the right to receive
notice to participate and vote in general meetings of the Company, and the
right to receive dividends, if declared.
2. Deferred Shares are non-transferable and entitle their holders to
no voting, dividend or other rights except the right to receive the par
value of the shares upon dissolution of the company.
c. Warrants and options
1. The Company's outstanding warrants as of December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
PRICE PER
ISSUANCE DATE AMOUNT SHARE EXPIRATION DATE
- ------------- ------ --------- ---------------
<S> <C> <C> <C>
March 21, 1996(a)....................... 3,572 $ 2.57 March 21, 1999
August 26, 1997(b)...................... 72,191 $13.00 March 13, 2000
------ ------
75,763 $12.51
====== ======
</TABLE>
a) In 1996, the Company issued 167,859 warrants to a group of
investors. Each warrant can be exercised to purchase an Ordinary share
within three years from a date of its issuance at an exercise price of
$2.57 per warrant. During 1998, 164,287 warrants were exercised.
b) On August 26, 1997, the Company granted 72,191 warrants to a
consultant which were exercisable upon the success of the IPO. The
consultant is entitled to purchase, for a period of two years after the
IPO, Ordinary Shares of the Company, at an exercise price of $13.00 per
share. Subsequent to the balance sheet date, on February 19, 1999, the
consultant exercised 32,191 warrants.
In addition, the Company paid this consultant a fee equal to
approximately 1% of the gross proceeds of the IPO.
All the warrants are exercisable as of December 31, 1998.
A shareholder had warrants to purchase 45,000 shares of the
Company's NIS 0.01 par value ordinary shares at a total price of $30,
which warrants were exercised in May 1998 at a total price of $30.
F-15
<PAGE> 93
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 10 -- SHARE CAPITAL (CONTINUED)
2. Stock options:
a. Under the Company's 1996 Stock Option Plans, the 1997 Stock
Option Plan and the 1998 Stock Option Plan (the "Plans"), options may be
granted to employees and directors of the Company or its subsidiary.
b. Pursuant to the plans, as of December 31, 1998, an aggregate of
91,716 options of the Company are still available for future grant.
c. Each option granted under the Plans to employees expires no
later than 4 to 5 years from the date of the grant. The options vest
primarily over four years. Any options which are canceled or not
exercised before expiration become available for future grants.
Options granted to directors are exercisable within a year from
their date of grant.
d. Each option granted to employees and directors is exercisable to
purchase one Ordinary Share at an exercise price of $2.33 to $17.00.
A summary of the Company's share option activity under the Plans is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1997 1998
------------------ ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
the year.................... -- $ -- 415,128 $2.33 543,753 $ 3.22
Granted....................... 423,003 $2.33 334,500 3.80 624,438 $12.29
Exercised..................... -- -- -- -- (42,325) $ 3.77
Forfeited..................... (7,875) $2.33 (205,875) 2.34 (59,907) $12.55
------- ----- -------- ----- --------- ------
Outstanding -- end of the
year........................ 415,128 $2.33 543,753 $3.22 1,065,959 $ 8.16
======= ===== ======== ===== ========= ======
Options exercisable........... 70,407 $2.33 133,689 $2.54 268,355 $ 4.48
======= ===== ======== ===== ========= ======
</TABLE>
The options outstanding as of December 31, 1998 have been separated
into ranges of exercise price, as follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED OPTIONS
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AS OF REMAINING AVERAGE AS OF AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICE 1998 LIFE PRICE 1998 PRICE
- ------------ ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 2.33 192,173 2.7 $ 2.33 137,607 $ 2.33
3.33 258,099 3.5 3.33 76,866 3.33
7.33-11.50 52,250 3.9 7.49 12,375 7.33
11.63-17.00 563,437 4.5 12.43 41,507 12.92
- ------------ --------- --- ------ ------- ------
$ 2.33-17.00 1,065,959 3.9 $ 8.16 268,355 $ 4.48
============ ========= === ====== ======= ======
</TABLE>
F-16
<PAGE> 94
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 10 -- SHARE CAPITAL (CONTINUED)
On October 20, 1998, the Board of Directors decided to reduce to
the current market price the exercise price of all employee stock
options, excluding options granted to members of the Board of Directors,
that were not exercised, canceled or forfeited, that had an original
exercise price above $11.63.
The number of options repriced was 304,500. The original exercise
price of these options ranged between $13.00-$21.50.
Compensation expense for the excess of market value over the
exercise price of options at the date of grant totaled $294 and is being
amortized to income over the vesting period for four years.
Under SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), pro-forma information regarding net income (loss) and
earnings (loss) per share is required for grants issued after December
1994, and has been determined as if the Company had accounted for its
employee share options under the fair value method of SFAS No. 123. The
fair value for these options was estimated at the grant date using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997 and 1998: risk-free interest rates of 7.0%,
5.5% and 5.5%, respectively, dividend yields of 0.0%, volatility factors
of the expected market price of the Company's Ordinary Shares of 0.20,
0.20 and 0.75, respectively, and a weighted-average expected life of
four years per option.
The weighted average fair values of options granted for the years
ended December 31, 1996, 1997 and 1998, were $2.33, $3.61 and $6.33,
respectively.
The weighted average fair values of options granted at an exercise
price less than the market price for the years ended December 31, 1997
and 1998 were $6.28 and $8.20 respectively.
Because changes in the subjective input assumptions can materially
affect the fair value estimate, it is management's opinion that the
existing option pricing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Pro-forma information under SFAS No. 123 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ----- --------
<S> <C> <C> <C>
Net income (loss) as reported.................. $(1,461) $ 636 $(11,392)
======= ===== ========
Pro-forma income (loss)........................ $(1,484) $ 586 $(11,803)
======= ===== ========
Pro-forma basic earnings (loss) per share...... $ (0.50) $0.21 $ (1.16)
======= ===== ========
Pro-forma diluted earnings (loss) per share.... $ (0.50) $0.07 $ (1.16)
======= ===== ========
</TABLE>
d. Dividends
In the event that cash dividends are declared in the future, such dividends
will be paid in NIS. The Company does not intend to pay cash dividends in the
foreseeable future.
The Company has decided to permanently reinvest its tax exempt income (see
note 12a).
F-17
<PAGE> 95
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 11 -- EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of historical basic and
diluted earnings (loss) per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Numerator:
Net income (loss)...................................... $ (1,461) $ 636 $ (11,392)
========= ========= ==========
Numerator for basic earnings (loss) per share -- income
(loss) available to ordinary shareholders........... $ (1,461) $ 636 $ (11,392)
========= ========= ==========
Numerator for diluted earnings (loss) per
share -- income (loss) available to ordinary
shareholders after assumed conversions.............. $ (1,461) $ 636 $ (11,392)
========= ========= ==========
Denominator:
Weighted average Ordinary shares outstanding............. 2,924,997 2,837,497 10,151,033
--------- --------- ----------
Denominator:
Denominator for basic earnings (loss) per share --
weighted-average shares............................. 2,924,997 2,837,497 10,151,033
--------- --------- ----------
Effect of dilutive securities(1)
Employee stock options.............................. -- 168,660 --
Warrants............................................ -- 135,827 --
Convertible preferred shares........................ -- 4,792,583 --
--------- --------- ----------
Dilutive potential Ordinary shares..................... -- 5,097,070 --
--------- --------- ----------
Denominator for diluted earnings (loss) per
share -- adjusted weighted-average shares and
assumed conversions............................... 2,924,997 7,934,567 10,151,033
========= ========= ==========
</TABLE>
- ---------------
(1) The effect of the inclusion of these securities in 1996 and 1998 would be
antidilutive.
NOTE 12 -- TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959
The Company has been granted in November 1995 the status of an "Approved
Enterprise", under the Law for the Encouragement of Industry (Taxation), 1969
(the "Investment Law") and the Company has elected the alternative benefits
program, waiver of grants in return for tax exemptions. Pursuant thereto, the
income of the Company derived from the "Approved Enterprise" program is
tax-exempt for two years and will enjoy a reduced tax rate of 25% for an
eight-year period. (Subject to adjustment of 20% based upon the foreign
investors' ownership of the Company).
The Company completed its investment according to its first program on
November 27, 1997.
Income derived from this program is tax exempt for two years commencing in
1998 and will enjoy a reduced tax of 25% for an additional eight years.
In 1998, the Company received an approval for an expansion program of its
Approved Enterprise. Accordingly, the Company's income from the expansion
program will be tax-exempt for a period of two years and will be subject to a
reduced tax rate as mentioned above for an additional period of eight years. The
F-18
<PAGE> 96
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 12 -- TAXES ON INCOME (CONTINUED)
aforementioned benefits are in respect of the taxable income that the Company
derives from the expansion program.
The period of tax benefits detailed above is subject to limits of 12 years
from the year of commencement of production, or 14 years from the date of
granting the approval, whichever is earlier.
The tax-exempt profits that will be earned by the Company's "Approved
Enterprise" can be distributed to shareholders, without tax liability to the
Company only upon the complete liquidation of the Company. As of December 31,
1998 retained earnings included approximately $2,630 in tax exempt income earned
by the Company's "Approved Enterprise". The company has decided to permanently
reinvest its tax exempt income. Accordingly, no deferred income taxes have been
provided on income attributable to the company's "Approved Enterprise". If these
retained tax-exempt profits are distributed in a manner other than in the
complete liquidation of the Company, they would be taxed at the corporate tax
rate applicable to such profits as if the Company had not chosen the alternative
tax benefits (currently -- 25% for an "Approved Enterprise") and an income tax
liability would be incurred of approximately $657 as of December 31, 1998.
The Investment Law also grants entitlement to claim accelerated
depreciation on equipment used by the "Approved Enterprise" during five tax
years.
Should the Company derive income from sources other than the "Approved
Enterprise" during the periods of benefits, such income shall be taxable at
regular corporate tax rates (1996 and thereafter -- 36%).
b. Tax benefits under the Israeli Law for the Encouragement of Industry
(Taxation), 1969
The Company is an "industrial company" under the Law for the Encouragement
of Industry (Taxation), 1969 and, therefore, is entitled to certain tax
benefits, including accelerated rates of depreciation and deduction of public
offering expenses.
c. Measurement of results for tax purposes under the Income Tax Law
(Inflationary Adjustments), 1985
Results for tax purposes are measured in real terms of earnings in NIS
after certain adjustments for increases in the CPI. As explained in Note 2b, the
financial statements are presented in U.S. dollars. The difference between the
annual change in the CPI and in the NIS/dollar exchange rate causes a difference
between taxable income and the income before taxes shown in the financial
statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has
not provided deferred income taxes on this difference between the reporting
currency and the tax bases of assets and liabilities.
d. Tax assessments
The Company has not received final tax assessments since its incorporation.
e. Net operating losses carryforwards
As of December 31, 1998, Fundtech Corporation had a U.S. federal net
operating loss carryforward of approximately $4,741.
f. Deferred income taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-19
<PAGE> 97
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 12 -- TAXES ON INCOME (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
U.S. net operating loss carryforwards....................... $ 1,910 $ 1,659
Other reserve and allowances (including in process, research
and development write-off $5,552 in 1998)................. 43 5,657
------- -------
Total deferred assets....................................... 1,953 7,316
Valuation allowance......................................... (1,953) (7,316)
------- -------
Balance at the end of the year.............................. $ -- $ --
======= =======
</TABLE>
The subsidiary has provided valuation allowances in respect of deferred tax
assets resulting from tax loss carryforwards and other temporary differences,
since it has a history of losses over the past years. Management currently
believes that it is more likely than not that the deferred tax regarding the
loss carryforwards and other temporary differences will not be realized.
g. Reconciliation of the theoretical tax expenses
A reconciliation between the theoretical income tax, assuming all income is
taxed at the statutory rate applicable to income of the Company and the actual
income tax as reported in the statements of operations, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ----- --------
<S> <C> <C> <C>
Pre tax income (loss).................................. $(1,461) $ 636 $(11,392)
------- ----- --------
Statutory tax rate in Israel........................... 36% 36% 36%
======= ===== ========
Theoretical tax (benefit) expense...................... $ (526) $ 229 $ (4,101)
Tax benefits arising from "approved enterprises"....... -- -- (947)
Write off of in process research and development....... -- -- 5,552
Tax adjustment in respect of inflation in Israel and
others............................................... (75) (18) (131)
Carryforward losses and other deferred taxes for which
valuation allowance was recorded..................... 853 363 --
Items for which deferred taxes were not recognized..... (258) 14 (301)
Difference between tax rate in Israel and in U.S. ..... 2 4 209
Utilization of tax losses carryforward................. -- (615) (296)
Non deductible expenses................................ 4 23 15
------- ----- --------
Income taxes........................................... $ -- $ -- $ --
======= ===== ========
</TABLE>
h. Income (loss) before taxes on income
Income (loss) before taxes on income consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------ --------
<S> <C> <C> <C>
Domestic (within Israel).............................. $ (57) $1,599 $ 4,183
Foreign (outside Israel).............................. (1,404) (963) (15,575)
------- ------ --------
$(1,461) $ 636 $(11,392)
======= ====== ========
</TABLE>
F-20
<PAGE> 98
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 13 -- SELECTED STATEMENTS OF OPERATIONS DATA
a. Summary information about geographical destinations
The Company operates in one industry -- the design, development, marketing
and support of a suite of client server software products which enables
businesses and their banks to process payments, transfer funds and manage cash
positions electronically, and is divided into 4 main geographical destinations.
The Company attributes revenues for external customers on the basis of
where the products are being sold as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------------------- ----------------------
TOTAL TOTAL LONG-LIVED TOTAL LONG-LIVED
REVENUES REVENUES ASSETS REVENUES ASSETS
-------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Israel........................... $ 50 $ 204 $189 $ 693 $ 413
U.S.A............................ 3,518 7,471 689 19,190 6,422
Australia........................ -- 332 -- 262 --
Europe........................... -- 12 -- 1,801 --
Other............................ -- -- -- 1,186 --
------ ------ ---- ------- ------
$3,568 $8,019 $878 $23,132 $6,835
====== ====== ==== ======= ======
</TABLE>
b. Major customers data; percentage of total revenues
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Customer A.................................................. -- 31% 1%
=== === ==
Customer B.................................................. 3% 12% 4%
=== === ==
</TABLE>
c. Financial income, net
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Financial expenses:
Interest and other........................................ $ 44 $ 28 $ 24
---- ---- ----
44 28 24
---- ---- ----
Financial income:
Foreign currency translation differences, net............. (11) 57 9
Interest and other........................................ 83 161 586
---- ---- ----
72 218 595
---- ---- ----
Financial income, net....................................... $ 28 $190 $571
==== ==== ====
</TABLE>
F-21
<PAGE> 99
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of CheckFree Holdings Corporation:
We have audited the accompanying combined balance sheets of the Cash
Management and Wire Transfer Divisions (the "Divisions") of CheckFree Holdings
Corporation ("CheckFree") as of June 30, 1996 and 1997 and the related combined
statements of operations and divisions' equity and of cash flows for the eight
months ended February 29, 1996 (Predecessor), the four months ended June 30,
1996, and the year ended June 30, 1997. 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 generally accepted auditing
standards. 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, such combined financial statements present fairly, in all
material respects, the financial position of the Divisions at June 30, 1996 and
1997 and the results of their operations and their cash flows for the eight
months ended February 29, 1996 (Predecessor), the four months ended June 30,
1996, and the year ended June 30, 1997 in conformity with generally accepted
accounting principles.
As described in Note 1 to the financial statements, the Cash Management
division and Wire Transfer division were operated as divisions of CheckFree, and
accordingly, the accompanying financial statements contain allocations of
certain accounts and balances of CheckFree which are common to the other
divisions of CheckFree. Such allocations were made in order to reflect the
financial position, results of operations and cash flows of the Divisions on a
combined stand-alone basis.
As described in Note 11 to the financial statements, CheckFree sold certain
assets and liabilities of the Divisions to Fundtech Ltd. on April 20, 1998.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 29, 1998
F-22
<PAGE> 100
CASH MANAGEMENT AND WIRE TRANSFER DIVISIONS
OF CHECKFREE HOLDINGS CORPORATION
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1996 1997 1998
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ -- $ -- $ --
Receivables, net of allowance for doubtful accounts
of $100,253, $796,801 and $369,703 as of June 30,
1996 and 1997 and March 31, 1998, respectively... 5,312,208 5,428,399 5,621,483
----------- ---------- ----------
Total Current Assets........................ 5,312,208 5,426,399 5,621,483
OTHER ASSETS:
Computer Equipment.................................. 262,902 380,099 425,889
Less Accumulated Depreciation....................... (43,118) (206,593) (174,441)
----------- ---------- ----------
Computer Equipment, net.......................... 219,784 173,506 251,448
Intangible Assets, net of accumulated amortization
of $368,933, $973,624 and $1,531,930 as of June
30, 1996 and 1997 and March 31, 1998,
respectively..................................... 4,581,685 1,903,048 1,344,742
----------- ---------- ----------
Total Assets................................ $10,113,677 $7,504,953 $7,217,673
=========== ========== ==========
LIABILITIES AND DIVISIONS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 494,204 $ 126,735 $ 66,553
Accrued liabilities................................. 333,359 692,166 329,398
Customer deposits................................... -- 22,338 31,197
Deferred revenue.................................... 3,784,470 4,363,681 4,968,274
Amounts due CheckFree............................... 662,123 1,808,655 517,342
----------- ---------- ----------
Total Current Liabilities................... 5,274,156 7,013,575 5,912,764
DIVISIONS' EQUITY..................................... 4,839,521 491,378 1,304,909
----------- ---------- ----------
Total Liabilities and Divisions' Equity..... $10,113,677 $7,504,953 $7,217,673
=========== ========== ==========
</TABLE>
See notes to combined financial statements.
F-23
<PAGE> 101
CASH MANAGEMENT AND WIRE TRANSFER DIVISIONS
OF CHECKFREE HOLDINGS CORPORATION
COMBINED STATEMENTS OF OPERATIONS AND DIVISIONS' EQUITY
<TABLE>
<CAPTION>
PREDECESSOR DIVISIONS
------------ --------------------------------------------------------
EIGHT MONTHS FOUR MONTHS YEAR NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED
FEBRUARY 29, JUNE 30, JUNE 30, MARCH 31, MARCH 31,
1996 1996 1997 1997 1998
------------ ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
License fees.......................... $2,099,459 $2,224,071 $ 4,600,165 $2,787,368 $2,385,571
Maintenance fees...................... 2,509,391 36,566 2,852,484 1,947,236 2,981,885
Consulting............................ 261,490 159,217 1,147,075 615,697 1,540,648
Other................................. 492,031 290,725 1,136,777 944,104 889,301
---------- ---------- ----------- ----------- ----------
Total operating revenues............ 5,362,371 2,710,579 9,736,501 6,294,405 7,797,405
OPERATING EXPENSES:
Cost of servicing and support......... 2,055,143 1,256,799 6,429,279 3,875,226 4,065,754
Selling and royalties................. 692,971 852,279 1,234,855 788,933 525,300
Research and development.............. 1,246,375 345,418 974,975 750,391 649,580
General and administrative............ 1,287,167 494,921 2,543,525 1,770,962 1,118,408
Depreciation and amortization......... 422,318 412,051 1,253,541 1,022,633 573,739
Write-off of capitalized software..... -- -- 1,588,571 1,588,571 --
---------- ---------- ----------- ----------- ----------
Total operating expenses............ 5,703,974 3,361,468 14,024,746 9,796,716 6,932,781
OPERATING INCOME (LOSS)................. (341,603) (650,889) (4,288,245) (3,502,311) 864,624
OTHER INCOME (EXPENSE)
Interest income....................... 8,659
Interest expense...................... 903 59,898 36,937 51,093
---------- ---------- ----------- ----------- ----------
Net other income (expense).......... 8,659 (903) (59,898) (36,937) (51,093)
---------- ---------- ----------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES....... (332,944) (651,792) (4,348,143) (3,539,248) 813,531
DIVISIONS' EQUITY (DEFICIT)
Beginning of Period................... (496,895) 5,491,313 4,839,521 4,839,521 491,378
End of Period......................... $ (829,839) $4,839,521 $ 491,378 $1,300,273 $1,304,909
========== ========== =========== =========== ==========
</TABLE>
See notes to combined financial statements.
F-24
<PAGE> 102
CASH MANAGEMENT AND WIRE TRANSFER DIVISIONS
OF CHECKFREE HOLDINGS CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR DIVISIONS
------------ -------------------------------------------------------
EIGHT MONTHS FOUR MONTHS YEAR NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED
FEBRUARY 29, JUNE 30, JUNE 30, MARCH 31, MARCH 31,
1996 1996 1997 1997 1998
------------ ----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) before income taxes.... $ (332,944) $ (651,792) $(4,348,143) $(3,539,248) $ 813,531
Adjustments to reconcile income
(loss) before income taxes to net
cash provided by operating
activities:
Depreciation and amortization...... 422,318 412,051 1,253,541 1,022,633 573,739
Write-off of capitalized
software......................... -- -- 1,388,571 1,588,571 --
Changes in operating assets and
liabilities
Increase in accounts receivable,
net........................... (1,327,454) (1,251,976) (116,191) (349,867) 193,084
Increase in prepaid expenses..... -- -- -- (1,170,000) --
Increase (decrease) in accounts
payable....................... 409,956 30,616 (367,469) (302,102) 60,182
Increase (decrease) in accrued
liabilities................... (21,781) (76,471) 358,807 (42,476) (362,768)
Increase (decrease) in customer
deposits...................... (20,710) -- 22,338 22,338 6,559
Increase in deferred revenue..... 1,502,188 1,460,942 579,211 2,358,488 604,593
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities........ 631,573 (76,630) (1,029,335) (611,663) 1,384,688
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software
development costs.................. -- (816,485) -- -- --
Capital expenditures for computer
equipment.......................... (64,912) (255,175) (117,197) (106,259) (93,375)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities.................. (64,912) (1,071,660) (117,197) (106,259) (93,375)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in amounts due
CheckFree.......................... $ (566,661) $1,148,290 $ 1,146,532 $ 717,922 $(1,291,313)
----------- ----------- ----------- ----------- -----------
INCREASE IN CASH....................... -- -- -- -- --
CASH, beginning of period.............. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
CASH, end of period.................... -- -- -- -- --
=========== =========== =========== =========== ===========
</TABLE>
See notes to combined financial statements.
F-25
<PAGE> 103
CASH MANAGEMENT AND WIRE TRANSFER DIVISIONS
OF CHECKFREE HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying combined financial statements have been prepared for the
purpose of presenting the stand-alone results of the combined operations of the
cash management and wire transfer divisions ("Divisions") of CheckFree Holdings
Corporation ("CheckFree").
Until February 1996, the Divisions were owned and operated by Servantis
Systems, Inc., a subsidiary of Servantis Systems Holdings, Inc. ("Servantis").
In February 1996, Servantis was acquired by CheckFree. The acquisition was
treated as a purchase for accounting purposes, and accordingly, the assets and
liabilities were recorded based on their fair values at the date of the
acquisition.
The impact of the purchase accounting adjustments on the Divisions' equity
(deficit) as of February 29, 1996 was as follows:
<TABLE>
<S> <C>
Divisions' deficit prior to acquisition..................... $ (829,839)
Purchase accounting Adjustments:
Fixed asset revaluation................................... 51,449
Intangible asset valuation................................ 2,437,676
Purchased profits elimination............................. 3,832,027
----------
Divisions' equity after acquisition......................... $5,491,313
==========
</TABLE>
Due to the resulting change in the carrying value of the Divisions' assets
and liabilities, results of operations and cash flows have been separated
between Predecessor and Divisions on the face of the statements of operations
and Divisions' equity and the statements of cash flows.
Certain costs incurred by CheckFree in connection with operating the
Divisions have been allocated to the Divisions in order to present the
historical financial statements of the Divisions as if the Divisions had
operated on a combined stand-alone basis. See Note 8 for a further discussion
regarding allocations of certain accounts and balances of CheckFree to the
Divisions.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Revenue Recognition
The Divisions generate revenues from licensing the right to use their
software products; supporting the software products ("maintenance revenue");
performing installation, consulting, training, and other professional services
related to their software products. The Divisions recognize revenues in
accordance with the provisions of the American Institute of Certified Public
Accountants ("AICPA") Statement of Position No. 91-1 ("SOP 91-1"), Software
Revenue Recognition.
In October 1997, the AICPA issued Statement of Position No. 97-2 ("SOP
97-2"), Software Revenue Recognition, which supersedes SOP 91-1. SOP 97-2 is
effective for fiscal years beginning after December 15, 1997. The adoption of
SOP 97-2 is not expected to have a material impact on the Divisions' financial
statements. In March 1998, the AICPA issued Statement of Position No. 98-4 ("SOP
98-4"), Deferral of the Effective Date of a Provision of SOP 97-2, Software
Revenue Recognition, which defers for one year the application of certain
requirements of SOP 97-2. The adoption of SOP 98-4 is not expected to have a
material impact of the Divisions' financial statements.
Revenue from software license agreements is recognized upon delivery of the
software if there are no significant postdelivery obligations. Any revenue
related to significant postdelivery obligations is deferred and recognized when
the product is accepted by the customer. Maintenance revenue is recognized
ratably over the term of the related contractual support period, generally 12
months. Consulting revenue is primarily related to professional services
performed on a time-and-materials basis and is recognized as the services are
performed.
F-26
<PAGE> 104
CASH MANAGEMENT AND WIRE TRANSFER DIVISIONS
OF CHECKFREE HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Such services do not include customization or modification to underlying
software code. Modification or customization services are separately priced and
recognized as the services are performed.
As a result of the purchase of Servantis by CheckFree, the Divisions were
required to record a purchase accounting adjustment in the amount of $3,832,027
to eliminate purchased profits from its deferred revenue. The effect of the
adjustment was to reduce deferred revenue, and the resulting amount was then
reflected as a reduction of recorded revenue over the next twelve months.
b. Cash and Cash Equivalents
The Divisions participate in CheckFree's cash management system and,
accordingly, do not maintain cash balances.
c. Computer Equipment
Computer equipment is stated at historical cost less accumulated
depreciation and amortization, with the exception of assets on hand at February
29, 1996 which were restated to market value in conjunction with the purchase of
the Divisions by CheckFree. Computer equipment is depreciated on a straight-line
basis over their estimated useful lives (from 3 to 5 years). When computer
equipment is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts and any related gain or
loss is recognized. Maintenance and repair costs are charged to expense as
incurred. The Divisions recorded depreciation expense of $72,191, $43,118,
$163,477, $118,671 and $15,434 for the eight-month period ended February 29,
1996, the four-month period ended June 30, 1996, the year ended June 30, 1997,
and the nine-month periods ended March 31, 1997 and March 31, 1998 (unaudited),
respectively.
d. Intangible Assets
Intangible assets are amortized on a straight-line basis over periods from
three to thirty years. At each balance sheet date, a determination is made by
management to ascertain whether the intangible assets have been impaired based
on several criteria, including, but not limited to, sales trends, undiscounted
operating cash flows, and other operating factors.
e. Capitalized Software
Research and development expenditures, except as described below, are
charged to expense as incurred. Computer software development costs for the core
operating system of the Divisions' software products to be marketed are charged
to research and development expense until technological feasibility is
established, after which remaining software production costs are capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." Management continually evaluates the recoverability of purchased or
capitalized computer software development costs based on projected revenues and
the future estimated economic life of its software products. In the quarter
ended March 31, 1997 the Divisions determined that certain assets related to
their WireNext software product were impaired and, accordingly, recorded a
charge of $1,588,571 to reflect the impairment. Capitalized computer software
development costs are amortized on a product-by-product basis based on the
greater of (a) the amount computed using the ratio that current gross revenues
fora product bear to the total of current and anticipated future gross revenues
for that product or (b) straight-line amortization using a three-year life. The
Divisions capitalized $816,485 for the four-month period ended June 30, 1996.
Amortization of intangible assets and capitalized computer software development
costs for the eight-month period ended February 29, 1996, the four-month period
ended June 30, 1996, the year ended
F-27
<PAGE> 105
CASH MANAGEMENT AND WIRE TRANSFER DIVISIONS
OF CHECKFREE HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
June 30, 1997 and the nine-month periods ended March 31, 1997 and 1998
(unaudited) were $350,127, $368,933, $1,090,066, $903,962 and $558,305,
respectively.
f. Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
g. Interim Combined Financial Statements
The unaudited combined balance sheet as of March 31, 1998, and the
unaudited combined statements of operations and divisions' equity (deficit) and
of cash flows for the nine months ended March 31, 1997 and 1998, in the opinion
of management, have been prepared on the same basis as the audited combined
financial statements and include all significant adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the results
of interim periods. The data disclosed in these notes to the combined financial
statements for these periods are also unaudited. Operating results from the
interim periods are not necessarily indicative of the results that may be
expected for the entire year.
NOTE 3 -- ACCOUNTS RECEIVABLE
Receivables at June 30, 1996 and 1997 and March 31, 1998 consist of the
following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Trade accounts receivable...................... $1,457,751 $1,765,203 $2,160,694
Unbilled accounts receivable................... 3,954,166 4,446,024 3,817,783
Other receivables.............................. 544 13,973 12,709
---------- ---------- ----------
5,412,461 6,225,200 5,991,186
Less allowance for doubtful accounts........... (100,253) (796,801) (369,703)
---------- ---------- ----------
$5,312,208 $5,428,399 $5,621,483
========== ========== ==========
</TABLE>
The billing terms related to the Divisions' license and services contracts
generally do not coincide with revenue recognition, giving rise to unbilled
accounts receivable.
NOTE 4 -- PREPAID EXPENSES
During the quarter ended March 31, 1997, the Divisions entered into a
reseller agreement with a strategic partner to provide the Divisions' customers
an alternative solution to a product the Divisions discontinued. The Divisions
purchased $1,600,000 of software from the strategic partner and expensed the
amount as product was delivered to the Divisions' customers. Of the prepaid
amount, $430,000 was expensed in the quarter ended March 31, 1997 and the
balance of $1,170,000 was expensed in the quarter ended June 30, 1997.
F-28
<PAGE> 106
CASH MANAGEMENT AND WIRE TRANSFER DIVISIONS
OF CHECKFREE HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INTANGIBLE ASSETS
Intangible assets at June 30, 1996 and 1997 and March 31, 1998 consist of
the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Purchased PC Software......................... $3,138,636 $1,881,175 $ 1,881,175
Workforce..................................... 335,818 335,818 335,818
Customer Base................................. 320,717 320,717 320,717
Tradenames.................................... 168,664 168,664 168,664
Capitalized Software.......................... 986,783 170,298 170,298
---------- ---------- -----------
Total.................................... 4,950,618 2,876,672 2,876,672
Less Accumulated Amortization................. (368,933) (973,624) (1,531,930)
---------- ---------- -----------
Net...................................... $4,581,685 $1,903,048 $ 1,344,742
========== ========== ===========
</TABLE>
NOTE 6 -- ACCRUED LIABILITIES
Accrued liabilities at June 30, 1996 and 1997 and March 31, 1998 consist of
the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued compensation and employee benefits........ $230,608 $242,393 $213,557
Accrued royalty expense........................... 25,095 404,271 8,737
Other accrued liabilities......................... 77,656 45,502 107,104
-------- -------- --------
$333,359 $692,166 $329,398
======== ======== ========
</TABLE>
NOTE 7 -- INCOME TAXES (UNAUDITED)
The Divisions have been included in CheckFree's consolidated United States
Federal and state income tax returns. CheckFree accounts for income taxes in
accordance with SFAS 109, "Accounting for Income Taxes," which requires an asset
and liability approach to financial accounting and reporting for income taxes.
CheckFree does not allocate income taxes to the Divisions on a stand-alone
basis; therefore the accompanying financial statements do not reflect an income
tax provision or income tax-related assets and liabilities.
The following represents the unaudited pro forma estimated impact of income
taxes as if the combined Divisions had filed income tax returns.
<TABLE>
<CAPTION>
PREDECESSOR DIVISIONS
------------ -----------------------------------------------------
EIGHT MONTHS FOUR MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED ENDED ENDED
FEBRUARY 29, JUNE 30, JUNE 30, MARCH 31, MARCH 31,
1996 1996 1997 1997 1998
------------ ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income (Loss) Before
Income Taxes........ $(332,944) $(615,792) $(4,348,143) $(3,539,248) $813,531
Pro Forma Income Tax
Expense (Benefit)... (133,178) (260,717) (1,739,257) (1,415,699) 325,412
Pro Forma Net Income
(Loss).............. $(199,766) $(391,075) $(2,608,886) $(2,123,549) $488,119
========= ========= =========== =========== ========
</TABLE>
As there are no material permanent differences in any of the periods
presented, the blended effective rate of 40% is essentially the same as the
combined Federal and state statutory rates.
F-29
<PAGE> 107
CASH MANAGEMENT AND WIRE TRANSFER DIVISIONS
OF CHECKFREE HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- RELATED PARTY TRANSACTIONS
Within both Servantis and CheckFree, the Divisions operated as separate
direct margin centers. Servantis and CheckFree incurred various costs in
connection with the operations of the Divisions, which included corporate
controlled expenses such as employee benefits, accounting, legal, tax,
information services, marketing and executive management. Such amounts, which
are management's best estimate of the costs incurred to operate the Divisions,
have been allocated to the Divisions using relative revenue, employee usage or
other measures as appropriate in order to present financial statements as if the
Divisions were operated on a stand-alone basis. It is management's assertion
that the cost allocation methods used are practical and reasonable methods of
allocation of the corporate controlled expenses of both Servantis and CheckFree.
However, these statements are not necessarily indicative of the financial
position and results of operations which would have occurred had the Divisions
been operated on a stand-alone basis. The following table lists the various
allocated expenses for the periods indicated:
<TABLE>
<CAPTION>
PREDECESSOR DIVISIONS
------------ ----------------------------------------------------
EIGHT MONTHS FOUR MONTHS YEAR NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED
FEBRUARY 29, JUNE 30, JUNE 30, MARCH 31, MARCH 31,
1996 1996 1997 1997 1998
------------ ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Corporate C&A............... $ 592,617 $ 303,036 $1,061,730 $ 897,830 $ 702,663
Sales....................... 442,678 651,761 1,083,902 680,183 457,068
Facilities.................. 383,873 191,937 593,435 474,464 335,000
Information Services........ 64,357 32,178 353,117 296,964 112,000
---------- ---------- ---------- ---------- ----------
Total Allocated........ $1,483,525 $1,178,912 $3,092,184 $2,349,441 $1,606,731
========== ========== ========== ========== ==========
</TABLE>
Additionally, the Divisions utilize the cash management services of the
parent, CheckFree. Excess cash provided by or used by the Divisions is accounted
for as amounts due CheckFree in the current liabilities section of the balance
sheet. The average outstanding balances in the amounts due CheckFree account is
used to compute the amount of interest expense or interest income realized by
the Divisions. Such amounts are reflected appropriately in the statement of
income. An intercompany interest rate of 5.25% is used to compute the interest
income and expense, as this amount approximates investment income earned by
CheckFree over the periods presented.
NOTE 9 -- EMPLOYEE RETIREMENT PLANS
a. 401(k) Plans
The Divisions participated in the defined contribution 401(k) retirement
plans sponsored by CheckFree and Servantis which covered substantially all of
the employees. Under the plans, eligible employees may contribute a portion of
their salary under retirement and CheckFree and Servantis, at their discretion,
may match a portion of the employee's contribution. Total expenses under these
plans amounted to $63,176, $49,618, $63,528, $47,646, and $62,517 for the eight
months ended February 29, 1996, the four months ended June 30, 1996, the year
ended June 30, 1997, the nine months ended March 31, 1997 and 1998 (unaudited),
respectively.
b. Pension Plan
The Divisions participated in a noncontributory money purchase pension plan
sponsored by Servantis, which covered substantially all of its employees age 21
or older who had a minimum of 12 months of service. The contribution to the
pension plan was 10% of the annual aggregate compensation of the qualified
F-30
<PAGE> 108
CASH MANAGEMENT AND WIRE TRANSFER DIVISIONS
OF CHECKFREE HOLDINGS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- EMPLOYEE RETIREMENT PLANS -- (CONTINUED)
participants in each year (subject to the maximum limits established by the
Internal Revenue Code). Total expenses under this plan were $37.524 for the
eight months ended February 29, 1996. Upon the purchase of Servantis by
CheckFree in February of 1996, the money purchase pension plan was dissolved and
employee assets were rolled into the CheckFree 401(k) retirement plan. Plan
assets were not allocated to the Divisions.
NOTE 10 -- GEOGRAPHIC SALES INFORMATION
The Divisions reported sales in multiple foreign locations. The following
table identifies revenue by location for the periods indicated:
<TABLE>
<CAPTION>
PREDECESSOR DIVISIONS
------------ ----------------------------------------------------
EIGHT MONTHS FOUR MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED ENDED ENDED
FEBRUARY 29, JUNE 30, JUNE 30, MARCH 31, MARCH 31,
LOCATION 1996 1996 1997 1997 1998
-------- ------------ ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States............... $4,782,591 $2,392,381 $8,668,539 $5,353,518 $7,012,717
Asia........................ 17,500 33,698 700,579 659,559 570,660
Europe...................... 515,095 -- 275,995 210,971 131,113
Central and Southern
America................... -- 15,550 21,500 21,500 --
Australia................... -- 240,000 13,300 13,300 54,790
Other....................... 47,185 28,950 56,588 35,557 28,125
---------- ---------- ---------- ---------- ----------
$5,362,371 $2,710,579 $9,736,501 $6,294,405 $7,797,405
========== ========== ========== ========== ==========
</TABLE>
NOTE 11 -- SUBSEQUENT EVENT
On April 20, 1998, certain assets and liabilities of the Divisions were
sold to Fundtech Ltd. for consideration of $18,250,000 in cash.
F-31
<PAGE> 109
[COLOR ARTWORK TO BE PROVIDED]
<PAGE> 110
[FUNDTECH LTD. LOGO]
<PAGE> 111
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses, other than underwriting commissions, expected to be incurred
by Fundtech in connection with the issuance and distribution of the securities
being registered under this Registration Statement are estimated to be as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 22,929
Nasdaq National Market Filing Fee........................... 17,500
National Association of Securities Dealers, Inc. Filing
Fee....................................................... 8,784
Israeli Taxes............................................... 824,766
Printing and Engraving...................................... 200,000
Legal Fees and Expenses..................................... 350,000
State Securities Qualification Fees and Expenses............ 10,000
Accounting Fees and Expenses................................ 200,000
Miscellaneous............................................... 366,021
----------
Total............................................. $2,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Association of Fundtech provide that, to the fullest extent
permitted by the Israeli Companies' Ordinance (New Version), 1983, as amended
(the "Companies' Ordinance"), Fundtech may indemnify its Office Holders (as
defined in the Companies' Ordinance), directors and officers for (i) a financial
obligation imposed on them in favor of another person by a court judgment,
including a compromise judgment or an arbitrator's award by court in respect of
an act performed in his capacity as an officer of Fundtech and (ii) reasonable
litigation expenses, including attorneys' fees, expended by such officer or
charged to him by a court, in proceedings instituted against him by Fundtech or
on its behalf or by any other person, or in a criminal charge from which he was
acquitted, all in respect of an act performed by him in his capacity as an
officer of Fundtech. Fundtech has entered into indemnification agreements with
most of its Office Holders.
Fundtech's Articles of Association also provide that, to the fullest extent
permitted by the Companies' Ordinance, Fundtech may procure directors' and
officers' liability insurance for (a) breach by any director or officer of the
duty of care or officer owed to Fundtech or to any other person, (b) breach by
any officer or director of a fiduciary duty owed to Fundtech, provided that such
person acted in good faith and had reasonable cause to assume that the action
would not prejudice the interests of Fundtech and (c) any financial liability
imposed upon any director or officer for the benefit of a third party by reason
of an act or omission of such person in his capacity as a director or officer of
Fundtech.
Under the Companies' Ordinance, Fundtech may not indemnify or procure
insurance coverage for the liability of its Office Holders (as defined in the
Companies' Ordinance) in respect of any monetary obligation imposed by reason of
(a) an act or omission which constitutes a breach of fiduciary duty, except to
the extent described above, (b) a willful breach of the duty of care or reckless
disregard of the circumstances or consequences of such breach, (c) an act or
omission done with the intent to unlawfully realize personal gain or (d) a fine
or penalty imposed for a criminal offense.
The Companies' Ordinance defines an "Office Holder" to include a director,
managing director, chief business manager, president, executive vice president,
vice president, other managers directly subordinate to the managing director,
any person so nominated by the Board and any other person who fills one of the
above positions, even if he carries a different title.
II-1
<PAGE> 112
In addition, pursuant to the Companies' Ordinance, indemnification of, and
procurement of insurance coverage for, an Office Holder of Fundtech is permitted
if it is approved by Fundtech's Audit Committee and Board of Directors. In
certain circumstances, the Companies' Ordinance also requires approval of such
indemnification and insurance by Fundtech's shareholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Described below are unregistered securities sold by Fundtech during the
three years preceding the filing of this Registration Statement:
On March 31, 1997, Fundtech sold an aggregate of 1,389,752 ordinary
shares to certain affiliated and unaffiliated investors for an aggregate
purchase price of $5,559,006 ($4.00 per share). The affiliated investors
were Aura, Oscar Gruss, the Star Entities, Jerusalem Pacific Ventures and
the Israel Growth Fund, and they purchased an aggregate of 390,002 ordinary
shares.
Between May 15, 1996 and October 7, 1996, Fundtech granted to
employees options to purchase an aggregate of 423,003 ordinary shares at an
exercise price of $2.33 per share. Such options vest over four years and
expire five years following the date of grant.
Between May 22, 1997 and September 3, 1997, Fundtech granted to
certain employees options to purchase an aggregate of 295,500 ordinary
shares at an exercise price of $3.33 per share which included a number of
options forfeited and reissued. Such options vest in four years and expire
five years from the date of grant.
Between December 1, 1997 and May 15, 1998 Fundtech granted certain
employees options to purchase an aggregate of 300,250 ordinary shares at
exercise prices ranging from $7.33 to $21.00. In October 1998, these
options were repriced at $11.625, the then current market price of the
ordinary shares.
On October 1, 1996, Fundtech granted a former employee an option to
purchase 18,750 ordinary shares at an exercise price of $2.67 per share,
exercisable prior to January 31, 1998. These options expired unexercised.
In September 1997, Fundtech granted to an unaffiliated consultant
options to purchase 72,191 ordinary shares at an exercise price of $13.00.
The options are exercisable for a two-year period commencing March 13,
1998. On February 19, 1999, the unaffiliated consultant exercised options
to purchase 32,191 ordinary shares.
On May 18, 1998, Fundtech agreed to grant options to purchase an
aggregate of 42,000 ordinary shares to members of the Board of Directors.
Such grant was made following the election of a Board of Directors at
Fundtech's annual general meeting of the shareholders, in August 1998. The
options vest over a period of one year.
Between October 20, 1998 and March 10, 1999, Fundtech granted to
executive officers and employees options to purchase an aggregate of
142,250 ordinary shares at exercise prices ranging from $10.375 to
$21.9375.
Each of the securities listed above was (i) sold pursuant to exemptions
from registration under Section 4(2) of the Securities Act and/or (ii) sold to
persons who were neither nationals nor residents of the United States and no
facilities or instrumentalities of United States interstate commerce were used
in connection with any offer or sale thereof. Except with respect to the sale of
ordinary shares on March 31, 1997, no underwriter or underwriting discount or
commission was involved in any of such sales. See "Certain Transactions."
II-2
<PAGE> 113
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
1 Form of Underwriting Agreement*
3.1 Amended Memorandum of Association of Registrant**
3.2 Amended and Restated Articles of Association of Registrant**
4.1 Form of Ordinary Share Certificate**
4.2 Form of Registration Rights**
5 Opinion of Herzog, Fox & Neeman*
10.1 Software License, Maintenance Services and Training
Agreement, dated February 28, 1997, by and between checker
and Fundtech**++
10.2 Software Development, Licensing and Maintenance Agreement,
dated September 26, 1997, by and between Merrill Lynch and
Fundtech**++
10.3 Development and Distribution License Agreement, dated August
15, 1997, by and between Tandem (subsequently acquired by
Compaq) and Fundtech**++
10.4 Fundtech Ltd. 1996 Employee Stock Option Plan for the
Employees of Fundtech Ltd.**
10.5 Fundtech Ltd. 1996 Employee Stock Option Plan for the
Employees of Fundtech Ltd. and the Employees of Fundtech
Corp.**
10.6 Fundtech Ltd. 1997 Stock Option Plan for Fundtech
Corporation**
10.7 Fundtech Ltd. December 1997 Israeli Share Option Plan
(English summary)**
10.8 Loan Agreement, dated March 1993, between Fundtech and Aura
Investments Research & Development Ltd., as amended (English
summary)**
10.9 Grant Approvals issued by the Chief Scientist to Fundtech
(English summary of representative approval)**
10.10 Grant Approvals issued by the Marketing Fund to Fundtech
(English summary)**
10.11 Asset Purchase Agreement between CheckFree Corporation and
Fundtech Ltd., dated as of April 20, 1998***
10.12 Employment Agreement between Reuven Ben-Menachem and
Fundtech Corporation, dated November 25, 1997*
10.13 Lease Agreement relating to Fundtech's Facility in Ramat
Gan, Israel*
10.14 Lease Agreement relating to Fundtech's Facility in Atlanta,
Georgia *
21 Subsidiaries of Registrant
23.1 Consent of Herzog, Fox & Neeman (included in Exhibit 5
hereto)*
23.2 Consent of Kost, Forer & Gabbay
23.3 Consent of Deloitte & Touche LLP
24 Power of attorney (included in the signature pages to the
Registration Statement)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed as an exhibit to the Registrant's Registration Statement on
Form F-1, as amended, dated March 13, 1998, and incorporated herein by
reference.
*** Previously filed as an exhibit to the Registrant's Report on Form 6-K, dated
April 30, 1998, and incorporated herein by reference.
++ Certain portions of this agreement have been omitted pursuant to a request
for confidential treatment.
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission (the "Commission") are not
required under the related instructions and the required information is
contained in the financial statements and notes thereto or are not applicable,
and therefore have been omitted.
II-3
<PAGE> 114
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 115
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Ramat Gan,
Israel, on the 26th day of March, 1999.
FUNDTECH LTD.
By: /s/ REUVEN BEN-MENACHEM
------------------------------------
Name: Reuven Ben-Menachem
Title: Chairman of the Board of
Directors, Chief Executive
Officer and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Reuven Ben-Menachem and Michael Carus,
and each of them, his true and lawful attorney-in-fact and agent with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments including any Registration Statement that becomes effective upon
filing pursuant to Rule 462 of the Act) to this Registration Statement, and to
file the same with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
II-5
<PAGE> 116
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ REUVEN BEN-MENACHEM Chairman of the Board of March 26, 1999
- --------------------------------------------------- Directors, Chief Executive
Reuven Ben-Menachem Officer and President
(principal executive
officer)
/s/ BOAZ MISHOLI Director March 26, 1999
- ---------------------------------------------------
Boaz Misholi
/s/ JAY B. MORRISON Director March 26, 1999
- ---------------------------------------------------
Jay B. Morrison
/s/ EDDY SHALEV Director March 26, 1999
- ---------------------------------------------------
Eddy Shalev
/s/ GEORGE M. LIEBERMAN Director March 26, 1999
- ---------------------------------------------------
George M. Lieberman
/s/ RINA SHAINSKI Director March 26, 1999
- ---------------------------------------------------
Rina Shainski
/s/ RIMON BEN-SHAOUL Director March 26, 1999
- ---------------------------------------------------
Rimon Ben-Shaoul
/s/ MICHAEL CARUS Executive Vice President and March 26, 1999
- --------------------------------------------------- Chief Financial Officer
Michael Carus (principal financial and
accounting officer)
</TABLE>
<TABLE>
<S> <C>
Authorized Representative in the United
States:
DATE
--------------
March 26, 1999
FUNDTECH CORP.
/s/ REUVEN BEN-MENACHEM
- ------------------------------------------
Reuven Ben-Menachem, Chief Executive
Officer
</TABLE>
II-6
<PAGE> 117
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------- -------
<C> <S>
1 Form of Underwriting Agreement*
3.1 Amended Memorandum of Association of Registrant**
3.2 Amended and Restated Articles of Association of Registrant**
4.1 Form of Ordinary Share Certificate**
4.2 Form of Registration Rights**
5 Opinion of Herzog, Fox & Neeman*
10.1 Software License, Maintenance Services and Training
Agreement, dated February 28, 1997, by and between CheckFree
and Fundtech**++
10.2 Software Development, Licensing and Maintenance Agreement,
dated September 26, 1997, by and between Merrill Lynch and
Fundtech**++
10.3 Development and Distribution License Agreement, dated August
15, 1997, by and between Compaq and Fundtech**++
10.4 Fundtech Ltd. 1996 Employee Stock Option Plan for the
Employees of Fundtech Ltd.**
10.5 Fundtech Ltd. 1996 Employee Stock Option Plan for the
Employees of Fundtech Ltd. and the Employees of Fundtech
Corp.**
10.6 Fundtech Ltd. 1997 Stock Option Plan for Fundtech
Corporation**
10.7 Fundtech Ltd. December 1997 Israeli Share Option Plan
(English summary)**
10.8 Loan Agreement, dated March 1993, between Fundtech and Aura
Investments Research & Development Ltd., as amended (English
summary)**
10.9 Grant Approvals issued by the Chief Scientist to Fundtech
(English summary of representative approval)**
10.10 Grant Approvals issued by the Marketing Fund to Fundtech
(English summary)**
10.11 Asset Purchase Agreement between CheckFree Corporation and
Fundtech Ltd., dated as of April 20, 1998***
10.12 Employment Agreement between Reuven Ben-Menachem and
Fundtech Corporation, dated November 25, 1997*
10.13 Lease Agreement relating to Fundtech's Facility in Ramat
Gan, Israel*
10.14 Lease Agreement relating to Fundtech's Facility in Atlanta,
Georgia*
21 Subsidiaries of Registrant
23.1 Consent of Herzog, Fox & Neeman (included in Exhibit 5
hereto)*
23.2 Consent of Kost, Forer & Gabbay
23.3 Consent of Deloitte & Touche LLP
24 Power of attorney (included in the signature pages to the
Registration Statement)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed as an exhibit to the Registrant's Registration Statement on
Form F-1, as amended, dated March 13, 1998, and incorporated herein by
reference.
*** Previously filed as an exhibit to the Registrant's Report on Form 6-K, dated
April 30, 1998, and incorporated herein by reference.
++ Certain portions of this agreement have been omitted pursuant to a request
for confidential treatment.
<PAGE> 1
Exhibit 21
LIST OF SUBSIDIARIES
Name of Subsidiary State of Incorporation
- ----------------------------------- -----------------------------------
Fundtech Corporation Delaware
Fundtech U.K. Limited United Kingdom
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and the use
of our report dated March 26, 1999, with respect to the consolidated financial
statements of Fundtech Ltd., in the Registration Statement on Form S-1, and
related Prospectus of Fundtech Ltd.
Tel-Aviv, Israel KOST, LEVARY and GABBAY
March 26, 1999 Certified Public Accountants (Israel)
A Member of Ernst & Young International
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Fundtech Ltd. on Form
S-1 of our report dated May 29, 1998 relating to the combined balance sheets of
the Cash Management and Wire Transfer Divisions (the "Divisions") of CheckFree
Holdings Corporation ("CheckFree") as of June 30, 1996 and 1997 and the related
combined statements of operations and divisions' equity and of cash flows for
the eight months ended February 29, 1996 (Predecessor), the four months ended
June 30, 1996, and the year ended June 30, 1997 (which expresses an unqualified
opinion and includes an explanatory paragraph relating to the inclusion in the
financial statements of the Divisions of allocations of certain accounts and
balances of CheckFree which are common to the other divisions of CheckFree, and
an explanatory paragraph relating to the sale of certain assets and liabilities
of the Divisions to Fundtech Ltd. on April 20, 1998), appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in the
Prospectus, which is a part of this Registration Statement.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,019
<SECURITIES> 0
<RECEIVABLES> 12,040
<ALLOWANCES> 301
<INVENTORY> 0
<CURRENT-ASSETS> 25,638
<PP&E> 3,759
<DEPRECIATION> 705
<TOTAL-ASSETS> 32,717
<CURRENT-LIABILITIES> 7,488
<BONDS> 0
0
0
<COMMON> 10,792
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 32,717
<SALES> 0
<TOTAL-REVENUES> 23,132
<CGS> 16
<TOTAL-COSTS> 6,418
<OTHER-EXPENSES> 28,677
<LOSS-PROVISION> 201
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,392)
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,208
<DISCONTINUED> 0
<EXTRAORDINARY> 16,600
<CHANGES> 0
<NET-INCOME> (11,392)
<EPS-PRIMARY> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
