<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 9, 2000
REGISTRATION NO. 333-33434
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
XACCT TECHNOLOGIES LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
ISRAEL 7372 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
XACCT TECHNOLOGIES LTD.
12 HACHILAZON STREET, RAMAT-GAN
52522, ISRAEL
(972-3) 576-4111
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ERIC GRIES
CHIEF EXECUTIVE OFFICER
XACCT TECHNOLOGIES, INC.
2900 LAKESIDE DRIVE
SANTA CLARA, CALIFORNIA 95054
(408) 654-9900
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
<TABLE>
COPIES TO:
<S> <C> <C> <C>
JOHN T. SHERIDAN, ESQ. CHARLES B. GOTTLIEB, ADV. MAYA LIQUORNIK, ADV. WILLIAM D. SHERMAN, ESQ.
JUNLING MA, ESQ. SARIT MOLCHO, ADV. MEITAR, LIQUORNIK, GEVA & CO. JUSTIN L. BASTIAN, ESQ.
ANTHONY KIKUTA, ESQ. S. FRIEDMAN & CO. 16 ABBA HILLEL STREET JACLYN LIU, ESQ.
WILSON SONSINI GOODRICH & ROSATI ADVOCATES AND NOTARIES RAMAT-GAN, ISRAEL MORRISON & FOERSTER LLP
PROFESSIONAL CORPORATION 3 DANIEL FRISCH STREET (972-3) 610-3100 775 PAGE MILL ROAD
650 PAGE MILL ROAD TEL AVIV, ISRAEL PALO ALTO, CALIFORNIA 94304-1018
PALO ALTO, CALIFORNIA 94304-1050 (972-3) 696-0183 (650) 813-5600
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared 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, check the following box. |_|
If this Form is to register additional securities for an offering
pursuant to Rule 462(b) 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(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 number of the earlier effective registration statement for the same
offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<TABLE>
CALCULATION OF REGISTRATION FEE
==================================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE (1) REGISTRATION FEE (2)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Voting Ordinary Shares, nominal value NIS 0.04 per share............................ $63,250,000 $16,698
==================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457(a) promulgated under the
Securities Act of 1933.
(2) $19,800 was previously paid.
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.
===============================================================================
<PAGE>
*******************************************************************************
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 these securtiies and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
*******************************************************************************
SUBJECT TO COMPLETION, DATED NOVEMBER 9, 2000
5,000,000 Shares
[GRAPHIC OF XACCT LOGO]
Ordinary Shares
-------------------
Prior to this offering, there has been no public market for our ordinary
shares. The initial public offering price of our ordinary shares is expected to
be between $9.00 and $11.00 per share. We have applied to list our ordinary
shares on The Nasdaq Stock Market's National Market under the symbol "XCCT."
The underwriters have an option to purchase a maximum of 750,000
additional ordinary shares to cover over-allotments of shares.
INVESTING IN OUR ORDINARY SHARES INVOLVES RISKS. SEE "RISK FACTORS" ON
PAGE 7.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS XACCT
------------------ ------------------ -----------------
<S> <C> <C> <C>
Per Share............................................... $ $ $
Total......................................................$..... $ $
</TABLE>
Delivery of the ordinary shares will be made on or about
_____________________ , 2000.
Neither the Securities and Exchange Commission, the Securities Authority
of the State of Israel nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
CREDIT SUISSE FIRST BOSTON
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is _______________ , 2000.
<PAGE>
[Diagram of XACCT business infrastructure]
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C> <C>
PROSPECTUS SUMMARY............................... 3 RELATED PARTY TRANSACTIONS.................... 67
RISK FACTORS..................................... 7 PRINCIPAL SHAREHOLDERS........................ 70
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 22 DESCRIPTION OF SHARE CAPITAL.................. 74
SHARES ELIGIBLE FOR FUTURE SALE............... 78
USE OF PROCEEDS.................................. 23 U.S. TAX CONSIDERATIONS....................... 80
DIVIDEND POLICY.................................. 23 ISRAELI TAXATION.............................. 83
CAPITALIZATION................................... 24 CONDITIONS IN ISRAEL.......................... 86
DILUTION......................................... 25 UNDERWRITING.................................. 88
SELECTED CONSOLIDATED FINANCIAL DATA............. 26 NOTICE TO CANADIAN RESIDENTS.................. 91
MANAGEMENT'S DISCUSSION AND ANALYSIS OF LEGAL MATTERS................................. 92
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 28 EXPERTS....................................... 92
BUSINESS......................................... 37 ENFORCEABILITY OF CIVIL LIABILITIES........... 93
MANAGEMENT....................................... 51 WHERE YOU CAN FIND MORE INFORMATION........... 94
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.... F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL _______________________ , 2000 (25 DAYS AFTER THE COMMENCEMENT OF
THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALER'S OBLIGATION
TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING OUR COMPANY AND THE ORDINARY SHARES BEING SOLD IN THIS
OFFERING AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES
APPEARING ELSEWHERE IN THIS PROSPECTUS.
XACCT
We are a provider of business infrastructure software for
telecommunications carriers, Internet service providers, enterprise network
operators, wireless service providers and cable network operators, which we
refer to collectively as network service providers. Our software gives network
service providers a software infrastructure, or platform, that enables them to
leverage the rapid growth of Internet services and data traffic to increase
revenue opportunities. Our platform collects in real time and aggregates network
usage and traffic data from network elements such as routers, switches,
firewalls, servers and gateways and synthesizes that data into the information
and formats required by the operations and business support systems of network
service providers. As a result, our software enables or enhances billing,
customer care, market analysis, churn management, fraud management, service
level management and other systems. Network service providers use our software's
comprehensive real-time data collection, data aggregation and automated service
provisioning capabilities to deploy new business models and higher-margin,
enhanced services.
As of September 30, 2000, we had licensed our business software to over
60 network service providers and value-added resellers. Our customers include
BCE Nexxia Inc., Broadwing Communications, Cable & Wireless, CPG, Digital
Island, Global One Communications, L.L.C., Genuity Inc., Harvard University,
Mannesman Ipulsys B.V., TV Cabo Acoreana, S.A., UUNET Technologies, Inc., Verio
Inc. and WorldCom Inc. In addition, we have developed strategic alliances or
collaborative relationships with a group of over 90 system integrators,
value-added resellers, network infrastructure vendors and software applications
vendors worldwide.
As the volume of global Internet traffic has grown and demand for
enhanced Internet-based services has increased, network service providers have
found that their inability to capture, aggregate and transform raw network
usage, traffic and transaction data into meaningful business information has
constrained their revenue generation potential. We believe that a significant
limitation on the ability of network service providers to generate revenues from
the Internet is their lack of a flexible and scalable business infrastructure to
implement higher-margin, enhanced service offerings. The Yankee Group estimates
that the market for Internet business infrastructure will grow from $207 million
in 1999 to $7.7 billion in 2004. In addition, The Insight Research Corporation
estimates that the market for operations support systems will grow from $33.9
billion in 2000 to $58.4 billion in 2005.
Our infrastructure software enables network service providers to support
business models that feature differentiated services that are priced to reflect
the value of the services to the user and their respective cost to the network
service provider. Our software is designed to gather network usage, traffic and
transaction data from network elements in real time and to synthesize, enhance
and tailor that information to produce the specified information and formats
required by network service providers to implement these business models.
Network service providers can use this information to offer and charge their
customers appropriately for network services based on usage time, quality of
service, transactions, events, content or volume. These network services include
Internet telephony, web hosting, application renting, video conferencing,
movies/video on demand, audio over Internet protocol, unified messaging, network
games, virtual private networking, voice-mail, fax over Internet protocol,
e-mail and file transfers. This detailed information can also be used to support
customer relationship management, customer retention and fraud management
applications. In addition, our platform provides for automated service
provisioning, which allows for automated activation, authentication,
authorization and management of user accounts, and user self-provisioning. User
self-provisioning allows a network service provider's users to activate, modify
or deactivate services without the intervention of the network service provider.
By automating the provisioning process, network service providers reduce their
costs, accelerate their time to revenue and increase user satisfaction.
Our infrastructure software has been engineered to meet the demanding and
evolving performance and scalability requirements of network service providers.
Our software is designed to support network service providers that operate large
and complex networks with multiple services, also known as carrier-class
providers, as well as large businesses that operate networks within their
extended enterprises. Our software is designed with a distributed architecture,
meaning that discrete components of the larger software infrastructure are
deployed on or near network
3
<PAGE>
elements throughout the network to capture, filter, aggregate and correlate
usage, traffic and transaction data from multiple elements and all layers of the
network. This distributed architecture enables data filtering and aggregation at
the network element level and, by reducing the volume of data sent over the
network, reduces system capacity bottlenecks and excessive bandwidth use. Our
infrastructure solution can therefore scale with the growth of our customers'
networks and network traffic while maintaining data integrity and high system
availability. We have also designed our infrastructure software as a platform
that supports the varying operations and business support systems employed by
different network service providers. We believe our solution is fully adaptable
to all major network infrastructure technologies, including hardware, software
and operations and business support systems. We have also designed our products
to work with industry standard protocols to allow for the rapid and seamless
assimilation of new, emerging network standards, devices and applications. Our
solution also offers a wide range of web-based monitoring, management and
reporting capabilities.
Our objective is to be the leading provider of business infrastructure
software to network service providers. Key elements of our strategy for
achieving this objective include:
o Enhancing our product line and extending our technology
leadership;
o Expanding our collaborative relationships with technology
providers to enhance our product offerings;
o Expanding and leveraging our relationships with systems
integrators and value-added resellers;
o Leveraging our installed customer base to create new or additional
sales opportunities; and
o Delivering our solution in strategically targeted international
markets.
Our principal executive offices are at 12 Hachilazon Street, Ramat-Gan
52522, Israel and our telephone number is (972-3) 576-4111. The principal
executive offices of our United States subsidiary are located at 2900 Lakeside
Drive, Santa Clara, California 95054 and our telephone number is (408) 654-9900.
Our World Wide Web address is www.xacct.com. The information on our web site is
not part of this prospectus.
--------------
XACCT is a registered trademark in Israel. This prospectus also contains
trademarks and trade names of other companies.
THE OFFERING
<TABLE>
<S> <C>
Ordinary shares offered................................ 5,000,000 ordinary shares
Ordinary shares to be outstanding after this offering.. 26,999,037 ordinary shares
Use of proceeds........................................ For research and development expenditures, the
expansion of our operations and sales and
marketing capabilities, working capital and
other general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol................. XCCT
</TABLE>
The number of ordinary shares to be outstanding after this offering is
based on the number of shares outstanding as of September 30, 2000 and assumes
the exercise of warrants to purchase 1,320,725 preferred shares outstanding as
of September 30, 2000 that expire upon the completion of this offering if
unexercised and the conversion of preferred shares into ordinary shares on a
one-to-one basis, but does not include:
o 4,550,144 ordinary shares issuable upon exercise of options
outstanding as of September 30, 2000 with a weighted average
exercise price of $3.12 per share;
o 7,980,373 ordinary shares available for future issuance under our
share option plans; and
o 750,000 ordinary shares that will be available for issuance under
our 2000 Employee Share Purchase Plan.
--------------
4
<PAGE>
IN THIS PROSPECTUS, "XACCT," "WE," "US" AND "OUR" REFER TO XACCT
TECHNOLOGIES LTD., A COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF ISRAEL AND
ITS WHOLLY-OWNED SUBSIDIARIES.
EXCEPT AS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS IS BASED ON
THE FOLLOWING ASSUMPTIONS:
o THE EXERCISE OF OUTSTANDING WARRANTS AS OF SEPTEMBER 30, 2000 TO
PURCHASE 1,320,725 PREFERRED SHARES AT A WEIGHTED AVERAGE EXERCISE
PRICE OF $7.76, WHICH WARRANTS IF UNEXERCISED WOULD EXPIRE UPON
THE CLOSING OF THIS OFFERING;
o THE CONVERSION OF ALL OF OUR OUTSTANDING PREFERRED SHARES INTO
ORDINARY SHARES UPON THE CLOSING OF THIS OFFERING;
o NO EXERCISE OF THE UNDERWRITERS' OVERALLOTMENT OPTION; AND
o THE FILING OF OUR AMENDED AND RESTATED ARTICLES OF ASSOCIATION
UPON COMPLETION OF THIS OFFERING.
Unless otherwise specified in this prospectus, ordinary shares refer to
voting ordinary shares and non-voting ordinary shares, and preferred shares
refer to voting preferred shares and non-voting preferred shares. Please see
"Description of Share Capital" for a more detailed description of our ordinary
and preferred shares.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FROM
INCEPTION
(JUNE 1997)
TO NINE MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------------
1997 1998 1999 1999 2000
------------- ---------- ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues...................................... $ -- $ -- $ 1,194 $ 616 $ 5,078
Gross profit.................................. -- -- 954 474 2,505
Research and development...................... 390 1,511 2,243 1,535 6,942
Sales and marketing........................... 127 1,995 6,472 4,049 14,150
General and administrative.................... 152 1,033 1,204 686 4,696
Operating loss................................ (669) (4,539) (9,346) (5,840) (28,820)
Net loss...................................... $ (662) $ (4,434) $ (9,078) $ (5,718) $ (28,132)
============= ========== ============ =========== ===========
Basic and diluted net loss per share.......... $ (0.30) $ (1.17) $ (2.34) $ (1.48) $ (6.76)
============= ========== ============ =========== ===========
Weighted average number of shares used in
computing basic and diluted net loss per
share...................................... 2,192,400 3,804,874 3,886,495 3,873,237 4,161,859
============= ========== ============ =========== ===========
Pro forma basic and diluted net loss per
share (unaudited).......................... $ (0.67) $ (1.50)
============ ===========
Pro forma weighted average number of shares
used in computing basic and diluted net
loss per share (unaudited)................. 13,566,732 18,750,905
============ ===========
SEPTEMBER 30, 2000
---------------------------------
ACTUAL PRO FORMA PRO FORMA
AS ADJUSTED
--------- ---------- -----------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................................................... $ 13,962 $ 24,105 $ 68,205
Working capital............................................................... 8,870 19,013 63,113
Total assets.................................................................. 21,631 31,774 75,874
Shareholders' equity.......................................................... 12,048 22,191 66,291
</TABLE>
See note 2 to our consolidated financial statements for an explanation of
the number of shares used to compute basic and diluted net loss per share.
The pro forma consolidated balance sheet data reflects:
o the exercise of outstanding warrants as of September 30, 2000 to
purchase 1,320,725 preferred shares at a weighted average exercise
price of $7.76 per share, which warrants if unexercised would
expire upon the completion of this offering; and
o the conversion of all issued and outstanding preferred shares into
ordinary shares.
The pro forma as adjusted consolidated balance sheet data reflects the
application of the net proceeds from the sale by us of 5,000,000 ordinary shares
in this offering at the assumed initial public offering price of $10.00 per
ordinary share, after deducting estimated underwriting discounts and estimated
offering expenses payable by us.
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR ORDINARY SHARES.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY SEE AS IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED, THE TRADING
PRICE OF OUR ORDINARY SHARES COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
RISKS RELATED TO THE COMPANY
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR PROSPECTS AND
THE MERITS OF INVESTING IN OUR ORDINARY SHARES, AND OUR FUTURE FINANCIAL
PERFORMANCE MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A
DECLINE IN OUR SHARE PRICE.
We were incorporated in June 1997. Through December 1998, we were engaged
primarily in the research and development of our initial product. We entered
into our first commercial license in January 1999 and have only recently
expanded our sales and service organizations. As a result of our limited
operating history, we have a limited amount of financial data that you can use
to evaluate our business. Moreover, the revenue and profitability potential of
our market is unproven. You must consider our prospects in light of the risks,
expenses and challenges we might encounter because we are at an early stage of
development in a new and rapidly evolving market. We may not successfully
address these risks, and our business strategy may not prove successful.
WE HAVE A LARGE ACCUMULATED DEFICIT, WE EXPECT FUTURE LOSSES AND WE MAY NOT
ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred substantial losses since our inception as we funded the
development of our product and technologies and expanded our sales and marketing
organizations. Our net losses were $4.4 million for 1998, $9.1 million for 1999
and $28.1 million in the nine months ended September 30, 2000. As of September
30, 2000, we had an accumulated deficit of $42.3 million.
In order to become profitable, we must increase our revenues. We may not
be able to increase or even maintain our revenues, and we cannot predict when we
will operate profitably, if at all. Even if sales of our XACCTUSAGE products
continue to grow, we expect to incur net losses for the foreseeable future due
to anticipated spending increases primarily on sales, marketing and research and
development efforts. Moreover, expected increases in competition will make it
difficult to increase our revenues. Even if we are able to increase revenues, we
may experience price competition, which could lower our gross margins and our
profitability. In addition, we anticipate that we may increase the percentage of
our revenues derived from indirect channels and services, which may carry lower
margin percentages than our direct sales. Increases in the percentage of our
revenues derived from indirect channels and services may consequently lower our
gross margin percentages. Even if we do achieve profitability, we may not
sustain or increase profitability on a quarterly or annual basis.
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, AND AN UNANTICIPATED DECLINE IN
REVENUES MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A DECLINE
IN OUR SHARE PRICE.
Our growth rates may not be sustainable and you should not use our past
performance to predict future operating margins or results. We believe that
period-to-period comparisons of our historical results of operations are not
meaningful and are not a good predictor of our future performance. Our quarterly
operating results have fluctuated significantly in the past and we expect them
to fluctuate significantly in the future. Factors that could cause quarterly
fluctuations in our operating results include:
o variations in demand for the XACCTUSAGE software products and
related services;
o our ability to develop, introduce and attain market acceptance of
enhancements to XACCTUSAGE and new related products and services
on a timely basis;
o new product and service introductions and pricing changes by our
competitors;
o the mix of products and services sold by us and our competitors;
o the mix of sales channels through which our products and services
are sold;
7
<PAGE>
o the mix of our U.S. and international sales;
o the timing and nature of new product announcements, introductions
or modifications by vendors of software applications, computer
hardware and software platforms and networking products that work
with our product line; and
o our ability to expand our operations, and the amount and timing of
expenditures to expand our operations, including costs related to
acquisitions of technologies and businesses.
We forecast the volume and timing of orders for operational planning, but
these forecasts are based on many factors and subjective judgments. We cannot
assure you of their accuracy. If our forecasts for revenues or expenses were to
prove materially inaccurate, our financial results could be harmed. Because of
our limited operating history, we have limited insight into trends that may
emerge in our market and affect our business. Forecasting for operational
planning is further complicated by our recent rapid growth.
As a result of the foregoing factors, it is likely that in some future
quarters or years our operating results will fall below the expectations of
securities analysts or investors, causing our share price to decline.
OUR REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AS A RESULT OF
VARIATIONS IN THE TIMING AND VOLUME OF CUSTOMER ORDERS FOR XACCTUSAGE SOFTWARE
PRODUCTS AND RELATED SERVICES, WHICH MAY RESULT IN A DECLINE IN OUR ORDINARY
SHARE PRICE.
Our revenues and operating results in any given quarter or year depend
upon the volume and timing of customer orders and payments and the date of
product delivery. Historically, a substantial portion of our revenues in any
given quarter has been recorded in the third month of that quarter. We expect
this trend to continue and intensify. Since our operating expenses are based on
anticipated revenue levels and because a high percentage of these expenses are
relatively fixed, a delay in a sale or revenue recognition for a sale could
cause significant variations in our operating results from quarter to quarter
and cause unexpected results. Significant sales may also occur earlier than
expected, which could cause operating results for later quarters to compare
unfavorably with operating results for earlier quarters.
We primarily depend upon new contracts and purchase orders to generate
revenues for each quarter. However, new contracts may not result in revenues in
the quarter in which the contracts were signed, and we may not be able to
predict accurately when revenues from those contracts will be recognized.
As a result of the foregoing factors, it is likely that in some future
quarters our revenues will fall below our expectations and our financial
performance will be harmed.
BECAUSE THE SALES AND IMPLEMENTATION CYCLE FOR OUR PRODUCTS IS LONG AND OFTEN
UNPREDICTABLE, OUR REVENUES AND OPERATING RESULTS MAY VARY SIGNIFICANTLY FROM
QUARTER TO QUARTER, WHICH MAY CAUSE OUR ORDINARY SHARE PRICE TO FLUCTUATE.
Customers often use our product line to deploy mission-critical solutions
for their businesses. Our customers generally consider a wide range of issues
before committing to license our products, including assessing the benefits of
our products and our competitors' products, as well as assessing the ability of
our products to operate with existing and future computer systems and
accommodate increased transaction volume and product reliability. Many of our
customers will be addressing these issues for the first time. As a result, we or
other parties, including system integrators, must educate potential customers on
the use and benefits of our products and services. In addition, the purchase of
our products generally involves a significant commitment of capital and other
resources by a customer. This commitment often requires significant technical
review, assessment of competitive products, approval at a number of management
levels within the customer's organization and dedication of personnel support to
facilitate the deployment of our products.
Because of these considerations and challenges, our sales cycle, from
initial evaluation to installation and acceptance, generally has ranged from
three to nine months and is difficult to predict for any particular transaction
or customer. Our customers often begin by licensing our products on a trial
basis before committing to additional licenses for full deployment. Furthermore,
our customers tend to deploy the XACCTUSAGE infrastructure slowly, depending
upon the customer's capabilities, the size of deployment, the complexity of the
customer's network environment and the quantity of the hardware and the degree
of hardware configuration necessary to deploy our
8
<PAGE>
products. The long and often unpredictable sales and implementation cycles for
our products may cause revenues and operating results to vary significantly from
quarter to quarter.
BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR AND ARE LIKELY TO CONTINUE TO
ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES, THE LOSS OF ONE OF THESE
CUSTOMERS OR THE CANCELLATION OR DEFERMENT OF A CUSTOMER'S ORDER WOULD CAUSE OUR
REVENUES TO DECLINE SUBSTANTIALLY AND MAY RESULT IN A DECLINE IN OUR SHARE
PRICE.
In any given period, a relatively small number of customers generally
account for a significant portion of our total revenues. For example, in 1999,
sales to our ten largest customers accounted for 84% of our revenues, among
which, sales to TV Cabo Acoreana, S.A., UUNET Technologies, Inc., Genuity Inc.
and Verio Inc. accounted for 51% of our revenues. In the nine months ended
September 30, 2000, sales to Broadwing Communications, Digital Island, Mannesman
Ipulsys B.V. and Cable & Wireless accounted for 54% of our revenues. Moreover,
some of the companies in our target market of network service providers are
consolidating, which could reduce the number of available potential customers.
The loss of a single prospective customer might cause our revenues to decline
substantially or fall short of our expectations. In addition, we derive and
expect to continue to derive a significant portion of our revenues in each
quarter from a small number of relatively large customers. For example, in each
of the three quarters in the period ended September 30, 2000, we had two
customers who together accounted for more than 45% of our revenues for the
quarter. If a large order is canceled or deferred or if an anticipated order
does not materialize, our operating results for a particular quarter could be
significantly harmed.
IF WE DO NOT CONTINUE TO ADD NEW CUSTOMERS, WE WILL NOT BE ABLE TO INCREASE OR
SUSTAIN OUR REVENUES.
Our license arrangements do not generally provide for substantial ongoing
license payments. Therefore, our future revenue growth depends on our success in
attracting new customers or expanding our relationships with existing customers.
Our ability to attract new customers and expand our relationships with existing
customers will depend on a variety of factors, including the performance,
quality, breadth and depth of our current and future products and services. Our
failure to add new customers or to expand our relationships with existing
customers would reduce our future revenues.
IF WE CANNOT CONVINCE NETWORK SERVICE PROVIDERS THAT OUR SOLUTION PROVIDES A
MEANS TO EXPAND THEIR REVENUE GENERATION POTENTIAL, WE WILL BE UNABLE TO
INCREASE OR SUSTAIN OUR REVENUES.
Our solution offers a software infrastructure that is designed to enable
network service providers to implement new business models and offer
higher-margin, enhanced services to expand their revenue generation potential.
The market for business infrastructure software for network service providers
has only recently emerged and is rapidly evolving. A viable market for business
infrastructure software, and for XACCTUSAGE in particular, may not develop and
our product line may not achieve or sustain market acceptance. Our solution has
achieved only limited adoption and there is limited information upon which to
evaluate whether a large number of potential customers will purchase our
solution to replace or expand their existing revenue generation models. In
addition, we cannot assure you that a superior solution enabling network service
providers to better capitalize on the growth of Internet services and data
traffic will not emerge. If we cannot convince network service providers that
our solution is superior to their current revenue generation models that are
based on flat-fee pricing or if we cannot educate potential customers, and
specifically their senior management, on the use and benefits of our products,
we will be unable to increase or sustain revenues. Further, if network service
providers develop their own software infrastructure solutions or decrease their
spending on software infrastructure or if we fail to penetrate these markets,
our operating results will suffer.
IF WE CANNOT MEET THE TECHNICAL AND CAPACITY REQUIREMENTS OF NETWORK SERVICE
PROVIDERS, WE WILL BE UNABLE TO INCREASE OR SUSTAIN OUR REVENUES.
Our product line may not be capable of satisfying the demanding technical
and capacity requirements of network service providers, many of which require
performance levels far in excess of that for which our products have been used
to date. We have only licensed our product line to a small number of customers,
and only a portion of these customers has commenced commercial deployment.
Moreover, network service providers will likely have changing requirements that
will require us to change our product designs or features, sales methods,
support capabilities or pricing policies. We may not successfully upgrade
XACCTUSAGE, and we may not successfully develop new products or services that
meet the expanding needs of network service providers. If we cannot continue
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to meet the expanding requirements of network service providers, we will be
unable to increase or sustain our revenues.
OUR OPERATING RESULTS TO DATE HAVE DEPENDED UPON REVENUES FROM ONE PRODUCT LINE,
XACCTUSAGE, AND OUR BUSINESS COULD BE MATERIALLY HARMED BY FACTORS THAT
ADVERSELY AFFECT THE PRICING AND DEMAND FOR THAT PRODUCT LINE.
Our future growth depends upon the commercial success of XACCTUSAGE. We
currently derive all of our revenues from the licensing, maintenance and support
of our XACCTUSAGE product line. We expect that we will continue to rely on new
and enhanced versions of XACCTUSAGE for a substantial portion of our revenues
for the foreseeable future. However, the limited sales and development of our
product line make our future prospects difficult to predict.
Any decline in demand for XACCTUSAGE as a result of competition,
technological change or other factors would significantly reduce our revenues.
IF OUR PRODUCT LINE FAILS TO OPERATE WITH THE MANY HARDWARE, SOFTWARE AND
NETWORKING PLATFORMS USED BY OUR CUSTOMERS, OUR BUSINESS MAY FAIL.
We currently target a customer base that uses a wide variety of
constantly changing software applications and programming tools, network
infrastructure products and hardware and software platforms. The success of our
product line depends upon our ability to address technical challenges,
including:
o integrating our XACCTUSAGE product line with multiple software
applications and programming tools, network infrastructure
products, hardware and software platforms and existing systems,
and modifying our product line as new applications, platforms,
products and systems are introduced;
o expanding the functionality of our product line, particularly the
number of operating systems and databases that our product line
can source or target and the ability of our products to process a
high number of transactions per second;
o anticipating and supporting new standards, especially Internet
standards; and
o integrating additional software modules under development with our
existing product line.
If our product line fails to satisfy these demanding and rapidly changing
technological challenges, our customers will be dissatisfied and we may be
unable to generate significant future sales.
IF WE DO NOT DEVELOP AND MAINTAIN SUCCESSFUL RELATIONSHIPS WITH SYSTEMS
INTEGRATORS AND OTHER TECHNOLOGY PROVIDERS, OUR ABILITY TO MARKET AND SELL OUR
PRODUCTS WILL BE HARMED.
We have entered into relationships with third-party systems integrators
that implement and increasingly resell XACCTUSAGE and related products and
services. We also have relationships with software applications, networking
products, hardware and software platform vendors to increase the flexibility of
our software platform and to pursue joint sales and marketing opportunities. We
have derived, and anticipate that we will continue to derive, a significant
portion of our revenues from customers that have relationships with these
technology providers. We could lose sales and marketing opportunities if we fail
to work effectively with these parties or fail to grow our base of applications,
networking products or platform vendors. We are currently investing and plan to
continue to invest significant resources to develop these relationships. Our
operating results could be adversely affected if these efforts do not generate
license and service revenues necessary to offset our significant investment in
building these relationships.
Many of our technology providers also work with competing software
companies. Our success will depend upon the willingness of these providers to
select our solution as superior to competing alternatives and to devote
sufficient resources to market our product. We may not be able to enter into
additional, or maintain our existing, strategic relationships on commercially
reasonable terms, or at all. Our agreements with these parties typically are in
the form of nonexclusive agreements. Competing priorities may limit their
willingness to aggressively market and sell our products. Further,
notwithstanding our agreements with these parties, any party may discontinue
marketing our products or terminate our relationship without cause or on limited
notice. If these relationships fail, we will have to devote substantially more
resources to the distribution, sales, marketing, implementation and support of
our XACCTUSAGE product line than we would otherwise, and our singular efforts
may not be as effective as joint efforts.
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Technology providers may also pursue other relationships and may attempt
to develop or acquire products and services that compete with our products and
services. Our strategic relationships may also interfere with our ability to
enter into other desirable strategic relationships.
OUR BUSINESS WILL SUFFER IF WE FAIL TO INTRODUCE NEW VERSIONS AND RELEASES OF
OUR PRODUCTS IN A TIMELY MANNER.
In the past we have failed to release some new products and upgrades on
time. We cannot assure you that we will meet project milestones for new versions
and releases. If we fail to develop and introduce new versions and releases of
our products in a timely manner and on a cost-effective basis, we could
experience:
o loss of or delay in revenues and loss of market share;
o customer dissatisfaction, loss of customers and cancellation of
orders and license agreements;
o failure to achieve market acceptance;
o diversion of development resources;
o negative publicity and injury to our reputation;
o increased service and warranty costs;
o legal actions by customers against us; and
o increased insurance costs.
IF OUR SOFTWARE CONTAINS ERRORS OR DESIGN FLAWS OR HAS AN ADVERSE IMPACT UPON
OUR CUSTOMERS' NETWORKS, WE MAY LOSE CUSTOMERS, OUR COSTS WILL INCREASE AND
REVENUES MAY BE DELAYED OR LOST.
Computer software such as ours generally contains undetected errors and
may contain design flaws that may adversely impact a user's networks. Because
customers use XACCTUSAGE to perform mission-critical applications, any problem
caused by our products may cause negative publicity and seriously harm our
reputation. Contractual limitations on liability contained in our license
agreements may not be enforceable, and we may be subject to claims based on
errors or design flaws in our software or mistakes in performing our services,
including claims relating to damages to our customers' internal systems. A
product liability claim, whether or not successful, could harm our business by
increasing our costs, damaging our reputation and distracting our management and
technical personnel.
THE UNAVAILABILITY OF AND DEFECTS IN THIRD PARTY SOFTWARE THAT WE INCORPORATE
INTO XACCTUSAGE COULD RESULT IN DELAYED OR LOST SALES AND INCREASED EXPENSES.
Portions of XACCTUSAGE incorporate software developed and maintained by
third-party software vendors, such as operating systems, tools and database
vendors. For example, our programs use Java programming technology provided by
Sun Microsystems and database servers provided by Oracle. We expect that we may
have to incorporate software from third party vendors and developers to a larger
degree in our future products. Any significant interruption in the availability
of these third-party software products or defects in these products or future
products could harm our sales unless and until we can secure another source. We
may not be able to replace the functionality provided by third-party software
currently offered with our products if that software becomes obsolete, defective
or incompatible with future versions of our products or is not adequately
maintained or updated. The absence of, or any significant delay in, the
replacement of that functionality could result in delayed or lost sales and
increased costs and could harm our business.
We also depend upon access to application programming interfaces used for
communication between external software products and packaged application
software. Application providers control our access to their application
programming interfaces. If these application providers deny or delay our access
to application programming interfaces, our business may be harmed. Some
application providers may become competitors or establish alliances with our
competitors, thereby increasing the likelihood that we would not be granted
access to their application programming interfaces.
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IF WE CANNOT SUCCESSFULLY EXPAND OUR SALES AND DISTRIBUTION CAPABILITIES, WE MAY
BE UNABLE TO INCREASE MARKET AWARENESS AND SALES OF OUR XACCTUSAGE PRODUCT LINE.
We must expand our direct and indirect sales operations to increase
market acceptance of XACCTUSAGE and related product and services and to increase
our revenues. We may not be successful in these efforts. There is a shortage of
direct sales personnel with the skills and expertise necessary to sell our
products. Moreover, because our product line and services require sophisticated
sales efforts targeted at the senior management of our prospective customers,
new hires will require training before they can achieve productivity. We may not
be able to hire enough qualified individuals in the future, and our recently
hired sales personnel may not achieve expected productivity levels. We also plan
to expand our relationships with systems integrators and other third party
resellers to build an indirect sales channel. Accordingly, we will need to
manage potential conflicts between our direct and indirect sales forces. Failure
to expand our sales channels and manage their expansion would harm our revenues
and operating results and place us at a competitive disadvantage.
OUR GROWTH MAY SUFFER IF WE ARE UNABLE TO IMPLEMENT OUR PRODUCTS IN A TIMELY
MANNER.
The use of our products by our customers requires consulting and
implementation services. While we have recently established relationships with
some third party providers, we continue to be the primary provider of consulting
and implementation services for our products. It is difficult and expensive to
recruit, train and retain qualified personnel to perform these services, and we
may from time to time have inadequate levels of staffing to perform these
services. As a result, our growth could be limited due to our lack of capacity
to provide consulting and implementation services or our inability to
subcontract these services to qualified third parties. In addition, we could
experience deterioration in service levels or decreased customer satisfaction,
any of which could harm our reputation and operating results.
UNANTICIPATED DIFFICULTIES IN IMPLEMENTING OUR PRODUCTS COULD SIGNIFICANTLY HARM
OUR REPUTATION WITH CUSTOMERS, INCREASE OUR COSTS AND DIMINISH OUR ABILITY TO
LICENSE ADDITIONAL PRODUCTS TO OUR CUSTOMERS.
Our products are often purchased as part of large projects undertaken by
our customers. The costs of our products and services represent only a portion
of the related hardware, software, development, training and consulting costs of
these projects. These projects are complex, time consuming and expensive and
typically involve working with sophisticated software, computing and
communications systems. In many cases, our customers must interact with, modify
or replace significant elements of their existing computer systems. Some
customers may require us to develop costly customized features or capabilities,
which increase our costs and consume our limited professional service and
customer support resources. The significant involvement of third parties,
including system integrators, reduces the control we have over the
implementation of our products and the level, quality and timeliness of service
provided to customers that license our software. Failure by customers to
successfully deploy our products, or the failure by third-party consultants or
us to ensure customer satisfaction, could damage our reputation with existing
and future customers and reduce future revenues.
If we experience difficulties with an implementation or do not meet
project milestones in a timely manner, we could be obligated to devote more
customer support, engineering and other resources to a particular project and to
provide these services at reduced or no cost.
IF WE ARE UNABLE TO INCREASE SERVICE REVENUES, OUR OPERATING RESULTS WILL BE
ADVERSELY AFFECTED.
Our service revenues are derived from support and maintenance
arrangements, including product upgrades, consulting and training. Service
revenues constituted 25% of our revenues in 1999 and 27% in the nine months
ended September 30, 2000. The level of service revenues depends significantly on
our ability to continue to obtain renewals of customer support contracts by our
installed customer base, to provide effective customer care services and to
release product updates and modifications on a timely basis. Maintenance and
support contracts typically have 12-month terms and the growth of our service
revenues depend in part upon the renewal rates of those contracts. If third
party organizations such as systems integrators become proficient in installing
or servicing our product line, we may lose customer support contracts and our
service revenues could decline. In addition, if we are unable to increase the
scale of our service organization, including successfully recruiting and
training a sufficient number of qualified services personnel, we may not be able
to increase service revenues.
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IF WE FAIL TO PROTECT OUR XACCT TRADEMARK, THE VALUE OF THE XACCT NAME WOULD
DECREASE AND WE MAY LOSE CUSTOMERS TO COMPETITORS.
We are in the process of applying to register our XACCT trademark in the
United States. If we receive a final rejection of our application to register
the XACCT trademark, we will likely experience greater expense and difficulty in
protecting the XACCT mark and its derivations. Even if our XACCT trademark is
approved in the United States and even though XACCT is a registered trademark in
Israel, we may not be able to enforce rights in our trademarks, and we may not
be able to use our trademarks in all jurisdictions. If the XACCT trademarks are
invalidated through legal action, or if we were prevented from using our
trademarks, we would need to rebuild our brand identity and reputation with our
customers, system integrators, value-added resellers, network infrastructure
vendors and software application vendors. We would also have to devise new
collateral materials. If we needed to rebuild our brand identity or devise new
collateral materials, our operating expenses would substantially increase and
our business would be harmed. Conversely, we may be unable to stop others from
using similar marks in connection with other goods and services. If that
happens, our existing and potential customers and system integrators,
value-added resellers, network infrastructure vendors and software application
vendors could confuse us and our products and services with another company and
its products and services. This could weaken the value of the XACCT name and
result in the loss of business to our competitors, either of which would harm
our operating results.
WE COULD BE CHARGED WITH TRADEMARK INFRINGEMENT AND INCUR SIGNIFICANT COSTS IN
CONTESTING THESE CHARGES AND FOR ANY RELATED LIABILITY.
Other companies that use or have registrations for terms similar to XACCT
for various products and services or for their company or brand name could claim
that we are infringing their federal or state trademark rights by our use of the
mark XACCT or its derivations. An infringement claim of that nature, whether
meritorious or not, could be time consuming and result in the diversion of
management resources and costly litigation. In addition, it could result in our
loss of the right to use the mark XACCT and its derivations, including the right
to use them:
o in our corporate name;
o as part of the services we offer; and
o as part of our web site address, which is currently www.xacct.com.
Litigation or settlement of an infringement claim could also require us
to pay damages or enter into royalty or licensing agreements on terms that are
unfavorable to us. If we are unable to use the mark XACCT and its derivations,
we will be required to adopt a new company and brand name and to market our
products and services under a new name. To do so, we will be required to incur
significant costs. Any of those events could significantly harm our business.
OUR GROWTH CONTINUES TO PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS AND
RESOURCES AND IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO MARKET AND SELL
OUR XACCTUSAGE PRODUCT LINE AND DEVELOP NEW PRODUCTS MAY BE HARMED.
We must plan and manage our growth in order to effectively market and
sell our product line and services and to achieve revenue growth and
profitability in a rapidly evolving market. Our growth has and will continue to
place a significant strain on our management systems and resources, and we may
not be able to effectively manage our growth in the future. We continue to
increase the scope of our operations both in the U.S. and internationally, and
have added a number of employees. For example, the number of our employees grew
from 93 at December 31, 1999 to 203 at September 30, 2000. In particular, our
sales organization grew from 22 people at December 31, 1999 to 56 people at
September 30, 2000. For us to effectively manage our growth, we must continue to
do the following:
o improve our operational, financial and management controls;
o improve our reporting systems and procedures;
o install new management and information control systems; and
o expand, train, motivate and manage our workforce.
Additionally, we expect that we will have to continue to expand our
facilities and may face difficulties and significant expenses identifying and
moving into suitable office space. Expanding our operations will require
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significant management attention and financial resources. We cannot be certain
that our investments in our growth will produce desired levels of revenue. Our
business will suffer dramatically if we fail to effectively manage our growth.
IF WE FAIL TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OR IF OUR MANAGEMENT FAILS
TO OPERATE EFFECTIVELY, WE WILL NOT BE ABLE TO IMPLEMENT OUR BUSINESS STRATEGY
OR OPERATE OUR BUSINESS EFFECTIVELY.
Our success depends upon the continued services of our senior management
and other key personnel, many of whom would be difficult to replace. The loss of
any of these individuals would harm our ability to implement our business
strategy and to operate our business effectively. In particular, the services of
Eric Gries, our President and Chief Executive Officer, and Eran Wagner, our
Executive Vice President, Technology, would be difficult to replace. None of our
officers or key employees is bound by an employment agreement for any specific
term.
We believe our success depends significantly upon our management's
ability to operate effectively, both individually and as a group. Richard Van
Hoesen, who was hired as Chief Financial Officer in January 2000, and certain
other members of the management team, have only recently joined us. We therefore
cannot assure you that our management will be able to perform effectively in
their respective roles and as a team.
Our success also depends upon our ability to continue to attract, retain
and motivate skilled employees. Competition for employees in our industry is
intense, especially in the San Francisco Bay Area and Israel. We believe that
there are only a limited number of persons with the requisite skills to serve in
many key positions and it is becoming increasingly difficult to hire, retain and
motivate these persons. We have in the past experienced, and we expect to
continue to experience, difficulty in hiring and retaining skilled employees.
Competitors and others in the past have attempted, and may in the future
attempt, to recruit our employees. We believe that we will incur increasing
salaries, benefits and recruiting expenses because of the difficulty in hiring
and retaining employees.
ACQUISITIONS OF NEW COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO OUR
BUSINESS AND STRAIN MANAGEMENT RESOURCES DUE TO DIFFICULTIES IN ASSIMILATING
PERSONNEL AND OPERATIONS.
We may make future acquisitions or investments in other companies,
products or technologies. If we make any acquisitions, we will be required to
assimilate the operations, products and personnel of the acquired businesses and
train, retain and motivate key personnel from the acquired businesses. We may be
unable to maintain uniform standards, controls, procedures and policies if we
fail in these efforts. Similarly, acquisitions may cause disruptions in our
operations and divert management's attention from day-to-day operations, which
could impair our relationships with our current employees, customers and
strategic partners. The issuance of equity securities for any acquisition could
be substantially dilutive to our shareholders. In addition, our profitability
may suffer because of acquisition-related costs or amortization costs for
acquired goodwill and other intangible assets.
WE MAY FACE CLAIMS OF INVASION OF PRIVACY OR INAPPROPRIATE DISCLOSURE, AND WE
MAY NEED TO SPEND SIGNIFICANT RESOURCES TO PROTECT AGAINST OR CORRECT PROBLEMS
CAUSED BY SECURITY BREACHES.
Because our software contains features which may allow us or our
customers to control, monitor or collect information from computers running our
software without notice to the computing users, we may face claims about
invasion of privacy or inappropriate disclosure, use or loss of this
information. Any imposition of liability could harm our operating results.
Additionally, third parties may attempt to breach our security or that of
our customers. We may be liable to our customers for any breach in security and
any breach could harm our business or reputation. We may be required to expend
significant capital and other resources to further protect against security
breaches or to correct problems caused by any breach.
OUR OPERATIONS ARE SUBJECT TO BUSINESS INTERRUPTION DUE TO LACK OF ADEQUATE
PROTECTION AND BACK-UP SYSTEMS.
Our operations are vulnerable to damage or interruption from computer
viruses, human error, natural disasters, intentional acts of vandalism and
similar events. We have not established a formal disaster recovery plan and our
back-up operations may be inadequate and our business interruption insurance may
not be enough to compensate us for losses that occur. Any sustained interruption
in our operations may harm our business and our ability to compete.
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RISKS RELATED TO OUR INDUSTRY
IF WE DO NOT KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE, CHANGING CUSTOMER
DEMANDS AND EVOLVING INDUSTRY STANDARDS, WE WILL NOT BE ABLE TO COMPETE.
Our industry is characterized by rapid technological change, frequent
product introductions and enhancements, changes in customer demands and evolving
industry standards. The technological life cycle of our products is difficult to
estimate. Future versions of software applications and networking products,
hardware and software platforms embodying new technologies and the emergence of
new industry standards could render our product line obsolete. XACCTUSAGE may
not operate correctly on future networking environments, hardware and software
platforms, programming languages, database environments and software
applications that our customers may use. We may not be able to successfully
continue to enhance our current product line to address these challenges.
Moreover, we may not be able to develop and introduce new products that
anticipate emerging technology standards and keep pace with competitive and
technological developments to address the increasingly sophisticated needs of
our customers on a timely basis. Our failure to do so would render our products
obsolete and would harm our ability to compete.
WE MAY BE REQUIRED TO CHANGE OUR REVENUE RECOGNITION POLICIES BASED ON CHANGING
IMPLEMENTATION GUIDELINES AND INTERPRETATIONS WHICH MAY CAUSE OUR REVENUES AND
OPERATING RESULTS TO FLUCTUATE UNEXPECTEDLY.
In recent years, software revenue recognition rules have been under heavy
review and interpretation by various accounting authoritative and regulatory
bodies, including the American Institute for Certified Public Accountants and
the Financial Accounting Standards Board. These reviews and interpretations have
resulted in significant changes in the practices and standards for recognizing
revenues in software companies.
Our revenue recognition policies are in compliance with current
accounting standards. However, the rapid pace of change in these standards could
result in significantly different standards in the future and could have a
material adverse effect on our business, results of operations or financial
position as we change our practices to comply with changing standards.
At this time, we are unaware of any contemplated changes to current
revenue recognition standards that would cause such an effect on our business.
WE MAY SUFFER PRICE REDUCTIONS, LOSS OF CUSTOMERS, REDUCED GROSS MARGINS AND
LOSS OF MARKET SHARE DUE TO INCREASING COMPETITION.
The market for our product line is new, evolving and subject to rapid
technological changes. To date, our primary competition has come from solutions
developed by the in-house technology departments of potential customers or
partners. We have experienced and expect to continue to experience increased
competition from current and potential competitors. Many of these companies have
greater name recognition, longer operating histories, larger customer bases and
significantly greater financial, technical, marketing, public relations, sales,
distribution and other resources. Some of our potential competitors are among
the largest and most well capitalized software, hardware and communications
companies in the world. Our competitors include:
o in-house information technology departments of potential customers
or partners that have developed or may develop systems that
substitute for some or all of the functionality of our XACCTUSAGE
product;
o companies with products that address our market, such as Hewlett
Packard Co., Lucent Technologies, Inc., EHPT Sweden AB and Narus,
Inc.; and
o companies that have developed software that addresses only certain
components of Internet Protocol mediation.
We are also aware of numerous other companies that are focusing
significant resources on developing and marketing products that will compete
with XACCTUSAGE. Additional competition could come from a number of companies
that produce application integration or communications software.
We expect that competition will increase in the near term and that our
primary long-term competitors may not have entered the market yet. If any of our
competitors were to become the industry standard or were to enter into or expand
relationships with significantly larger companies through mergers, acquisitions
or otherwise, our business and operating results could be significantly harmed.
Current and potential competitors have established or may
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establish cooperative relationships among themselves or with third parties to
offer a single solution and increase the ability of their products to address
customer needs. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins and loss of market share, any of which
could reduce our future revenues. We may not compete successfully against
current and potential competitors, especially those with significantly greater
resources.
THE GROWTH OF OUR BUSINESS DEPENDS ON THE INCREASING USE OF THE INTERNET AND
OTHER PUBLIC AND PRIVATE NETWORKS.
We sell XACCTUSAGE to organizations providing Internet-based services. If
the use of the Internet and other public and private networks does not grow as
anticipated, our revenues could decline and our business would be significantly
harmed. We depend on the increased acceptance and use of the Internet as a
medium for electronic communications and commerce and its adoption for
transacting business processes. Rapid growth in the use of the Internet is a
recent occurrence. As a result, acceptance and use may not continue to develop
at historical rates and a sufficiently broad base of users may not adopt or
continue to use the Internet as a medium of communications and commerce. Demand
and market acceptance for recently introduced services and products for the
Internet are subject to a high level of uncertainty, and there exist few proven
services and products.
FUTURE REGULATION OF THE INTERNET MAY SLOW ITS GROWTH, RESULTING IN DECREASED
DEMAND FOR OUR PRODUCTS AND SERVICES AND INCREASED COSTS OF DOING BUSINESS.
Due to the increasing popularity and use of the Internet, it is possible
that state and federal regulators will adopt laws and regulations that may
impose additional burdens on those companies conducting business over the
Internet. The growth and development of the market for Internet-based services
may prompt calls for more stringent consumer protection laws. The adoption of
any additional laws or regulations may decrease the expansion of the Internet. A
decline in the growth of the Internet could decrease demand for our products and
services or otherwise harm our business. Moreover, the applicability to the
Internet of existing laws in various jurisdictions governing issues such as
communications, property ownership, sales tax, libel and personal privacy is
uncertain and may take years to resolve. Any new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the Internet and other on-line services could harm our growth.
IF WE FAIL TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WE MAY LOSE THESE
RIGHTS AND OUR BUSINESS WOULD BE SERIOUSLY HARMED.
Our success and ability to compete depend upon our internally developed
technology and other proprietary rights, which we protect through a combination
of copyright, trademark and trade secret laws, as well as confidentiality
agreements and licensing arrangements. In addition, we have made three patent
applications in the United States and four patent applications in selected
foreign countries regarding certain aspects of our technology. However, existing
laws afford only limited protection. Competitors and potential competitors may
develop products with the same functionality as our products. Moreover,
competitors and potential competitors may attempt to copy or reverse engineer
aspects of our product line or to obtain and use information that we regard as
proprietary. Policing the unauthorized use of our products is difficult, and we
cannot be certain that we will be able to prevent misappropriation of our
technology, particularly in foreign countries where the laws may not protect
proprietary rights as fully as do the laws of the United States. Use by others
of our proprietary rights could materially harm our business, and expensive
litigation may be necessary in the future to enforce our intellectual property
rights.
IF OUR SOURCE CODE IS RELEASED TO OUR CUSTOMERS, OUR ABILITY TO PROTECT OUR
PROPRIETARY RIGHTS COULD BE JEOPARDIZED AND OUR REVENUES COULD DECLINE.
Some of our license agreements require us to place the source code for
our products in escrow. These agreements generally provide these customers with
a limited, non-exclusive license to use this code if:
o there is a bankruptcy, insolvency or winding-up proceeding
involving us;
o we cease to do business without a successor; or
o we do not provide contractually agreed maintenance and support.
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Our revenues could decline and our business could be seriously harmed if
customers were granted access to our source code.
OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MIGHT RESULT IN COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.
It is possible that third parties will claim that we have infringed their
intellectual property rights. Substantial litigation regarding intellectual
property rights exists in the software industry, and we expect that software
developers will be increasingly subject to infringement claims as the number of
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. Some of our competitors may have filed or
may intend to file patent applications covering aspects of their technology upon
which they may claim our technology infringes. Any claims, with or without
merit, could be time-consuming, result in costly litigation, prevent or delay
product shipment, divert the attention and resources of our management or
technical personnel or require us to develop non-infringing technology or to
enter into royalty or licensing agreements, any of which could harm our
business. Patent litigation in particular has complex technical issues and
inherent uncertainties. In the event an infringement claim against us was
successful and we could not obtain a license on acceptable terms, license a
substitute technology or redesign to avoid infringement, our business would be
harmed. Furthermore, former employers of our current and future employees may
assert that our employees have improperly disclosed to us or are using
confidential or proprietary information.
RISKS RELATED TO OUR OFFERING
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE MAY CAUSE THE MARKET PRICE OF OUR ORDINARY SHARES TO DECLINE.
Our current shareholders hold a substantial number of our ordinary shares
that they will be able to sell in the public market in the near future. Sales of
a substantial number of shares after this offering could significantly reduce
the market price of our ordinary shares. Even the perception that our current
shareholders might sell ordinary shares could depress the trading price of the
ordinary shares. These sales, and the possibility of these sales, could make it
more difficult for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate.
Holders of approximately 20.7 million ordinary shares, which will
represent approximately 76.6% of our outstanding share capital after completion
of this offering, have certain rights to require us to register their ordinary
shares with the Securities and Exchange Commission. In addition, after this
offering, we intend to register all ordinary shares that we may issue under our
share plans and employee share purchase plan. Once we register these shares,
they can be freely sold in the public market upon issuance. If these holders
cause a large number of securities to be sold in the public market, the sales
could reduce the trading price of our ordinary shares. These sales also could
impede our ability to raise future capital.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR SHARE PRICE, WHICH COULD NEGATIVELY
AFFECT YOUR INVESTMENT.
Our ordinary shares have never been sold in a public market and an active
trading market for our shares may not develop or be sustained. If you purchase
our ordinary shares in this offering, you will pay a price that was not
established in a competitive market. Rather, you will pay a price that we
negotiated with the representatives of the underwriters. The price of our
ordinary shares that will prevail in the market may be lower than the price you
pay.
The market price of the ordinary shares may fluctuate significantly in
response to the following factors, most of which are beyond our control:
o variations in our quarterly operating results;
o changes in securities analysts' estimates of our financial
performance;
o changes in market valuations of similar companies;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o loss of a major customer or failure to complete significant
license transactions; and
o additions or departures of key personnel.
17
<PAGE>
Moreover, the market for technology and Internet-related companies has
experienced extreme volatility that often has been unrelated to the operating
performance of particular companies. These fluctuations may adversely affect the
trading price of our ordinary shares, regardless of our actual operating
performance. As a result, you may be unable to sell your ordinary shares at or
above the offering price.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED SHARE
PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average share price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities class
action claims than companies in other industries. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and divert management's attention and resources, and could seriously harm
our business.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL SHAREHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS.
Upon completion of this offering, our executive officers, directors and
principal shareholders will beneficially own, in the aggregate, approximately
80.6% of our outstanding ordinary shares. As a result, these shareholders, if
acting together, will be able to exercise control over all matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of control could
disadvantage other shareholders with interests different from those of our
officers, directors and principal shareholders. For example, our officers,
directors and principal shareholders could delay or prevent an acquisition or
merger even if the transaction would benefit other shareholders. Please see
"Principal Shareholders" for a more detailed description of our share ownership.
FAILURE TO RAISE ADDITIONAL CAPITAL OR TO GENERATE THE SIGNIFICANT CAPITAL
NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS COULD REDUCE OUR
ABILITY TO COMPETE AND RESULT IN LOWER REVENUES.
We expect that the net proceeds from this offering, our cash reserves and
any cash flows from operations will be sufficient to meet our working capital
and capital expenditure needs for at least the next 12 months. However, our
limited operating history makes it difficult to predict whether these funds will
be sufficient to finance our anticipated growth. We may need to raise additional
funds if our estimates of revenues or if our working capital or capital
expenditure requirements change or prove inaccurate, if we are required to
respond to unforeseen technological or marketing hurdles or if we choose to take
advantage of unanticipated opportunities. Additional funds might not be
available at acceptable terms, if at all. If additional funds are raised through
the issuance of equity securities, the percentage ownership of our then current
shareholders would be reduced and the value of their investments might decline.
In addition, any new securities issued might have rights, preferences or
privileges senior to those of the securities held by our shareholders. If we
raise additional funds through the issuance of debt, we might become subject to
restrictive covenants.
If we need additional capital and cannot raise it on acceptable terms and
on a timely basis, we may not be able to, among other things:
o develop or enhance our products and services;
o acquire new technologies, products or businesses;
o expand operations, in the United States or internationally;
o hire, train and retain employees; or
o respond to competitive pressures or unanticipated capital
requirements.
Our failure to do any of these things could result in lower revenues and
could seriously harm our business.
18
<PAGE>
WE MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT IMPROVE OUR
OPERATING RESULTS OR INCREASE THE VALUE OF YOUR INVESTMENT.
We will have broad discretion in how we use the proceeds from this
offering, and we may spend these proceeds in ways that do not improve our
operating results or increase the value of your investment. You will not have
the opportunity to evaluate the economic, financial or other information on
which we base our decisions regarding how to use the proceeds from this
offering.
WE DO NOT INTEND TO PAY DIVIDENDS ON OUR ORDINARY SHARES.
We have never declared or paid any cash dividend on our share capital. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future.
NEW INVESTORS IN OUR ORDINARY SHARES WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION IN THE BOOK VALUE OF THEIR INVESTMENT.
The initial public offering price of our ordinary shares will be
substantially higher than the net tangible book value per share of our ordinary
shares immediately after this offering. Therefore, if you purchase our ordinary
shares in this offering, you will incur an immediate dilution of $7.54 in net
tangible book value per share of ordinary shares from the price you paid, based
on an assumed initial public offering price of $10.00 per share. The exercise of
outstanding options may result in further dilution. For a further description of
the dilution that you may experience immediately after this offering, please see
"Dilution."
RISKS RELATED TO INTERNATIONAL OPERATIONS
WE ARE SUSCEPTIBLE TO ADDITIONAL RISKS FROM INTERNATIONAL OPERATIONS.
We derived 37% of our revenues in 1999 and 29% of our revenues in the
nine months ended September 30, 2000 from sales outside North America. As a
result, we face additional risks from doing business internationally including:
o reduced protection of intellectual property rights in some
countries;
o licenses, tariffs and other trade barriers;
o difficulties in staffing and managing foreign operations;
o longer sales and payment cycles;
o greater difficulties in collecting accounts receivable;
o seasonal reductions in business activity;
o potentially adverse tax consequences;
o laws and business practices favoring local competition;
o costs and difficulties of customizing products for foreign
countries;
o compliance with a wide variety of complex foreign laws and
treaties;
o political and economic instability; and
o variance and unexpected changes in local laws and regulations.
Our principal research and development facilities are located in Israel,
and our directors, executive officers and other key employees are located
primarily in Israel, the United States and Europe. In addition, we maintain
offices in Germany, Sweden and the United Kingdom to market and sell our
products in those countries and surrounding regions. We have sold XACCTUSAGE
internationally for only a few quarters, and we have limited experience in
developing localized versions of XACCTUSAGE and marketing and distributing them
internationally.
If we fail to overcome the challenges encountered in our international
operations, we could experience slower than expected revenue growth and our
business could be harmed.
19
<PAGE>
EXCHANGE RATE FLUCTUATIONS BETWEEN THE U.S. DOLLAR AND THE NIS MAY NEGATIVELY
AFFECT OUR EARNINGS.
Although most of our revenues and a majority of our expenses are
denominated in U.S. dollars, a significant portion of our research and
development expenses are incurred in New Israeli Shekels, or NIS. As a result,
we may be negatively affected by fluctuations in the exchange rate between the
U.S. dollar and the NIS. Further, because most of our international revenues are
denominated in U.S. dollars, a strengthening of the dollar versus other
currencies could make our products less competitive in foreign markets and
collection of receivables more difficult. We do not currently engage in currency
hedging activities but we may choose to do so in the future.
BECAUSE WE HAVE IMPORTANT FACILITIES AND RESOURCES LOCATED IN ISRAEL, ANY MAJOR
ADVERSE DEVELOPMENT IN ITS POLITICAL OR ECONOMIC CONDITIONS COULD CAUSE OUR
BUSINESS TO SUFFER.
Our principal research and development facilities and our international
headquarters are located in Israel. Any major hostilities involving Israel or
the interruption or curtailment of trade between Israel and its present trading
partners could significantly harm our business. Since establishment in 1948, the
State of Israel has been and continues to be in a state of hostility with its
neighbors, varying from time to time in intensity and degree. In recent months,
there has been intense violence, hostility and on-going clashes between the
Palestinians and Israeli Security Forces, primarily in the Gilo neighborhood of
southern Jerusalem, the West Bank and the Gaza Strip. We could be adversely
affected by any major hostilities involving Israel, the interruption or
curtailment of trade between Israel and its trading partners, a change in
Israeli taxation or the treatment of exports or a significant downturn in the
economic or financial conditions in Israel. Please see "Conditions in Israel"
for a further discussion of political and economic conditions in Israel.
Some of our senior officers and key employees who are citizens and
residents of Israel under the age of 54 are currently or may be obligated to
perform annual reserve duty in the Israeli Defense Forces and are subject to
being called for active military duty at any time. Fulfillment of these
obligations may deprive us of key employees for extended periods of time.
Further, inflation in Israel and devaluation of the NIS could have an
impact on our financial results. Although Israel has experienced substantially
reduced rates of inflation and devaluation in recent years, they are still
relatively high compared to those in the United States. Our business could be
harmed by inflation or devaluation. If inflation rates in Israel increase again
and hurt Israel's economy as a whole, our operations and financial condition
could suffer.
ANY FUTURE PROFITABILITY MAY BE DIMINISHED IF TAX BENEFITS FROM THE STATE OF
ISRAEL ARE REDUCED OR WITHHELD.
Pursuant to the Israeli Law for the Encouragement of Capital Investments,
1959, the Israeli government has granted "Approved Enterprise" status to our
existing capital investment program in Israel. Consequently, we are eligible for
tax benefits with respect to income derived from our investment program for the
first several years in which such investment program generates taxable income.
Our future profitability may be diminished if all or a portion of these tax
benefits are reduced or eliminated. These tax benefits may be cancelled in the
event of changes in Israeli government policies or if we fail to comply with
requisite conditions and criteria. Currently the benefits available to an
approved enterprise are dependent upon the fulfillment of the conditions
stipulated in the applicable law and in the certificate of approval of such
program. We may not satisfy these conditions in the future. We cannot assure you
that these tax benefits will be continued in the future at their current levels,
if at all. If these tax benefits were reduced or eliminated, the taxes we would
have to pay are likely to increase.
In May 2000, an expert committee of the Israeli Ministry of Finance
recommended substantial tax reforms to Israeli tax law which, if adopted, may
increase the amount of tax we have to pay with respect to income derived from
our approved enterprise under the Law for the Encouragement of Capital
Investments, 1959, which may result in lower profitability and a decline in our
share price. Please see "Israeli Taxation" for a further discussion of tax
issues under Israeli Law.
ISRAELI COURTS MIGHT NOT ENFORCE JUDGMENTS RENDERED OUTSIDE OF ISRAEL, WHICH MAY
MAKE IT DIFFICULT TO COLLECT ON JUDGMENTS RENDERED AGAINST US.
Some of our directors and executive officers are not residents of the
United States and some of their assets and our assets are located outside the
United States. Service of process upon our non-U.S. resident directors and
executive officers and the enforcement of judgments obtained in the United
States against us, and our directors and executive officers outside of the
United States, may be difficult to obtain. Furthermore, if a foreign judgment is
enforced by an Israeli court, it will be payable in Israeli currency. XACCT
Technologies, Inc., our U.S. subsidiary, is the U.S. agent authorized to receive
service of process in any action against us in any federal or state court
arising
20
<PAGE>
out of this offering or any related purchase or sale of securities. We have not
given consent for this agent to accept service of process in connection with any
other claim.
We have been informed by our legal counsel in Israel that there is doubt
as to the enforceability of civil liabilities under U.S. securities laws in
original actions instituted in Israel. Moreover, an Israeli court generally will
not enforce a foreign judgment if it was given in a state whose laws do not
provide for the enforcement of judgments of Israeli courts or if its enforcement
is likely to prejudice the sovereignty, the law, public policy or the security
of the State of Israel. An Israeli court also will not declare a foreign
judgment enforceable if:
o the judgment was obtained by fraud;
o adequate service of process was not effected or the defendant did
not have a reasonable opportunity to present his or her arguments
and evidence;
o the judgment was rendered by a court not competent to render it
according to the laws of private international law in Israel;
o the judgment is at variance with another judgment that was given
in the same matter between the same parties and which is still
valid; or
o at the time the action was brought in the foreign court a suit in
the same matter and between the same parties was pending before a
court or tribunal in Israel.
For further information, please see "Enforceability of Civil
Liabilities."
WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT AN
ACQUISITION OF XACCT, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR
SHAREHOLDERS.
Our articles of association provide for a staggered board of directors
and the ability of our board of directors to issue, without further shareholder
action, preferred shares with rights and privileges which may be senior to our
ordinary shares. These provisions may inhibit or may have the effect of
delaying, preventing or making more difficult a merger or other acquisition of
XACCT, even if doing so would be beneficial to our shareholders. Please see
"Description of Share Capital--Mergers and Acquisitions and Anti-Takeover
Provisions Under Israeli Law" for a further discussion of anti-takeover
provisions.
ISRAELI LAW CONTAINS CERTAIN PROVISIONS THAT COULD DELAY OR PREVENT AN
ACQUISITION OF XACCT, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR
SHAREHOLDERS.
Israeli law regulates mergers, acquisition of shares through tender
offers and certain other corporate transactions in a manner that may discourage
or delay potential acquisition proposals, even if they are beneficial to our
shareholders. Please see "Description of Share Capital--Mergers and Acquisitions
and Anti-Takeover Provisions Under Israeli Law" for a further discussion of
anti-takeover provisions.
THE NEW ISRAELI COMPANIES LAW IMPOSES SUBSTANTIAL DUTIES ON SHAREHOLDERS AND MAY
CAUSE UNCERTAINTIES REGARDING CORPORATE GOVERNANCE.
The Israeli Companies Law, which became effective on February 1, 2000,
brought about significant changes to Israeli corporate law. The new law includes
provisions imposing substantial duties on certain controlling and
non-controlling shareholders. Please see "Management--Approval of Certain
Transactions--Duties of Shareholders," for a more detailed discussion of
shareholder duties under the Companies Law. In addition, uncertainties regarding
certain aspects of corporate governance may persist until Israeli courts
interpret the Companies Law. These uncertainties could delay or inhibit takeover
attempts or other corporate transactions, decisions or actions that may be
beneficial to shareholders.
21
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements in "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks outlined under "Risk
Factors," that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor any
other person assume responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform these statements to actual results.
22
<PAGE>
USE OF PROCEEDS
We estimate that we will receive approximately $44.1 million in net
proceeds from this offering, based upon the sale of 5 million ordinary shares at
an assumed initial public offering price of $10.00 per share, the midpoint of
the offering range on the cover of this prospectus, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us. If the
underwriters exercise their over-allotment option in full, our net proceeds will
be approximately $51.1 million.
We intend to use the net proceeds of this offering for additional working
capital and other general corporate purposes. We have not yet determined our
expected use of the proceeds from this offering, but we currently estimate that
through September 2001 we will use approximately $11.0 million to $13.0 million
on research and development expenditures. We will also use a portion of the
proceeds for expansion of our operations and sales and marketing capabilities,
and the capital requirements to support these expansions, primarily including
computing equipment, furniture and fixtures. Other than as noted above, we
currently do not have any specific plans on the allocation of the proceeds, and
therefore the proceeds we receive from this offering do not necessarily
correlate with our expansion.
The actual amount of net proceeds that we spend on a particular use will
depend on a variety of factors, many of which are beyond our control. These
factors include our future revenue growth, if any, additional financing sources,
if any, the availability and desirability of potential acquisitions of
businesses, products or technologies, the amount of expenditures required for
other uses and the amount of cash generated or used by our operations. Many of
these factors are beyond our control. As a result, our management will retain
broad discretion in the use of the net proceeds from this offering.
Until we use the net proceeds of this offering, we intend to invest the
net proceeds in short-term, investment-grade marketable securities.
We are also conducting an initial public offering at this time to
position ourselves more strongly in our market, to create a public market for
our ordinary shares and to facilitate our future access to the public capital
markets.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our ordinary shares in
the past. We do not expect to pay any cash dividends on our ordinary shares in
the foreseeable future and intend to retain our future earnings, if any, to
finance the development of our business.
In the event that cash dividends are declared in the future, we will pay
those dividends in New Israeli Sheckels, or NIS, or in foreign currency, subject
to any statutory limitations. Under current Israeli regulations, any dividends
or other distributions paid with respect to ordinary shares will be freely
repatriable in such non-Israeli currencies at the rate of exchange prevailing at
the time of conversion, provided that Israeli income tax has been paid on, or
withheld from, those payments. Because exchange rates between the NIS and the
U.S. dollar fluctuate, a U.S. shareholder will bear the risks of currency
fluctuations during the period between the date the dividend is declared and
paid by us in NIS and the date conversion is made by the shareholder into U.S.
dollars.
23
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30,
2000:
o on an actual basis;
o on a pro forma basis giving effect to (1) the exercise of warrants
outstanding as of September 30, 2000 to purchase 1,320,725
preferred shares at a weighted average exercise price of $7.76 per
share, which warrants if unexercised would expire upon the closing
of this offering; and (2) the conversion of all issued and
outstanding preferred shares into ordinary shares; and
o on a pro forma as adjusted basis to reflect the sale of the
ordinary shares in this offering at an assumed initial public
offering price of $10.00 per ordinary share after deducting
estimated underwriting discounts and the estimated expenses of
this offering payable by us.
You should read the table below in conjunction with our consolidated
financial statements and the related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
(UNAUDITED)
-------------------------------------
ACTUAL PRO FORMA PRO FORMA
AS ADJUSTED
---------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Shareholders' equity:
Preferred shares, NIS 0.04 nominal value, 20,550,000 shares authorized;
15,301,036 shares issued and outstanding, actual; no shares issued
and outstanding pro forma and pro forma as adjusted .................. $ 152 $ -- $ --
Ordinary shares, NIS 0.04 nominal value, 182,630,000 voting shares and 1,820,000
non-voting shares authorized; 5,377,276 voting shares issued and outstanding,
actual; 20,613,891 voting shares and 1,385,146 non-voting shares issued and
outstanding, pro forma; and 25,613,891 voting shares and 1,385,146 non-voting
shares issued and
outstanding, pro forma as adjusted ................................... 53 218 268
Additional paid-in capital............................................... 69,134 79,264 123,314
Deferred stock compensation.............................................. (12,715) (12,715) (12,715)
Receivables on account of shares......................................... (2,270) (2,270) (2,270)
Accumulated deficit...................................................... (42,306) (42,306) (42,306)
---------- ----------- ------------
Total shareholders' equity.......................................... $ 12,048 $ 22,191 $ 66,291
========== =========== ============
Total capitalization............................................ $ 12,048 $ 22,191 $ 66,291
========== =========== ============
</TABLE>
The table excludes:
o 4,550,144 ordinary shares issuable upon exercise of options
outstanding as of September 30, 2000 with a weighted average
exercise price of $3.12 per share;
o 7,980,373 ordinary shares available for future issuance under our
share option plans; and
o 750,000 ordinary shares that will be available for issuance under
our 2000 Employee Share Purchase Plan.
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<PAGE>
DILUTION
If you invest in our ordinary shares, your interest will be diluted to
the extent of the difference between the public offering price per share of our
ordinary shares and the pro forma as adjusted net tangible book value per share
of our ordinary shares immediately after this offering.
Investors participating in this offering will incur immediate,
substantial dilution. The pro forma net tangible book value of our ordinary
shares as of September 30, 2000 was $22.2 million, or $1.01 per ordinary share.
Pro forma net tangible book value per share represents the amount of our total
tangible assets less total liabilities, divided by the number of ordinary shares
outstanding after assuming the exercise of warrants to purchase 1,320,725
preferred shares outstanding as of September 30, 2000, which warrants if
unexercised would expire upon the completion of this offering and the conversion
of all issued and outstanding preferred shares into ordinary shares. Assuming
our sale of ordinary shares offered by this prospectus at an assumed initial
public offering price of $10.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable,
our pro forma as adjusted net tangible book value at September 30, 2000 would
have been $66.3 million, or $2.46 per ordinary share. This represents an
immediate increase in pro forma net tangible book value of $1.45 per share to
existing shareholders and an immediate dilution of $7.54 per share to new
investors purchasing ordinary shares in this offering. The following table
illustrates this dilution on a per ordinary share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per ordinary share.................................... $ 10.00
Pro forma net tangible book value per ordinary share as of September 30, 2000............ $ 1.01
Increase per share attributable to new investors......................................... 1.45
--------
Pro forma as adjusted net tangible book value per ordinary share after this offering........ 2.46
--------
Dilution per ordinary share to new investors................................................ $ 7.54
========
</TABLE>
The following table sets forth on a pro forma as adjusted basis, as of
September 30, 2000, the differences between the number of ordinary shares
purchased from us, the total consideration paid and the average price per share
paid by existing holders of ordinary shares and by the new investors, before
deducting the estimated underwriting discount and estimated offering expenses
payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders............................ 21,999,037 81.5% $ 62,930,196 55.7% $ 2.86
New investors.................................... 5,000,000 18.5% 50,000,000 44.3% $10.00
------------- ------- --------------- --------
Total....................................... 26,999,037 100.0% $ 112,930,196 100.0%
============= ======= =============== =======
</TABLE>
The foregoing discussion and tables exclude:
o 4,550,144 ordinary shares issuable upon exercise of options
outstanding as of September 30, 2000 with a weighted average
exercise price of $3.12 per share;
o 7,980,373 ordinary shares available for future issuance under our
share option plans; and
o 750,000 ordinary shares that will be available for issuance under
our 2000 Employee Share Purchase Plan.
To the extent any of these options are exercised or any of these shares
are issued, there will be further dilution to new investors.
If the underwriters' over-allotment option is exercised in full, the
number of shares held by new investors increases to 5,750,000, or 20.7% of the
total ordinary shares outstanding after this offering.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following selected consolidated financial data as of December 31,
1998 and 1999 and for the period from our inception in June 1997 through
December 31, 1997 and for the years ended December 31, 1998 and 1999 have been
derived from our consolidated financial statements and the related notes set
forth elsewhere in this prospectus. These consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in the
United States. The selected consolidated financial data as of December 31, 1997
have been derived from audited consolidated financial statements not included in
this prospectus, which have also been prepared in accordance with generally
accepted accounting principles in the United States. The selected consolidated
statements of operations data for the nine months ended September 30, 1999 and
2000 and the consolidated balance sheet data at September 30, 2000 have been
derived from unaudited financial statements included elsewhere in this
prospectus. The unaudited financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position at those dates and
the results of operations for those periods. You should read the selected
consolidated financial data set forth below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
our consolidated financial statements and the related notes included elsewhere
in this prospectus. Our historical results are not necessarily indicative of
future results.
<TABLE>
<CAPTION>
INCEPTION
(JUNE 1997) TO YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
--------------------------- --------------------------
1997 1998 1999 1999 2000
------------- ------------- ------------ ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues:
License............................... $ -- $ -- $ 898 $ 519 $ 3,712
Service............................... -- -- 296 97 1,366
------------- ------------- ------------ ------------ ------------
Total revenues...................... -- -- 1,194 616 5,078
------------- ------------- ------------ ------------ ------------
Cost of revenues:
License............................... -- -- 48 30 265
Service............................... -- -- 192 112 2,308
------------- ------------- ------------ ------------ ------------
Total cost of revenues.............. -- -- 240 142 2,573
------------- ------------- ------------ ------------ ------------
Gross profit............................. -- -- 954 474 2,505
------------- ------------- ------------ ------------ ------------
Operating expenses:
Research and development.............. 390 1,511 2,243 1,535 6,942
Sales and marketing................... 127 1,995 6,472 4,049 14,150
General and administrative............ 152 1,033 1,204 686 4,696
Amortization of deferred stock
compensation(*)..................... -- -- 381 44 5,537
------------- ------------- ------------ ------------ ------------
Total operating expenses............ 669 4,539 10,300 6,314 31,325
------------- ------------- ------------ ------------ ------------
Operating loss........................... (669) (4,539) (9,346) (5,840) (28,820)
Interest and other income, net........... 7 105 268 122 829
------------- ------------- ------------ ------------ ------------
Net loss before taxes on income.......... $ (662) $ (4,434) $ (9,078) $ (5,718) $ (27,991)
------------- ------------- ------------ ------------ ------------
Taxes on income.......................... -- -- -- -- (141)
------------- ------------- ------------ ------------ ------------
Net loss................................. $ (662) $ (4,434) $ (9,078) $ (5,718) $ (28,132)
============= ============= ============ ============ ============
Basic and diluted net loss per share..... $ (0.30) $ (1.17) $ (2.34) $ (1.48) $ (6.76)
============= ============= ============ ============ ============
Weighted average number of shares used
in computing basic and diluted net
loss per share........................ 2,192,400 3,804,874 3,886,495 3,873,237 4,161,859
============= ============= ============ ============ ============
Pro forma basic and diluted net loss per
share (unaudited)..................... $ (0.67) $ (1.50)
============ ============
Pro forma weighted average number of
shares used in computing basic and
diluted net loss per share (unaudited). 13,566,732 18,750,905
============ ============
</TABLE>
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------
1999 1999 2000
------------- ---------- ---------
<S> <C> <C> <C>
(*)Amortization of stock-based compensation relates to the following:
Cost of revenues.................................................... $ 8 $ 1 $ 307
Research and development............................................ 107 9 1,293
Sales and marketing................................................. 189 33 1,898
General and administrative.......................................... 77 1 2,039
------------- ---------- ---------
Total............................................................. $ 381 $ 44 $ 5,537
============= ========== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ SEPTEMBER 30,
1997 1998 1999 2000
-------- --------- ---------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 366 $ 5,445 $ 17,309 $ 13,962
Working capital.................................................. 243 5,021 17,312 8,870
Total assets..................................................... 518 6,064 20,086 21,631
Shareholders' equity............................................. 338 4,973 17,827 12,048
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH
THE "SELECTED CONSOLIDATED FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. WE
BELIEVE THAT PERIOD-TO-PERIOD COMPARISONS OF OUR RESULTS OF OPERATIONS ARE NOT
NECESSARILY MEANINGFUL AND SHOULD NOT BE RELIED UPON AS INDICATIONS OF FUTURE
PERFORMANCE.
OVERVIEW
We are a provider of business infrastructure software for network service
providers. Our infrastructure software is designed to allow network service
providers to implement new value-based and usage-based business models and to
offer higher-margin, enhanced services through comprehensive real-time data
collection, data aggregation and automated service provisioning.
Our software is designed to gather network usage, traffic and transaction
information from network elements such as routers, switches, firewalls, servers
and gateways and to synthesize, enhance and tailor that information to produce
the specified information and formats required by network service providers to
implement new value-based and usage-based business models. Network service
providers can use this real-time data to offer and charge their customers
appropriately for network services based on usage time, quality of service,
transactions, events, content or volume. These network services include Internet
telephony, web hosting, application renting, video conferencing, movies/video on
demand, audio over Internet protocol, unified messaging, network games, virtual
private networking, voice-mail, fax over Internet protocol, e-mail and file
transfers. This detailed information can also be used to support operations and
business support systems of network service providers, including billing,
customer care, market analysis, churn management, fraud management, service
level management and other systems. We have designed our solution to provide the
carrier-class scalability, reliability, manageability and flexibility that our
customers demand to run their mission-critical business applications.
We were incorporated in Israel and commenced operations in June 1997. We
were a development stage company from our inception in June 1997 through
December 1998. We began shipping our initial product in January 1999. We have
spent a substantial amount to date developing our initial products and
establishing our operations. From our incorporation in June 1997 through the end
of 1998, we primarily engaged in research activities and development of our
products. We first began generating revenues from software license fees from the
initial version of our products in January 1999. During 1999, we continued to
enhance the functionality of our products and build our management team and
operations. During the nine months ended September 30, 2000 we added 35
customers and hired 110 employees. As our revenues increased we also incurred
significant operating expenses as we expanded our research and development
organization, our direct sales force and our professional services department.
At September 30, 2000, we had an accumulated deficit of $42.3 million.
We derive our revenues principally from software licenses and related
services. To date, our license revenues have been derived from licenses of
XACCTUSAGE, our server-based software platform that resides at the network
service provider's site, as well as information source modules and gatherers
which reside near the switches, routers, hubs and other elements of the network.
We recognize revenue from license fees when persuasive evidence of an agreement
exists, delivery of the product has occurred, no significant obligations with
regard to implementation remain on our part, the fee is fixed or determinable
and collectibility is probable. We generally do not grant a right of return to
our customers. When a right of return exists, we defer revenue until the right
of return expires, at which time revenue is recognized provided that all other
revenue recognition criteria have been met. We consider all arrangements with
payment terms extending beyond thirty days not to be fixed or determinable. If
the fee is not fixed or determinable, revenue is recognized as payments become
due from the customers provided that all other revenue recognition criteria have
been met. Customer payments received prior to the recognition of revenues are
recorded as deferred revenue.
When contracts contain multiple elements wherein vendor specific
objective evidence (VSOE) of fair value exists for all undelivered elements, we
account for the delivered elements in accordance with the "Residual Method"
prescribed by Statement of Position No. 98-9. Service revenues include
maintenance and support and consulting services such as implementation, training
and installation. Customers who license our products usually purchase
maintenance and support contracts. These contracts provide unspecified software
upgrades, as well as technical support, over a specified term, which typically
is 12 months. Maintenance and support contracts are usually paid in advance, and
revenues from these contracts are recognized on a straight-line basis over the
term of the contract. Customers typically purchase additional consulting
services from us to support their implementation activities.
28
<PAGE>
These consulting services generally are sold on a time and materials basis.
Consulting and training revenues are recognized at the time the services are
rendered. Customer advances and billed amounts due from customers in excess of
recognized revenues are recorded as deferred revenues. Arrangements that include
consulting services are evaluated to determine whether those services are
essential to the functionality of other elements of the arrangement. When
services are considered essential, revenue under the arrangement is recognized
using contract accounting. When services are not considered essential, the
revenue allocable to the software services is recognized as the services are
performed. To date, we have determined that the services are not essential to
the functionality of the other elements of the arrangements.
We market our products through our direct sales force and through
relationships with system integrators, value-added resellers and technology
vendors. Revenues attributable to indirect sales are recognized upon acceptance
by the end customer. In 1999, we derived 63% of our revenues from customers
located in North America and 37% of our revenues from customers outside North
America, substantially all of which were in Europe. In the nine months ended
September 30, 2000, we derived 71% of our revenues from customers in North
America and 29% of our revenues from customers located outside North America.
Please see note 9 to our consolidated financial statements for additional
financial information presented by geographic area. In the nine months ended
September 30, 2000, we opened three offices in Europe. We plan to expand our
operations into Asia and further across Europe.
Our limited operating history makes it difficult to predict our future
operating results. We believe our future success will depend on our ability to
expand our customer base and enhance our products. We intend to continue to
invest significantly in sales, marketing and research and development and expect
to incur operating losses for the foreseeable future. A delay in the revenue
recognition from one or more license transactions could cause significant
variations in operating results from quarter to quarter and could result in
larger-than-anticipated losses.
In 1999, a small number of customers accounted for a significant portion
of our total revenues. During that year, revenues from four customers accounted
for 51% of total revenues. We expect that revenues from a limited number of
customers will continue to account for a large percentage of total revenues in
future quarters. TV Cabo Acoreana, S.A., UUNET Technologies, Inc., Genuity Inc.,
and Verio Inc. each accounted for at least 10% of total revenues in 1999. For
the nine months ended September 30, 2000, Digital Island and Broadwing
Communications each accounted for at least 10% of total revenues.
We intend to continue to invest in product development and technologies
to enhance our products and services and develop new products and services.
Also, an important part of our strategy is to expand our operations and employee
base and build our sales, marketing, customer support, technical and operational
resources. We expect to continue to incur substantial operating losses in the
future, and our expected increase in operating expenses will require significant
increases in revenues before we become profitable.
STOCK-BASED COMPENSATION
Deferred stock compensation represents the difference between the
estimated fair value of the ordinary shares for accounting purposes and the
option exercise price at the date of grant. We have amortized deferred stock
compensation of $5.9 million in connection with stock options we have granted
through September 30, 2000. Approximately $12.7 million is to be amortized over
the remaining vesting period of the options. This amount is amortized over the
four-year vesting period of the options using the graded vesting option
approach. We expect to record additional deferred stock compensation with
respect to share option grants made subsequent to September 30, 2000. Deferred
stock compensation expense will be reduced for future periods to the extent that
options are terminated prior to full vesting. Please see note 7 to our
consolidated financial statements for a further description of stock-based
compensation expense.
NET OPERATING LOSS CARRYFORWARDS
From our inception in June 1997 through December 31, 1999, we had $4.7
million of Israeli net operating loss carryforwards and $6.9 million of U.S.
federal and state net operating loss carryforwards to offset future taxable
income. These net operating loss carryforwards expire in varying amounts from
2006 to 2019. Given our limited operating history and our losses incurred to
date, coupled with the difficulty of forecasting future results, a full
valuation allowance has been recorded. Furthermore, as a result of changes in
our equity ownership from our preferred share offerings and this offering, use
of net operating losses and tax credits may be subject to substantial annual
limitations. This is due to the ownership change limitations provided in the
United States Internal Revenue Code and similar state provisions. The degree of
any such limitation cannot presently be estimated. To date, we have
29
<PAGE>
not performed an evaluation to determine if such a limitation exists, and we may
not perform that evaluation until and unless we are profitable in the future.
The annual limitation may result in the expiration of net operating losses and
tax credits before utilization. Please see note 8 to our consolidated financial
statements for a further discussion of net operating loss carryforwards.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 2000
REVENUES
Total revenues increased $4.5 million or 724% from $616,000 for the nine
months ended September 30, 1999 to $5.1 million for the nine months ended
September 30, 2000. This increase was primarily attributable to the increase in
the number of customers. In the first nine months of 1999, we generated revenues
from 22 customers and in the first nine months of 2000, we generated revenues
from 55 customers. This increase was because of greater market acceptance of our
software products. The average license revenues transaction size also increased
from approximately $48,700 for the nine months ended September 30, 1999 to
approximately $196,100 for the nine months ended September 30, 2000.
LICENSE. License revenues increased $3.2 million or 615% from $519,000
for the nine months ended September 30, 1999 to $3.7 million for the nine months
ended September 30, 2000. This increase was primarily attributable to the
continued growth of our revenues since the first two quarters of 1999, the
initial quarters in which we licensed our products.
SERVICE. Service revenues increased $1.3 million or 1,308% from $97,000
for the nine months ended September 30, 1999 to $1.4 million for the nine months
ended September 30, 2000. This increase was primarily attributable to the
increased implementation and consulting services performed and the growth in the
number of maintenance contracts.
COST OF REVENUES
Total cost of revenues increased $2.4 million or 1,712% from $142,000 for
the nine months ended September 30, 1999 to $2.6 million for the nine months
ended September 30, 2000. This increase was primarily attributable to the growth
in our professional services organization.
LICENSE. Cost of license revenues consists primarily of expenses incurred
to manufacture, package and distribute software products and related
documentation and license fees paid to third parties under technology license
arrangements. Cost of license revenues increased $235,000 or 783% from $30,000
for the nine months ended September 30, 1999 to $265,000 for the nine months
ended September 30, 2000. The increase in cost of license revenues for the first
nine months of September 30, 2000 was primarily attributable to increased
licensing of third-party technologies. We expect cost of license revenues to
grow in absolute dollars as we continue to license third-party technologies.
SERVICE. Cost of services revenues includes salaries and other expenses
from our professional services and customer support organization and related
overhead expenses. Cost of service revenues increased $2.2 million or 1,961%
from $112,000 for the nine months ended September 30, 1999 to $2.3 million for
the nine months ended September 30, 2000. This increase was primarily
attributable to the growth in the number of employees in our professional
services and customer support organizations, which grew from 14 employees at
September 30, 1999 to 41 employees at September 30, 2000. Cost of services
revenues exceeded services revenues during the nine months ended September 30,
2000 because of the investment in our services organization. We expect to
continue to invest heavily in professional services and customer support,
consulting and training and expect cost of services revenues to increase.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses include
salaries and related payroll and facilities expenses for engineering and
technical personnel in addition to purchased software used for product
development. We expense all of these costs as incurred. Research and development
expenses increased $5.4 million or 352% from $1.5 million for the nine months
ended September 30, 1999 to $6.9 million for the nine months ended September 30,
2000. This increase was primarily because of the growth in the number of
engineering personnel from 24 employees at September 30, 1999 to 75 employees at
September 30, 2000. We expect research and development expense to increase in
absolute dollars in the future as we continue to hire additional research and
30
<PAGE>
development personnel and spend additional amounts on enhancement of existing
products and development of new products.
SALES AND MARKETING. Sales and marketing expenses consist of salaries,
commissions and related overhead expenses for sales and marketing personnel,
promotional expenses and travel expenses. Sales and marketing expenses increased
$10.1 million or 249% from $4.0 million for the nine months ended September 30,
1999 to $14.1 million for the nine months ended September 30, 2000. The increase
was largely due to increased personnel and personnel-related costs associated
with the hiring of additional sales and marketing personnel, increased
commissions paid resulting from higher sales and increased marketing promotions
such as trade show participation. We increased our sales and marketing personnel
from 20 employees at September 30, 1999 to 58 at September 30, 2000. We also
incurred additional expenses during the first quarter of 2000 as we increased
the number of regional and international sales offices. We expect that sales and
marketing expense will continue to be a significant component of operating
expense. We expect sales and marketing expense will increase in absolute dollars
as we increase our sales and marketing activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
of salaries for administrative, legal, executive and finance personnel and
related overhead expenses, recruiting costs and professional service fees for
legal, accounting and other professional services. General and administrative
expenses increased $4.0 million or 585% from $686,000 for the nine months ended
September 30, 1999 to $4.7 million for the nine months ended September 30, 2000.
The increase was primarily because of the growth in the number of general and
administrative personnel from 5 employees at September 30, 1999 to 29 employees
at September 30, 2000. We expect general and administrative expense to increase
as we hire additional personnel to support the anticipated growth of our
business and our operations as a public company.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We have recorded deferred
stock-based compensation for stock options granted to employees and consultants
in 1999 of approximately $3.2 million and in the nine months ended September 30,
2000 of approximately $15.4 million. Of this amounts, we amortized approximately
$5.5 million in the nine months ended September 30, 2000. Based on option grants
through September 30, 2000, we expect to amortize $2.3 million in the fourth
quarter of 2000. We expect to recognize lower amounts in subsequent quarters.
INTEREST AND OTHER INCOME, NET. Interest and other income, net consist
primarily of interest received on invested cash balances. Interest and other
income, net increased $707,000 or 580% from $122,000 for the nine months ended
September 30, 1999 to $829,000 for the nine months ended September 30, 2000
primarily due to higher cash balances in the year following equity financings
completed in October 1999 and March 2000.
INCEPTION (JUNE 1997) TO DECEMBER 31, 1998 AND YEAR ENDED DECEMBER 31,
1999
REVENUES
LICENSE. We recorded no license revenues for the period from our
inception in June 1997 to December 31, 1998. License revenues in 1999 were
$898,000 following the commercial release of our initial product in the fourth
quarter of 1998 and the initiation of sales activities.
SERVICE. We recorded no revenues for the period from our inception to
December 31, 1998. Service revenues in 1999 totaled $296,000. This increase was
primarily because of maintenance on new licenses and increased implementation
and consulting services performed in conjunction with increased license sales in
1999.
COST OF REVENUES
LICENSE. We recorded no cost of license revenues for the period from our
inception to December 31, 1998. We incurred $48,000 in cost of license revenues
in 1999 primarily for the packaging and documentation costs to distribute our
software.
SERVICE. We recorded no cost of service revenues for the period from our
inception to December 31, 1998. We incurred $192,000 in cost of service revenues
in 1999 to support the installation and implementation of our software and as we
expanded our professional service organization.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$342,000 or 18% from $1.9 million for the period from our inception to December
31, 1998 to $2.2 million in 1999. The increase was primarily attributable to the
hiring of additional engineering personnel.
31
<PAGE>
SALES AND MARKETING. Sales and marketing expenses increased $4.4 million
or 205% from $2.1 million for the period from our inception to December 31, 1998
to $6.5 million in 1999. The increase was attributable primarily to increased
sales and marketing efforts and higher sales commissions resulting from
increased sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1.2
million in the period from our inception to December 31, 1998 and remained flat
at $1.2 million in 1999.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We recorded no deferred
stock compensation in the period from our inception to December 31, 1998. We
recorded $3.2 million in deferred stock compensation in 1999 and amortized
$381,000 of deferred stock compensation expense in 1999.
INTEREST AND OTHER INCOME, NET. Interest and other income, net increased
$156,000 or 139% from $112,000 for the period from our inception to December 31,
1998 to $268,000 in 1999 as a result of higher average cash balances.
SEVEN QUARTERS ENDED SEPTEMBER 30, 2000
We first began shipping products in the first quarter of 1999 and, as a
result, we believe that annual comparisons of our operating results and
quarterly results of operations involving periods prior to December 31, 1998 are
less meaningful than an analysis of recent quarterly operating results.
Accordingly, we are providing a discussion and analysis of our quarterly
operating results for the seven quarters ended September 30, 2000.
The following tables list the operating results for the seven most recent
quarters as well as, for the periods indicated, each line item as a percentage
of total revenues. We believe this unaudited information has been presented on
the same basis as our annual consolidated financial statements and includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the unaudited information for the quarters presented. This
information should be read together with the consolidated financial statements
and the related notes included elsewhere in this prospectus. The operating
results for any quarter are not necessarily indicative of the results for any
future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1999 1999 1999 1999 2000 2000 2000
--------- --------- ------------ ------------ ----------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License........................ $ 81 $ 186 $ 252 $ 379 $ 833 $ 1,238 $ 1,641
Service........................ 4 44 49 199 203 301 862
--------- -------- ------------- ----------- ---------- -------- -------------
Total revenues............... 85 230 301 578 1,036 1,539 2,503
Cost of revenues:
License........................ 7 9 14 18 24 201 40
Service........................ 15 33 64 80 521 804 983
--------- -------- ------------- ----------- ---------- -------- -------------
Total cost of revenues....... 22 42 78 98 545 1,005 1,023
--------- -------- ------------- ----------- ---------- -------- -------------
Gross profit...................... 63 188 223 480 491 534 1,480
--------- -------- ------------- ----------- ---------- -------- -------------
Operating expenses:
Research and development....... 529 497 509 708 1,794 2,218 2,930
Sales and marketing............ 1,131 1,278 1,640 2,423 3,806 4,811 5,533
General and administrative..... 194 235 257 518 1,106 1,399 2,191
Amortization of deferred stock
compensation................. -- -- 44 337 1,355 1,891 2,291
--------- -------- ------------- ----------- ---------- -------- -------------
Total operating expenses..... 1,854 2,010 2,450 3,986 8,061 10,319 12,945
--------- -------- ------------- ----------- ---------- -------- -------------
Operating loss.................... (1,791) (1,822) (2,227) (3,506) (7,570) (9,785) (11,465)
Interest and other income,
net............................ 95 19 8 146 169 497 163
--------- -------- ------------- ----------- ---------- -------- -------------
Net loss before taxes on income... $ (1,696) $ (1,803)$ (2,219) $ (3,360) $ (7,401) $(9,288) $ (11,302)
--------- -------- ------------- ----------- ---------- -------- -------------
Taxes on income................... -- -- -- -- -- -- (141)
--------- -------- ------------- ----------- ---------- -------- -------------
Net loss.......................... $ (1,696) $ (1,803)$ (2,219) $ (3,360) $ (7,401) $(9,288) $ (11,443)
========= ======== ============= =========== ========== ======== =============
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1999 1999 1999 1999 2000 2000 2000
--------- --------- ------------ ------------ ----------- --------- -------------
(% OF REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License..................... 95% 81% 84% 66% 80% 80% 66 %
Service..................... 5 19 16 34 20 20 34
---------- -------- ------------ ---------- ----------- -------- -------------
Total revenues............ 100 100 100 100 100 100 100
---------- -------- ------------ ---------- ----------- -------- -------------
Cost of revenues:
License..................... 8 4 5 3 2 13 2
Service..................... 18 14 21 14 50 52 39
---------- -------- ------------ ---------- ----------- -------- -------------
Total cost of revenues.... 26 18 26 17 52 65 41
---------- -------- ------------ ---------- ----------- -------- -------------
Gross profit................... 74 82 74 83 48 35 59
---------- -------- ------------ ---------- ----------- -------- -------------
Operating expenses:
Research and development.... 622 216 169 122 173 144 117
Sales and marketing......... 1,331 556 545 419 367 313 221
General and administrative.. 228 102 85 90 107 91 88
Amortization of deferred
stock compensation........ -- -- 15 58 131 123 91
---------- -------- ------------ ---------- ----------- -------- -------------
Total operating expenses.. 2,181 874 814 689 778 671 517
---------- -------- ------------ ---------- ----------- -------- -------------
Operating loss................. (2,107) (792) (740) (606) (730) (636) (458)
Interest and other income,
net........................ 112 8 3 25 16 32 7
---------- -------- ------------ ---------- ----------- -------- -------------
Net loss before taxes on income (1,995)% (784)% (737)% (581)% (714)% (604)% (451)
---------- -------- ------------ ---------- ----------- -------- -------------
Taxes on income................ -- -- -- -- -- -- (6)
---------- -------- ------------ ---------- ----------- -------- -------------
Net loss....................... (1,955)% (784)% (737)% (581)% (714)% (604)% (457)%
========== ======== ============ ========== =========== ======== =============
</TABLE>
REVENUES
Total revenues increased sequentially on a quarterly basis from $85,000
for the quarter ended March 31, 1999 to $2.5 million for the quarter ended
September 30, 2000. We began to generate revenues in 1999 following the
commercial release of our initial product in the fourth quarter of 1998. These
revenues grew sequentially through the seven quarters ended September 30, 2000
as our customer base and our average transaction size increased. Our customer
base increased from 11 at March 31, 1999 to 62 at September 30, 2000. Average
transaction size increased from approximately $22,000 in the quarter ended March
31, 1999 to approximately $314,000 in the quarter ended September 30, 2000,
primarily as a result of larger initial deployments by our customers.
LICENSE. License revenues increased sequentially on a quarterly basis
from $81,000 for the quarter ended March 31, 1999 to $1.6 million for the
quarter ended September 30, 2000 resulting from increased sales of our software
products as a result of the expansion of our direct sales force.
SERVICE. Service revenues increased from $4,000 for the quarter ended
March 31, 1999 to $862,000 for the quarter ended September 30, 2000. This
increase resulted primarily from increased software licenses following the
introduction of our products and the expansion of our professional service
organization.
COST OF REVENUES
Total cost of revenues increased sequentially on a quarterly basis from
$22,000 for the quarter ended March 31, 1999 to $1.0 million for the quarter
ended September 30, 2000.
LICENSE. Cost of license revenues has grown sequentially since the
beginning of 1999 to support increased software licenses following the
introduction of our initial product. We expect that cost of license revenues
will increase in dollar amounts but remain relatively flat as a percentage of
total revenues in the long term.
SERVICE. Cost of service revenues increased sequentially on a quarterly
basis since the beginning of 1999. This increase was due primarily to our hiring
of additional service personnel in anticipation of supporting larger service
obligations necessary to support a larger customer base. This investment
substantially increased cost of service revenues as a percentage of service
revenues in the third quarter of 1999. We expect that cost of service revenues
will continue to increase in dollar amount as we continue to expand our customer
support organization in advance of anticipated customer demand.
33
<PAGE>
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses increased
from $529,000 for the quarter ended March 31, 1999 to $2.9 million for the
quarter ended September 30, 2000 primarily due to the hiring of 53 additional
engineering personnel during the seven quarters ended September 30, 2000 to
support new product development and product enhancements. We intend to spend
significant amounts on enhancing existing products and developing new products.
As a result, we anticipate that research and development expenses will increase
significantly in dollar amounts in future periods.
SALES AND MARKETING. Sales and marketing expenses increased from $1.1
million for the quarter ended March 31, 1999 to $5.5 million for the quarter
ended September 30, 2000 primarily due to increased personnel and
personnel-related costs associated with our hiring of additional sales and
marketing personnel due to the expansion of our direct sales force, increased
commissions paid resulting from higher sales and increased marketing promotions
such as trade show participation. We increased our sales and marketing
department from 34 employees at December 31, 1999 to 58 employees at September
30, 2000. We anticipate that sales and marketing expenses will increase
significantly in dollar amounts as we continue to expand our sales and marketing
organization and programs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $194,000 in the quarter ended March 31, 1999 to $2.2 million in the quarter
ended September 30, 2000. This sequential increase was primarily attributable to
increased personnel and personnel-related costs associated with the hiring of
additional administrative and finance personnel, and higher recruiting and
professional service fees. We believe that our general and administrative
expenses will continue to increase in dollar amounts as our operations grow and
as we incur the expenses associated with operating as a public company.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We amortized stock
compensation expense of $5.9 million in the seven quarters ended September 30,
2000.
INTEREST AND OTHER INCOME, NET. Interest and other income, net increased
from $95,000 in the quarter ended March 31, 1999 to $163,000 in the quarter
ended September 30, 2000 primarily due to higher cash balances in the three
quarters ended September 30, 2000 following equity financings completed in
October 1999 and March 2000.
The amount and timing of our expenses generally will vary from quarter to
quarter depending on our level of actual and anticipated business activities.
For example, sales and marketing expenses in the fourth quarter typically
reflect higher commission payments as a result of higher commission rates after
achievement of yearly target sales levels and increased marketing expenses
related to significant industry trade shows held during various times during the
year. Our revenues and operating results are difficult to forecast and will
fluctuate, and we believe that period-to-period comparisons of our operating
results will not necessarily be meaningful. Additionally, as a strategic
response to a changing competitive environment, we may elect from time to time
to make certain pricing, service, marketing or acquisition decisions that could
have a negative impact on our financial performance. Our past operating history
has shown that a significant percentage of our quarterly revenues are realized
toward the end of a quarter. A delay in the completion of a sale past the end of
a particular quarter could negatively impact results for that quarter. Our
future quarterly operating results may not meet the expectations of securities
analysts or investors in any given quarter, which would likely cause the price
of our ordinary shares to decline.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
the private sale of $52.7 million of our securities. We anticipate that we will
receive $10.2 million on or prior to the closing of this offering from the
exercise of outstanding warrants for the purchase of 1,320,725 ordinary shares
at a weighted average exercise price of $7.76 per share, which warrants expire
upon the completion of this public offering. We will receive less than $10.2
million to the extent warrant holders net exercise their warrants.
Net cash used in operating activities was $8.2 million for the period
ended December 31, 1999 and $17.1 million for the nine months ended September
30, 2000 and was primarily attributable to net losses during these periods and
amortization of deferred stock compensation during these periods.
Net cash used in investing activities was $1.5 million for the period
ended December 31, 1999 and $3.0 million for the nine months ended September 30,
2000. Net cash used in investing activities for the nine months ended September
30, 2000 consisted primarily of the
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purchase of capital expenditures partially offset by proceeds from the sale of
marketable securities. In 1999, net cash used in investing activities consisted
primarily of the purchase of capital expenditures and investment in marketable
securities. The majority of our capital investments were for computer hardware
and software and office furniture and equipment.
Net cash provided by financing activities was $21.6 million for the
period ended December 31, 1999 and $16.8 million for the nine months ended
September 30, 2000. Net cash provided by financing activities consisted
primarily of net proceeds from the issuance of preferred shares and the exercise
of warrants for both periods.
We expect to experience significant growth in our operating expenses for
the foreseeable future in order to execute our business plan. As a result, we
anticipate that operating expenses and planned capital expenditures will
constitute a material use of our cash resources. In addition, we may use cash
resources to fund acquisitions or investments in other businesses, technologies
or product lines. We believe that available cash and cash equivalents, the net
proceeds from this offering and the exercise of warrants upon closing of this
offering and any cash flows from operations, will be sufficient to meet our
working capital and operating expense requirements for at least the next 12
months. However, we may require additional funds to support our working capital
and operating expense requirements or for other purposes and may seek to raise
these additional funds through public or private debt or equity financings. We
cannot assure you that this additional financing will be available, or if
available, will be available on reasonable terms and not dilutive to our
shareholders.
YEAR 2000 COMPLIANCE
We have not experienced any Year 2000-related disruption in our products
and the operation of our systems. To our knowledge, none of our material
suppliers or vendors experienced any material Year 2000 problems. Although most
Year 2000 problems should have become evident on January 1, 2000 or February 29,
2000, additional Year 2000-related problems may become evident in the future.
TAXATION
Our tax rate will reflect a mix of the United States statutory tax rate
on our United States income and the Israeli tax rate discussed below. We expect
that most of our taxable income will be generated in Israel. Israeli companies
are generally subject to income tax at the rate of 36% of taxable income.
However, our production facilities have been granted approved enterprise status
pursuant to the Israeli Law for the Encouragement of Capital Investments,
5719-1959, referred to as the Investment Law. The effective rate of tax of a
company that derives income from an approved enterprise, as discussed below, may
be considerably lower.
The primary tax benefits resulting from our approved enterprise status
are described below.
Subject to the compliance with the applicable conditions, the portion of
our income that is derived from our approved enterprise program will be tax
exempt for a period of two years, commencing the year that we first generate
Israeli taxable income from our approved enterprise program, and will be subject
to a reduced corporate tax rate of between 10% and 25%, depending on the
proportion of non-Israeli investors in the company, for an additional period of
up to a total of 10 years. The total period of tax benefit will not extend past
the earlier of 12 years from the commencement of production or 14 years from
receipt of the approval. These benefits should result in income recognized by us
being tax exempt or taxed at a lower rate for a specified period after we begin
to report taxable income and exhaust any net operating loss carry forwards.
However, these benefits may not be applied to reduce the tax rate for any income
derived by our non-Israeli subsidiaries.
In the period from our inception in June 1997 through December 31, 1997,
in the years ended December 31, 1998 and 1999 and in the nine months ended
September 30, 2000, we incurred losses for tax purposes. Accordingly, we did not
provide for taxes on income in any of the reported periods except $141,000, on
behalf of our European subsidiaries, which was recorded in September 2000.
In May 2000, an expert committee of the Israeli Ministry of Finance
recommended substantial tax reforms to Israeli tax law which, if adopted, may
increase the amount of the tax we have to pay with respect to income derived
from our approved enterprise under the Law for the Encouragement of Capital
Investments, 1959, which may result in lower profitability and a decline in our
share price. Please see "Israeli Taxation" for a further discussion of tax
issues under Israeli Law.
INFLATION AND MARKET RISK
Most of our sales historically have been made in U.S. dollars, and most
of our expenses have been incurred in U.S. dollars or denominated in NIS, which
is linked to the dollar. We have not been materially affected by currency
fluctuations between the NIS and the U.S. dollar or by the Israeli rate of
inflation.
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We do not currently use financial instruments for trading or hedging
purposes and do not currently hold any derivative financial instruments, which
could expose us to significant market risk. We invest our funds primarily in
low-risk, short-term banking instruments yielding fixed interest rates.
FUNCTIONAL CURRENCY
The U.S. dollar is the primary currency in the economic environment in
which we and our subsidiaries operate. Substantially all of our sales are made
outside of Israel and are denominated in U.S. dollars. Most of our expenses,
including marketing and service costs, are made outside of Israel and are
incurred in U.S. dollars. As a result, our functional currency is the U.S.
dollar.
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BUSINESS
OVERVIEW
We are a provider of business infrastructure software for next-generation
networks. Our customers primarily consist of telecommunication carriers,
Internet service providers, enterprise network operators, wireless service
providers and cable network operators, which we refer to as network service
providers. Network service providers use our software's comprehensive real-time
data collection, data aggregation and automated service provisioning
capabilities to deploy new business models and higher-margin, enhanced services.
Our solution serves as a software infrastructure for network service providers
that enables the collection and aggregation of network usage, traffic and
transaction data from network elements such as routers, switches, firewalls,
servers and gateways and the synthesis of that data into the information and
formats required by the billing, customer care, market analysis, churn
management, fraud management, service level management and other operations and
business support systems of network service providers. Network service providers
can use the gathered real-time data to offer and charge appropriately for
network services based on usage time, quality of service, transactions, events,
content or volume. These network services include Internet telephony, web
hosting, application renting, video conferencing, movies/video on demand, audio
over Internet protocol, unified messaging, network games, virtual private
networking, voice-mail, fax over internet protocol, e-mail and file transfers.
This detailed network information can also be used to support customer
relationship management, customer retention and fraud management applications.
We have designed our solution to provide the carrier-class scalability,
reliability, manageability and flexibility that our customers demand to run
their mission-critical business applications.
As of September 30, 2000, we had over 60 network service provider and
value-added reseller customers. Our customers include BCE Nexxia, Broadwing
Communications, Cable & Wireless, CPG, Digital Island, Global One
Communications, L.L.C., Genuity Inc., Harvard University, Mannesman Ipulsys
B.V., TV Cabo Acoreana, S.A., UUNET Technologies Inc, Verio Inc. and WorldCom,
Inc. In addition, we have developed strategic alliances or collaborative
relationships with a group of over 90 system integrators, value-added resellers,
network infrastructure vendors and software applications vendors worldwide.
INDUSTRY BACKGROUND
GROWTH OF INTERNET SERVICES AND DATA TRAFFIC. The Internet is a global
network of interconnected public and private networks that enables millions of
people to communicate, collaborate, access information and conduct business
electronically. International Data Corporation estimates that the number of
worldwide Internet users will grow from 144 million at the end of 1998 to 602
million by 2003. This increased connectivity to the Internet and the
availability of new communications technologies are making Internet-based video,
voice and data communications an integral part of the services offered by
telecommunications carriers, cable network operators, enterprise network
operators, wireless service providers and Internet service providers, which we
refer to collectively as network service providers. The networks of the early
1990s, however, were not designed to handle these new service offerings or the
dramatic increases in data traffic and users. As the variety of service
offerings and the amount of network data traffic have increased, network service
providers have begun to transform their traditional networks into converged,
packet-based networks for integrated voice and data services, or next-generation
networks.
INCREASING COMPETITION AMONG NETWORK SERVICE PROVIDERS. Increased
acceptance and use of the Internet has forced network service providers to
quickly transition to newer communications technologies to support their new
service offerings. Network service providers seek to differentiate themselves
from their competitors through value-added services such as Internet-based video
and voice transmission, which require rapid and large investments in physical
networks and operations and business support systems. The availability of these
new services to Internet users is causing further acceleration in the growth of
Internet usage and data traffic.
NETWORK SERVICE PROVIDERS SEEK TO LEVERAGE THE GROWTH OF INTERNET
SERVICES AND DATA TRAFFIC. Network service providers seek to take advantage of
the significant revenue opportunities that have been created by the growing
volume of global Internet traffic and the increasing demand for enhanced
Internet-based communications services. To date, the growth of these
opportunities has been limited by problems associated with Internet access,
bandwidth, security and the quality and range of applications available. As
these issues are being addressed, however, network service providers are finding
that their inability to aggregate and transform raw network usage, traffic and
transaction data into meaningful business information has constrained their
revenue generation potential. Increasingly, network service providers are
looking for methods to move away from flat-fee pricing to business
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models based on utility or value to the user and cost to the network service
provider. These new business models will increase revenues by enabling new
services and pricing options, programs to increase customer satisfaction and
differentiation based on quality of service. We believe that the principal
limitation on the ability of network service providers to generate revenues from
the Internet is their lack of a business infrastructure, or Internet
back-office, necessary to support these new business models. This Internet back
office is analogous to the infrastructure that allows traditional
telecommunications companies to manage, measure, monitor and analyze traffic
across telephone networks.
In order to fully capitalize on the opportunities created by the growth
of the Internet and compete effectively, network service providers need a
business infrastructure that enables the following capabilities:
o value-and-utility-based pricing of services and price modeling;
o differentiated service levels and quality-of-service metering;
o intelligent analysis of real-time network usage data for decision
support;
o customer care/customer relationship management;
o fraud prevention and management;
o carrier-class scalability, reliability, manageability and
flexibility;
o integration with both next-generation and legacy back-office
business systems; and
o rapid assimilation of new network elements and technologies.
EXISTING SOLUTIONS ARE LIMITED. Network service providers have attempted
to address these challenges by implementing custom-made, expensive systems
tools. These single-purpose utilities have proven inadequate for multi-service,
multi-vendor and multi-technology global networks. They are typically difficult
to adapt to purposes beyond those for which they originally were constructed and
do not scale to either the types of data traffic or the new technologies,
devices and services that are characteristic of next-generation networks.
Moreover, these solutions rely on separate collection and analysis of network
data, delayed analysis of the data collected and manual service provisioning.
Consequently, we believe that current solutions do not provide network service
providers with the Internet back-office functionality needed to create flexible
new business models and manage a dynamic range of customers, service offerings
and pricing structures. We further believe that this has forced many network
service providers to price their service offerings on a simple, flat-fee basis.
MARKET OPPORTUNITY FOR A BUSINESS INFRASTRUCTURE THAT EXPANDS REVENUE
GENERATION MODELS. Network service providers can benefit from a new class of
business infrastructure that will allow them to leverage the rapid growth of
Internet services and data traffic into increased opportunities for revenue
generation. We believe that there is significant demand for infrastructure
software that addresses the limitations of existing solutions and enables
network service providers to rapidly capitalize on the growth of the Internet
and to implement higher-margin, enhanced service offerings. This solution must
support high-volume, real-time data collection from multiple sources and all
layers of the network, operate non-intrusively and have sufficiently robust
quality and reliability for the largest carrier-class network service providers.
Network service providers also require a flexible, extensible software platform
that allows them to dynamically monitor, provision and configure multiple
service-types across their networks. Moreover, any solution must readily adapt
to the full range of network devices and standards associated with
next-generation networks. The immediate opportunity for a solution that combines
these attributes is in the market for Internet business infrastructure software,
which The Yankee Group estimates will grow from $207 million in 1999 to $7.7
billion in 2004. We believe, however, that such a solution could also claim a
substantial portion of the larger market for operations support systems, which
The Insight Research Corporation estimates will grow from $33.9 billion in 2000
to $58.4 billion in 2005.
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XACCT SOLUTION
We are a provider of business infrastructure software for the
next-generation public network. Our infrastructure software is designed to allow
network service providers to implement new value- and usage-based business
models and offer higher-margin, enhanced services. Network service providers use
our platform to run mission-critical business applications that require
comprehensive real-time data collection, data aggregation and automated service
provisioning. Our solution serves as a software infrastructure for network
service providers that enables the collection and aggregation of network usage,
traffic and transaction data from network elements such as routers, switches,
firewalls, servers and gateways and the synthesis of that data into the
information and formats required by the billing, customer care, market analysis,
churn management, fraud management, service level management and other
operations and business support systems of network service providers. Network
service providers can use this real-time data to offer and charge appropriately
for network services based on usage time, quality of service, transactions,
events, content or volume. These network services include Internet telephony,
web hosting, application renting, video conferencing, movies/video on demand,
audio over Internet protocol, unified messaging, network games, virtual private
networking, voice-mail, fax over internet protocol, e-mail and file transfers.
This detailed network information can also be used to support customer
relationship management, customer retention and fraud management applications.
We have designed our solution to provide the carrier-class scalability,
reliability, manageability and flexibility that our customers demand.
Our solution offers our customers the following benefits:
ENABLES INTELLIGENT PRICING OF VALUE-ADDED SERVICES. Our infrastructure
software captures, aggregates and analyzes in real-time the network usage,
traffic and transaction data necessary to allow network service providers to
price their services based on value and utility to the user and cost to the
network service provider. For example, instead of charging a flat-rate fee for
simple Internet access, network service providers can use our solution to offer
and charge appropriately for network services based on criteria such as:
o type of application or service being used
o type of content
o class of service
o quality of service
o number of transactions
o security level
o usage time
o time of day or time of week
o destination and distance
o use of internal or external networks
Our solution also provides detailed network information that can be used
to support customer relationship management, customer retention and fraud
management applications.
ENABLES AUTOMATED SERVICE PROVISIONING. Our platform is designed to allow
network service providers to implement automated service provisioning, which
allows for automated activation, authentication, authorization and management of
user accounts, as well as self-provisioning, meaning that the network service
provider's users can activate, modify or deactivate services without the
intervention of a network service provider's customer service representative.
Automated service provisioning reduces a network service provider's costs and
time to revenue by streamlining user interactions and increasing user
satisfaction.
CARRIER-CLASS SCALABILITY AND RELIABILITY. Our software is designed to
support network service providers that operate large and complex networks with
multiple services, also known as carrier-class providers, as well as large
businesses that operate networks within their extended enterprises.
Internet-based services generate significant amounts of data that must be
aggregated, correlated, processed and analyzed in real-time. We have designed
our solution to scale with the growth of our customers' networks and the growth
of network traffic. Our software is designed with a distributed architecture,
meaning that discrete components of the larger software infrastructure are
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deployed on or near network elements throughout the network to capture, filter,
aggregate and correlate network usage information from multiple network elements
and all layers of the network. This distributed architecture enables data
filtering and aggregation at the network element level and, by reducing the
volume of data sent over the network, reduces system capacity bottlenecks and
excessive bandwidth use. Our infrastructure solution can therefore scale with
the growth of our customers' networks and network traffic while maintaining data
integrity and high system availability.
FLEXIBILITY AND EXTENSIBILITY. We have also designed our infrastructure
software as a platform that supports the varying operations and business support
systems employed by different network service providers. We believe our solution
is fully adaptable to all major network infrastructure technologies, including
hardware, software and operations and business support systems. In addition, our
products are designed to work with industry standard protocols to allow for the
rapid and seamless assimilation of new, emerging network standards, devices and
applications. For example, we are currently extending our platform to
incorporate the wireless application protocol, or WAP, as it continues to
develop. Our platform's flexible architecture is designed to enable our systems
to evolve and grow with our customers. As a result, when network technology
providers introduce new hardware or software, we typically need only four to
eight weeks to plan, develop and test a software module to interface with the
new network element.
MANAGEABILITY. We offer a secure, easy-to-use browser interface through
which network administrators can centrally manage the XACCT business
infrastructure. Our platform enables system-wide and component-specific
upgrades, configuration changes and activation of components. In addition, our
solution offers a wide range of monitoring and built-in reporting capabilities.
STRATEGY
Our objective is to be the leading provider of business infrastructure
solutions to network service providers. Key elements of our strategy to achieve
this objective include:
EXTEND PRODUCT AND TECHNOLOGY LEADERSHIP. We created what we believe to
be the first commercially available, carrier-class business infrastructure
solution to combine multi-source, multi-layer data collection and aggregation
with automated service provisioning on a single platform. We will continue to
expand our research and development efforts and enhance our products to expand
our market leadership position as the adoption of next-generation networks
continues. In addition, we intend to continue to introduce new products and
services that will enable network service providers to leverage the rapid growth
of Internet services and data traffic into increased opportunities for revenue
generation.
EXPAND COLLABORATIVE RELATIONSHIPS WITH TECHNOLOGY PROVIDERS. We plan to
leverage our collaborative relationships with key technology providers to
enhance our overall product offerings and better serve our customers. Our
XACCTREADY alliance program, launched in June 1999, now has over 90 members
worldwide, including business applications providers, network hardware and
software vendors and value-added systems integrators. By offering compatibility
with an increasing number of business applications and network hardware and
software platforms, we intend to facilitate broad acceptance of and demand for
our solutions.
LEVERAGE AND EXPAND STRATEGIC ALLIANCES. We believe that forging
strategic alliances with key systems integrators is critical to delivering
comprehensive business infrastructure solutions. We work closely with major
systems integrators to integrate our solutions into our customers' networks, and
we intend to continue to leverage these relationships to reinforce our position
as the preferred infrastructure platform for next-generation applications
deployment. We also intend to develop additional systems integrator
relationships to increase market penetration and extend the scope of our
customer reach.
LEVERAGE INSTALLED CUSTOMER BASE. We intend to further penetrate our
existing customers and obtain new customers by capitalizing on the success of
our initial installations and leveraging our ability to deliver scalable,
reliable, carrier-class solutions. The strategic importance of our products to
our customers allows us to develop relationships with our customers' senior
decisionmakers, which in turn facilitates rapid adoption and deployment of our
platform throughout our customers' organizations.
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BROADEN INTERNATIONAL PRESENCE. In addition to our three sales offices in
the United States, we currently maintain direct sales offices in Germany,
Israel, Sweden and the United Kingdom. We plan to expand our direct and indirect
sales channels to include Asia and Latin America, with particular focus on those
areas that are adopting next-generation networks.
PRODUCTS AND TECHNOLOGY
PRODUCTS
Our principal product is the XACCTUSAGE software platform. XACCTUSAGE is
a carrier-class software platform that provides two basic functions: network
usage data collection and automated service provisioning. The XACCTUSAGE product
family includes a Service Provider Edition and an Enterprise Edition, each of
which is designed to meet the special needs of its respective audience.
The Service Provider Edition is targeted to:
o LECS--traditional telecommunications providers, also known as
local exchange carriers;
o CLECS--competitive local exchange carriers;
o wireless data service providers;
o cable operators that deliver data services;
o ISPS--Internet service providers; and
o ASPS--applications service providers.
The Enterprise Edition of XACCTUSAGE is designed for large businesses
that operate networks within the extended enterprise but that do not need the
full range of functionality contained in the Service Provider Edition. Both
editions are based on XACCTUSAGE's core multi-source, multi-layer network usage
metering and multi-service provisioning platform. Both editions are designed to
scale to meet the demands of the largest networks while allowing changes to
network devices and business applications to be made independently, without
disrupting the operation of business applications or the network.
TECHNOLOGY
XACCTUSAGE captures in real-time the Internet protocol session and
transaction information produced and logged by the individual network elements
and, with its real-time enhancement process, transforms this raw data into
meaningful business information. XACCTUSAGE utilizes a variety of
device-specific, as well as general purpose, software agents called information
source modules. These software modules capture, filter, aggregate, correlate and
merge data collected from the various network elements such as routers,
switches, firewalls, authentication servers, lightweight directory access
protocol servers, domain name servers, web servers, email servers, video
servers, voice over IP gateways and hundreds of other network elements. Because
these software modules are located near the network elements, our information
source modules and other modules comprise a distributed software architecture
that allows XACCTUSAGE to capture usage information from all layers of the
network, from the physical layer to the application layer. XACCTUSAGE does not
interfere or disrupt the operation of any network element or service. XACCT
software agents can be activated without adverse impact on network elements,
enabling them to perform multi-service data collection spanning a wide range of
network devices and services.
DATA COLLECTION AND USAGE. Our platform tracks or meters a variety of
parameters such as actual session quality of service, bandwidth used, bit-rate,
duration and applications launched by the end-user, and transforms this data
into a clear and detailed picture of user-level service utilization. We refer to
this output as extensible detail records. Extensible detail records are
comprehensive and extensible usage records that are roughly analogous to the
telephone communications industry's call detail records. Unlike call detail
records, however, extensible detail records can be configured to virtually any
data format and transport and can therefore be readily integrated with the
existing operations support and business support systems of network service
providers. Thus, extensible detail records also allow network service providers
to use this data for a variety of business planning and decision support
purposes such as:
o usage-based pricing for network services;
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o user and application profiling;
o service usage audits;
o capacity planning; and
o other traffic engineering purposes.
SERVICE PROVISIONING. The automated, end-to-end service provisioning
capabilities of the XACCTUSAGE platform enable network service providers to
implement real-time subscriber activation, authentication, authorization and
management. Instead of manually configuring services for an existing or a new
subscriber, the network service providers' customer service application passes
the information to XACCTUSAGE via its application programming interface. The
XACCT service provisioning modules, in turn, configure the relevant application
servers automatically in real-time and notify the network service provider's
customer service representative upon completion. In the case of bundled
services, if while configuring multiple services the system encounters a problem
with a specific service, the XACCT system has the intelligence to roll back the
entire operation upon identifying a specific problem and alert the network
service provider so that corrective actions can be promptly taken.
In addition, network service providers can offer customer self-care
programs that allow the customers to add, delete and modify their services and
service plans, in real-time, without using the network service provider's call
center. This feature allows network service providers to reduce their call
center costs, improve customer satisfaction and shorten their time to revenue.
PRODUCT ARCHITECTURE
The XACCT architecture is composed of several well-defined functional
layers, which together provide for the scalability, flexibility, availability
and manageability of our platform.
[GRAPHIC]
CENTRAL EVENT MANAGER. The central event manager is a server component
that provides centralized management and control of all XACCT components. The
central event manager orchestrates and controls the distribution, deployment and
configuration of the various modules, as well as communication among information
source modules, for the purpose of data collection, provisioning and data
storage in the central database.
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USER INTERFACE SERVER. The user interface server is a server component
that provides a single, secure point of contact for administration and system
management purposes. The user interface server can be accessed through a
standard, off-the-shelf web-browser without the need for any prior client
software installation, allowing for secure access to the system locally or
remotely. The user interface server enables efficient, centralized system
administration to facilitate system reconfigurations and field upgrades. The
user interface server also includes a customized reporting system with built-in
report generation capabilities. The user interface server can also accommodate
the use of third party reporting packages.
XACCT INTERFACE SERVER. The XACCT interface server, or the XIS, is an
add-on to XACCTUSAGE that serves as a gateway to the system and enables direct
integration with external systems, such as the operations and business support
systems of network service providers. The XIS can be configured to produce
specified data formats and transport methods required by the operations and
business support service applications of network service providers, as well as
to facilitate the integration of XACCTUSAGE with those applications. Network
service providers can use the XIS to send the network usage, traffic and
transaction data that XACCTUSAGE collects directly into their operations and
business support systems. Network service providers can also use the XIS to
develop custom client applications that link the XIS with their back-office
applications to perform service provisioning. XIS's built-in, real-time
provisioning transaction server enables automated flow-through provisioning of
simple or compound services.
GATHERERS. Gatherers perform flexible, policy-based data filtering and
aggregation of network usage, traffic and transaction data. Gatherers can
perform multiple tasks at the same time using policy-based processing. Gatherers
are software agents that run as background processes on dedicated or
non-dedicated hosts. Gatherers can be installed on the same network segment as
the source device such as a router and switch or on the application server
itself to minimize the data traffic impact on the network. This localized data
filtering and aggregation improves the scalability and efficiency of the system
by reducing the volume of data sent over the network to the central event
manager, providing only necessary information and avoiding duplication.
Gatherers can host multiple information source modules.
INFORMATION SOURCE MODULES. Information source modules are highly
configurable, distributed, add-on modules that act as interfaces, or
translators, that send Internet protocol session data in real-time from network
elements to gatherers. Information source modules are modular, abstract
interfaces that are designed to be platform neutral to facilitate integration of
the XACCTUSAGE infrastructure with an existing network. Each information source
module is designed for a specific type of network data source. The following are
categories of information source modules:
o DATA COLLECTION MODULES are modules used to extract and collect
information from various network and service elements, including
transport devices and application level systems. Data collection
modules can be single-purpose, vendor-specific modules or
general-purpose, standards-based modules.
o DATA ENHANCEMENT MODULES are modules used to synthesize, through
general-purpose functions and mathematical calculations, data
acquired from multiple sources to create records that contain the
information that meet the specific requirements of network service
providers.
o DATA PROCESSING MODULES are modules used to process collected data,
including data processed by other data processing modules, and to
perform logical operations like data aggregation, filtering and
merging.
Information source modules are packaged separately, allowing network
service providers to customize information source module configurations to meet
the specific requirements of their networks. The XACCTUSAGE infrastructure is
designed to permit dynamic reconfiguration in which modules may be upgraded,
added or removed without disrupting ongoing operation.
SERVICE PROVISIONING MODULES. Service provision modules are highly
configurable, distributed modules designed to enable service provisioning
information to flow into various network elements to add, remove and update user
account information.
CENTRAL DATABASE. The central database is a central repository of both
system-wide configuration information and collected network usage, traffic and
transaction data. Network usage, traffic and transaction data can be fed
directly to the operations and business support systems of the network service
providers or stored in the database. Network service providers can use this data
repository for off-line mining and analysis of collected data. Network
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service providers can modify the database structure to suit their needs. While
XACCTUSAGE does not itself contain a database management system, XACCTUSAGE is
available bundled with third party database management systems.
PRODUCT FEATURES
NON-INTRUSIVE NETWORK INTERFACES FOR COLLECTION AND PROVISIONING.
XACCTUSAGE's non-intrusive operation does not interfere with or disrupt the
operation of any network elements or services. XACCT software agents can be
activated without any adverse impact on network elements, enabling them to
perform multi-service data collection spanning a wide range of network devices
and services from the physical layer to the application layer.
MODULAR, DISTRIBUTED DATA PROCESSING CAPABILITIES. The XACCTUSAGE
architecture is designed to work in distributed heterogeneous environments and
is capable of running on multiple platforms. The modular, distributed design
also enables at-source data filtering and aggregation to reduce system capacity
bottlenecks and excessive bandwidth use caused by the collection process. The
real-time, policy-based filtering, aggregation, enhancement and merging
capabilities enable XACCTUSAGE to scale and adapt to the large and complex
networks of our customers.
OPEN, EXTENSIBLE DATA OUTPUT AND PROVISIONING INTERFACES. The XACCT
Interface Server can be configured to produce specified data formats and
transport methods to match downstream applications, as well as to allow for
quick and easy integration with back-office applications. XACCT Interface
Server's real-time provisioning transaction server enables automated
provisioning of complex services.
UNIFIED, SECURED, WEB-BASED MANAGEMENT. Our web-based user interface
allows secure access to the system with off-the-shelf browsers, locally or
remotely. Our user interface server allows for efficient, centralized system
administration to allow easy system reconfigurations and field upgrades. Our
user interface server also includes a customizable reporting system with
built-in report generation. An open database connectivity compliant interface is
also available to enable the use of off-the-shelf graphical reporting packages.
LICENSING ARRANGEMENTS
We license XACCTUSAGE and the XACCT Interface Server pursuant to
non-exclusive and non-transferable end-user license agreements. The end-user
license agreements impose restrictions on the customers' ability to use the
software other than for purposes that we have agreed with the customer and
typically refer to an agreed-upon network architecture.
Support obligations are typically covered by an additional support
agreement or by a support exhibit to our agreements with customers. Our support
agreements and exhibits typically require annual payments by the customer for
support, product releases and upgrade services.
CUSTOMERS AND CASE STUDIES
We have initially targeted network service providers and integrated
communications providers such as local exchange carriers, competitive local
exchange carriers, cable operators, wireless operators, Internet service
providers and application service providers. As of September 30, 2000, over 60
customers had licensed XACCTUSAGE, including the following:
BCE Nexxia Inc. Global One Communications, L.L.C.
Broadwing Communications Harvard University
BullsEye Telecom Mannesman Ipulsys B.V.
Cable & Wireless Siemens
COLT Telecommunications TV Cabo Acoreana, S.A.
CPG UUNET Technologies, Inc.
Digital Island Verio Inc.
Genuity Inc. WorldCom, Inc.
In 1999, a small number of customers accounted for a significant portion
of our total revenues. During that year, revenues from four customers accounted
for 51% of total revenues. We expect that revenues from a limited number of
customers will continue to account for a large percentage of total revenues in
future quarters. TV Cabo Acoreana, UUNET Technologies, Genuity and Verio each
accounted for at least 10% of total revenues in 1999. Sales to Broadwing
Communications, Digital Island, Mannesman Ipulsys and Cable & Wireless accounted
for 54%
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of our revenues in the nine months ended September 30, 2000. In the nine
months ended September 30, 2000, Digital Island and Broadwing Communications
each accounted for at least 10% of total revenues.
In 1999, we derived 63% of our revenues from customers located in North
America and 37% from customers outside North America, substantially all of which
were in Europe. Please see note 9 to our consolidated financial statements for
additional financial information presented by geographic area.
In 2000, we derived 71% of our revenues from customers in North America
and 29% of our revenues from customers outside of North America.
The following case studies illustrate how some of our customers are using
XACCTUSAGE:
BROADWING
Broadwing Communications is a wholly-owned subsidiary of Broadwing Inc.
Broadwing Inc. is an integrated communications company that delivers voice, data
and Internet solutions to a variety of customers nationwide.
CHALLENGE: Broadwing needed to build a flexible business
infrastructure that could support the rapid deployment
of new network services differentiated by value-based pricing.
SOLUTION: We designed and implemented a solution for Broadwing that
normalizes data collected from multiple network elements in order to
measure customer bandwidth utilization. The ability of XACCTUSAGE to
selectively filter and aggregate incoming data allows the system to
handle large volumes of incoming data with minimal network impact.
Real-time correlation of this data with Broadwing's operational databases
allows Broadwing to measure the bandwidth delivered for each type of
service on a per customer basis. A key benefit of the adoption of
XACCTUSAGE is the granular view into network management traffic data now
available to Broadwing. Further, the seamless integration of XACCTUSAGE
with Broadwing's existing Kenan billing system enables Broadwing to offer
new services quickly and with minimal disruption.
GENUITY
Genuity Inc., formerly known as GTE Internetworking, is a leading
provider of high quality, managed Internet infrastructure services to
enterprises and service providers. Genuity offers a comprehensive suite of
services ranging from Internet access, web hosting and content delivery to
sophisticated, high value-added services such as voice over Internet protocol,
or VoIP, and virtual private networks.
CHALLENGE: Genuity needed to deploy a business infrastructure that
would support the rapid expansion of VoIP traffic over its network. In
particular, Genuity needed software that would enable it to collect data
about customer usage across its Cisco-based network and transmit that
data into its existing billing system.
SOLUTION: We provided Genuity with a platform that enables it not
only to provide its customers with different pricing models for VoIP
services but also to perform traffic engineering tasks, analyze usage
trends, plan network resource provisioning, audit service usage and
rapidly deploy new services. XACCTUSAGE enables Genuity to collect
Internet protocol session and transaction information from multiple
network devices. XACCTUSAGE then transforms this raw data into accurate,
meaningful and customized billing records called eXtensible Detail
Records, or XDRs. XDRs are analogous to enhanced versions of the Call
Detail Records (CDRs) generated by traditional telephone company
switches, and allowed Genuity to integrate XACCTUSAGE with its existing
Kenan Arbor customer care and billing system. As a result, Genuity has
been able to quickly scale its VoIP business and is now one of the
largest VoIP service providers in the world.
GLOBALONE
GlobalOne is a worldwide provider of voice, data and Internet Protocol,
or IP, network services. GlobalOne is a subsidiary of France Telecom.
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CHALLENGE: GlobalOne needed to deploy a single, scalable and
flexible platform that would provide it with bandwidth utilization and
service management metrics on a per customer basis and that would enable
it to offer differentiated, usage-based, bandwidth-on-demand services.
SOLUTION: XACCTUSAGE captures, aggregates and consolidates all IP
traffic data from GlobalOne's worldwide network of Cisco routers in
real-time and correlates this data with customer information in
GlobalOne's operational database, enabling it to support customer service
level agreements. XACCTUSAGE also extracts information on network
performance and data transmission burst rates. The XACCTUSAGE system
correlates information in multiple formats into a single, normalized
billing record that incorporates bandwidth utilization, network
performance and service level metrics. The resulting record is presented
in formats that can be processed by any of the several billing systems in
use at GlobalOne. Our solution allows GlobalOne to provide data in
support of service level agreements, and to offer differentiated,
usage-based pricing models that allow it to offer bandwidth-on-demand
service.
COLLABORATIVE RELATIONSHIPS AND STRATEGIC ALLIANCES
To enhance the productivity of our sales and service organizations, we
have established relationships with system integrators, value-added resellers,
network infrastructure vendors and software applications vendors through our
XACCTREADY program.
SYSTEM INTEGRATORS AND VALUE-ADDED RESELLERS. We have established
strategic relationships with a number of leading system integrators. Many of our
system integrators have established relationships across a broad range of
network service providers and enterprise customers and our relationships with
these system integrators often enable us to reach key decision-makers within
these enterprises more quickly, thus reducing sales cycles. Working with system
integrators enables us to leverage their professional services and integration
resources and shorten solution implementation time. In addition, by leveraging
our partners' domain expertise, we can more effectively and rapidly penetrate
vertical markets. We also market XACCTUSAGE through value-added resellers.
Value-added resellers enable us to seed the market with specific pre-packaged
solutions built on the XACCTUSAGE platform. Many of these value-added resellers
specialize in providing solutions to particular market segments, including the
network service provider, government and large enterprise segments. We intend to
leverage the domain expertise of our value-added resellers to deliver solutions
that accelerate our penetration in key markets.
We had relationships with the following system integrators and
value-added resellers as of September 30, 2000:
<TABLE>
<S> <C> <C>
Atos Integration Group FDC Steria
Cap Gemini Telecom and Media Federal Network Services, Inc. Telesoft Corporation
Certis Ltd. International Computers Limited (ICL)The Management Network Group, Inc.
Consultancy and Projects Group (CPG) Logica plc UNISYS Limited
Danet GmbH Maxnet Systems, Inc. WeMM
DMR Consulting Group, Inc. Nissho Iwai Infocom Corporation XPERT Integrated Systems Ltd.
EtNoteam S.p.A. Polystar Instruments AB
</TABLE>
NETWORK INFRASTRUCTURE VENDORS. We work with leading vendors of network
hardware and software infrastructure products to help ensure compatibility of
XACCTUSAGE with their products. We worked with the following network hardware
and software infrastructure vendors as of September 30, 2000:
<TABLE>
<S> <C> <C>
Abatis Systems Corporation IP Highway, Inc. Sun Microsystems, Inc.
Agilent Technologies Riverstone Networks Top Layer
Bridgewater Systems Corporation Sonus Networks Unisphere Solutions, Inc.
Ennovate Networks, Inc.
</TABLE>
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SOFTWARE APPLICATIONS VENDORS. We work with leading application software
and database vendors and operations support and billing systems integrators to
help ensure compatibility or integration of XACCTUSAGE with their products. We
worked with the following application software and database vendors and
operations support and billing systems integrators as of September 30, 2000:
<TABLE>
<S> <C> <C>
ADC Telecommunications (Saville) FileTek, Inc. Proxima Systems Ltd.
Alpha Software Consulting Billing Geneva Technology Ltd. Satyam Computer Services, Ltd.
Solutions Independent Technology Systems (INTEC) Savera Systems Incorporated
Amdocs Incorporated Info Directions, Inc. Sepro Telecom International Ltd.
American Management Systems Infocomm International Corporation Sigma Systems Group, Inc.
Aptis Software, Inc. Intasys Corporation SLP InfoWare
Ascom AG Integretel, Inc. Smarten
Athene Software Kingston-SCL Ltd. Solect Technology Group
Calculus Solutions LHS Communications Systems, Inc. Teleknowledge Group Ltd.
Comptel AB MaxBill Limited USHA Communications Technology
Convergys Corporation Mindport Integrated Business Systems BV Veramark Technologies, Inc.
CSG Systems Net Toll Version Software (PTY) Ltd.
Daleen Technologies, Inc. OAN Services, Inc. Vitria Technology, Inc.
DST Innovis (CableData, Inc.) Portal Software, Inc.
</TABLE>
SALES AND MARKETING
We license our products and sell services primarily through our direct
sales organization, complemented by the selling and support efforts of our
authorized value-added resellers, including system integrators, and other
strategic partners. As of September 30, 2000, our sales force consisted of 25
sales professionals and 17 technical field professionals. We have sales offices
in or near the greater metropolitan areas of Atlanta, Denver, San Francisco,
Ramat-Gan, Israel, London, England, Stockholm, Sweden and Berlin, Germany.
System engineers who provide pre-sales support to potential customers on product
information and deployment capabilities complement our direct sales
professionals. We plan to significantly expand the size of our direct sales
organization and to establish additional sales offices domestically and
internationally.
Our sales process requires that we work closely with targeted customers
to identify short-term technical needs and long-term goals. Our sales team,
which includes both sales and technical professionals, then works with the
customer to develop a proposal to address these needs. In many cases, we
collaborate with our customers' senior management to develop mission-critical
applications. The level of customer analysis and financial commitment required
for many of our product implementations has caused our sales cycle generally to
range from three to nine months.
We focus our marketing efforts on educating potential customers,
generating new sales opportunities, and creating awareness of our product and
their applications. We conduct a variety of marketing programs to educate our
target market, including seminars, trade shows, direct mail campaigns, press
relations and industry analyst programs.
SERVICE AND SUPPORT
The primary function of our professional services organization is to
facilitate the implementation of our product by customers and system
integrators. We provide services directly to our customers and to system
integrators for XACCTUSAGE project planning, implementation and performance. Our
professional services organization works closely with system integrators to
train their personnel in the design and implementation of our product line.
We offer different customer support options to our customers, ranging
from local business hour support to seven days a week, 24 hours-a-day support
with a dedicated customer support representative.
Our professional services and customer support groups deliver education
and product training to our customers and strategic partners relating to the
design of business solutions using XACCTUSAGE, as well as the technical aspects
of deployment, use and maintenance. Our professional service and customer
support organizations consisted of 41 employees as of September 30, 2000.
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RESEARCH AND DEVELOPMENT
As of September 30, 2000, our technical and engineering staff consisted
of 75 employees who research and develop advanced architecture and technologies
as well as back-office applications, create technological documentation for
products and provide quality assurance throughout the development cycle.
Since our inception, we have focused our research and development efforts
on developing and enhancing XACCTUSAGE. We are currently working to increase the
performance, quality, features, coverage and manageability of our XACCTUSAGE
product and to develop back-office applications. Research and development
expenses were $390,000 in the period from our inception in June 1997 through
December 31, 1997, $1.5 million in 1998, $2.2 million in 1999 and $6.9 million
for the nine months ended September 30, 2000.
COMPETITION
The market for our product is new, evolving and subject to rapid
technological change. To date, our primary competition has come from solutions
developed by the in-house technology departments of potential customers or
partners. We have experienced and expect to continue to experience increased
competition from current and potential competitors. Many of these companies have
greater name recognition, longer operating histories, larger customer bases and
significantly greater financial, technical, marketing, public relations, sales,
distribution and other resources. Some of our potential competitors are among
the largest and most well capitalized software, hardware and communications
companies in the world. Our competitors include:
o in-house information technology departments of potential customers or
partners that have developed or may develop systems that substitute
for some or all of the functionality of our XACCTUSAGE product;
o companies with products that address our market, such as Hewlett
Packard Co., Lucent Technologies Inc., EHPT Sweden AB
and Narus, Inc.; and
o companies that have developed software that addresses only certain
components of Internet Protocol mediation.
We are also aware of numerous other companies that are focusing
significant resources on developing and marketing products that will compete
with XACCTUSAGE. Additional competitors could come from a number of companies
that produce application integration or communication software.
We expect that competition will increase in the near-term and that our
primary long-term competitors may not have entered the market yet. If any of our
competitors were to become the industry standard or were to enter into or expand
relationships with significantly larger companies through mergers, acquisitions
or otherwise, our business and operating results could be significantly harmed.
In addition, potential competitors may bundle their products or incorporate
functionality into existing products in a manner that discourages users from
purchasing our products. Increased competition could result in price reductions,
fewer customer orders, reduced gross margin and loss of market share, any of
which could cause our business to suffer.
We believe that the principal competitive factors in our market include:
o product quality, scalability, performance and reliability;
o the ability of products to operate with multiple software
applications;
o the ability of products to operate with multi-vendor network
infrastructure products, hardware and software platforms;
o establishment of a significant base of reference customers;
o ability to implement solutions quickly;
o customer service;
o relationship with system integrators and value-added resellers;
o strength of core technology; and
o product price.
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Although we believe that we compete favorably with respect to these
factors, our market is relatively new and is evolving rapidly. We may not
compete successfully against current and potential competitors.
INTELLECTUAL PROPERTY AND OTHER PROPERTY RIGHTS
Our success is dependent upon our ability to develop and protect our
proprietary technology and intellectual property rights. To protect our
proprietary technology and intellectual property, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade secrets
and copyright and trademark laws. However, we believe that factors such as the
technological and creative skills of personnel, new product developments,
frequent product enhancements and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position. We
cannot assure you that others will not develop technologies that are similar or
superior to our technology.
We license XACCTUSAGE pursuant to non-exclusive end-user license
agreements that impose restrictions on our customers' ability to use the
software. In addition, we seek to avoid disclosure of our trade secrets by
requiring employees, customers and others with access to our proprietary
information to execute confidentiality agreements with us and restricting access
to our source code. We also seek to protect our software, documentation and
other written materials under trade secret and copyright laws.
Our license agreements generally provide that licensees will have a
limited, non-exclusive right to use our code if:
o there is a bankruptcy, insolvency or winding-up proceeding involving
us;
o we cease to do business without a successor; or
o we do not provide contractually agreed maintenance and support.
Some of our license agreements also require us to place the source code for
XACCTUSAGE into escrow.
We have three U.S. patent applications currently pending in the U.S. and
four foreign patent applications currently pending in selected foreign
countries. It is possible that the patents that we have applied for, if issued,
or our potential future patents may be successfully challenged or that no patent
will be issued from our patent applications. It is also possible that we may not
develop proprietary products or technologies that are patentable, that any
patent issued to us may not provide us with any competitive advantages, or that
the patents of others will seriously harm our ability to do business.
EMPLOYEES
As of September 30, 2000, we had a total of 203 full time employees. Of
the total number of employees, 75 were engaged in research and development, 46
in sales, 12 in marketing, 41 in customer support, professional services and
training, and 29 in administration and finance. None of our employees are bound
by an employment agreement requiring service for any defined period of time.
None of our employees are represented by a labor union. We have not experienced
any work stoppage and consider our relations with our employees to be good.
As of September 30, 2000, 83 of our employees were located in Israel. We
are not a party to any collective bargaining agreement with our employees.
However, Israeli law and certain provisions of the nationwide collective
bargaining agreements between the government of Israel, the Histadrut, which is
the General Federation of Labor in Israel, and the Coordinating Bureau of
Economic Organizations which is the Israeli federation of employers'
organizations, apply to our Israeli employees by way of expansion orders of the
Israeli Ministry of Labor and Welfare. These provisions and other mandatory
provisions of Israel law principally concern the maximum length of the work day
and the work week, minimum wages, contributions to a pension fund, insurance for
work-related accidents, procedures for dismissing employees, determination of
severance payment and other conditions of employment. Furthermore, pursuant to
such provisions, the wages of most of our employees are subject to increase as a
result of cost of living adjustments, based on changes in the Israeli Consumer
Price Index. The formulas for those adjustments and their amounts and frequency
are modified from time to time according to the agreements reached between the
government of Israel, the Manufacturers Association and the General Federation
of Labor in Israel. Israeli law generally requires the payment of severance pay
upon the retirement or death of an employee or upon termination of employment by
the employer or, in certain circumstances, by the employee. We currently fund
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most of our ongoing severance obligations for our Israeli employees by making
monthly payments for insurance policies to cover these obligations.
FACILITIES
We lease approximately 18,300 square feet in a single office building
located in Ramat-Gan, Israel and approximately 16,200 square feet in a single
office building located in Santa Clara, California. The leases for the office
space in Ramat-Gan, Israel will expire in April 2003 with an option for an
additional three year lease term. The lease for the office space in Santa Clara,
California expires in December 2004.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table presents information regarding our directors and
executive officers as of October 31, 2000. All of these individuals are
presently serving in the respective capacities described below.
<TABLE>
<CAPTION>
NAME AGE POSITION
----- --------
<S> <C> <C>
Eric Gries................................. 41 President, Chief Executive Officer and Director
Eran Wagner................................ 33 Executive Vice President, Technology and Chairman of the
Board
Richard Van Hoesen......................... 45 Vice President and Chief Financial Officer
Limor Schweitzer........................... 32 Chief Technology Officer and Director
Anil Uberoi................................ 51 Executive Vice President, Product Marketing
Robert C. Hawk............................. 61 Director
Nitsan Yanovski............................ 39 Director
Jon Q. Reynolds, Jr........................ 32 Director
Todd Springer.............................. 33 Director
</TABLE>
ERIC GRIES has served as our President, Chief Executive Officer and a
director since March 1998. From January 1996 to January 1998, Mr. Gries was the
General Manager of the Network and Systems Management Division at Compuware
Corporation, a global software company. From March 1992 to December 1995, Mr.
Gries was the Vice President of Product Marketing for ACI, Ltd., a publisher of
database development tools. Mr. Gries received his Bachelor of Science and
Master of Business Administration from Northeastern University.
ERAN WAGNER is a co-founder of our company and has served as our
Executive Vice President, Technology, since January 2000, a director since June
1997 and Chairman of the Board since June 1997. From June 1997 to January 1998,
Mr. Wagner served as our Chief Executive Officer. From February 1998 to December
1998, Mr. Wagner served as our Executive Vice President, Strategic Alliances
and from January 1999 to December 1999, he served as our Executive Vice
President, Technical Services. Prior to founding our company, Mr. Wagner was
President and Chief Executive Officer of Xpert UNIX Systems Ltd., a company he
co-founded in 1993 that provides global networking solutions and specializes in
the areas of network billing and accounting, network security, software
development and systems integration. Mr. Wagner served in an elite technology
unit of the Israel Defense Forces. Mr. Wagner holds a Bachelor of Science in
Mathematics and Computer Science from Tel Aviv University.
RICHARD VAN HOESEN has served as our Vice President and Chief Financial
Officer since January 2000. From November 1998 to January 2000, Mr. Van Hoesen
was Senior Vice President and General Manager of the Micro Focus Division of
Merant plc, a global software company. From March 1998 to November 1998, Mr. Van
Hoesen was Senior Vice President and Chief Financial Officer of Merant. From May
1996 to March 1998, Mr. Van Hoesen was the Vice President, Finance, Chief
Financial Officer and Treasurer of Wall Data Incorporated, a software company.
From October 1994 to May 1996, Mr. Van Hoesen was Vice President and Chief
Financial Officer of Consilium, an enterprise manufacturing software company.
Mr. Van Hoesen holds a Bachelor of Science in Engineering from Lehigh University
and a Master of Business Administration from the Wharton School at the
University of Pennsylvania.
LIMOR SCHWEITZER is a co-founder of our company and has served as a
director since June 1997 and our Chief Technology Officer since January 1998.
From June 1997 to January 1998, Mr. Schweitzer served as our Product Architect
and Research and Development Manager. In 1993, Mr. Schweitzer co-founded Xpert
UNIX Systems Ltd., a provider of global networking solutions specializing in the
areas of network billing and accounting, network security, software development
and systems integration. Mr. Schweitzer has served as the Chief Operations
Officer and the Vice President, Technology, of Xpert UNIX Systems Ltd. since its
inception through June 1997. Mr. Schweitzer served in an elite technology unit
of the Israel Defense Forces. Mr. Schweitzer holds a Bachelor of Science in
Mathematics and Physics from Tel Aviv University.
ANIL UBEROI has served as the Executive Vice President, Product Marketing
of XACCT Technologies, Inc., one of our wholly-owned subsidiaries, since October
2000 and as the Vice President, Product Marketing of XACCT Technologies, Inc.
from April 1998 to October 2000. From January 1996 to March 1998, Mr. Uberoi was
the director of high-speed Internet connectivity solutions at Netopia, Inc.,
which was formerly Farallon Communications. From February 1990 to January 1996,
Mr. Uberoi was Group Marketing Manager for all networking products at Sun
Microsystems Computer Company. Mr. Uberoi has done graduate work at Stanford
University and University of California at Berkeley in addition to having a
Master of Business Administration from
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Santa Clara University, a Master of Business Administration from Bombay
University, and a Bachelor of Engineering from Vikram University, India.
ROBERT C. HAWK has been a director of XACCT since July 1998. Mr. Hawk has
been the President of Hawk Communications, Inc., a telecommunications consulting
company, since May 1997. From May 1986 to April 1997, Mr. Hawk was the President
and Chief Executive Officer of US WEST Multimedia Communications. Mr. Hawk was
President of the Carrier Division of US WEST Communications, a regional
telecommunications service provider, from September 1990 to May 1996. Prior to
that time, Mr. Hawk was Vice President, Marketing and Strategic Planning for CXC
Corporation. Prior to joining CXC Corporation, Mr. Hawk was Director of Advanced
Systems Development for AT&T/American Bell, a telecommunications company. Mr.
Hawk is on the boards of directors of Covad, Efficient Networks, Concord
Communications, Centillium and Com 21. Mr. Hawk received a Bachelor of Business
Administration from University of Iowa and a Master of Business Administration
from University of San Francisco.
NITSAN YANOVSKI has been a director of XACCT since September 1997.
Mr. Yanovski has been Vice President, Business Development of Ampal Industries
(Israel) Ltd. since 1996, and was the Deputy Director General of Ampal
Industries (Israel) Ltd.from 1993 to 1996. Mr. Yanovski serves as a director on
the boards of Ampal Industries (Israel) Ltd., Ampal (Israel) Ltd., Ampal
Development (Israel) Ltd., Shellcase Ltd. and Xpert Integrated Systems Ltd.
Mr. Yanovski received a Bachelor of Arts in Economics from Tel Aviv University.
JON Q. REYNOLDS, JR. has served as a director of XACCT since October
1999. Mr. Reynolds has been employed at Technology Crossover Ventures since July
1997, most recently as a general partner. From July 1993 to December 1995, Mr.
Reynolds was an associate at General Atlantic Partners, a private equity firm
focusing on information technology. From December 1991 to July 1993, Mr.
Reynolds was a member of the mergers and acquisitions group at Lazard Freres &
Co. Mr. Reynolds received an Associate Bachelor in Geography from Dartmouth
College and a Master of Business Administration from Columbia Business School.
TODD A. SPRINGER has served as a director of XACCT since November 1998.
Mr. Springer has been a Managing Director of Trident Capital, a venture capital
firm, since June 1998. From March 1996 to June 1998, Mr. Springer served as Vice
President of Trident Capital. From September 1994 to February 1996, Mr. Springer
was an associate in corporate finance with Jefferies & Company, Inc., an
investment bank. Mr. Springer is on the board of directors of eOnline, Inc. Mr.
Springer received his Bachelor of Science in Economics from Wharton School at
the University of Pennsylvania and his Master of Business Administration from
Stanford Graduate School of Business.
BOARD OF DIRECTORS
Immediately following this offering, our board of directors will consist
of 7 directors. As set forth in our articles of association, the person serving
as our Chief Executive Officer will be appointed automatically to the board,
subject to annual shareholder approval. The remaining six directors will be
divided into three classes with each class serving an initial term ranging from
less than one year to three years and thereafter for additional three year
terms. Upon completion of this offering, we will be required under Israeli law
to have two outside or independent directors who will serve a three year term
that can be extended for one additional three year term. The first outside
directors shall be appointed by a general meeting convened not later than three
months after the date on which we become a public company.
At each annual general meeting of shareholders, the directors who are up
for election to succeed those directors who resign or whose terms are expiring
will be elected by the holders representing the requisite majority of our
ordinary shares as may be required by law. In addition, our articles of
association provide that our authorized number of directors may be changed by
modifying the articles of association by an affirmative vote of 75% of those
present and voting at a general meeting of shareholders. This classification of
the board of directors may have the effect of delaying or preventing changes in
the effective control of our company.
ALTERNATIVE DIRECTOR
Our articles of association allow a director to appoint an alternative
director possessing all the rights and obligations of the director who appointed
him or her, except that the alternate has no standing at any meeting while the
appointing director is present and is not entitled to remuneration. A person who
is not qualified to be appointed as a director, or a person who already serves
as a director or an alternative director, may not be appointed as an
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alternative director. Unless the appointing director limits the time or scope of
the appointment, the appointment is effective for all purposes until the
appointing director ceases to be a director or terminates the appointment. The
appointment of an alternative director does not in itself diminish the
directorship responsibilities of the appointing director.
OUTSIDE OR INDEPENDENT DIRECTORS
Under the new Israeli Companies Law, 5759-1999, or the Companies Law,
which became effective on February 1, 2000, companies incorporated under the
laws of the State of Israel whose shares have been offered to the public in or
outside of Israel are required to appoint at least two outside or independent
directors. The Companies Law provides that a person may not be appointed as an
outside director if that person or that person's relative, partner or employer
or any entity under that person's control has, as of the date of that person's
appointment as an outside director, or had, during the two years preceding that
date, any affiliation with the company or any entity controlling, controlled by
or under common control with the company. The term "affiliation" includes:
o an employment relationship;
o a business or professional relationship maintained on a regular
basis;
o control; and
o service as an office holder.
The Companies Law requires that the outside directors be residents of
Israel. However, the Minister of Justice of the State of Israel has promulgated
regulations exempting certain qualifying foreign companies such as our company
from the applicability of certain provisions of the Companies Law. A "foreign
company" is defined in The Companies Regulations (Concessions for Public
Companies Whose Shares are Registered in a Stock Exchange Outside Israel),
5760-2000, or the regulations, as a public company whose shares were offered to
the public solely outside of Israel or are registered only on a stock exchange
outside of Israel. Pursuant to the regulations, an outside director of the
foreign company need not be an Israeli resident. No person may serve as an
outside director if such person's position or other business activities create,
or may create, a conflict of interest with the person's responsibilities as an
outside director, or may otherwise interfere with the person's ability to serve
as an outside director. Until the lapse of two years from the termination of
office, we may not engage an outside director to serve as an office holder of
our company and may not employ or receive services from such person either
directly or indirectly, including to a corporation controlled by that person. If
at the time of the appointment of the outside directors our board shall be
comprised of members of only one gender, then at least one of the outside
directors must be of the other gender.
Outside directors are to be elected by a majority vote at a shareholders'
meeting, provided that either:
o the majority of shares voted at the meeting, including at least
one-third of the shares of non-controlling shareholders voted at the
meeting, vote in favor of election of the outside director; or
o the total number of shares of non-controlling shareholders voted
against the election of the outside director does not exceed 1% of
the aggregate voting rights in the company.
The initial term of an Israeli outside director is three years and it may
be extended for one additional three year term. Each committee of a company's
board of directors is required to include at least one outside director, except
for the audit committee which must include both outside directors, as also
required by the Nasdaq National Market. The Companies Law requires us to elect
the initial outside directors at our first shareholders meeting to take place
within three months after the date of our initial public offering. We intend to
take all actions necessary to comply with the Companies Law and its requirements
relating to the appointment of outside directors upon the completion of this
offering.
An outside director is entitled to compensation as provided in the
regulations that have been adopted pursuant to the Companies Law, and the
outside director is otherwise prohibited from receiving any other compensation,
directly or indirectly, in connection with his or her services as an outside
director.
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BOARD COMMITTEES
COMPENSATION COMMITTEE. The board of directors has a compensation
committee that was established in November 1998. The compensation committee,
currently comprised of Messrs. Hawk, Springer and Yanovski, makes
recommendations with respect to share option plans and share purchase plans, and
all matters concerning executive compensation and employee agreements.
AUDIT COMMITTEE. The Companies Law requires public companies to appoint
an audit committee. The responsibilities of the audit committee under the
Companies Law include identifying irregularities in the management of the
company's business and approving related party transactions as required by
Israeli law. Under the Companies Law, an audit committee must consist of at
least three directors, including two outside directors. The chairman of the
board of directors, any director employed by or otherwise providing services to
the company, and any controlling shareholder or any relative of a controlling
shareholder, may not be a member of the audit committee. In addition, pursuant
to the listing requirements of the Nasdaq National Market, we will be required
to have at least two independent directors on our audit committee. Our audit
committee was formed in November 1998 and is currently comprised of Messrs.
Reynolds, Springer and Yanovski. Our audit committee performs the following
functions:
o monitors our system of internal controls;
o monitors corporate financial reporting and internal and external
audits;
o provides the board of directors with the results of its examinations
and recommendations;
o outlines to the board of directors the improvements made or to be
made in internal accounting controls;
o nominates independent auditors; and
o provides the board of directors with other financial information and
materials necessary to make the board of directors aware of
significant financial matters.
We intend to appoint an audit committee which complies with the
requirements of the Companies Law and the Nasdaq National Market upon completion
of this offering and following the appointment of outside directors as provided
above.
INTERNAL AUDITOR
Under the Companies Law, public companies must appoint an internal
auditor that will be appointed by the board of directors following
recommendation by the audit committee. The role of the internal auditor is to
examine, among other matters, whether the company's actions comply with the law
and orderly business procedure. Under the Companies Law, the internal auditor
may be an employee of the company but not an interested party, an office holder,
an affiliate or a relative of an interested party, office holder or affiliate,
and he or she may not be the company's independent accountant or its
representative. We intend to appoint an internal auditor in accordance with the
requirements of the Companies Law upon the completion of this offering.
DIRECTOR COMPENSATION
We do not currently pay cash compensation to our directors in their
capacity as directors, except for reimbursement of business, travel and other
related expenses. As described below in "Related Party Transactions," we have
granted options to Robert Hawk.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee is currently comprised of Messrs. Hawk,
Springer and Yanovski. Messrs. Hawk, Springer and Yanovski have served on the
compensation committee since their appointment in November 1998. None of these
committee members has at any time been an officer or employee of our company or
of our subsidiaries. You should note the following relationships and
transactions with members of the compensation committee and their affiliates:
ROBERT C. HAWK. In July 1998, Mr. Hawk purchased 63,455 ordinary shares
at $0.19 per share pursuant to a restricted stock purchase agreement. Under the
restricted stock purchase agreement, Eran Wagner and Limor Schweitzer have the
right to repurchase those ordinary shares. The right of Eran Wagner and Limor
Schweitzer to repurchase those ordinary shares lapsed as to one-fourth of the
total number of shares on the first anniversary of the grant date and lapses as
to 1/12th of the total shares each quarter thereafter. The lapsing of the
repurchase right is dependent upon the continued service by Mr. Hawk on our
board of directors. In May 1999, Mr. Hawk received an option to purchase 24,500
ordinary shares at an exercise price of $0.35 per share. Mr. Hawk purchased
24,500 ordinary shares upon exercise of this option in August 1999 at an
aggregate exercise price of $8,575.
TODD A. SPRINGER. Mr. Springer is a managing director of Trident Capital
Management, an entity affiliated with Information Associates-II, L.P. and IA-II
Affiliates Fund, L.L.C., each a preferred shareholder of our company. The
following summarizes our private placement transactions with Information
Associates-II, L.P. and IA-II Affiliates Fund, L.L.C.:
o OCTOBER 1998: 1,185,184 Series B-1 preferred shares purchased at
$1.40 per share and warrants issued to purchase 375,046 Series B-1
preferred shares.
o OCTOBER 1998: 1,315,146 Series B-2 preferred shares purchased at
$1.40 per share.
o OCTOBER 1999: 399,938 Series C-1 preferred shares purchased at $5.32
per share and warrants issued to purchase 140,980 Series C-1
preferred shares.
o OCTOBER 1999: 70,000 Series C-2 preferred shares purchased at $5.32
per share.
o MARCH 2000: 375,046 Series B-1 preferred shares purchased at $2.80
per share upon exercise of outstanding warrants.
NITSAN YANOVSKI. Mr. Yanovski is the Vice President of Business
Development of Ampal Industries (Israel) Ltd. and several affiliated entities,
which are preferred shareholders of our company. The following summarizes our
private placement transactions with Ampal Industries (Israel) Ltd. and its
affiliated entities:
o JUNE 1997: 560,000 Series A preferred shares purchased at $0.71 per
share and warrants issued to purchase 287,000 Series A preferred
shares.
o MARCH 1998: 287,000 Series A preferred shares purchased at $0.84 per
share upon exercise of outstanding warrants.
o MARCH 1998: 644,000 Series A preferred shares purchased at $0.93 per
share.
o OCTOBER 1998: 1,071,567 Series B-1 preferred shares purchased at
$1.40 per share and warrants issued to purchase 160,734 Series B-1
preferred shares.
o OCTOBER 1999: 939,883 Series C-1 preferred shares purchased at $5.32
per share and warrants issued to purchase 281,967 Series C-1
preferred shares.
o APRIL 2000: 80,366 Series B-1 preferred shares purchased at $2.80
per share upon exercise of outstanding warrants.
Mr. Yanovski is also a non-employee director of Xpert Integrated Systems
Ltd., our Israeli reseller. Eran Wagner and Limor Schweitzer, each a director
and executive officer of our company, are also non-employee directors of Xpert
Integrated Systems Ltd.
Moreover, entities affiliated with Ampal Israel American Corporation,
including Ampal Industries (Israel) Ltd., own approximately 20% of the
outstanding shares of Xpert Integrated Systems Ltd.
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No interlocking relationship exists between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
that we paid during the fiscal year ended December 31, 1999 to our Chief
Executive Officer and our other most highly compensated officers who earned more
than $100,000 during that fiscal year. All option grants were made under our
1998 Stock Option Plan, our 1998 Section 102 Share Option Plan or Section 3(i)
of the Israeli Income Tax Ordinance.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------------
NAME AND PRINCIPAL ------------------------- SECURITIES
POSITION SALARY BONUS UNDERLYING OPTIONS
-------------------------- -------------- ----------- -------------------
<S> <C> <C> <C>
Eric Gries......................................... $201,400 $60,420 182,000
President and Chief Executive Officer
Eran Wagner ....................................... 152,640 20,352 91,000
Executive Vice President, Technology
Limor Schweitzer .................................. 100,000 10,000 91,000
Chief Technology Officer
Anil Uberoi ....................................... 159,000 26,500 56,000
Executive Vice President, Product Marketing
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to share options
granted to our Chief Executive Officer and our other most highly compensated
executive officers during the fiscal year ended December 31, 1999. We have never
granted any share appreciation rights. All option grants listed in the table
below were made under our 1998 Stock Option Plan, our 1998 Section 102 Share
Option Plan or Section 3(i) of the Israeli Income Tax Ordinance. Percentage of
total options is based on an aggregate of 1,437,170 ordinary shares granted
under the 1998 Stock Option Plan, the 1998 Section 102 Share Option Plan or
Section 3(i) of the Israeli Income Tax Ordinance in the year ended December 31,
1999. The 5% and 10% assumed annual rates of share price appreciation are
required by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future ordinary share prices. The
potential realizable values at 5% and 10% appreciation are calculated by
assuming that the estimated fair market value on the date of grant is equal to
an assumed initial public offering price of $10.00 per share and appreciates at
the indicated rate for the entire term of the option and that the option is
exercised at the exercise price and sold on the last day of its term at the
appreciated price.
<TABLE>
INDIVIDUAL GRANTS
-------------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENTAGE OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS EXERCISE EXPIRATION SHARE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER ------------------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
------- ---------------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Eric Gries........... 182,000 12.66% $1.57 10/20/07 $868,969 $2,082,080
Eran Wagner.......... 91,000 6.33 1.57 10/20/07 434,484 1,041,040
Limor Schweitzer..... 91,000 6.33 1.57 10/20/07 434,484 1,041,040
Anil Uberoi.......... 28,000 1.95 0.35 8/12/07 133,688 320,205
28,000 1.95 1.57 10/20/07 133,688 320,205
</TABLE>
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<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
The following table sets forth information concerning ordinary shares
acquired upon exercise of share options in the fiscal year ended December 31,
1999 and exercisable and unexercisable options held as of December 31, 1999 for
our Chief Executive Officer and our other most highly compensated executive
officers. All options listed in the table below were granted under our 1998
Stock Option Plan, 1998 Section 102 Share Option Plan or Section 3(i) of the
Israeli Income Tax Ordinance. The value realized is based on the assumed initial
public offering price of $10.00, minus the per share exercise price, multiplied
by the number of shares issued upon exercise of the option.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
ACQUIRED ON VALUE ------------------------------- -------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------- -------------- ----------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Eric Gries.......... -- -- 215,412 518,958 $2,128,982 $4,850,528
Eran Wagner......... -- -- 13,125 130,375 126,656 1,146,969
Limor Schweitzer.... -- -- 13,125 130,375 126,656 1,146,969
Anil Uberoi......... -- -- 105,234 205,300 1,035,097 1,972,140
</TABLE>
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
ERIC GRIES' employment agreement, dated January 27, 1998, establishes Mr.
Gries' initial annual salary of $190,000 commencing on March 1998 and provides
for a $30,000 lump sum signing bonus and eligibility for benefits and
performance based bonuses. Mr. Gries' annual salary, like that of the other
executive officers, is subject to periodic adjustment and in February 2000 was
increased to $217,000. This agreement also provides for his nomination to our
board of directors. Mr. Gries' employment is at will and may be terminated at
any time, with or without cause. If his employment is terminated by us without
cause or if he is constructively terminated, his salary and benefits will
continue for 12 months following the effective date of termination. Under this
agreement, Mr. Gries was granted the right to receive an option to purchase
412,370 ordinary shares at an exercise price of $0.07 per share under the 1998
Stock Option Plan. As an incentive bonus for 1998, Mr. Gries received an option
to purchase 140,000 ordinary shares at an exercise price of $0.35 per share
under the 1998 Stock Option Plan. As an incentive bonus for 1999, Mr. Gries
received an option to purchase 182,000 ordinary shares at an exercise price of
$1.57 per share under the 1998 Stock Option Plan. As an incentive bonus for
2000, Mr. Gries received an option to purchase 70,490 ordinary shares at an
exercise price of $0.71 per share under the 1998 Stock Option Plan and an option
to purchase 200,000 ordinary shares at $12.63 per share under the 2000 Share
Option Plan. The shares subject to these options are early exercisable as of
April 2000 and vest ratably in quarterly installments over a four year period
from the date of grant. All of the shares subject to options held by Mr. Gries
that have not vested shall vest either upon a change of control of our company,
or if Mr. Gries is terminated without cause or is constructively terminated. As
of September 30, 2000, an aggregate of 625,320 ordinary shares have not vested.
ERAN WAGNER'S offer letter, dated August 15, 1998, provides for an
initial annual salary of $144,000 commencing on September 25, 1998, and
eligibility for benefits and performance based bonuses. Mr. Wagner's employment
is at will and may be terminated at any time, with or without cause. If Mr.
Wagner's employment is terminated without cause, his salary and benefits will
continue for six months following effective date of termination. As an incentive
bonus for 1998, Mr. Wagner received an option to purchase 52,500 ordinary shares
at an exercise price of $0.35 per share under the 1998 Stock Option Plan. As an
incentive bonus for 1999, Mr. Wagner received an option to purchase 91,000
ordinary shares at an exercise price of $1.57 per share under the 1998 Stock
Option Plan. As an incentive bonus for 2000, Mr. Wagner received an option to
purchase 28,490 ordinary shares at an exercise price of $0.71 per share under
the 1998 Stock Option Plan and an option to purchase 50,000 ordinary shares at
$12.63 per share under the 2000 Share Option Plan. The shares subject to these
options are early exercisable as of April 2000 and vest ratably in quarterly
installments over the four year period from the date of grant. All of the shares
subject to options held by Mr. Wagner that have not vested shall vest either
upon (1) the diminution by us of Mr. Wagner's position or responsibilities as
Executive Vice President, Technology, or (2) a sale of our company that results
in the subsequent diminution of Mr. Wagner's position or responsibilities as
Executive Vice President, Technology. As of September 30, 2000, an aggregate of
171,275 shares have not vested.
RICHARD VAN HOESEN'S offer letter, dated January 14, 2000, provides for
an initial annual salary of approximately $200,000 commencing on January 14,
2000, and eligibility for benefits and performance based bonuses. Mr. Van
Hoesen's employment is at will and may be terminated at any time, with or
without cause. If Mr. Van Hoesen's employment is terminated without cause, his
salary and benefits will continue for 12 months
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<PAGE>
following the effective date of his termination. Pursuant to the offer letter,
Mr. Van Hoesen received options to purchase 467,194 ordinary shares at an
exercise price of $3.00 per share under the 1998 Stock Option Plan. The shares
subject to these options are early exercisable as of April 2000 and vest ratably
in quarterly installments over a four year period from the date of grant. Mr.
Van Hoesen exercised his options and purchased an aggregate of 467,194 shares by
executing an installment obligation on June 18, 2000. In the event of
termination of Mr. Van Hoesen's employment, with respect to any unvested shares,
we may cause their forfeiture, transfer them to the trustee or accelerate
payment under the installment obligation with respect to all shares. As of
September 30, 2000, 467,194 shares are unvested. All of the shares subject to
options held by Mr. Van Hoesen that have not vested shall vest upon a change of
control of our company to the extent permitted by the relevant stock option
agreements, the stock option plan and applicable law.
LIMOR SCHWEITZER'S offer letter, dated as of January 1, 2000, provides
for an initial annual salary of $165,000 commencing as of the date of the offer
letter and eligibility for benefits and performance based bonuses. Mr.
Schweitzer's employment is at will and may be terminated at any time, with or
without cause. If Mr. Schweitzer's employment is terminated without cause, his
salary and benefits will continue for six months following the effective date of
termination. Mr. Schweitzer received an option to purchase 52,500 ordinary
shares at an exercise price of $0.35 per share under Section 3(i) of the Israeli
Income Tax Ordinance. As an incentive bonus for 1999, Mr. Schweitzer received an
option to purchase 91,000 ordinary shares at an exercise price of $1.57 per
share under Section 3(i) of the Israeli Income Tax Ordinance. As an incentive
bonus for 2000, Mr. Schweitzer received an option to purchase 14,000 ordinary
shares at an exercise price of $0.71 per share under Section 3(i) of the Israeli
Income Tax Ordinance and an option to purchase 40,000 ordinary shares at an
exercise price of $12.63 per share under the 2000 Share Option Plan. The shares
subject to these options are early exercisable and vest ratably in quarterly
installments over a four year period from the date of grant. All of the shares
subject to options held by Mr. Schweitzer that have not vested shall vest either
upon (1) diminution by us of Mr. Schweitzer's position or responsibilities as
Chief Technology Officer or (2) a sale of our company that results in the
subsequent diminution of Mr. Schweitzer's position or responsibilities as Chief
Technology Officer. As of September 30, 2000 an aggregate of 152,219 shares have
not vested.
ANIL UBEROI'S offer letter, dated March 26, 1998, provides for an initial
annual salary of $150,000 commencing on April 1, 1998, and eligibility for
benefits and performance based bonuses. Mr. Uberoi's employment is at will and
may be terminated at any time, with or without cause. If Mr. Uberoi's employment
is terminated without cause, his salary and benefits will continue for three
months following effective date of termination. Pursuant to the offer letter,
Mr. Uberoi received an option to purchase 212,534 ordinary shares at an exercise
price of $0.14 per share under the 1998 Stock Option Plan. As an incentive bonus
for 1998, Mr. Uberoi received an option to purchase 42,000 ordinary shares at an
exercise price of $0.35 per share under the 1998 Stock Option Plan. As an
incentive bonus for 1999, Mr. Uberoi received an option to purchase 28,000
ordinary shares at an exercise price of $0.35 per share and 28,000 ordinary
shares at an exercise price of $1.57 per share under the 1998 Stock Option Plan.
As an incentive bonus for 2000, Mr. Uberoi received an option to purchase 37,100
ordinary shares at an exercise price of $0.71 per share under the 1998 Stock
Option Plan and an option to purchase 50,000 ordinary shares at $12.63 per share
under the 2000 Share Option Plan. The shares subject to these options are early
exercisable as of April 2000 and vest ratably in quarterly installments over a
four year period from the date of grant. Mr. Uberoi exercised certain options
and purchased an aggregate of 191,990 shares by executing an installment
obligation on July 1, 2000. In the event of termination of Mr. Uberoi's
employment, with respect to any unvested shares, we may cause their forfeiture,
transfer them to the trustee or accelerate payment under the installment
obligation with respect to all shares. All of the shares subject to options held
by Mr. Uberoi that have not vested shall vest upon a change of control of our
company to the extent permitted by the relevant stock option agreements, the
stock option plan and applicable law. As of September 30, 2000, an aggregate of
165,794 shares have not vested.
OTHER AGREEMENTS
We require each of our employees to enter into proprietary rights and
invention assignment agreements prohibiting the employee from disclosing any of
our confidential or proprietary information. In addition, the agreements
generally provide that upon termination the employee will not solicit our
employees for a period of 12 months. Substantially all of our key employees in
Israel have agreed not to compete with us for one year following the termination
of their employment with us. A recent decision of the Supreme Court of the State
of Israel has severely restricted the enforceability of non-competition clauses
for Israeli employees. At the time of commencement of employment, our U.S.
employees also generally sign offer letters specifying certain basic terms
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<PAGE>
and conditions of employment and our Israel employees generally sign employment
agreements specifying certain basic terms and conditions of employment,
including customary notice provisions for termination consistent with Israeli
law.
EMPLOYEE BENEFIT PLANS
SECTION 102 SHARE OPTION PLAN
In July 1998, our board of directors adopted the Section 102 Share Option
Plan in accordance with Section 102 of the Israeli Income Tax Ordinance. The
Section 102 Share Option Plan expires in 2006. As of September 30, 2000, we had
outstanding options to purchase 1,221,477 ordinary shares under the plan at a
weighted average exercise price of $2.15 per ordinary share. As of that date,
our officers held options to purchase 292,724 ordinary shares under the Section
102 Share Option Plan, and no director held any options issued under the plan.
NUMBER OF ORDINARY SHARES AVAILABLE UNDER THE SECTION 102 SHARE OPTION
PLAN. Under the Section 102 Share Option Plan, we have reserved an aggregate of
2,060,000 ordinary shares for grant to our Israeli employees.
EXERCISE PRICE AND FORM OF OPTIONS. Our board of directors determines the
exercise prices of options granted under the Section 102 Share Option Plan at
the time of the grant. The options granted under the plan typically expire no
later than eight years from the date of grant. Any shares subject to options
that are cancelled or not exercised before expiration become available for
future grant.
ADMINISTRATION OF SECTION 102 SHARE OPTION PLAN. In general, our board of
directors administers the Section 102 Share Option Plan. Our board of directors
determines the terms of the options granted, including the exercise price, the
number of ordinary shares subject to each option, the exercisability of the
options and the form of consideration payable upon exercise.
RIGHTS UPON TERMINATION. Pursuant to the Section 102 Share Option Plan,
if the employment of any optionee is terminated as a result of death or
disability of such optionee, the optionee or his or her heirs may, within a
period of three months following the termination, exercise the options that were
already vested upon such termination.
TRANSFERABILITY OF OPTIONS. Except for transfer as a result of death, the
Section 102 Share Option Plan does not allow for the transfer of options and
only the optionee may exercise an option.
ADJUSTMENTS UPON MERGER. The Section 102 Share Option Plan provides that
in the event of a merger with or into another corporation, the successor
corporation shall assume or substitute equivalent options for each option.
However, in the event that the successor corporation will not agree to assume
the options, then all outstanding options will accelerate and become fully
vested ten days prior to the close of the merger.
PROXY. Until we become a public company, any shares purchased through the
exercise of an option granted under the Section 102 Share Option Plan are voted
by proxy pursuant to the directions of our board of directors, with the proxy to
be given to the person or persons designated by our board of directors.
Currently, Eran Wagner and Limor Schweitzer are the persons designated by our
board of directors to vote the proxies.
TAXATION. Pursuant to Section 102 of the Israeli Income Tax Ordinance and
the rules promulgated thereunder (including the requirement that the options and
the underlying shares be deposited with a trustee for a period of 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 ordinary shares to the
employee's name or upon the sale of those options and/or ordinary shares. We
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. The
benefit is equal to the difference between the market price and the exercise
price. The related capital gains tax is payable by the employee.
SECTION 3(I) SHARE OPTION PLAN
Section 3(i) of the Israeli Income Tax Ordinance governs the tax
treatment of share options not issued pursuant to Section 102 of the Israeli
Income Tax Ordinance. As of September 30, 2000, we had outstanding an aggregate
of 898,218 options, at a weighted average exercise price of $3.76 per share,
that will be taxed in accordance with Section 3(i) of the Israeli Income Tax
Ordinance. In April 2000, our board of directors adopted the
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Section 3(i) Share Option Plan. The Section 3(i) Share Option Plan will be
effective for a period of ten years commencing upon the date of its adoption. As
of September 30, 2000, no options have been granted under this plan.
NUMBER OF ORDINARY SHARES AVAILABLE UNDER THE SECTION 3(I) SHARE OPTION
PLAN. As of September 30, 2000, a total of 700,000 of our ordinary shares have
been reserved for issuance under the Section 3(i) Share Option Plan. Any shares
subject to options that are cancelled or not exercised before expiration will
become available for future grant.
ADMINISTRATION OF SECTION 3(I) SHARE OPTION PLAN. In general, our board
of directors administers the Section 3(i) Share Option Plan. Our board of
directors determines the terms and conditions of the options, as well as the
identity of the participants and the number of ordinary shares covered by each
option granted under the Section 3(i) Share Option Plan, based upon a
recommendation of the compensation committee.
RIGHTS UPON TERMINATION. The Section 3(i) Share Option Plan provides that
in case the employment of any optionee is terminated as a result of death or
disability of such optionee, the optionee or his or her heirs may, within a
period of three months following the termination, exercise the options that were
already vested upon the time of the termination. This period may be extended by
our board of directors for a period not to exceed the period during which the
options by their terms would otherwise have been exercisable.
TRANSFERABILITY. Except for transfer as a result of death, the Section
3(i) Share Option Plan does not allow for the transfer of options and only the
optionee is allowed to exercise an option.
ADJUSTMENTS UPON MERGER OR ASSET SALE. The Section 3(i) Share Option Plan
provides that in the event of a merger with or into another corporation or a
sale of all or substantially all of our assets, the successor corporation shall
assume or substitute equivalent options for each outstanding option. However, in
the event that the successor corporation will not agree to assume or substitute
the options, then all outstanding options will accelerate and become fully
vested ten days prior to the close of the merger or sale.
TAXATION. The options and the underlying shares are exercisable or
available for sale immediately upon vesting and are not required to be deposited
in trust. The participants in the Section 3(i) Share Option Plan are not
eligible for any tax benefits or deferrals. We are 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. The related income tax or capital
gain tax are paid by the participants.
1998 STOCK OPTION PLAN
Our board of directors adopted the 1998 Stock Option Plan in July 1998.
Our 1998 Stock Option Plan provides for the grant of incentive share options,
within the meaning of Section 422 of the Internal Revenue Code, to our
employees, and for the grant of nonstatutory share options to our employees,
directors and consultants.
NUMBER OF ORDINARY SHARES AVAILABLE UNDER THE 1998 STOCK OPTION PLAN. As
of September 30, 2000, a total of 5 million of our ordinary shares were reserved
for issuance pursuant to the 1998 Stock Option Plan, of which options to acquire
1,932,449 ordinary shares at a weighted average exercise price of $0.62 per
share were issued and outstanding, 1,427,701 ordinary shares had been issued
upon exercise of outstanding options and 1,639,850 ordinary shares remain
available for issuance. As of September 30, 2000, our officers and directors
held options to purchase 912,695 ordinary shares under the 1998 Stock Option
Plan.
ADMINISTRATION OF THE 1998 STOCK OPTION PLAN. In general, our board of
directors administers the 1998 Stock Option Plan. Our board of directors
determines the terms of the options granted, including the exercise price, the
number of ordinary shares subject to each option, the exercisability of the
options and the form of consideration payable upon exercise.
EXERCISE PRICE AND FORM OF OPTIONS. Our board of directors determines the
exercise price of options granted under the 1998 Stock Option Plan. In the case
of an incentive share option, the exercise price must at least be equal to the
fair market value of our ordinary shares on the date of grant. In addition, the
term of an option may not exceed ten years.
EARLY EXERCISE. On April 24, 2000, the shareholders approved amendments
to the 1998 Stock Option Plan to allow for the early exercise of options granted
pursuant to the plan. In accordance with the amendments, certain employees may,
upon the prior approval of our board of directors and in certain cases subject
to any additional
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consents and approvals as may be required by law, early exercise their options
prior to their vesting. The payment for the shares issued as a result of such
early exercise is subject to an installment obligation and carries interest at
the annual interest rate of 6.5%. The shares purchased by the employees pursuant
to such early exercise are deposited in escrow with a trustee and are released
to the employee by the trustee only upon the termination of the vesting period
applicable to such shares and upon the full payment of all amounts with respect
to such shares under the early exercise arrangement. All payments are due upon
the earlier of termination of employment or five years following the date of the
early exercise of the options. We retain a lien over such shares until their
release.
In the event of termination of the employment of an employee who has
early exercised his or her shares prior to the end of the applicable vesting
period, we may, in our sole discretion: (1) cause the forfeiture of the shares,
(2) transfer the shares to the trustee of our Section 102 Share Option Plan or
(3) accelerate the payment of any amounts due in respect to such shares issued
under the early exercise arrangement. Should we not exercise our right to cause
the forfeiture of the shares or to transfer the shares to the trustee of our
Section 102 Share Option Plan within 90 days of the date of the termination of
the applicable employment relationship, the employee is required to immediately
pay all monies due in respect to the shares purchased pursuant to the early
exercise arrangement.
RIGHTS UPON TERMINATION. After termination of an employee, director or
consultant, he or she may exercise his or her vested options for the period of
time stated in the option agreement. Generally, if termination is due to death
or disability, the option will remain exercisable for three months. In all other
cases, our board of directors may allow the option to remain exercisable for
three months. An option may generally not be exercised later than the expiration
of its original term.
TRANSFERABILITY OF OPTIONS. Unless otherwise determined by the
administrator, our 1998 Stock Option Plan generally does not allow for the
transfer of options and only the optionee may exercise an option during his or
her lifetime.
ADJUSTMENTS UPON MERGER OR ASSET SALE. Our 1998 Stock Option Plan
provides that in the event of our merger with or into another corporation or a
sale of substantially all of our assets, the successor corporation will assume
or substitute equivalent options for each option. If the outstanding options are
not assumed or substituted, all outstanding options will accelerate and become
fully vested prior to the close of such merger or sale of assets.
AMENDMENT AND TERMINATION OF OUR 1998 STOCK OPTION PLAN. Our 1998 Stock
Option Plan will automatically terminate on July 23, 2003, 60 months from the
day of adoption. In addition, our board of directors has the authority to amend,
suspend or terminate the 1998 Stock Option Plan, provided it does not adversely
affect any previously granted option.
2000 SHARE OPTION PLAN
The 2000 Share Option Plan was adopted by our board of directors and
approved by our shareholders in April 2000. The 2000 Share Option Plan provides
for the grant of incentive share options, within the meaning of Section 422 of
the Internal Revenue Code, to our employees, and for the grant of nonstatutory
share options to our employees, directors and consultants.
NUMBER OF ORDINARY SHARES AVAILABLE UNDER THE 2000 SHARE OPTION PLAN. As
of September 30, 2000, we had reserved a total of 5,300,000 of our ordinary
shares for issuance pursuant to the 2000 Share Option Plan, of which options to
acquire 498,000 ordinary shares at a weighted average price of $10.49 per share
were outstanding, all of which are being held by our officers and directors, and
4,802,000 ordinary shares remain available for issuance. Our 2000 Share Option
Plan provides for annual increases in the number of shares available for
issuance on the first day of each fiscal year, beginning 2001, equal to the
lesser of 5% of the outstanding ordinary shares on the first day of each fiscal
year, 1,500,000 ordinary shares or another amount determined by our board.
ADMINISTRATION OF THE 2000 SHARE OPTION PLAN. In general, our board of
directors administers the 2000 Share Option Plan. Our board of directors
determines the terms of the options granted, including the exercise price, the
number of ordinary shares subject to each option, the exercisability of the
options and the form of consideration payable upon exercise.
EXERCISE PRICE AND FORM OF OPTIONS. Our board of directors determines the
exercise price of options granted under the 2000 Share Option Plan. In the case
of incentive share options, the exercise price must at least be equal to
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the fair market value of our ordinary shares on the date of grant. In addition,
the term of an option may not exceed ten years.
LIMITATION ON OPTION GRANTS. No optionee may be granted an option to
purchase more than 1,500,000 ordinary shares in any fiscal year, provided
however, in connection with his or her initial service, an optionee may be
granted a one-time option to purchase up to 3,000,000 ordinary shares.
RIGHTS UPON TERMINATION. After termination of one of our employees,
directors or consultants, he or she may exercise his or her vested options for
the period of time stated in the option agreement. Generally, if termination is
due to death or disability, the option will remain exercisable for 12 months. In
all other cases, the option will generally remain exercisable for three months.
However, an option generally may not be exercised later than the expiration of
its original term.
TRANSFERABILITY OF OPTIONS. Unless otherwise determined by the
administrator, our 2000 Share Option Plan generally does not allow for the
transfer of options and only the optionee may exercise an option during his or
her lifetime.
ADJUSTMENTS UPON MERGER OR ASSET SALE. Our 2000 Share Option Plan
provides that in the event of our merger with or into another corporation or a
sale of substantially all of our assets, the successor corporation will assume
or substitute equivalent options for each option. If the outstanding options are
not assumed or substituted, all outstanding options will accelerate and become
fully vested prior to the close of such merger or sale of assets.
AMENDMENT AND TERMINATION OF OUR 2000 SHARE OPTION PLAN. Our 2000 Share
Option Plan will automatically terminate in April 2010, unless we terminate it
sooner. In addition, our board of directors has the authority to amend, suspend
or terminate the 2000 Share Option Plan provided it does not adversely affect
any previously granted option.
2000 EMPLOYEE SHARE PURCHASE PLAN
The 2000 Employee Share Purchase Plan was adopted by our board of
directors and approved by our shareholders in April 2000.
NUMBER OF ORDINARY SHARES AVAILABLE UNDER THE 2000 EMPLOYEE SHARE
PURCHASE PLAN. As of September 30, 2000, we had reserved a total of 750,000 of
our ordinary shares for sale under our 2000 Employee Share Purchase Plan. In
addition, our 2000 Employee Share Purchase Plan provides for annual increases in
the number of ordinary shares available for issuance on the first day of each
fiscal year, beginning 2001, equal to the lesser of 2.0% of the outstanding
ordinary shares on the first day of each fiscal year, 750,000 ordinary shares or
another amount determined by our board of directors.
ADMINISTRATION OF THE 2000 EMPLOYEE SHARE PURCHASE PLAN. Generally, our
board of directors administers the 2000 Employee Share Purchase Plan. Our board
of directors has full and exclusive authority to interpret the terms of the
purchase plan and determine eligibility.
ELIGIBILITY TO PARTICIPATE. All of our employees are eligible to
participate if they are customarily employed by us or any participating
subsidiary for at least 20 hours per week and more than five months in any
calendar year. However, an employee will not be granted an option to purchase
shares under the 2000 Employee Share Purchase Plan if such employee:
o owns shares possessing 5% or more of the total combined voting power
or value of all classes of our capital shares immediately after
grant, OR
o has rights to purchase shares under all of our employee share
purchase plans that accrue at a rate that exceeds $25,000 worth of
the value of the shares for each calendar year.
OFFERING PERIODS; PARTICIPATION. Our 2000 Employee Share Purchase Plan is
intended to qualify under Section 423 of the Internal Revenue Code and contains
consecutive, overlapping 24-month offering periods. Each offering period
includes four six-month purchase periods. The offering periods start on the
first trading day on or after May 1st and November 1st of each year, except for
the first offering period, which will commence on the first trading day on or
after the effective date of this offering, and will end on the first trading day
on or after October 31, 2002.
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Our 2000 Employee Share Purchase Plan permits participants to purchase
ordinary shares through payroll deductions of up to 15% of their compensation
from each pay period. For purposes of our 2000 Employee Share Purchase Plan,
compensation includes base salary, wages, overtime pay and bonuses.
Additionally, a participant is able to purchase a maximum of 5,000 ordinary
shares under the 2000 Employee Share Purchase Plan during a six-month purchase
period.
PURCHASE OF SHARES. Amounts deducted and accumulated by the participant
will be used to purchase full ordinary shares at the end of each six-month
purchase period. The price will be 85% of the lower of the fair market value of
our ordinary shares at the beginning of an offering period or at the end of a
purchase period. If the fair market value at the end of a purchase period is
less than the fair market value at the beginning of the offering period,
participants will be withdrawn from the current offering period following their
purchase of shares and will be automatically re-enrolled in a new offering
period. Participants may end their participation at any time during an offering
period and will be paid their payroll deductions to date. Participation in our
2000 Employee Share Purchase Plan ends automatically upon termination of
employment with us.
TRANSFERABILITY OF RIGHTS. A participant is not able to transfer rights
granted under our 2000 Employee Share Purchase Plan other than by will, the laws
of descent and distribution or as otherwise provided under the 2000 Employee
Share Purchase Plan.
ADJUSTMENTS UPON MERGER OR ASSET SALE. In the event of our merger with or
into another corporation or a sale of all or substantially all of our assets, a
successor corporation will assume or substitute equivalent options for each
outstanding option. If the outstanding options are not assumed or substituted,
the offering period then in progress will be shortened, and a new exercise date
will be set prior to the closing of the merger or sale of assets.
AMENDMENT AND TERMINATION OF THE 2000 EMPLOYEE SHARE PURCHASE PLAN. Our
2000 Employee Share Purchase Plan will terminate in April 2010. However, our
board of directors has the authority to amend or terminate our 2000 Employee
Share Purchase Plan, except that, subject to certain exceptions, no such action
may adversely affect any outstanding rights to purchase shares.
APPROVAL OF CERTAIN TRANSACTIONS
DUTIES OF OFFICE HOLDERS
The Companies Law codifies the fiduciary duties that "office holders,"
including directors and executive officers, owe to a company. An office holder's
fiduciary duties consist of a duty of loyalty and a duty of care. The duty of
loyalty includes:
o avoiding any conflict of interest between the office holder's
position in the company and his or her personal affairs;
o avoiding any activity that is competitive with the company;
o avoiding exploiting any business opportunity of the company in order
to receive personal advantage for himself or herself or others; and
o 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.
The duty of care requires an office holder to act at a level of care that
a reasonable office holder in the same position would employ under the same
circumstances. This includes the duty to utilize reasonable means to obtain:
o information regarding the appropriateness of a given action brought
for his or her approval or performed by him or her by virtue of his
or her position; and
o all other information of importance pertaining to the foregoing
actions.
An office holder is defined in the Companies Law to include a director,
the general manager or chief executive officer, chief business manager or chief
operating officer, deputy general manager or executive vice-president,
vice-president, any other officer or manager directly subordinated to the
general manager and any other person assuming the responsibilities of any of the
above mentioned positions without regard to that person's title. Each person
listed in the table under "Executive Officers and Directors" is an office
holder. Under the Companies Law, all arrangements as to compensation and terms
of service of office holders require approval of the
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board of directors, provided such compensation is on market terms and that the
articles of association of the company do not provide otherwise. Arrangements
regarding the compensation and terms of service of office holders that are not
on market terms require the approval of the audit committee, prior to the
approval of the board of directors. Arrangements regarding the compensation and
terms of service of directors as such and in relation to any other role that
they may have in the company require approval of the audit committee prior to
the approval of the board of directors and the shareholders.
The Companies Law requires that an office holder of the company promptly
disclose any personal interest that he or she may have and all related material
information known to him or her, in connection with any existing or proposed
transaction by the company. In addition, if the transaction is an extraordinary
transaction as such term is defined under the Companies Law, the office holder
must also disclose any personal interest held by the office holder's spouse,
siblings, parents, grandparents, descendants, spouse's descendants and the
spouses of any of the foregoing. In addition, the office holder must also
disclose any interest held by any corporate entity in which the office holder is
a 5% or greater shareholder, director or general manager or in which he or she
has the right to appoint at least one director or the general manager. An
extraordinary transaction is defined in the Companies Law as a transaction other
than in the ordinary course of business, otherwise than on market terms, or that
is likely to have a material impact on the company's profitability, assets or
liabilities.
After the office holder complies with the above disclosure requirements,
a transaction that is not an extraordinary transaction requires only board
approval unless the articles of association of the company provide otherwise. If
the transaction in which the office holder has a personal interest is an
extraordinary transaction, then, in addition to any approval stipulated by the
articles of association, it must also be approved by the company's audit
committee and then by the board of directors, and, under certain circumstances,
by a meeting of the shareholders of the company. Generally, a director who has a
personal interest in a matter which is to be considered at a meeting of the
board of directors or of the audit committee may not be present during the board
of director's or audit committee's discussions and may not vote on this matter.
DUTIES OF SHAREHOLDERS
The Companies Law applies the same disclosure requirements to a
controlling shareholder of a public company. A shareholder that holds 25% or
more of the voting rights in the company is deemed to be a controlling
shareholder if no other shareholder owns more than 50% of the voting rights in
the company. Extraordinary transactions with a controlling shareholder or in
which a controlling shareholder has a personal interest, and the terms of
compensation of a controlling shareholder who is an office holder, require the
approval of the audit committee, the board of directors and the shareholders of
the company. The shareholder approval must include at least one-third of the
shareholders who have no personal interest in the transaction and are present,
in person or by proxy, at the meeting or, alternatively, the total shareholdings
of those who have no personal interest in the transaction who vote against the
transaction must not represent more than 1% of the voting rights in the company.
The Companies Law requires that every shareholder that participates either by
proxy or in person, in a vote regarding a transaction with a controlling member
of the company indicate whether or not that shareholder has a personal interest
in the vote in question, a failure of which results in the invalidation of that
shareholder's vote.
Under the Companies Law, a shareholder has a duty to act in good faith
towards the company and the other shareholders of the company and to refrain
from abusing that shareholder's power in the company including, among other
things, voting in a general meeting of shareholders on the following matters:
o any amendment to the articles of association;
o an increase of the company's authorized share capital;
o a merger; or
o approval of interested party transactions, which require shareholder
approval.
However, under the Companies Regulations (Relief From Related Party
Transactions), 5760-2000, promulgated pursuant to the Companies Law, each of the
following transactions between a company and its controlling shareholder(s) do
not require shareholder approval:
o the extension of the term of an existing related party transaction
provided that the original transaction was duly approved in
accordance with the applicable provisions of the Israeli Companies
Law or the Israeli Securities Law and regulations promulgated
thereunder;
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o such transaction has been approved by the audit committee and the
board of directors as being solely for the benefit of the company;
o such transaction is between the company and its controlling
shareholder(s) or a company in its or their control, provided that
the audit committee and the board of directors approve the
transaction and determine that the transaction is in accordance with
the terms defined in a duly approved frame-work transaction. A
frame-work transaction is a transaction that defines general terms
under which the company may, in the ordinary course of business,
enter into transactions of a similar type;
o such transaction is a transaction between the company and its
controlling shareholder(s) or a corporation under its or their
control, for the purpose of entering into a transaction with a third
party or to submit a joint offer to conduct business with a third
party, provided that, the audit committee and the board of directors
have approved the transaction and that the terms of the transaction
in relation to the company are not materially different from those
relating to the controlling shareholder(s) or a corporation in its or
their control, taking into account their proportionate participation
in the transaction; or
o such transaction is between companies that are controlled by the same
controlling shareholder or between the company and its controlling
shareholder(s), provided that for each public company involved, the
audit committee and its board of directors find that the transaction
is in accordance with market terms, in the ordinary course of
business and does not harm the welfare of the company.
Further, a private placement of securities by a public company that will
increase the relative holdings of a shareholder that holds 5% or more of the
company's outstanding share capital or that will cause any person to become, as
a result of such issuance, a holder of more than 5% of the company's outstanding
share capital, requires approval by the board of directors and shareholders of
the company issuing the securities. However, in accordance with the Companies
Regulations (Relief From Related Party Transactions), 5760-2000, the approval of
the shareholders shall not be required for a private placement in which less
than 20% of the actual voting rights in the company, prior to such offer, are
granted. The definition of a private placement for the purposes of such
exemption includes private placements that are part of the same transaction or
contingent or conditioned upon a previous private placement and all private
placements effectuated by the issuing company, in the previous twelve month
periods in which (1) the same parties (or relatives or affiliates thereof) were
involved, or (2) the consideration thereof consists of rights to the same
assets. The private placement exemptions discussed above do not apply if a
private placement is made to a director or chief executive officer of the
issuing company or to such person or entity that shall become, as a result of
such placement, a controlling shareholder.
The Companies Law further provides that a shareholder shall refrain from
oppressing other shareholders.
In addition, any controlling shareholder, any shareholder who knows that
it possesses power to determine the outcome of a shareholder vote and any
shareholder who, pursuant to the provisions of a company's articles of
association, has the power to appoint or prevent the appointment of an office
holder in the company, or has any other power over the company, is under a duty
to act with fairness towards the company. A breach of the above duty of fairness
will be considered as a breach of the fiduciary duty of an office holder as
described above.
For information concerning the direct and indirect personal interests of
some of our office holders and principal shareholders in transactions with us,
please see "Related Party Transactions" and "Description of Share
Capital--Mergers and Acquisitions and Anti-Takeover Provisions Under Israeli
Law."
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATIONS OF LIABILITY
The Companies Law provides that an Israeli company cannot exonerate an
office holder from liability with respect to a breach of his or her duty of
loyalty, but may exonerate in advance an office holder from his or her liability
to the company, in whole or in part, with respect to a breach of his or her duty
of care. Our articles of association provide that, subject to any restrictions
imposed by the Companies Law, we may enter into an insurance contract providing
coverage for the liability of any of our office holders with respect to:
o a breach of his or her duty of care to us or to another person;
o a breach of his or her duty of loyalty to us, provided that the
office holder acted in good faith and had reasonable grounds to
assume that his or her act would not prejudice our interests; or
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o a financial liability imposed upon him or her in favor of another
person with respect to an act performed by him or her in his or her
capacity as an office holder.
In addition, we may indemnify an office holder against the following
expenses or liabilities imposed upon him or her in his or her capacity as an
office holder:
o a financial liability imposed on him or her in favor of another
person by any judgment, including a settlement or an arbitrator's
award approved by a court; and
o reasonable litigation expenses, including attorneys' fees, incurred
by such office holder or imposed upon him or her by a court, in
relation to proceedings instigated by us against him or her or that
are instigated on our behalf or by another person, or as a result of
a criminal charge from which he or she was acquitted or a criminal
charge in which he or she was convicted for a criminal offense that
does not require proof of intent.
The Companies Law provides that a company may not indemnify an office
holder nor enter into an insurance contract which would provide coverage for any
monetary liability incurred as a result of any of the following:
o a breach by the officer holder of his or her duty of loyalty unless
the office holder acted in good faith and had a reasonable basis to
believe that the act would not prejudice the company;
o a breach by the office holder of his or her duty of care if such
breach was committed intentionally or recklessly;
o an act or omission with the intent to unlawfully derive a personal
benefit; or
o a fine levied against the office holder as a result of a criminal
offense.
Under the Companies Law, the shareholders of a company may include or
amend its articles of association to include either of the following provisions:
o a provision authorizing the company to grant in advance an
undertaking to indemnify an office holder, provided that the
undertaking is limited to specified classes of events which the board
of directors deem foreseeable at the time of grant and limited to an
amount determined by the board of directors to be reasonable under
the circumstances, or
o a provision authorizing the company to retroactively indemnify an
office holder.
In addition, pursuant to the Companies Law, indemnification of, and
procurement of insurance coverage for, a company's office holders must be
approved by the audit committee and the board of directors. In the case of
directors, approval by the shareholders is also required.
Our articles of association allow us to insure and indemnify our office
holders to the fullest extent permitted by Israeli law, provided that the
insurance or indemnification is approved by the audit committee of our board of
directors and, if required by the Companies Law, also by our shareholders. We
have procured indemnification insurance for our directors and office holders.
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RELATED PARTY TRANSACTIONS
We describe below transactions and series of similar transactions, as of
September 30, 2000, to which we were or will be a party:
o in which the amounts involved exceeded or will exceed $60,000; and
o in which any director, executive officer, holder of more than 5% of
our ordinary shares or any member of their immediate family had or
will have a direct or indirect material interest.
EQUITY INVESTMENT TRANSACTIONS
From June 1997 through March 1998, we sold 2,828,000 Series A preferred
shares at $0.71 and $0.93 per share, as well as issued warrants to purchase
789,250 Series A preferred shares at an exercise price of $0.84 per share, all
of which have been exercised. From November 1998 through February 1999, we sold
4,399,864 Series B-1 preferred shares and 1,315,146 Series B-2 non-voting
preferred shares at $1.40 per share, as well as issued warrants to purchase
857,213 Series B-1 preferred shares at an exercise price of $2.80 per share, of
which warrants to purchase 664,342 Series B-1 preferred shares have been
exercised. From October 1999 through January 2000, we sold 3,933,895 Series C-1
preferred shares and 70,000 Series C-2 non-voting preferred shares at
approximately $5.32 per share, as well as issued warrants to purchase 1,201,158
Series C-1 preferred shares at exercise prices of $7.82 and $9.39 per share, of
which warrants to purchase 73,304 Series C-1 preferred shares have been
exercised. In March 2000, we sold 1,227,235 Series D preferred shares at $12.63
per share. Listed below are the directors, executive officers and shareholders
who beneficially own 5% or more of our securities who participated in these
financings.
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING
WARRANTS FOR SERIES SERIES WARRANTS FOR
DIRECTORS, SERIES A SERIES B-1 SERIES B-1 B-2 C-1 SERIES C-1 SERIES C-2 SERIES D AGGREGATE
EXECUTIVE OFFICERS PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED CASH
AND 5% SHAREHOLDERS SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES CONSIDERATION*
------------------- --------- ----------- ------------- --------- --------- ------------ ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Entities affiliated
with Ampal
American Israel
Corporation....... 1,491,000 1,151,933 80,368 -- 939,883 281,967 -- -- $7,963,023
Entities affiliated
with Israel
Seed L.P.......... 1,491,000 410,746 -- -- 73,304 -- -- -- 2,326,839
Entities affiliated
with Trident
Capital........... -- 1,560,230 -- 1,315,146 399,938 140,980 70,000 -- 7,050,109
Entities affiliated
with Eucalyptus
Ventures L.P...... -- 1,151,921 80,359 -- 281,967 84,588 -- -- 3,225,008
Entities associated
with Technology
Crossover
Ventures.......... -- -- -- -- 1,315,832 394,751 -- -- 6,999,982
Technorov Holdings
(1993) Ltd........ 635,250 328,608 -- -- 93,989 28,196 -- -- 1,500,008
Entities affiliated
with WSG Capital,
L.P.............. -- 460,768 32,144 -- 93,989 28,196 -- -- 1,190,001
Sun Microsystems,
Inc............... -- -- -- -- -- -- -- 1,187,648 14,999,994
</TABLE>
--------------
* The amounts exclude warrants to be exercised.
Entities affiliated with Ampal American Israel Corporation that
participated in the financings include Ampal American Israel Corporation, Ampal
Industries (Israel) Ltd., Marinera Ltd. and Inveco International Inc. Nitsan
Yanovski, a director of our company, is the Vice President, Business Development
of Ampal Industries (Israel) Ltd. He disclaims beneficial ownership of the
securities held by these entities except for his proportional interest in these
entities and except to the extent of his right to acquire 71,435 of our Series
B-1 preferred shares held by Ampal Industries (Israel) Ltd.
Entities affiliated with Israel Seed L.P. that participated in the
financings include Israel Seed L.P. and Israel Seed II L.P.
Entities affiliated with Trident Capital that participated in the
financings include Information Associates-II, L.P. and IA-II Affiliates Fund,
L.L.C. Trident Capital Management is the general partner of Information
Associates-II, L.P. Todd Springer, a director of our company, is a managing
director of Trident Capital Management-II, L.L.C., which is the general partner
of Information Associates-II, L.P., and a member of IA-II
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Affiliates Fund, L.L.C. Mr. Springer disclaims beneficial ownership of the
securities held by these entities, except to the extent of his pecuniary
interest in these entities.
Entities affiliated with Eucalyptus Ventures L.P. that participated in
the financings include Eucalyptus Ventures L.P., Eucalyptus Ventures (Israel)
L.P., Eucalyptus Ventures (Cayman) L.P. and Eucalyptus Ventures Affiliated
Fund L.P.
Entities affiliated with Technology Crossover Ventures that participated
in the financings include TCV III (GP), TCV III, L.P., TCV III (Q), L.P. and
TCV III Strategic Partners, L.P. Jon Q. Reynolds, Jr., a director of our
company, is a member of Technology Crossover Management III, L.L.C.,
which is the general partner of each of these entities. Mr. Reynolds disclaims
beneficial ownership of the securities held by these entities except to the
extent of his pecuniary interest in these entities.
Entities affiliated with WSG Capital, L.P. that participated in the
financings include WSG Capital, L.P. and WSG Capital II, L.P. Eric Gries, Eran
Wagner and Limor Schweitzer, who are each executive officers and directors of
our company, are the sole members and managers of WSG Management LLC, which is
the general partner of WSG Capital, L.P. and WSG Capital II, L.P. Mr. Gries, Mr.
Wagner and Mr. Schweitzer disclaim beneficial ownership of the securities held
by these entities except for their proportional interest in these entities.
On various occasions during 2000 and the three preceding fiscal years, we
granted the following options to purchase our ordinary shares to the following
executive officers and directors:
<TABLE>
<CAPTION>
SHARES UNDERLYING PRICE PER
NAME OPTIONS GRANTED SHARE DATE OF GRANT
------- ------------------- ------------- ---------------
<S> <C> <C> <C>
Eric Gries................................................. 412,370 $ 0.07 2/1/98
140,000 0.35 12/21/98
182,000 1.57 10/20/99
70,490 0.71 1/1/00
200,000 12.63 4/10/00
Eran Wagner................................................ 52,500 $ 0.35 12/21/98
91,000 1.57 10/20/99
28,490 0.71 1/1/00
50,000 12.63 4/10/00
Limor Schweitzer........................................... 52,500 $ 0.35 12/21/98
91,000 1.57 10/20/99
14,000 0.71 1/1/00
40,000 12.63 4/10/00
Richard Van Hoesen......................................... 447,300 $ 3.00 1/14/00
19,894 3.00 4/10/00
Anil Uberoi................................................ 212,534 $ 0.14 4/1/98
42,000 0.35 12/21/98
28,000 0.35 8/12/99
28,000 1.57 10/20/99
37,100 0.71 1/1/00
50,000 12.63 4/10/00
Robert Hawk................................................ 24,500 $ 0.35 5/18/99
</TABLE>
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<PAGE>
The options listed above generally vest over a four year period. Certain
options contain early exercise provisions. On August 1, 1999, Robert Hawk
exercised his option to purchase 24,500 ordinary shares for an aggregate
exercise price of $8,575, and as of September 30, 2000, 15,313 ordinary shares
are unvested and are subject to repurchase by Eran Wagner and Limor Schweitzer
as described below. On February 25, 2000, Eric Gries exercised his option to
purchase 292,732 ordinary shares for an aggregate exercise price of $20,491. On
June 18, 2000, Richard Van Hoesen exercised his options to purchase 467,194
ordinary shares by executing an installment obligation, and on July 1, 2000,
Anil Uberoi exercised options to purchase 191,990 ordinary shares by executing
an installment obligation, all of which shares are unvested and subject to
certain contingencies as described below in "--Other Related Party
Transactions."
In July 1998, Robert Hawk purchased 63,455 ordinary shares at $0.19 per
share pursuant to a restricted stock purchase agreement. Under the restricted
stock purchase agreement, Eran Wagner and Limor Schweitzer, each an officer and
director of the company, have the right to repurchase those ordinary shares. The
right of Eran Wagner and Limor Schweitzer to repurchase those ordinary shares
lapsed as to one-fourth of the total number of shares on the first anniversary
of the grant date and lapses as to 1/12th of the total shares each quarter
thereafter. The lapsing of the repurchase right is dependent upon the continued
service by Mr. Hawk on our board of directors.
LOANS TO OFFICERS
In March 2000, our U.S. subsidiary, XACCT Technologies, Inc., extended a
home improvement loan to Eric Gries in the amount of $175,000 with an interest
rate of 6.45% per annum. The principal plus interest on the loan are due upon
the earlier of his date of termination or two years from the date of the loan.
We have a security interest in the proceeds of any severance payments due to Mr.
Gries under his employment agreement.
OTHER RELATED PARTY TRANSACTIONS
In connection with his early exercise of options to purchase 467,194
ordinary shares, Richard Van Hoesen executed an installment obligation on June
18, 2000, which carries an annual interest rate of 6.5%. All payments are due
upon the earlier of the termination of Mr. Van Hoesen's employment or five (5)
years from the date of the exercise of the options. All shares issued upon the
exercise of the options have been deposited in escrow with a trustee and will be
released to Mr. Van Hoesen only upon the termination of the vesting period
applicable to such shares and the full payment of all amounts with respect to
such shares. We retain a lien over such shares until their release. In the event
of termination of Mr. Van Hoesen's employment prior to the vesting of all the
shares, we may cause the forfeiture of or transfer to the trustee the unvested
shares, or accelerate payments under the installment obligation.
In connection with his early exercise of options to purchase 191,990
ordinary shares, Anil Uberoi executed an installment obligation on July 1, 2000,
which carries an annual interest rate of 6.5%, subject to substantially the same
terms as described above for Mr. Van Hoesen's installment obligation.
Eran Wagner and Limor Schweitzer, who are both our directors and
officers, are each a board member of Xpert Integrated Systems Ltd. Xpert
Integrated Systems Ltd. is our Israeli reseller, and we also retain that entity
to perform our system administration tasks. In addition, both Mr. Wagner and Mr.
Schweitzer are directors and shareholders of Xpert UNIX Systems Ltd., which owns
approximately 53.3% of Xpert Integrated Systems Ltd. Mr. Wagner and Mr.
Schweitzer each own 100 ordinary shares of Xpert UNIX Systems Ltd., which
together constitute 100% of the outstanding shares of Xpert UNIX Systems Ltd.
Both Mr. Wagner and Mr. Schweitzer disclaim beneficial ownership of the
securities held by Xpert Integrated Systems Ltd. except for their proportional
interest in that entity through Xpert UNIX Systems Ltd.
In addition, Nitsan Yanovski, one of our directors, is also a director of
Xpert Integrated Systems Ltd. While none of our other directors or officers are
affiliated with Xpert UNIX Systems Ltd. or with Xpert Integrated Systems Ltd.,
entities affiliated with Ampal American Israel Corporation own approximately 20%
of the outstanding shares of Xpert Integrated Systems Ltd.
We have procured indemnification insurance for our directors and office
holders.
Holders of preferred shares are entitled to certain registration rights
with respect to the ordinary shares issued or issuable upon conversion of the
preferred shares. Please see "Description of Share Capital--Registration
Rights."
We believe that all related-party transactions described above were on
terms no less favorable than could have been otherwise obtained from unrelated
third parties.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of September 30, 2000, and as
adjusted to reflect the sale of ordinary shares offered by us in this offering,
for:
o each person who we know beneficially owns more than 5% of our
ordinary shares;
o each of our directors;
o each executive officer named in the Summary Compensation Table; and
o all of our directors and executive officers as a group.
Unless otherwise indicated, the principal address of each of the
shareholders below is c/o XACCT Technologies, Inc., 2900 Lakeside Drive, Suite
100, Santa Clara, California 95054. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and includes
voting or investment power with respect to the securities. Except as indicated
by footnote, and subject to applicable community property laws, each person
identified in the table possesses sole voting and investment power with respect
to all ordinary shares shown to be held by them. The number of ordinary shares
outstanding used in calculating the percentage for each listed person or entity
includes ordinary shares underlying options or warrants held by such person that
are exercisable within 60 days of September 30, 2000, but excludes ordinary
shares underlying options or warrants held by any other person or entity.
Percentage of beneficial ownership is based on 20,678,312 ordinary shares
outstanding as of September 30, 2000, after giving effect to the conversion of
all outstanding preferred shares upon the closing of this offering and
26,999,037 ordinary shares outstanding immediately after the completion of this
offering assuming the exercise of outstanding warrants as of September 30, 2000
to purchase 1,320,725 preferred shares, but no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or any other
outstanding warrants after September 30, 2000. The numbers shown in the table
assume no exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF BENEFICIALLY OWNED
SHARES -------------------------------
BENEFICIALLY
OWNED BEFORE OFFERING AFTER OFFERING
------------- --------------- --------------
<S> <C> <C> <C>
5% SHAREHOLDER
--------------
Entities affiliated with Ampal American Israel Corporation (1)........ 3,945,151 18.8% 14.4%
Entities affiliated with Trident Capital (2).......................... 3,486,294 16.7 12.8
Entities affiliated with Israel Seed L.P. (3)......................... 1,975,050 9.6 7.3
Entities affiliated with Technology Crossover Ventures (4) ........... 1,710,583 8.1 6.2
Entities affiliated with Eucalyptus Ventures L.P. (5)................. 1,598,835 7.7 5.9
Sun Microsystems, Inc. (6) ........................................... 1,187,648 5.7 4.4
Technorov Holdings (1993) Ltd. (7).................................... 1,086,043 5.2 4.0
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
Eric Gries (8)........................................................ 1,619,957 7.6 5.8
Eran Wagner (9)....................................................... 2,727,087 13.0 10.0
Limor Schweitzer (10)................................................. 2,702,597 12.9 9.9
Richard Van Hoesen (11)............................................... 467,194 2.2 1.7
Anil Uberoi (12)...................................................... 397,364 1.9 1.5
Robert C. Hawk (13)................................................... 87,955 0.4 0.3
Nitsan Yanovski (1)................................................... 3,945,151 18.8 14.4
Todd A. Springer (2).................................................. 3,486,294 16.7 12.8
Jon Q. Reynolds Jr. (4)............................................... 1,710,583 8.1 6.2
All executive officers and directors as a group
(nine persons) (14)................................................ 17,144,452 72.2% 57.0%
</TABLE>
--------------
(1) Principal address is 1177 Avenue of the Americas, New York, New York
10036. Number of shares includes 1,491,000 shares held by Ampal
American Israel Corporation, 2,242,821 shares held by Ampal Industries
(Israel) Ltd., 129,178 shares held by Marinera Ltd., and 82,152 shares
held by Inveco International Inc. In addition, Ampal Industries
(Israel) Ltd. has a proxy to vote 82,152 shares issuable upon exercise
of warrants held by Inveco International Inc. Ampal Industries
(Israel) Ltd. is a wholly-owned subsidiary of Ampal Industries Inc.,
a Delaware corporation which is in turn wholly owned by Ampal American
Israel
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Corporation, a company that is traded on Nasdaq under the symbol AMPL.
AmpalAmerican Israel Corporation is 61% owned by Rabar Finance
Corporation Ltd., a private company whose interests are beneficially
owned, directly or indirectly, by Raz Steinmetz, who owns 94% of the
company, and Daniel Steinmetz, who owns 6% of the company. Raz
Steinmetz is the President and Daniel Steinmetz is the Vice President of
Rabar. Raz Steinmetz and Daniel Steinmetz are also the sole directors of
Rabar. Marinera Ltd. is a company 50% owned by Raz Steinmetz and 50%
owned by Daniel Steinmetz. Nitsan Yanovski, Vice President, Business
Development of Ampal Industries (Israel)Ltd. and a director of our
company, disclaims beneficial ownership of the securities held by these
entities except for his proportional interest in these entities and
except to the extent of his right to acquire 71,435 of our Series B-1
preferred shares held by Ampal Industries (Israel) Ltd. Ampal
Industries (Israel) Ltd. has the right to vote the shares of Marinera
Ltd. and Inveco International, Inc.
(2) Principal address is 11150 Santa Monica Boulevard, Suite 320, Los
Angeles, CA 90025. Number of shares includes 3,294,137 shares held
by Information Associates-II, L.P., and 192,157 shares held by
IA-II Affiliates Fund L.L.C. Todd Springer, one of our directors, is a
managing director of Trident Capital Management-II, L.L.C., or
Trident Capital, which is the general partner of Information
Associates-II, L.P., and is a member of IA-II Affiliates Fund, L.L.C.
The members of Trident Capital include Donald R. Dixon, John H. Moragne,
Jr., Stephen S. Beitler, Stephen M. Hall, Christopher P. Marshall,
Poseidon Management, L.P., a Delaware limited partnership organized
for the benefit of Robert C. McCormack and certain members of his
immediate family, Rockwell A. Schnabel and Mr. Springer. Trident
Capital is managed by its members, with each member having the
authority to use the title "Managing Director." Each member is
considered to have voting and dispositive control over the shares of
XACCT held by Trident Capital. The members of IA-II Affiliates Fund
L.L.C., or IA-II Affiliates, include Stephen S. Beitler,
Cynthia Cronk-Brockhoff, Donald R. Dixon, Stephen M. Hall,
Venetia Kontogouris, Christopher P. Marshall, Edward J. Mathias,
Robert C. McCormack, Peter Meekin, John H. Moragne,
Rockwell A. Schnabel, Trident Capital and Mr. Springer. IA-II
Affiliates is managed by its members, with each member having the
authority to use the title "Managing Director." Each member is
considered to have voting and dispositive control over the shares of
XACCT held by IA-II Affiliates. Each of the members of Trident Capital
and IA-II Affiliates disclaims beneficial ownership of any shares held
by such entity except to the extent of its respective pecuniary interests
in those shares.
(3) Principal address is Countanche House, 66-68 Esplanade Street, Helier,
Jersey, Channel Islands. Number of shares includes 987,525 shares held by
Israel Seed L.P. and 987,525 shares held by Israel Seed II L.P. Israel
Seed L.P. and Israel Seed II L.P., or the Israel Seed funds, are
organized as "blind pool" partnerships in which the limited partners have
no discretion over investment or sale decisions, are not able to withdraw
from the Israel Seed funds except under exceptional circumstances, and
generally participate ratably in each investment made by the Israel Seed
funds. The general partner of each of the Israel Seed funds is Seed
Venture Partners Ltd., or SVP, which has sole investment control with
respect to each of the Israel Seed funds. The investment advisor to SVP
is Seed Management Associates, the sole principals of which, as far as
the Israel Seed funds are concerned, are Jonathan Medved and Neil Cohen,
and as such, they may be deemed to share voting control over the shares
held by the Israel Seed funds. Michael Eisenberg, a director and
shareholder of Seed Management Associates, may also be deemed to share
voting control over the shares held by the Israel Seed funds. No other
persons have investment control over SVP or the Israel Seed funds. SVP,
Jonathan Medved, Neil Cohen and Michael Eisenberg disclaim beneficial
ownership of any shares held by the Israel Seed funds except to the
extent of their respective pecuniary interests in those shares.
(4) Principal address is c/o Technology Crossover Ventures, 575 High Street,
Suite 400, Palo Alto, CA 94301. Number of shares includes 1,568,147
shares held by TCV III (Q), L.P., 12,425 shares held by TCV III (GP),
58,996 shares held by TCV III, L.P., and 71,015 shares held by TCV III
Strategic Partners, L.P. TCV III (Q), L.P., TCV III (GP), TCV III, L.P.
and TCV III Strategic Partners, L.P., or the TCV funds, are organized as
"blind pool" partnerships in which the limited partners, or equivalents,
have no discretion over investment or sale decisions, are not able to
withdraw from the TCV funds except under exceptional circumstances and
generally participate ratably in each investment made by the TCV funds.
The sole general partner of each of the TCV funds is Technology Crossover
Management III, L.L.C., or TCM, and as such it has sole investment
control with respect to each of the TCV funds. The sole managing members
of TCM are Jay C. Hoag and Richard H. Kimball and, as such, they may also
be deemed to share voting and dispositive control over the shares of
XACCT held by the TCV funds. No other persons have investment control
over TCM or the TCV funds. Jon Q. Reynolds, Jr., one of our directors, is
also a member of TCM, and as such he may also be deemed to share voting
and dispositive control over the shares of XACCT held by the TCV Funds.
TCM and Messrs. Hoag, Kimball and Reynolds disclaim beneficial ownership
of any shares held by the TCV funds except to the extent of their
respective pecuniary interests in those shares.
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<PAGE>
(5) Principal address is One Bush Street, San Francisco, CA 94104. Number of
shares includes 1,460,718 shares held by Eucalyptus Ventures L.P., 73,381
shares held by Eucalyptus Ventures (Israel) L.P., 44,114 shares held by
Eucalyptus Ventures (Cayman) L.P., and 20,622 shares held by Eucalyptus
Ventures Affiliated Fund L.P. Eucalyptus Ventures Management L.L.C., or
EVM, is the general partner of each of Eucalyptus Ventures L.P.,
Eucalyptus Ventures (Israel) L.P., Eucalyptus Ventures (Cayman)
L.P. and Eucalyptus Ventures Affiliated Fund L.P., or the Eucalyptus
funds. EVM has sole investment control with respect to each of the
Eucalyptus funds. The sole managing members of EVM are Aaron Mankovski
and Bruce Crocker, and as such, they may also be deemed to share voting
and dispositive control over the shares of XACCT held by the Eucalyptus
funds. No other persons have investment control over EVM or the
Eucalyptus funds. Aaron Mankovski and Bruce Crocker disclaim beneficial
ownership of any shares held by the Eucalyptus funds except to the extent
of their respective pecuniary interests in those shares.
(6) Principal address is 901 San Antonio Road, Palo Alto, CA 94303-400.
(7) Principal address is 46 Rothschild Boulevard, Tel Aviv 94104, Israel.
Technorov Holdings (1993) Ltd. is a privately held company, 57% of which
is owned by Alrov (Israel) Ltd., a publicly traded company listed on the
Israeli Stock Exchange, and 43% of which is owned by Leumi & Co.
Investment Banking Ltd., a wholly owned subsidiary of Bank Leumi, the
second largest bank in Israel.
(8) Number of shares includes 492,912 shares held by WSG Capital, L.P.,
122,185 shares held by WSG Capital II, L.P., 292,732 shares held by the
Eric and Carmela Trust and 712,128 ordinary shares issuable upon the
exercise of share options exercisable within 60 days of September 30,
2000 of which 86,808 ordinary shares are vested as of September 30, 2000.
WSG Management LLC is the general partner of each of WSG Capital L.P. and
WSG Capital II, L.P. and has sole investment control with respect to each
of those funds. Eric Gries, our chief executive officer and a director,
together with Eran Wagner and Limor Schweitzer, both directors and
executive officers of XACCT, are the sole members and managers of WSG
Management LLC. No one other than Messrs. Wagner, Schweitzer and Gries
has investment control over WSG Management LLC, WSG Capital L.P. or WSG
Capital II, L.P. Mr. Gries disclaims beneficial ownership of any XACCT
shares held by WSG Capital L.P. or WSG Capital II, L.P., except to the
extent of his pecuniary interests in those shares.
(9) Number of shares includes 492,912 shares held by WSG Capital L.P.,
122,185 shares held by WSG Capital II, L.P. and 221,990 ordinary shares
issuable upon the exercise of share options exercisable within 60 days of
September 30, 2000 of which 50,715 ordinary shares are vested as of
September 30, 2000. WSG Management LLC is the general partner of each of
WSG Capital L.P. and WSG Capital II, L.P. and has sole investment control
with respect to each of those funds. Eran Wagner, the chairman of our
board of directors and an executive officer, together with Limor
Schweitzer, a director and an executive officer, and Eric Gries, our
chief executive officer and a director, are the sole members and managers
of WSG Management LLC. No one other than Messrs. Wagner, Schweitzer and
Gries has investment control over WSG Management LLC, WSG Capital L.P. or
WSG Capital II, L.P. Mr. Wagner disclaims beneficial ownership of any
XACCT shares held by WSG Capital L.P. or WSG Capital II, L.P., except to
the extent of his pecuniary interests in those shares.
(10) Number of shares includes 492,912 shares held by WSG Capital L.P.,
122,185 shares held by WSG Capital II, L.P. and 197,500 ordinary shares
issuable upon the exercise of share options exercisable within 60 days of
September 30, 2000 of which 45,281 ordinary shares are vested as of
September 30, 2000. WSG Management LLC is the general partner of each of
WSG Capital L.P. and WSG Capital II, L.P. and has sole investment control
with respect to each of those funds. Limor Schweitzer, a director and an
executive officer, together with Eric Gries, our chief executive officer
and a director, and Eran Wagner, a director and executive officer, are
the sole members and managers of WSG Management LLC. No one other than
Messrs. Wagner, Schweitzer and Gries has investment control over WSG
Management LLC, WSG Capital L.P. or WSG Capital II, L.P. Mr. Schweitzer
disclaims beneficial ownership of any XACCT shares held by WSG Capital
L.P. or WSG Capital II, L.P., except to the extent of his pecuniary
interests in those shares.
(11) Number of shares includes 467,194 ordinary shares issued upon the
exercise of options, all of which are subject to our repurchase option as
of September 30, 2000.
(12) Number of shares includes 191,990 ordinary shares issued upon exercise of
options, 11,825 of which are subject to our repurchase option 60 days
after September 30, 2000, and 205,644 ordinary shares issuable upon the
exercise of share options exercisable within 60 days of September 30,
2000.
(13) Number of shares includes 7,000 shares held by Christopher G. Hawk, 7,000
shares held by Casey R. Hawk and 7,000 shares held by Stephanie G. Hawk,
the children of Robert C. Hawk, as permitted transferees.
(14) Number of shares includes 2,029,684 ordinary shares issuable upon the
exercise of share options exercisable within 60 days of September 30,
2000. Of the number of shares beneficially owned by the executive
officers and directors as a group, 485,569 shares are subject to
repurchase or other contingences as of September 30,
72
<PAGE>
2000, and 615,097 shares held by WSG Capital funds are triple counted
under the shareholdings of Eric Gries, Eran Wagner and Limor Schweitzer,
respectively.
73
<PAGE>
DESCRIPTION OF SHARE CAPITAL
DESCRIPTION OF SHARES
Below is a summary of the material provisions governing our share
capital. This summary does not purport to be complete and is subject to the
terms and conditions of our memorandum of association and articles of
association, a copy of each of which has been filed as an exhibit to the
registration statement of which this prospectus is a part.
As of September 30, 2000, our authorized share capital consisted of
182,630,000 voting ordinary shares, NIS 0.04 nominal value per share, 1,820,000
non-voting ordinary shares, NIS 0.04 nominal value per share, and 20,550,000
preferred shares, NIS 0.04 nominal value per share. Upon the closing of this
offering, assuming no exercise of the underwriters' over-allotment option, our
authorized share capital will consist of:
o 198,180,000 voting ordinary shares, of which approximately 25,613,891
ordinary shares will be issued and outstanding;
o 1,820,000 non-voting ordinary shares, of which approximately
1,385,146 non-voting ordinary shares will be issued and outstanding;
and
o 5,000,000 special preferred shares, of which no preferred shares will
be issued or outstanding.
DESCRIPTION OF THE SPECIAL PREFERRED SHARES
The special preferred shares, NIS 0.04 nominal value per share, may be
issued from time to time as shares of one or more series with distinct serial
designations approved by our board of directors. The designations include, among
others, the dividend rate and the number of ordinary shares into which the
special preferred shares are convertible. We intend to authorize 5,000,000
special preferred shares upon consummation of this offering.
DESCRIPTION OF ORDINARY SHARES
All of our issued and outstanding voting and non-voting ordinary shares,
including the voting ordinary shares issued to certain of our employees in
accordance with the early exercise arrangement when paid for, and the voting
ordinary shares offered hereby when issued and paid for, will be, duly
authorized and validly issued, fully paid and non-assessable. Neither our
memorandum of association nor our articles of association nor the laws of the
State of Israel restrict in any way the ownership or voting of ordinary shares
by non-residents of Israel except with respect to subjects of countries that are
in a state of war with Israel.
Each non-voting ordinary share has the same rights as the voting ordinary
shares except for voting rights, including the right to receive notice of
meetings of shareholders and to participate in and vote at such meetings. Each
non-voting ordinary share is convertible at any time after the issuance of such
share at the option of the holder thereof and without payment of any additional
consideration into one fully-paid and non-assessable voting ordinary share. The
voting and non-voting ordinary shares do not have pre-emptive rights.
LIQUIDATION AND DIVIDEND RIGHTS. If we liquidate, after satisfaction in
full of all the liabilities to our creditors, our assets will be distributed to
the holders of ordinary shares in proportion to the nominal consideration paid
by them. This liquidation right may be affected by the grant of preferential
dividend or distribution rights to the holders of our authorized special
preferred shares, if and when such shares shall be issued, or to the holders of
any other class of preferred shares that we might authorize and issue in the
future. We may declare a dividend to be paid to the holders of ordinary shares
according to their rights and interests in our profits. Under the Companies Law,
cash dividends may be paid out of retained earnings of a company and also out of
the net earnings of a company, as calculated under that law, for the two years
preceding the distribution of dividend, provided however, that there is no
reasonable concern that such distribution will prevent the company from
satisfying its existing and foreseeable obligations as they become due. The
Companies Law also permits a company to effectuate a distribution by
repurchasing its own shares provided such distribution fulfills the criteria set
forth above relating to distributions. Under our articles of association, our
board of directors may declare interim and final dividends and distributions
with respect to any fiscal period.
VOTING, SHAREHOLDERS' MEETINGS AND RESOLUTIONS. Holders of voting
ordinary shares have one vote for each voting ordinary share held on all matters
submitted to a vote of shareholders. These voting rights may be affected by the
grant of any special voting right to the holders of our authorized special
preferred shares, if and when such shares shall be issued, or to the holders of
any other class of preferred shares that we might authorize and issue in the
future. An annual general meeting shall be held once every year and such annual
meeting must be held within a
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period of not more than 15 months after the last preceding annual general
meeting. According to our articles of association, the quorum required for a
general meeting of shareholders is the presence of at least two shareholders, in
person or by proxy, who together hold or represent at least 33% of the voting
rights. A meeting adjourned for lack of quorum shall be adjourned to the same
day, in the following week at the same time and the same place unless stated
otherwise in the invitation to such meeting. Under the Companies Law, unless
otherwise stated in our articles of association or applicable law, all
resolutions of shareholders require a simple majority.
Most shareholder resolutions, including resolutions for the election of
directors, the appointment of auditors or the approval of transactions with
office holders as required by the Companies Law, will be deemed adopted if
approved by the holders of a majority of the voting power represented at the
meeting, in person or by proxy, and voting thereon. Certain corporate actions
such as (1) amending the articles of association, (2) amending the memorandum of
association, (3) a merger or consolidation, (4) a voluntary winding up, (5)
approving changes in capitalization and (6) authorizing a new class of shares or
changing special rights of a class of shares, will be deemed adopted only if
approved by the holders of not less than 75% of the voting power represented in
person or by proxy at the meeting and voting thereon, and in some cases 75% of
the voting power of the affected class of shares. For a discussion of
shareholder duties, please see "Management--Approval of Certain Transactions."
TRANSFER OF SHARES AND NOTICES. Fully paid ordinary shares are issued in
registered form and may be transferred freely. Under the Companies Law, all
shareholders' meetings require prior notice of at least 21 days. Pursuant to
regulations promulgated pursuant to the Companies Law, such notice shall include
the type of the general meeting, the time and place of the meeting, the agenda,
a summary of the proposed resolutions and the record date. The notice shall also
include the formal address and telephone number of the company as well as the
places, including Internet sites, where the full text of the proposed
resolutions and proxies, if applicable, may be reviewed by the shareholders. For
the purposes of determining the shareholders entitled to notice and to vote at
the meeting, the board of directors may fix the record date not more than 40
days and not less then four days prior to the date of the general meeting.
MODIFICATION OF CLASS RIGHTS. As long as our share capital is divided
into different classes of shares, the rights attached to any class, unless
otherwise provided by our articles of association, may be modified or abrogated
only by a resolution of our shareholders subject to the consent in writing of
three-fourths of the holders of the issued shares of that class, or with the
adoption of a resolution by 75% of those present and voting at a separate
general meeting of the holders of the shares of that class.
OPTIONS AND WARRANTS
As of September 30, 2000, options to purchase 4,550,144 of our ordinary
shares were outstanding under our 1998 Stock Option Plan, our Section 102 Share
Option Plan, our 2000 Section 3(i) Share Option Plan and Section 3(i) of the
Israeli Income Tax Ordinance and our 2000 Share Option Plan, with a weighted
average exercise price of $3.12 per share. We also have outstanding warrants as
of that date to purchase an aggregate of 1,320,725 preferred shares at a
weighted average exercise price of $7.76 per share. Each of these warrants
contains "net exercise provisions." These provisions allow a holder to exercise
the warrant for a lesser number of shares in lieu of paying cash. The number of
shares that would be issued in this case would be based upon the market price of
the shares at the time of the net exercise. Upon the completion of our initial
public offering, these warrants will have expired or will have been exercised.
REGISTRATION RIGHTS
After this offering, the holders of approximately 19.3 million of our
ordinary shares have certain rights to register those shares under the
Securities Act of 1933, as amended, under a rights agreement. The second amended
and restated rights agreement provides that if requested by holders of at least
50% of any class of preferred shares or at least 50% of all preferred shares
combined or ordinary shares received upon conversion or reclassification of the
preferred shares with respect to the registration of not less than that number
of registrable shares which would result in an anticipated aggregate offering
price, net of underwriting discount and commissions, greater than $5,000,000, we
will file a registration statement under the Securities Act covering all
registrable securities requested to be included. We will not be obligated to
effect a demand registration until six months after this initial public
offering. The managing underwriter may reduce the number of registrable
securities to be registered for marketing reasons. All expenses incurred in
connection with such registrations, other than underwriters' and brokers'
discounts and commissions, will be borne by us.
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In addition, if we propose to register any of our ordinary shares under
the Securities Act other than registrations relating solely to employee share
option or purchase plans or relating solely to a transaction under Rule 145
enacted under the Securities Act, the holders of registrable securities may
require us to include all or a portion of their shares in such registration,
although the managing underwriter of any such offering has certain rights to
reduce the number of shares to be included in such registration. All expenses
incurred in connection with such registrations, other than underwriters' and
brokers' discounts and commissions, will be borne by us. The underwriters of
this initial public offering have decided to exclude all registrable securities
from this offering.
MERGERS AND ACQUISITIONS AND ANTI-TAKEOVER PROVISIONS UNDER ISRAELI LAW
MERGERS AND ACQUISITIONS
Israeli law regulates mergers, votes required to approve mergers and
acquisitions of shares through tender offers. The law requires special approvals
for transactions involving significant shareholders and regulates other matters
that are relevant to these types of transactions.
Generally, under the Companies Law, a merger is required to be approved
by the board of directors and the shareholders holding a majority of the shares
of each of the Israeli merging companies at a shareholders meeting called with
at least 21 days prior notice. If the share capital of the company that will not
be the surviving company is divided into different classes of shares, the
approval of each class is also required. Our articles of association requires
that a merger be approved by the holders of not less than 75% of the voting
power represented in person or by proxy at a shareholders' meeting and voting
thereon. In addition, a merger can be completed only after all approvals have
been submitted to the Israeli Registrar of Companies and 70 days have passed
from the time that a proposal for approval of the merger was filed with the
Registrar. In certain circumstances a merger also requires the approval of the
Controller of Restrictive Trade Practices.
The Companies Law also provides that an acquisition of shares in a public
company on the open market must be made by means of a tender offer if as a
result of the acquisition the purchaser would become a 25% shareholder of the
company, provided that there is no other shareholder that holds more than 25% of
the company's outstanding share capital. In addition, if there is already
another shareholder of the company who holds more than 25% but less than 50% of
the company's outstanding share capital, the Companies Law provides that an
acquisition of shares in a public company must be made by means of a tender
offer if as a result of the acquisition the purchaser would become a 45%
shareholder of the company. However, in accordance with the Companies Law, if
following any acquisition of our shares, the acquiring party will hold 90% or
more of our shares, the acquisition must be made by means of tender offer for
all of our shares. These rules do not apply if the acquisition is made by way of
a merger. Regulations promulgated under the Companies Law provide that these
tender offer requirements do not apply to companies whose shares are listed for
trading outside of Israel if, according to the law in the country in which the
shares are traded, including the rules and regulations of the stock exchange on
which the shares are traded, either:
o there is a limitation on acquisition of any level of control of the
company; or
o the acquisition of any level of control requires the purchaser to do
so by means of a tender offer to the public.
Further, Israeli tax law may treat some acquisitions, including a
stock-for-stock swap between an Israeli company and a foreign company, less
favorably than does U.S. tax law. For example, Israeli tax law may subject a
shareholder who exchanges his ordinary shares for shares in a foreign
corporation to immediate taxation.
CLASSIFIED BOARD OF DIRECTORS
Our Chief Executive Officer is appointed to our board of directors by
virtue of his office, subject to annual shareholder approval. The other
directors are divided into three classes. The directors in each class will serve
for staggered three-year terms. This system of electing and removing directors
may discourage a third party from making a tender offer or otherwise attempting
to obtain control of us, because a staggered board generally makes it more
difficult for shareholders to replace a majority of the directors.
SPECIAL PREFERRED SHARES
The authorization of undesignated preferred shares makes it possible for
the board of directors to issue preferred shares with voting or other rights or
preferences that could impede the success of any attempt to change
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our control. These and other provisions may have the effect of deferring hostile
takeovers or delaying changes in our control or management.
ANTI-TAKEOVER PROVISIONS
The Companies Law requires a party who wishes to acquire shares of a
publicly-held company without the approval of its minority shareholders to
acquire 95% of all outstanding shares not held by the acquirer before the
acquisition. Even if the acquirer acquires 95% of the outstanding shares, the
remaining minority shareholders may seek to block the acquisition in court.
TRANSFER AGENT AND REGISTRAR
We have selected American Stock Transfer & Trust Company as the transfer
agent and registrar for our ordinary shares.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our ordinary shares.
Future sales of substantial amounts of our ordinary shares in the public market
following this offering could cause the prevailing market price of our ordinary
shares to fall and impede our ability to raise equity capital at a time and on
terms favorable to us.
Upon completion of this offering, we will have outstanding an aggregate
of 26,999,037 ordinary shares, assuming the exercise of outstanding warrants as
of September 30, 2000 to purchase 1,320,725 preferred shares, which warrants if
unexercised would expire upon the closing of this offering, but no exercise of
the underwriters' over-allotment option and no exercise of outstanding options
or any other outstanding warrants after September 30, 2000. Of these outstanding
shares, the 5,000,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act of 1933, as
amended, unless purchased by our affiliates, as that term is defined in Rule 144
under the Securities Act. The remaining 21,999,037 ordinary shares outstanding
upon completion of this offering and held by existing shareholders will be
"restricted securities" as that term is defined in Rule 144 under the Securities
Act. Restricted shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below, or
another exemption. Of these restricted shares, 1,320,725 shares will have been
issued upon the exercise of warrants outstanding as of September 30, 2000. When
these warrants are exercised and the exercise price is paid in cash, the shares
must be held for one year before they can be sold under Rule 144. However, each
of these warrants contains "net exercise provisions." These provisions allow a
holder to exercise the warrant for a lesser number of ordinary shares in lieu of
paying cash. The number of shares that would be issued in this case would be
based upon the market price of the ordinary shares at the time of the net
exercise. If the warrant had been held for at least one year, the ordinary
shares could be publicly sold under Rule 144. Upon the completion of our initial
public offering, these warrants will have expired or have been exercised. All
ordinary shares issued pursuant to the exercise of warrants will be subject to
the 180-day lock-up agreements, and, subject to Rule 144, will become publicly
tradable after the expiration of the lock-up period. The remaining shares will
become eligible for public sale as follows.
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
----------------- ------
<S> <C>
101,959 90 days after the date of this prospectus, these
shares are saleable under Rule 701
13,230 90 days after the date of this prospectus, these
shares are saleable under Rule 144
20,563,123 After 180 days from the date of this prospectus, the
180 day lock-up terminates and these shares are
saleable under Rule 144 (subject in some cases to
volume limitations) or Rule 144(k)
</TABLE>
Sales of restricted shares in the public market, or the availability of
such shares for sale, could adversely affect the market price of our ordinary
shares.
LOCK-UP AGREEMENT
All officers, directors and holders of our preferred shares and
substantially all of the holders of our ordinary shares have entered into
contractual "lock-up" agreements providing that they will not offer, sell,
contract to sell or grant any option to purchase or otherwise dispose of
ordinary shares owned by them or that could be purchased by them through the
exercise of options or warrants for a period of 180 days after the date of this
prospectus without the prior written consent of Credit Suisse First Boston
Corporation. As a result of these contractual restrictions, notwithstanding
possible earlier eligibility for sale under the provisions of Rules 144, 144(k)
and 701, additional shares will be available beginning 181 days after the
effective date of this offering, subject in some cases to certain volume
limitations.
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RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this prospectus, a person, or persons whose shares are
aggregated, who has beneficially owned restricted shares for at least one year,
including persons who may be deemed to be our affiliates, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
o 1% of the number of ordinary shares then outstanding, which will
equal approximately 269,990 shares immediately after this offering;
or
o the average weekly trading volume of the ordinary shares as reported
through The Nasdaq Stock Market's National Market during the four
calendar weeks preceding the filing of a Form 144 with respect to
such sale.
Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of certain public
information about us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been our affiliate
at any time during 90 days preceding a sale, and who has beneficially owned for
at least two years the restricted shares proposed to be sold, including the
holding period of any prior owner except an affiliate, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
RULE 701
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 permits resales of shares issued
prior to the date the issuer becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended, pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Exchange Act, in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirements. In addition, the Securities and Exchange Commission
has indicated that Rule 701 will apply to typical stock options granted by an
issuer before it becomes subject to the reporting requirements of the Exchange
Act, along with the shares acquired upon exercise of such options, including
exercises after the date the issuer becomes so subject. Securities issued in
reliance on Rule 701 are restricted securities and, subject to the contractual
restrictions described above, beginning 90 days after the date of this
prospectus, may be sold by persons other than affiliates subject only to the
manner of sale provisions of Rule 144 and by affiliates under Rule 144 without
compliance with its one-year minimum holding period requirements.
We have entered into an agreement with the underwriters that we will not
sell or otherwise dispose of any ordinary shares or any securities convertible
into or exercisable or exchangeable for ordinary shares, or enter into any swap
or similar agreement that transfers, in whole or in part, the economic risk of
ownership of the ordinary shares, for a period of 180 days after the date of
this prospectus, without the prior written consent of Credit Suisse First Boston
Corporation, subject to limited exceptions.
REGISTRATION OF SHARES ISSUED IN CONNECTION WITH COMPENSATORY OPTION PLANS
We intend to file a registration statement under the Securities Act
covering the ordinary shares subject to outstanding options or reserved for
issuance under the share option plans and share purchase plans. Upon the
effectiveness of such registration statement, all such shares will, subject to
Rule 144 volume limitations applicable to affiliates and the expiration of a
180-day lockup period, be available for sale in the open market, except to the
extent that such shares are subject to our vesting restrictions or the
contractual restrictions described above.
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U.S. TAX CONSIDERATIONS
The following describes the material United States federal income tax
consequences of the purchase, ownership and disposition of the ordinary shares
to a U.S. holder.
For purposes of this discussion, a U.S. holder is:
o an individual citizen or resident of the United States;
o a corporation or other entity taxable as a corporation created or
organized under the laws of the United States or any political
subdivision thereof;
o an estate, the income of which is includable in gross income for
United States federal income tax purposes regardless of its source;
or
o a trust, if (1) a United States court is able to exercise primary
supervision over its administration and one or more United States
persons have the authority to control all of its substantial
decisions, or (2) the trust was in existence on August 20, 1996 and
has properly elected to continue to be treated as a United States
person.
This summary is for general information only and does not purport to be a
comprehensive description of all of the federal income tax considerations that
may be relevant to a decision to purchase the ordinary shares. This summary
generally considers only U.S. holders that will own the ordinary shares as
capital assets. This summary does not consider the United States tax
consequences to a person that is not a U.S. holder.
This discussion is based on current provisions of the Internal Revenue
Code of 1986, as amended, or the Code, current and proposed Treasury regulations
issued under the Code, and administrative and judicial interpretations of the
Code, all as in effect today and all of which are subject to change, possibly
with a retroactive effect. This discussion does not address all aspects of U.S.
federal income taxation that may be relevant to any particular U.S. holder based
on the U.S. holder's particular circumstances. In particular, this discussion
does not address the tax treatment of U.S. holders:
o who are broker-dealers;
o who own, directly, indirectly or constructively, 10% or more of our
outstanding voting shares;
o holding the ordinary shares as part of a hedging, straddle or
conversion transaction;
o whose functional currency is not the dollar; and
o who may be subject to special tax rules not discussed below,
including insurance companies, tax-exempt organizations, financial
institutions and persons subject to the alternative minimum tax.
Additionally, the tax treatment of persons who hold the ordinary shares
through a partnership or other pass-through entity is not considered, nor are
the possible application of U.S. federal estate or gift taxes or any aspect of
state, local or non-U.S. tax laws.
You are advised to consult your own tax advisor with respect to the
specific U.S. federal income tax consequences to you of purchasing, holding or
disposing of the ordinary shares.
DISTRIBUTIONS ON THE ORDINARY SHARES
The amount of a distribution, if any, with respect to the ordinary
shares will equal the amount of cash and the fair market value of any property
distributed and will also include the amount of any Israeli taxes withheld as
described below under "Israeli Taxation--Withholding and Capital Gains Taxes
Applicable to Non-Israeli Shareholders." In general, a distribution paid by us
with respect to the ordinary shares to a U.S. holder will be treated as ordinary
dividend income to the extent that the distribution does not exceed our current
and accumulated earnings and profits, as determined for U.S. federal income tax
purposes. The amount of any distribution which exceeds these earnings and
profits will be treated first as a non-taxable return of capital, reducing the
U.S. holder's tax basis in its ordinary shares to the extent thereof, and then
as capital gain. Corporate holders generally will not be allowed a deduction for
dividends received on ordinary shares.
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A dividend paid by us in NIS will be included in the income of U.S. holders
at the dollar amount of the dividend, based upon the spot rate of exchange in
effect on the date of the distribution. U.S. holders will have a tax basis in
the NIS for U.S. federal income tax purposes equal to that dollar value. Any
subsequent gain or loss on the NIS arising from exchange rate fluctuations will
be taxable as ordinary income or loss and will be U.S. source income or loss.
Dividends paid by us generally will be foreign source passive income for
U.S. foreign tax credit purposes or, in the case of a U.S. holder that is a
financial services entity, financial services income. Subject to the limitations
in the Code, U.S. holders may elect to claim as a foreign tax credit against
their U.S. federal income tax liability the Israeli income tax withheld from
dividends received on the ordinary shares. U.S. holders that do not elect to
claim a foreign tax credit may instead claim a deduction for Israeli income tax
withheld. The rules relating to foreign tax credits are complex, and you should
consult your own tax advisor to determine whether and to what extent you would
be entitled to this credit.
DISPOSITION OF THE ORDINARY SHARES
Upon the sale, exchange or other disposition of the ordinary shares, a
U.S. holder generally will realize capital gain or loss in an amount equal to
the difference between the amount realized on the disposition and the U.S.
holder's tax basis in the ordinary shares. The gain or loss recognized on the
sale, exchange or other disposition of the ordinary shares generally will be
long-term capital gain or loss if the U.S. holder held the ordinary shares for
more than one year at the time of the disposition.
Gain or loss recognized by a U.S. holder on a sale, exchange or other
disposition of ordinary shares generally will be treated as U.S. source income
or loss for U.S. foreign tax credit purposes.
PASSIVE FOREIGN INVESTMENT COMPANIES
We believe that we were not a passive foreign investment company in 1999
and do not expect to become a passive foreign investment company. However, the
factual determination of our passive foreign investment company status is made
annually and thus may be subject to change. Therefore, we cannot assure you that
we will not become a passive foreign investment company in 2000 or in a future
year.
PASSIVE FOREIGN INVESTMENT COMPANY STATUS
In general, we will be a passive foreign investment company if for any of
our taxable years in which you held ordinary shares:
o at least 75% of our gross income for the taxable year is passive
income; or
o at least 50% of the value, determined on the basis of a quarterly
average, of our assets is attributable to assets that produce or are
held for the production of passive income.
Passive income generally includes dividends, interest, some types of
royalties and rents and gains from the sale or exchange of assets that produce
passive income. Cash and other current assets readily convertible into cash will
be treated as passive assets for purpose of the asset test. If we own directly
or indirectly at least 25% by value of the stock of another corporation, we will
be treated for purposes of the passive foreign investment company tests as
owning our proportionate share of the other corporation's assets and as directly
earning our proportionate share of the other corporation's income.
EFFECTS OF PASSIVE FOREIGN INVESTMENT COMPANY STATUS
If we were classified as a passive foreign investment company, and you
did not make either a mark-to-market election or a qualified electing fund
election, each as described below, you would be subject to special rules for:
o any gain you realize on the sale or other disposition of your
ordinary shares; and
o any excess distribution that we make to you, which means any
distribution you receive on the shares in a taxable year that is
greater than 125% of the average annual distribution received by you
on our ordinary shares in the three preceding taxable years or your
holding period for the ordinary shares, if shorter.
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Under these special tax rules:
o the gain or excess distribution would be allocated ratably over your
holding period for the ordinary shares;
o the amount allocated to the taxable year in which you realized the
gain or excess distribution and any taxable year before the first
taxable year in which we were classified as a passive foreign
investment company would be treated as ordinary income and subject to
tax at the rates currently applicable to ordinary income;
o the amount allocated to each of the other years would be subject to
tax at the highest tax rate applicable to ordinary income in effect
for that year; and
o the interest charge applicable to underpayments of tax would be
imposed on the resulting tax attributable to each year before the
current year in which we were classified as a passive foreign
investment company.
To avoid this tax consequence, a U.S. holder may elect to mark-to-market
the ordinary shares. If you make this election:
o you will include as ordinary income each year the excess, if any, of
the fair market value of your ordinary shares at the end of the
taxable year over your adjusted taxable basis in your ordinary
shares, and you will recognize additional gain, if any, on the sale
or other disposition of your ordinary shares as ordinary income for
that taxable year;
o you will be allowed to claim a deduction as an ordinary loss for the
excess, if any, of the adjusted taxable basis of your ordinary shares
over their fair market value at the end of the taxable year or over
their final sale or disposition price, but only to the extent of the
net amount of previously included income that results from the
mark-to-market election; and
o your basis in the ordinary shares will be adjusted to reflect any
income or loss amounts.
However, if we were classified as a passive foreign investment company,
persons who inherit the ordinary shares from you would not receive the normally
available increase in the tax basis in the ordinary shares to fair market value
as of the date of death, even if you have made the mark-to-market election.
Under some circumstances, U.S. holders in a passive foreign investment
company may make a qualified electing fund election as an alternative to the
mark-to-market election described above. If you make a qualified electing fund
election, you would not be subject to the passive foreign investment company
rules described above. Instead, you generally would be required to include in
your taxable income some undistributed amounts of our income. However, we do not
currently intend to take actions necessary for a U.S. holder to make a qualified
electing fund election if we are determined to be a passive foreign investment
company.
If you own ordinary shares during any year that we are a passive foreign
investment company, you must file with your U.S. income tax return IRS Form 8621
for distributions received on the ordinary shares and any gain realized on the
disposition of the ordinary shares.
Neither we nor our advisors has any duty to, or will undertake to inform,
U.S. holders of change in circumstances that would cause us to become a passive
foreign investment company. U.S. holders should consult their own tax advisors
concerning our status as a passive foreign investment company at any time after
the date of this prospectus.
BACKUP WITHHOLDING
A U.S. holder may be subject to backup withholding at a rate of 31% with
respect to dividend payments and proceeds from the disposition of the ordinary
shares. In general, backup withholding will apply only if a U.S. holder fails to
comply with certain identification procedures. Backup withholding will not apply
with respect to payments made to certain exempt recipients, such as corporations
and tax-exempt organizations. Backup withholding is not an additional tax and
may be claimed as a credit against the U.S. federal income tax liability of a
U.S. holder. Alternatively, the U.S. holder may be eligible for a refund of any
excess amounts withheld under the backup withholding rules. In either case, the
required information must be furnished to the Internal Revenue Service.
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ISRAELI TAXATION
The following is a summary of the current tax issues relating to
companies in Israel, with special reference to its effect on us. The following
also contains a discussion of certain Israeli tax consequences to persons
purchasing the ordinary shares offered hereby and certain Israeli Government
programs benefiting us. To the extent that the discussion is based on new tax
legislation that has not been subject to judicial or administrative
interpretation, we cannot assure you 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. You should consult your
own tax advisors as to the 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.
You are urged to consult your own tax advisors about the Israeli or other
tax consequences of the purchase, ownership and disposition of our ordinary
shares, including, in particular, the effect of any foreign, state or local
taxes.
GENERAL CORPORATE TAX STRUCTURE
Israeli companies are subject to corporate tax at a rate of 36%. However,
the effective rate of tax of a company that derives income from an approved
enterprise, as defined below, may be considerably lower.
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
We believe that we currently qualify as an "industrial company" under the
Law for the Encouragement of Industry (Taxes), 1969, or the Industry
Encouragement Law. A company qualifies as an "industrial company" if it is
resident in Israel and at least 90% of its income in a given tax year, exclusive
of income from certain loans, marketable securities, capital gains, interest and
dividends, is derived from industrial enterprises owned by it. An "industrial
enterprise" is defined as an enterprise whose major activity in a particular tax
year is industrial manufacturing.
Under the Industry Encouragement Law, an industrial company is entitled
to deduct the purchase price of patents and certain other intangible property
rights, other than goodwill, over a period of eight years, beginning with the
year in which such rights were first used.
An industrial company may be eligible for special depreciation rates for
machinery, equipment and buildings. These rates vary, based on various factors,
including the date of commencement of operation and the number of works shifts.
An industrial company owning an approved enterprise may choose between such
special depreciation rates and the depreciation rates available to approved
enterprises.
Qualification as an industrial company under the Industry Encouragement
Law is not conditioned upon the receipt of prior approval from any Israel
government authority. We cannot assure you that we will continue to qualify as
an industrial company or that we will, in the future, be able to take advantage
of any tax benefits available to industrial companies.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
The Law for the Encouragement of Capital Investments, 1959, or 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, 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
resources, and by its physical characteristics, such as 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. If a company has more than one approval or
only a portion of its capital investments is approved, its effective tax rate is
the result of a weighted average of the applicable rates.
We have been granted the status of an "approved enterprise" under the
Investment Law, and we qualify as a "foreign investors' company" as defined in
the Investment Law. We have elected to receive the alternative package of
benefits under the Investment Law. Under the terms of our approved enterprise
program, our income from the approved enterprise will be tax exempt for a period
of two years, commencing with the year in which we first earn
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taxable income from our approved enterprise program, and subject to a reduced
corporate tax rate of between 10% and 25% (depending on the level of foreign
investment in the company) for an additional period of up to a total of eight
years, provided that the total period of tax benefits will not extend past the
earlier of (1) 12 years from the year of commencement of production or (2) 14
years from the year of approval of the approved enterprise status. The initial
two-year period of benefit has not yet commenced.
If dividends are paid out of tax-exempt profit derived from our approved
enterprise, we will be liable for corporate tax at the rate that would have been
applied if we had not elected the alternative tax benefit. This rate is
generally 10% to 25%, depending on the percentage of the foreign investment in
the company. The dividend recipient is taxed at the reduced rate applicable to
dividends from approved enterprises, which is 15%, and we will be required to
withhold this tax at the source. Cash dividends paid by an Israeli company are
normally subject to a 25% withholding tax, except for dividends that are paid to
an Israeli company, in which case no tax is withheld unless the dividend is paid
in respect of earnings from an approved enterprise. In addition, because we have
received certain benefits under Israeli laws relating to approved enterprise,
payment of dividends may subject us to certain Israeli taxes to which we would
not otherwise be subject. The tax-exempt income attributable to the approved
enterprise can be distributed to shareholders without subjecting us to taxes
only upon our complete liquidation.
The Investment Law also provides that an approved enterprise is entitled
to accelerated tax depreciation on property and equipment included in an
approved investment program.
Any future applications we make to the Investment Center will be reviewed
separately, and decisions as to whether or not to approve such applications will
be based, among other things, on the then prevailing criteria set forth in the
Investment Law, on the specific objective we set forth in such applications and
on certain financial criteria. Accordingly, we cannot assure you that any such
applications will be approved. In addition, the benefits available to an
approved enterprise are conditional upon our fulfilling certain conditions
stipulated in the Investment Law and its regulations and the criteria set forth
in the specific certificate of approval. If we do not meet these conditions, in
whole or in part, we would be required to refund the amount of tax benefits,
with the addition of the Israeli Consumer Price Index linkage adjustment and
interest thereupon. We believe that our approved enterprise operates in
substantial compliance with each of these conditions and criteria.
TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax Law (Inflationary Adjustments), 1985, or the Inflationary
Adjustments Law, attempts to overcome some of the problems experienced in a
traditional tax system by an economy experiencing rapid inflation, which was the
case in Israel at the time the Inflationary Adjustments Law was enacted. The
Inflationary Adjustments Law was designed to neutralize the erosion of capital
investments in business and to prevent tax benefits resulting from deduction of
inflationary expenses. The Inflationary Adjustments Law applies a supplementary
set of inflationary adjustments to the normal taxable profits computed under
regular historical cost principles.
The Inflationary Adjustments Law introduced a special tax adjustment for
the preservation of equity based on changes in the Israeli Consumer Price Index,
whereby certain corporate assets are classified broadly into fixed
(inflation-resistant) assets and non-fixed assets. Where shareholders' equity,
as such term is defined in the Inflationary Adjustments Law, exceeds the
depreciated cost of fixed assets, a tax deduction that takes into account the
effect of the 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, without limit. If the
depreciated cost of fixed assets exceeds shareholders' equity, then such excess,
multiplied by the annual inflation rate, is added to taxable income.
In addition, subject to certain limitations, depreciation deductions on
fixed assets and losses carried forward are adjusted for inflation on the basis
of changes in the Israeli Consumer Price Index. Under the Inflationary
Adjustments Law, results for tax purposes are measured in real terms, in
accordance with changes in the Israeli Consumer Price Index.
We are taxed under this law. The discrepancy between the change in (1)
the Israeli Consumer Price Index and (2) the exchange rate of Israeli currency
in relation to the dollar, may in future periods cause significant differences
between taxable income, as determined for Israeli tax purposes, and the income
measured in U.S. dollars as reflected by our consolidated financial statements,
which are measured in U.S. dollars.
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WITHHOLDING AND CAPITAL GAINS TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS
The State of Israel imposes income tax on non-residents of Israel on
income accrued or derived from sources in Israel or received in Israel. The
sources of income include passive income such as dividends, royalties and
interest, as well as non-passive income from business conducted or services
rendered in Israel. Upon distribution of dividends other than bonus shares,
i.e., stock dividends, income tax is generally withheld at the rate of 25%, or
12.5% if the taxed entity is a U.S. company holding 10% or more of our shares,
or at the rate of 15% for dividends distributed out of income generated by an
approved enterprise, unless a different rate is provided in a treaty between
Israel and the shareholder's country of residence. Under the income tax treaty
between the United States and Israel, the maximum tax on dividends paid to a
shareholder who is a qualifying U.S. resident is 25%.
Israeli law imposes a capital gains tax on the sale of securities and
other capital assets. Under current law, however, sales by an individual of the
ordinary shares offered by this prospectus are exempt from Israeli capital gains
tax for so long as the shares are quoted on Nasdaq or listed on a stock exchange
recognized by the Israeli Ministry of Finance, provided that we continue to
qualify as an industrial company, and provided further that the individual does
not hold such shares for business purposes. If we do not maintain our status as
an industrial company then, subject to any applicable tax treaty, the Israeli
capital gain tax rates would be up to 50% for non-Israeli resident individuals
and 36% for corporations.
Under the Israel-U.S. treaty, a holder of ordinary shares who is a U.S.
resident generally will be exempted from Israeli capital gain tax on the sale of
ordinary shares if such holder owned, directly or indirectly, shares
representing less than 10% of our voting power throughout the 12-month period
before the sale. Under certain circumstances specified in the treaty, if Israeli
capital gains tax is payable, it can be credited against U.S. federal tax,
subject to limitations in U.S. tax law applicable to foreign tax credits.
A non-resident of Israel who receives interest, dividend or royalty
income derived from or accrued in Israel, from which Israeli tax was withheld at
source, is generally exempted from the duty to file tax returns in Israel with
respect to such income, provided such income was not derived from a business
conducted in Israel by such person and such person has no other non-passive
income from sources within Israel.
Israel presently has no estate or gift tax. However, an expert committee
appointed by the Israeli Government and chaired by the General Manager of the
Finance Ministry has recommended the implementation of a gifts tax and an estate
tax. As of the date of this prospectus, the recommendation has not been
implemented into legislation by the Israeli Parliament.
PENDING TAX REFORMS
In May 2000, an expert committee appointed by the Israeli Government and
chaired by the General Manager of the Finance Ministry recommended substantial
reforms to the Israeli tax system and tax laws. The recommendations have not
been implemented into legislation. The implementation of these recommendations
requires that a draft bill incorporating the recommendations be adopted by the
Israeli Parliament. The expert committee recommended among other things: (1)
broadening the categories of taxable income and lowering the tax rates
applicable to the ordinary income of individuals; (2) imposing a tax on the
income of Israeli residents regardless of the territorial source of such income;
(3) subject to applicable treaties for the prevention of double taxation,
applying a general tax rate of up to 25% on capital gains recognized in Israel
and reconsidering the scope of certain exemptions currently available to Israeli
residents on capital gains derived from the sale of shares of companies listed
on specified non-Israeli stock exchanges, including The Nasdaq Stock Market's
National Market; (4) imposing a gift tax and an estate tax; (5) eliminating the
additional reductions in corporate tax rates that are currently available under
the Investment Law and which depend on the percentage of foreign investment in a
company's share capital; (6) imposing a 25% tax rate on income derived from
approved enterprises with respect to any company regardless of the percentage of
foreign investment in such company's share capital; and (7) eliminating the tax
exemption available under the alternative benefits program of the Investment Law
and imposing a reduced tax rate of 10% to companies electing the alternative
benefits program. There is no certainty that the recommendations of the
committee will be adopted in whole or in part by the Israeli Parliament.
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CONDITIONS IN ISRAEL
We are incorporated under the laws of the State of Israel, and
substantially all of our research and development facilities, and certain
Israeli and non-U.S. operations are managed from the State of Israel.
Accordingly, we are directly affected by economic, political and military
conditions in Israel. Our operations may be materially adversely affected if
major hostilities involving Israel arise or if trade between Israel and its
present trading partners is 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. Additionally, from time to time since
December 1987, Israel has experienced civil unrest, primarily in the West Bank
and Gaza Strip territories administered by Israel since 1967. 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. In recent months, there has
been intense violence, hostility and on-going clashes between the Palestinians
and Israeli Security Forces, primarily in the Gilo neighborhood of southern
Jerusalem, the West Bank and the Gaza Strip. Israel has not entered into peace
agreements with Syria or Lebanon and is still in a state of war with Syria and
Lebanon. Further, there have been delays in the negotiations and implementation
of the agreements with the Palestinians. We cannot predict how the peace process
will develop or what effect that it may have upon the company.
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 these
countries, we believe that in the past the boycott has not had a material
adverse effect on us. We cannot assure you 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 54 are, unless exempt, obligated to perform up to 36 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
our male officers and employees are currently obligated to perform annual
reserve duty. Although we have operated effectively under these requirements, we
cannot assess the full impact of these requirements on our workforce or business
if conditions should change, and we cannot predict the impact on us of any
expansion of such obligations.
TRADE RELATIONS
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 member of the World Trade
Organization and is a signatory to the General Agreement on Trade in Services.
In addition, Israel has been granted preferences under the Generalized System of
Preferences from the United States, Australia and Canada. These preferences
allow Israel to export products covered by such program either duty-free or at
reduced tariffs.
Israel has entered into preferential trade agreements with the European
Union, the United States and the European Free Trade Association. In recent
years, Israel has established commercial and trade relations with a number of
other nations, including China, India, Russia and other nations in Asia and
Eastern Europe, with which Israel had not previously had such relations.
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, for these and other reasons, has
intervened in the economy by utilizing, among other means, fiscal and monetary
policies, import duties, foreign currency restrictions and control of wages,
prices and foreign currency exchange rates. The Israeli government has in the
past periodically changed its policies in all these areas. During 1997, the
monetary policy of the Bank of Israel changed in several respects. These changes
included a decision of the Bank of Israel to reduce its intervention in the
currency markets to allow the NIS to trade more freely. In addition, the Bank of
Israel has adopted and implemented certain measures to liberalize foreign
86
<PAGE>
currency regulations. There are currently no Israeli currency control
restrictions on remittance of dividends or the proceeds from the sale of the
ordinary shares, although legislation remains in effect pursuant to which
currency controls may be imposed by administrative action at any time.
The Israeli government's monetary policy contributed to relative price
and exchange rate stability in recent years, despite fluctuating rates of
economic growth and unemployment. The Israeli inflation rates for the years
1997, 1998 and 1999 were 7.0%, 8.6% and 1.3%, respectively. We cannot assure you
that the Israeli government will be successful in its attempts to keep prices
and exchange rates stable.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, dated _______, 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Chase Securities Inc.
and U.S. Bancorp Piper Jaffray Inc. are acting as representatives, the following
respective numbers of ordinary shares:
NUMBER OF
UNDERWRITERS SHARES
------------ ------------
Credit Suisse First Boston Corporation.............
Chase Securities Inc...............................
U.S. Bancorp Piper Jaffray Inc.....................
------------
Total......................................... 5,000,000
============
The underwriting agreement provides that the underwriters are obligated
to purchase all the ordinary shares in this offering if any are purchased, other
than those shares covered by the over-allotment option described below. The
underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of ordinary shares may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 750,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of ordinary shares.
The underwriters propose to offer the ordinary shares initially at the
public offering price on the cover page of this prospectus and to selling group
members at that price less a concession of $ _______ per share. The underwriters
and selling group members may allow a discount of $ _______ per share on sales
to other broker/dealers. After the initial public offering, the public offering
price and concession and discount to broker/dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------------------------------- ----------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Underwriting Discounts and $ $ $ $
Commissions paid by us.......
Expenses paid by us............. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the ordinary shares being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933,
as amended relating to, any of our ordinary shares or securities convertible
into or exchangeable or exercisable for any of our ordinary shares, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus.
Our officers and directors and certain other shareholders, including
holders of our ordinary shares and preferred shares, have agreed that they will
not offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any of our ordinary shares or securities convertible into or
exchangeable or exercisable for any of our ordinary shares, enter into a
transaction which would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of our ordinary shares, whether any of these
transactions are to be settled by delivery of our ordinary shares or other
securities, in cash or otherwise or publicly disclose the intention to make any
such offer, sale, pledge or disposition or to enter into any transaction, swap,
hedge or other arrangement, without, in each case, the prior written consent of
Credit Suisse First Boston Corporation for a period of 180 days after the date
of this prospectus.
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The underwriters have reserved for sale, at the initial public offering
price, up to 250,000 shares of ordinary shares for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing ordinary shares in this offering. We have received an exemption from
the Israeli Securities Authority in accordance with Section 15(D) of the Israeli
Securities Law, 1968 to sell the ordinary shares reserved for Israeli employees.
The number of shares available for sale to the general public in the offering
will be reduced to the extent these persons purchase the reserved shares. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under
the Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list the ordinary shares on The Nasdaq Stock Market's
National Market under the symbol "XCCT."
Credit Suisse First Boston Corporation acted as the placement agent in
connection with a private placement of our Series D preferred shares in March
2000. Credit Suisse First Boston Corporation received a customary fee for its
service as placement agent. We sold Series D preferred shares at a purchase
price of $12.63 per share. In this private placement, an entity affiliated with
Credit Suisse First Boston Corporation purchased 23,752 ordinary shares,
individuals and entities affiliated with Chase Securities Inc. purchased an
aggregate of 7,918 ordinary shares and individuals affiliated with U.S. Bancorp
Piper Jaffray Inc. purchased an aggregate of 7,917 ordinary shares. These
individuals and entities purchased the Series D preferred shares on the same
terms as the other investors in the private placement. The 23,752 shares
acquired by an entity affiliated with Credit Suisse First Boston Corporation,
the 7,918 shares acquired by individuals and entities affiliated with Chase
Securities Inc. and the 7,917 shares acquired by individuals affiliated with
U.S. Bancorp Piper Jaffray Inc. will be restricted from sale, transfer,
assignment or hypothecation for a period of one year from the effective date of
this offering except to officers or partners, but not directors, of the
representatives and to members of the selling group and their officers or
partners.
Prior to this offering, there has been no public market for our ordinary
shares. The initial public offering price for the ordinary shares will be
determined by negotiation between us and the underwriters. The principal factors
to be considered in determining the initial public offering price include the
following:
o the information in this prospectus and otherwise available to the
underwriters;
o market conditions for initial public offerings;
o the history and prospects for the industry in which we will compete;
o the ability of our management;
o our prospects for future earnings;
o the present state of our development and our current financial
condition;
o the recent market prices of, and the demand for, publicly traded
ordinary shares of generally comparable companies; and
o the general condition of the securities markets at the time of this
offering.
In connection with this offering, the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate covering
transactions and penalty bids in accordance with Regulation M under the
Securities Exchange Act of 1934.
o Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified
maximum.
o Over-allotment involves sales by the underwriters of shares in excess
of the number of shares the underwriters are obligated to purchase,
which creates a syndicate short position. The short position may be
either a covered short position or a naked short position. In a
covered short position, the number of shares over-allotted by the
underwriters is not greater than the number of shares, which they may
purchase in the over-allotment option. In a naked short position, the
number of shares involved is greater than the number of shares in the
over-allotment option. The underwriters may close out any short
position by either exercising their over-allotment option and/or
purchasing shares in the open market.
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o Syndicate covering transactions involve purchases of the ordinary
shares in the open market after the distribution has been completed
in order to cover syndicate short positions. In determining the
source of shares to close out the short position, the underwriters
will consider, among other things, the price of shares available for
purchase in the open market as compared to the price at which they
may purchase shares through the over-allotment option. If the
underwriters sell more shares than could be covered by the
over-allotment option--a naked short position--that position can only
be closed out by buying shares in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the
shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
o Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the ordinary shares
originally sold by the syndicate member is purchased in a stabilizing
or syndicate covering transaction to cover syndicate short positions.
These stabilizing transactions, over-allotment transactions, syndicate covering
transactions and penalty bids may have the effect of raising or maintaining the
market price of the ordinary shares or preventing or retarding a decline in the
market price of the ordinary shares. As a result, the price of the ordinary
shares may be higher than the price that might otherwise exist in the open
market. These transactions may be affected on The Nasdaq Stock Market's National
Market or otherwise and, if commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make Internet distributions on the same
basis as other allocations.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the ordinary shares in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of ordinary shares are made. Any resale of the ordinary shares in Canada
must be made under applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or under a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of the ordinary shares.
REPRESENTATIONS OF PURCHASERS
By purchasing ordinary shares in Canada and accepting a purchase
confirmation a purchaser is representing to us and the dealer from whom the
purchase confirmation is received that:
o the purchaser is entitled under applicable provincial securities laws
to purchase the ordinary shares without the benefit of a prospectus
qualified under the securities laws;
o where required by law that the purchaser is purchasing as principal
and not as agent; and
o the purchaser has reviewed the text above under Resale Restrictions.
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of ordinary shares to whom the SECURITIES ACT (British
Columbia) applies is advised that the purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any ordinary shares acquired by such purchaser in this offering. The report must
be in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of ordinary shares acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of ordinary shares should consult with their own
legal and tax advisors with respect to the tax consequences of an investment in
the ordinary shares in their particular circumstances and about the eligibility
of the ordinary shares for investment by the purchaser under relevant Canadian
legislation.
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LEGAL MATTERS
Certain legal matters in connection with this offering with respect to
United States law will be passed upon for us by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California. The validity of the
ordinary shares offered hereby and certain other legal matters in connection
with this offering with respect to Israeli law will be passed upon for us by S.
Friedman & Co., Advocates & Notaries, Tel Aviv, Israel. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Morrison & Foerster LLP, Palo Alto, California, with respect to United States
law and by Meitar, Liquornik, Geva & Co., Israel, with respect to certain legal
matters in connection with this offering with respect to Israeli law. WS
Investment Company, an investment partnership composed of certain current and
former members of and persons associated with Wilson Sonsini Goodrich & Rosati,
Professional Corporation, beneficially owns an aggregate of 37,500 of our
ordinary shares. Attorneys at S. Friedman & Co., Advocates & Notaries,
beneficially own options to purchase 40,750 of our ordinary shares.
EXPERTS
Kost Forer & Gabbay, a member of Ernst & Young International, independent
auditors, have audited our consolidated financial statements as of December 31,
1998 and 1999, and for the period from our inception in June 1997 to December
31, 1997 and for each of the years in the two-year period ended December 31,
1999 as set forth in their report. We have included our consolidated financial
statements and the related notes in the prospectus and elsewhere in the
registration statement in reliance on Kost Forer & Gabbay's report, given upon
the authority of such firm as experts in accounting and auditing.
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ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated in the State of Israel, and some of our officers and
directors and the Israeli experts named in this prospectus are not residents of
the United States and substantially all of their assets may be located outside
of the United States. The service of process upon, and the enforcement of
judgments against, us, our non-U.S. resident officers and directors and the
Israeli experts may be difficult.
We have been informed by our legal counsel in Israel, S. Friedman & Co.,
that there is doubt as to the enforceability of civil liabilities under the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, in original actions instituted in Israel. However, subject to certain
time limitations, Israeli courts may enforce foreign, final, non-appealable
executory judgments in civil matters, including a monetary or compensatory
judgment in a non-civil matter, obtained after completion of due process before
a court of competent jurisdiction, according to the laws of the state in which
the judgment is given and the rules of private international law prevailing in
Israel. The rules of private international law currently prevailing in Israel do
not prohibit the enforcement of judgments of Israeli courts, provided that:
o adequate service of process has been effected and the defendant has
had a reasonable opportunity to be heard;
o the judgment and the enforcement thereof are not contrary to the law,
public policy, security or sovereignty of the State of Israel;
o the judgment was not fraudulently obtained and does not conflict with
any other valid judgment in the same matter between the same parties;
and
o an action between the same parties in the same matter is not pending
in any Israeli court or tribunal at the time the lawsuit is
instituted in the foreign court.
We have appointed our U.S. subsidiary, XACCT Technologies, Inc., as our
agent to receive service of process in any action against us in any federal
court or court of the State of California arising out of this offering or any
purchase or sale of securities in connection with this offering. We have not
given such agent consent to accept service of process in connection with any
other claim.
If a foreign judgment is enforced by an Israeli court, it generally will
be payable in Israeli currency, which can then be converted into non-Israeli
currency and transferred out of Israel. 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 of such judgment, but the judgment
debtor may 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 Israeli CPI plus interest at the annual statutory rate set by
Israeli regulations prevailing at such time.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities
and Exchange Commission in connection with this offering. This prospectus, which
is part of the registration statement, does not contain all of the information
included in the registration statement and the exhibits and schedules to the
registration statement. For further information with respect to us and our
ordinary shares, we refer you to the registration statement and the exhibits and
schedules filed as part of the registration statement. Statements contained in
this prospectus concerning the contents of any contract or any other document
are not necessarily complete. If a contract or document has been filed as an
exhibit to the registration statement, we refer you to the copy of the contract
or document that has been filed. Each statement in this prospectus relating to a
contract or document filed as an exhibit is qualified by the filed exhibit. You
may read and copy the registration statement and any other documents we file at
the Securities and Exchange Commission's Public Reference Room at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 or at the regional offices of
the Securities and Exchange Commission located at CitiCorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, or Seven World Trade
Center, 13th Floor, New York, New York 10048. The Securities and Exchange
Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission at http://www.sec.gov.
We intend to make available to our shareholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports containing unaudited financial data for the first
three quarters of each year.
We file reports with the Israeli Registrar of Companies regarding our
registered address, our registered capital, our shareholders of record and the
number of shares held by each shareholder, the identity of the directors and
details regarding security interests on our assets. In addition, we must file
with the Israeli Registrar of Companies our articles of association and a copy
of certain resolutions adopted by a general meeting of shareholders. The
information filed with the Israeli Registrar of Companies is available to the
public. In addition to the information available to the public, our shareholders
are entitled, upon request, to review and receive copies of all minutes of
meetings of our shareholders.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Statements of Changes in Shareholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
XACCT TECHNOLOGIES LTD.
We have audited the accompanying consolidated balance sheets of XACCT
Technologies Ltd. and its subsidiary as of December 31, 1998 and 1999 and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for the period from June 8, 1997 (inception) to December 31,
1997, and for each of the two years in the period ended December 31, 1999. 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 about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
XACCT Technologies Ltd. and its subsidiary as of December 31, 1998 and 1999, and
the consolidated results of their operations and cash flows for the period from
June 8, 1997 (inception) to December 31, 1997, and for each of the two years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles in the United States.
Tel Aviv, Israel KOST FORER & GABBAY
March 2, 2000 A Member of Ernst and Young International
F-2
<PAGE>
XACCT TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER31, EQUITY AS OF
-------------------- SEPTEMBER 30 SEPTEMBER 30,
1998 1999 2000 2000
--------- --------- ------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 5,445 $ 17,309 $ 13,962
Short-term deposits........................................ -- 251 205
Marketable securities...................................... -- 465 --
Trade receivables.......................................... 30 559 1,937
Other accounts receivable and prepaid expenses............. 151 322 1,233
--------- --------- -------------
Total current assets..................................... 5,626 18,906 17,337
--------- --------- -------------
LONG-TERM INVESTMENTS:
Loans to employees(*)...................................... -- -- 212
Severance pay fund......................................... 78 180 343
Long-term deposits......................................... -- 44 169
--------- --------- -------------
Total long-term investments.............................. 78 224 724
--------- --------- -------------
PROPERTY AND EQUIPMENT, NET................................... 360 956 3,570
--------- --------- -------------
Total Assets........................................... $ 6,064 $ 20,086 $ 21,631
========= ========= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables............................................. $ 335 $ 465 $ 720
Deferred revenues.......................................... -- 127 1,862
Accrued expenses and other liabilities..................... 270 1,002 5,885
--------- --------- -------------
Total Current liabilities.............................. 605 1,594 8,467
--------- --------- -------------
ACCRUED SEVERANCE PAY......................................... 486 665 1,116
--------- --------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES........................
SHAREHOLDERS' EQUITY:
Preferred shares of NIS 0.04 par value:
Authorized: 12,950,000 as of December 31, 1998,
18,550,000 as of December 31, 1999 and 20,550,000 as
of September 30, 2000;.................................
Issued and outstanding: 8,903,636 as of December 31,
1998,13,336,155 as of December 31, 1999 and 15,301,036
as of September 30, 2000;..............................
Issued and outstanding, pro forma: no shares as of
September 30, 2000;Aggregate liquidation preference of
$32,264 as of December 31, 1999 and $50,250
as of September 30, 2000............................... 3 33 152 --
Ordinary shares of NIS 0.04 par value:
Authorized: 43,050,000 as of December 31, 1998,
39,450,000 as of December 31, 1999 and 184,450,000 as
of September 30, 2000;.................................
Issued and outstanding: 4,263,455 (**) as of December
31, 1998, 4,345,775 (**) as of December 31, 1999 and
5,377,276 (***) as of September 30, 2000;..............
Issued and outstanding pro forma: 21,999,037 (***) as of
September 30, 2000..................................... 2 11 53 218
Additional paid-in capital.................................... 10,064 34,818 69,134 79,264
Deferred stock compensation................................... -- (2,824) (12,715) (12,715)
Receivables on account of shares.............................. -- (37) (2,270) (2,270)
Accumulated deficit........................................... (5,096) (14,174) (42,306) (42,306)
--------- --------- ------------- ----------------
Total shareholders' equity............................... 4,973 17,827 12,048 $ 22,191
--------- --------- ------------- ----------------
Total Liabilities and Shareholders' Equity............. $ 6,064 $ 20,086 $ 21,631
========= ========= =============
</TABLE>
--------------
(*) Includes $175 loan to the Chief Executive Officer (see Note 10).
(**) Includes 420,000 shares issued to a trustee in respect of options granted
to employees which have been exercised during September, 2000 in favor of
the early exercise.
(***) Includes 1,018,649 shares issued to a trustee in favor of the early
exercise.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F-3
<PAGE>
XACCT TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 8, 1997
(INCEPTION) YEAR ENDED NINE MONTHS ENDED
TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, --------------------------- -----------------------------
1997 1998 1999 1999 2000
-------------- --------------------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses............................ $ -- $ -- $ 898 $ 519 $ 3,712
Services............................ -- -- 296 97 1,366
-------------- ------------ -------------- ------------- ---------------
Total revenues.................... -- -- 1,194 616 5,078
-------------- ------------ -------------- ------------- ---------------
Cost of revenues:
Licenses............................ -- -- 48 30 265
Services............................ -- -- 192 112 2,308
-------------- ------------ -------------- ------------- ---------------
Total cost of revenues............ -- -- 240 142 2,573
-------------- ------------ -------------- ------------- ---------------
Gross profit........................... -- -- 954 474 2,505
-------------- ------------ -------------- ------------- ---------------
Operating expenses:
Research and development............ 390 1,511 2,243 1,535 6,942
Sales and marketing................. 127 1,995 6,472 4,049 14,150
General and administrative.......... 152 1,033 1,204 686 4,696
Amortization of deferred stock
compensation(*)................... -- -- 381 44 5,537
-------------- ------------ -------------- ------------- ---------------
Total operating expenses.......... 669 4,539 10,300 6,314 31,325
-------------- ------------ -------------- ------------- ---------------
Operating loss......................... (669) (4,539) (9,346) (5,840) (28,820)
Interest and other income.............. 8 111 303 150 927
Interest and other expenses............ (1) (6) (35) (28) (98)
-------------- ------------ -------------- ------------- ---------------
Net loss before taxes on income........ (662) (4,434) (9,078) (5,718) (27,991)
-------------- ------------ -------------- ------------- ---------------
Taxes on income........................ -- -- -- -- (141)
-------------- ------------ -------------- ------------- ---------------
Net loss............................... $ (662) $ (4,434)$ (9,078) $ (5,718) $ (28,132)
-------------- ------------ -------------- ------------- ---------------
Basic and diluted net loss per share... $ (0.30) $ (1.17)$ (2.34) $ (1.48) $ (6.76)
============== ============ ============== ============= ===============
Weighted average number of shares used
in computing basic and diluted net
loss per share...................... (**)2,192,400 (**)3,804,874 (**)3,886,495 (**)3,873,237 (***)4,161,859
============== ============ ============== ============= ===============
Pro forma basic and diluted net loss
per share (unaudited)............... $ (0.67) $ (1.50)
============== ===============
Pro forma weighted average number of
shares used in computing basic and
diluted net loss per share
(unaudited)......................... (**)13,566,732 (***)18,750,905
============== ===============
</TABLE>
--------------
(*) Amortization of stock-based compensation relates to the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -----------------------
1999 1999 2000
------------- ---------- ------------
<S> <C> <C> <C>
Cost of revenues........................................................ $ 8 $ 1 $ 307
Research and development................................................ 107 9 1,293
Sales and marketing..................................................... 189 33 1,898
General and administrative.............................................. 77 1 2,039
------------- ---------- ------------
Total amortization of deferred stock compensation................ $ 381 $ 44 $ 5,537
============= ========== ============
</TABLE>
--------------
(**) Does not include 420,000 shares issued to a trustee in respect of options
granted to employees which have been exercised during September 2000.
(***) Includes 1,018,649 shares issued to a trustee in favor of the early
exercise.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
XACCT TECHNOLOGIES LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ORDINARY SHARES PREFERRED SHARES DEFERRED
------------------------ ----------------------- ADDITIONAL STOCK
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL COMPENSATION
------------ --------- ------------ --------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of June 8, 1997
(inception)........................ -- $ -- -- $ -- $ -- $ --
Issuance of Ordinary shares, net... 4,200,000* 1 -- -- -- --
Issuance of Preferred A shares,
net.............................. -- -- 1,540,000 --** 999 --
Net loss .......................... -- -- -- -- -- --
------------ --------- ------------ --------- --------------- ------------
Balance as of December 31, 1997....... 4,200,000* 1 1,540,000 --** 999 --
Stock split by rights offering..... -- 1 -- --** (1) --
Issuance of Ordinary shares, net... 63,455 --** -- -- 12 --
Issuance of Preferred A shares,
net.............................. -- -- 2,077,250 1 1,824 --
Issuance of Preferred B shares,
net.............................. -- -- 5,286,386 2 7,230 --
Net loss........................... -- -- -- -- -- --
------------ --------- ------------ --------- --------------- ------------
Balance as of December 31, 1998....... 4,263,455* 2 8,903,636 3 10,064 --
Issuance of Preferred B shares,
net.............................. -- -- 428,624 --** 574 --
Issuance of Preferred C shares,
net.............................. -- -- 4,003,895 2 20,925 --
Stock split by rights offering..... -- 9 -- 28 -- --
Exercise of options, net........... 82,320 --** -- -- 50 --
Deferred stock compensation........ -- -- -- -- 3,205 (3,205)
Amortization of deferred stock
compensation..................... -- -- -- -- -- 381
Net loss........................... -- -- -- -- -- --
------------ --------- ------------ --------- --------------- ------------
Balance as of December 31, 1999....... 4,345,775* 11 13,336,155 33 34,818 (2,824)
Stock split by rights offering..... -- 34 -- 113 (147) --
Exercise of options, net........... 432,852 2 -- -- 95 --
Exercise of warrants, net.......... -- -- 737,646 3 2,458 --
Issuance of Preferred D shares,
net.............................. -- -- 1,227,235 3 14,223 --
Deferred stock compensation........ -- -- -- -- 15,428 (15,428)
Amortization of deferred stock
compensation..................... -- -- -- -- -- 5,537
Repayment of receivable on account
of shares........................ -- -- -- -- -- --
Early exercise of options (see
note 10)......................... 598,649 6 -- -- 2,259 --
Net loss........................... -- -- -- -- -- --
------------ --------- ------------ --------- --------------- ------------
Balance as of September 30, 2000
(unaudited)........................ 5,377,276*** $ 53 15,301,036 $ 152 $ 69,134 $ (12,715)
============ ========= ============ ========= =============== ============
RECEIVABLES TOTAL
ON ACCOUNT OF ACCUMULATED SHAREHOLDERS'
SHARES DEFICIT EQUITY
------------ ------------ -----------
<S> <C> <C> <C>
Balance as of June 8, 1997
(inception)........................ $ -- $ -- $ --
Issuance of Ordinary shares, net... -- -- 1
Issuance of Preferred A shares,
net.............................. -- -- 999
Net loss .......................... -- (662) (662)
------------ ------------ -----------
Balance as of December 31, 1997....... -- (662) 338
Stock split by rights offering..... -- -- --
Issuance of Ordinary shares, net... -- -- 12
Issuance of Preferred A shares,
net.............................. -- -- 1,825
Issuance of Preferred B shares,
net.............................. -- -- 7,232
Net loss........................... -- (4,434) (4,434)
------------ ------------ -----------
Balance as of December 31, 1998....... -- (5,096) 4,973
Issuance of Preferred B shares,
net.............................. -- -- 574
Issuance of Preferred C shares,
net.............................. -- -- 20,927
Stock split by rights offering..... (37) -- --
Exercise of options, net........... -- -- 50
Deferred stock compensation........ -- -- --
Amortization of deferred stock
compensation..................... -- -- 381
Net loss........................... -- (9,078) (9,078)
------------ ------------ -----------
Balance as of December 31, 1999....... (37) (14,174) 17,827
Stock split by rights offering..... -- -- --
Exercise of options, net........... -- -- 97
Exercise of warrants, net.......... -- -- 2,461
Issuance of Preferred D shares,
net.............................. -- -- 14,226
Deferred stock compensation........ -- -- --
Amortization of deferred stock
compensation..................... -- -- 5,537
Repayment of receivable on account
of shares........................ 32 -- 32
Early exercise of options (see
note 10)......................... (2,265) -- --
Net loss........................... -- (28,132) (28,132)
------------ ------------ -----------
Balance as of September 30, 2000
(unaudited)........................ $ (2,270) $ (42,306) $ 12,048
============ ============ ===========
</TABLE>
--------------
* Includes 420,000 shares issued to a trustee in respect of options granted
to employees which have been exercised during September, 2000 in favor of
the early exercise.
** Represents an amount lower than $1.
*** Includes 1,018,649 shares issued to a trustee in favor of the early
exercise.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
XACCT TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 8, 1997 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, -------------------- -----------------------
1997 1998 1999 1999 2000
-------------- --------- --------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $ (662) $ (4,434) $ (9,078) $ (5,718) $ (28,132)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation.................................... 11 66 178 120 628
Accrued interest on short-term bank deposits.... -- -- (4) -- --
Amortization of deferred stock compensation..... -- -- 381 44 5,537
Gain from sale of marketable securities......... -- -- -- -- (25)
Increase (decrease) in accrued severance pay,
net........................................... 6 402 77 (6) 288
Increase in trade receivables................... (4) (25) (529) (562) (1,378)
Increase in other accounts receivable and
prepaid expenses.............................. (47) (104) (171) (91) (911)
Increase (decrease) in trade payables........... 70 265 130 (135) 255
Increase in deferred revenues................... -- -- 127 481 1,735
Increase in accrued expenses and other
liabilities................................... 104 165 732 688 4,883
-------------- --------- --------- ---------- -----------
Net cash used in operating activities......... (522) (3,665) (8,157) (5,179) (17,120)
-------------- --------- --------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............. (112) (325) (774) (259) (3,242)
Investment in short-term deposits............... -- -- (247) -- (175)
Realization of short-term deposits.............. -- -- -- -- 221
Investment in long term deposits................ -- -- (44) -- (151)
Realization of long-term deposits............... -- -- -- -- 26
Purchase of marketable securities............... -- -- (465) -- --
Proceeds from the sale of marketable securities. -- -- -- -- 490
Loans to employees.............................. -- -- -- -- (212)
-------------- --------- --------- ---------- -----------
Net cash used in investing activities......... (112) (325) (1,530) (259) (3,043)
-------------- --------- --------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares, net........... 1,000 9,069 21,501 574 14,226
Proceeds from exercise of warrants, net......... -- -- 50 50 2,461
Proceeds from exercise of options, net.......... -- -- -- -- 97
Proceeds from receivables on account of shares.. -- -- -- -- 32
-------------- --------- --------- ---------- -----------
Net cash provided by financing activities..... 1,000 9,069 21,551 624 16,816
-------------- --------- --------- ---------- -----------
Increase (decrease) in cash and cash equivalents... 366 5,079 11,864 (4,814) (3,347)
Cash and cash equivalents at the beginning of the
period.......................................... -- 366 5,445 5,445 17,309
-------------- --------- --------- ---------- -----------
Cash and cash equivalents at the end of the period. $ 366 $ 5,445 $ 17,309 $ 631 $ 13,962
============== ========= ========= ========== ===========
Non-cash transaction:
Receivables on accounts of shares............. $ -- $ -- $ 37 $ -- $ 2,265
============== ========= ========= ========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. GENERAL
XACCT Technologies Ltd. ("the Company" or "XACCT") was incorporated
in Israel and commenced operations in June 1997.
The Company and its U.S. wholly-owned subsidiary, XACCT Technologies
Inc., a Delaware corporation, develop, manufacture and market
intelligent business infrastructure software for telecommunications
carriers, Internet service providers, enterprise network operators,
wireless service providers and cable network operators.
The Company sales are made principally in North America and Europe. As
for major customers, see Note 9.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States.
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 consolidated
financial statements and accompanying Notes. Actual results could
differ from those estimates.
FINANCIAL STATEMENTS IN U.S. DOLLARS
A majority of the revenues of the Company and its subsidiary is
generated in United States dollars (dollars). In addition, a
substantial portion of the Company and its subsidiary's costs 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 and reporting currency. Accordingly, monetary accounts
maintained in currencies other than the dollar are remeasured into
dollars in accordance with Statement No. 52 of the Financial
Accounting Standard Board (FASB), "Foreign Currency Translation" . All
transaction gains and losses from the remeasurement of monetary
balance sheet items are reflected in the statement of operations as
income or expenses, as appropriate.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiary. Inter-company transactions and balances
were eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments that are
readily convertible to cash with original maturities of three months
or less.
SHORT-TERM DEPOSITS
Bank deposits with maturities of more than three months, but less than
one year, are included in short-term deposits.
MARKETABLE SECURITIES
Investments in marketable securities are accounted for in accordance
with Statement of Financial Accounting Standards 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115).
F-7
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company's marketable securities are comprised of government
debentures. The Company classifies its marketable securities as
available-for-sale. Unrealized losses on marketable securities in 1999
were immaterial. Accordingly, these losses were included in interest
expense.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated by using the straight-line
method over the estimated useful lives of the assets at the following
annual rates:
%
-----------------------------
Computers and peripheral equipment.... 33
Office furniture and equipment........ 7-15
Leasehold improvements................ Over the term of the lease
The Company periodically assesses the recoverability of the carrying
amount of property and equipment and provides for any possible
impairment loss based upon the difference between the carrying amount
and fair value of such assets. As of December 31, 1999, no impairment
indicators have been identified.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
Statement of Financial Accounting Standards (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. The
Company does not incur any material costs between the completion of
the working model and the point at which the product is ready for
general release. Therefore, through December 31, 1999, the Company has
charged all software development costs to research and development
expenses in the period in which they were incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 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.
REVENUE RECOGNITION
The Company has adopted Statement of Position (SOP) 97-2, "Software
Revenue Recognition," as amended. SOP 97-2, generally requires revenue
earned on software arrangements involving multiple elements to be
allocated to each element based on the relative fair value of the
elements. The Company has also adopted SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition with Respect to Certain
Transactions," for all transactions entered into after January 1,
2000. SOP 98-9 requires that revenue be recognized under the "residual
method" when vendor specific objective evidence (VSOE) of fair value
exists for all undelivered elements and no VSOE exists for the
delivered elements.
F-8
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
To date, the Company has derived its revenue from license fees and
sub-license fees of its XACCTUSAGE products, maintenance and support
and rendering of consulting services such as implementation, training
and installation. The Company sells its products primarily through its
direct sales force and indirectly through resellers. Revenue
attributable to indirect sales is recognized upon acceptance by the
end customer.
Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant
XACCT obligations with regard to implementation remain, the fee is
fixed or determinable, and collectibility is probable. The Company
generally does not grant a right of return to its customers. When a
right of return exists, the Company defers revenue until the right of
return expires, at which time revenue is recognized provided that all
other revenue recognition criteria have been met. The Company
considers all arrangements with payment terms extending beyond thirty
days not to be fixed or determinable. If the fee is not fixed or
determinable, revenue is recognized as payments become due from the
customer provided that all other revenue recognition criteria have
been met.
When contracts contain multiple elements wherein VSOE of fair value
exists for all undelivered elements, the Company accounts for the
delivered elements in accordance with the "Residual Method" prescribed
by SOP 98-9. Under the residual method, the entire discount of the
arrangement is attributed to the delivered elements. Maintenance and
support revenue included in these arrangements is deferred and
recognized on a straight-line basis over the term of the maintenance
and support agreement, which typically is 12 months. The VSOE of fair
value of the undelivered elements (maintenance and support and
services) is determined based on the price charged for the undelivered
element when sold separately.
Arrangements that include consulting services are evaluated to
determine whether those services are essential to the functionality of
other elements of the arrangement. When services are considered
essential, revenue under the arrangement is recognized using contract
accounting. When services are not considered essential, the revenue
allocable to the software services is recognized as the services are
performed. To date, the Company has determined that the services are
not considered essential to the functionality of other elements of the
arrangement.
Deferred revenue includes amounts received from customers for which
revenue has not been recognized.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25 (APB 25) "Accounting for Stock Issued to Employees" in
accounting for its employee stock option plans. Under APB 25, when the
exercise price of the Company's share options equals or is above the
market price of the underlying shares on the date of grant, no
compensation expense is recognized.
The Company applies SFAS No. 123 "Accounting for Stock-Based
Compensation" and EITF 96-18 "Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services" with respect to options issued to
non-employees. SFAS No. 123 requires use of an option valuation model
to measure the fair value of the options at the grant date. The pro
forma disclosures required by SFAS No. 123, are provided in Note 7.
SEVERANCE PAY
The Company's liability for severance pay is calculated pursuant to
Israeli severance pay law based on the most recent salary of the
employees multiplied by the number of years of employment, as of the
balance sheet date. Employees are entitled to one month's salary for
each year of employment or a portion thereof. The Company's liability
for all of its employees is fully provided by monthly deposits with
insurance policies and by an accrual.
F-9
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The deposited funds include profits accumulated up to the balance
sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israeli severance pay law or
labor agreements. The value of the deposited funds is based on the
cash surrendered value of these policies, and includes immaterial
profits.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
The carrying amounts of cash and cash equivalents, short-term
deposits, trade receivables, and trade payables approximate their fair
value due to the short-term maturity of such instruments. Marketable
securities are based on the quoted market price. The carrying amounts
of the Company's long-term deposits and the long-term loans
approximate their fair value. The fair value was estimated using
discounted cash flow analysis, based on the Company's incremental
lending rates for similar types of arrangements.
BASIC AND DILUTED NET LOSS PER SHARE
Basic net loss per share is computed based on the weighted average
number of ordinary shares outstanding during each year. Diluted net
loss per share is computed based on the weighted average number of
ordinary shares outstanding during each year, plus dilutive potential
ordinary shares considered outstanding during the year, in accordance
with FASB No. 128, "Earnings Per Share."
All convertible preferred shares, outstanding stock options, and
warrants have been excluded from the calculation of the diluted net
loss per share because all such securities are anti-dilutive for all
periods presented. The total numbers of shares related to the
outstanding convertible preferred shares, options and warrants
excluded from the calculations of diluted net loss per share were
1,603,700, 11,678,660, 18,537,015, 12,303,942 and 21,171,905 for the
period from June 8, 1997 (inception) to December 31, 1997, for the
years ended December 31, 1998 and 1999 and for the nine months ended
September 30, 1999 and 2000, respectively.
Basic and diluted pro forma net loss per share, as presented in the
statements of operations, has been calculated as described above and
also gives effect to the automatic conversion of the convertible
preferred shares into ordinary shares that will occur upon the closing
of the offering contemplated by this prospectus (using the as-if
converted method).
The following table presents the calculation of pro forma basic and
diluted net loss per share:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
1999 2000
------------- -------------------
(UNAUDITED)
<S> <C> <C>
Net loss as reported........................................... $ (9,078) $ (28,132)
------------- -------------------
Pro forma:
Shares used in computing basic and diluted net loss per
share.................................................. 3,886,495 4,161,859
Effect of assumed conversion of convertible preferred
shares (unaudited)..................................... 9,680,237 14,589,046
------------- -------------------
Shares used in computing pro forma basic and diluted net 13,566,732 18,750,905
loss per share (unaudited)............................. ============= ===================
Pro forma basic and diluted net loss per share (unaudited) $ (0.67) $ (1.50)
============= ===================
</TABLE>
F-10
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED PRO FORMA SHAREHOLDERS' EQUITY
If the offering contemplated by this prospectus is consummated, all of
the convertible preferred shares outstanding will automatically be
converted into ordinary shares and all of the warrants outstanding
will be exercised into shares. Pro forma shareholders' equity at
September 30, 2000, as adjusted for the assumed conversion and
exercise of those shares and warrants outstanding at September 30,
2000, is disclosed on the balance sheet.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalent, short-term bank deposits, marketable securities and trade
receivables. Cash and cash equivalents and short-term bank deposits
are deposited with major banks in Israel and in the United States.
Such deposits in the United States may be in excess of insured limits
and are not insured in other jurisdictions. 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. Marketable securities are Government of
Israel debentures. The Company's trade receivables are mainly derived
from sales to telecommunication carriers, Internet service providers,
enterprise network operators, wireless services and cable network
operators in the United States and Europe. The Company usually does
not require collateral on trade receivables because its customers are
large, well-established companies.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities"
and its amendments, SFAS 137 and 138 in June 1999 and June 2000,
respectively. These Statements establish 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. These Statements also require 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 formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. The FASB
has issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement
No. 133". The Statement defers for one year the effective date of SFAS
No. 133. The rule will apply to all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company does not expect the
impact of this new statement of the Company's consolidated balance
sheets or results of operations to be material.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial
Statements" which provides guidance related to revenue recognition
based on interpretations and practices followed by the SEC. SAB 101
was effective the first fiscal quarter of fiscal years beginning after
December 15, 1999 and requires companies to report any changes in
revenue recognition as cumulative change in accounting principle at
the time of implementation in accordance with APB 20, "Accounting
Changes." In March 2000, the SEC issued SAB 101A "Amendment: Revenue
Recognition in Financial Statements," which delays implementation of
SAB 101 until the Company's second fiscal quarter of 2000. In June
2000, the SEC issued SAB 101B "Second Amendment: Revenue Recognition
in Financial Statements," which delays the implementation of SAB 101
until the Company's fourth fiscal quarter of 2000. The Company has
early adopted SAB 101. Such adoption of SAB 101 did not
F-11
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
have a material effect on the consolidated financial position or
results of operations of the Company. The Company will adopt the final
draft of SAB 101 when released.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44),
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB 25." This Interpretation clarifies (a) the
definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a non
compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective
July 1, 2000, but certain conclusions in this Interpretation cover
specific events that occur after either December 15, 1998, or January
12, 2000. To the extent that this Interpretation covers events
occurring during the period after December 15, 1998, or January 12,
2000, but before the effective date of July 1, 2000, the effects of
applying this Interpretation are recognized on a prospective basis
from July 1, 2000.
UNAUDITED INFORMATION
The financial statements include the unaudited consolidated balance
sheet as of September 30, 2000, the statement of shareholders' equity
for the nine months ended September 30, 2000 and the consolidated
statements of operations and cash flows for the nine months ended
September 30, 1999 and 2000. This unaudited information has been
prepared by the Company on the same basis as the audited consolidated
financial statements and, in management's opinion, reflects all
adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the financial information, in accordance
with generally accepted accounting principles for interim financial
information, for the periods presented. Results for interim periods
are not necessarily indicative of the results to be expected for the
entire year.
3. PROPERTY AND EQUIPMENT
DECEMBER 31,
-------------------
1998 1999
--------- --------
Cost:
Computers and peripheral equipment.......... $ 339 $ 747
Office furniture and equipment.............. 93 453
Leasehold improvements...................... 5 11
--------- --------
437 1,211
Accumulated depreciation....................... (77) (255)
--------- --------
Depreciated cost............................... $ 360 $ 956
========= ========
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Employee expenses and payroll accruals......... $ 202 $ 718
Accrued expenses............................... 66 275
Other liabilities.............................. 2 9
--------- --------
$ 270 $ 1,002
========= ========
5. ACCRUED SEVERANCE PAY
The Company's liability for severance pay pursuant to Israeli law is
calculated based upon the employees' most recent monthly salary
multiplied by the period of employment. Part of the liability is
funded through insurance policies which are designated only for
severance payments. The value of these policies is recorded as an
asset in the Company's balance sheets.
Severance expenses for the period from June 8, 1997 (inception) to
December 31, 1997 and for the years ended December 31, 1998 and 1999,
were $26, $460 and $317, respectively.
F-12
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. COMMITMENTS AND CONTINGENT LIABILITIES
LEASE COMMITMENTS
The facilities of the Company and its U.S. subsidiary are rented under
operating leases with terms ending in 2004.
Future minimum lease commitments under non-cancelable operating leases
for the years ending December 31 are as follows:
2000 $687
2001 $759
2002 $772
2003 $498
2004 $415
Rent expenses under operating leases for the period from June 8, 1997
(inception) to December 31, 1997 and for the years ended December 31,
1998 and 1999, approximated $20, $96 and $159, respectively.
GUARANTEES
As of December 31, the Company has provided guarantees, in connection
with rental agreements totaling approximately $30.
7. SHARE CAPITAL
GENERAL
On January 29, 2000, the Company effected a pro-rata rights offering,
pursuant to which each existing shareholder was granted six additional
shares of the same class, with a nominal value of NIS 0.01 par value
each, subject to the payment or liability for the payment of the
nominal value. Each option and warrant holder is entitled to
adjustments to his or her respective options or warrants.
All share and per share data included in these consolidated financial
statements have been retroactively adjusted to reflect
recapitalizations of the Company, the abovementioned rights offering,
as well as to reflect the 1:1 rights offering and 100:1 stock split
effected on January 27, 1998 and on February 9, 1998, respectively.
In October 1999, the Company reclassified 5,600,000 authorized
ordinary shares into authorized Preferred C shares.
In April 2000 the Company increased its authorized share capital by
creating an additional 762,000,000 shares of the various classes at a
nominal value of NIS 0.01. The Company effected a pro-rata three to
one rights offering and immediately thereafter effected a one share
for four share consolidation of its shares with the effect of
increasing the nominal value of each share from NIS 0.01 to NIS 0.04.
F-13
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
COMPOSITION OF SHARE CAPITAL
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1998 1999
------------------------------ -----------------------------
ISSUED AND ISSUED AND
AUTHORIZED OUTSTANDING AUTHORIZED OUTSTANDING
ORIGINAL ------------- -------------- -------------- --------------
ISSUANCE PRICE NUMBER OF SHARES
-------------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shares of NIS 0.04 par value each:
Ordinary shares................ 41,300,000 4,263,455* 37,630,000 4,345,775*
Non-voting Ordinary shares..... 1,750,000 -- 1,820,000 --
Preferred "A" shares........... $ 0.71-$0.93 4,200,000 3,617,250 4,200,000 3,617,250
Preferred "B-1" shares......... $ 1.40 7,000,000 3,971,240 7,000,000 4,399,864
Preferred "B-2" shares......... $ 1.40 1,750,000 1,315,146 1,750,000 1,315,146
Preferred "C-1" shares......... $ 5.32 -- -- 5,530,000 3,933,895
Preferred "C-2" shares......... $ 5.32 -- -- 70,000 70,000
-------------- ------------- -------------- -------------- --------------
56,000,000 13,167,091 58,000,000 17,681,930
============= ============== ============== ==============
</TABLE>
--------------
* Includes 420,000 shares issued to a trustee in favor of options to
employees which have not yet been exercised.
ORDINARY SHARES
The voting ordinary shares confer upon the holders the right to receive
notice to participate and vote in the general meetings of the Company,
the right to receive dividends, if and when declared, and the right to
appoint directors.
The non-voting ordinary shares confer all of the rights of the voting
ordinary shares, except for the rights to appoint directors and to
receive notice to participate and vote in the general meetings of the
Company. The non-voting ordinary shares shall be convertible at the
option of the holder into an equal number of voting ordinary shares.
PREFERRED SHARES
The Series A, B-1 and C-1 preferred shares confer all of the rights of
the voting ordinary shares. The Series B-2 and C-2 non-voting preferred
shares confer all of the rights of the non-voting ordinary shares. All
the preferred shares confer additional rights as detailed below:
CONVERSION
Each share of Series A, B-1 and C-1 preferred shares is
convertible into a voting ordinary share on a one-to-one
basis, subject to adjustments for future dilution.
Each share of Series B-2 and C-2 preferred shares is
convertible into Series B-1 and C-1 preferred shares,
respectively, on a one-to-one basis, or into non-voting
ordinary shares, pursuant to the then applicable conversion
rate.
All preferred shares shall be automatically converted into
ordinary shares at the then applicable conversion rate
immediately prior to the consummation of an initial public
offering ("IPO").
The pro forma shareholders' equity gives effect to the
conversion of all outstanding preferred shares as if such
conversion occurred on September 30, 2000.
F-14
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LIQUIDATION PREFERENCE
The preferred shares confer a preference over ordinary shares,
in the event of any liquidation, dissolution or winding up of
the Company, either voluntarily or involuntarily. The
liquidation preference is equal to the original purchase price
in U.S. dollars.
OTHER PREFERENCE
In addition, all preferred shares confer preemptive rights and
certain rights of first refusal, co-sale rights and
anti-dilution rights.
STOCK WARRANTS
As part of the issuance of shares in October 1999, the investors
received warrants to purchase 1,201,158 Series C-1 preferred shares,
with an exercise price of $7.82 for 50% of the warrants and $9.39, for
the other 50%. The first 50% of the warrants are exercisable through
the earlier of the termination of a 24-month period, an IPO or
liquidation of the Company. The remaining 50% of the warrants are
exercisable through the earlier of the termination of a 30-month
period, consummation of an IPO, or liquidation of the Company. As of
September 30, 2000, 73,304 warrants have been exercised.
As part of the issuance of shares on October 29, 1998, the investors
received warrants to purchase 857,213 Series B-1 preferred shares,
with an exercise price of $2.80 per share. The first 50% of the
warrants are exercisable through the earlier of the termination of an
18-month period, an IPO or liquidation of the Company. The remaining
50% of the warrants are exercisable through the earlier of the
termination of a 24-month period, an IPO, or liquidation of the
Company. As of September 30, 2000, 664,342 warrants have been
exercised.
STOCK OPTIONS TO SERVICE PROVIDERS
In June 1997, in connection with an issuance of shares, the Company
granted its consultants options to purchase 63,700 ordinary shares at
$0.71 per share in respect of past services. The fair value for these
options was estimated at the date of grant using an option pricing
model with the following assumptions: risk-free interest rate of 6%,
dividend yields of 0%, volatility of 0.1% and an expected life of 1
year. The fair value of these options at the grant date was
approximately $0.00. As of September 30, 2000, all the options have
been exercised.
In 1998, the Company granted service providers options to purchase
23,170 ordinary shares at an exercise price of $0.19 in respect of
past services. As of December 31, 1999, these options are fully
vested. The Company accounts for these options in accordance with the
provisions of SFAS No. 123. No compensation expense has been recorded
in the consolidated financial statements regarding those options due
to the insignificant amount of total compensation. The fair value for
these options was estimated at the date of grant using an option
pricing model with the following assumptions: risk-free interest rate
of 5.5% dividend yields of 0% volatility of 0.1% and an expected life
of 1 year. The fair value of these options at the grant date was
approximately $0.00.
STOCK OPTIONS
As of December 31, 1999, the Company has authorized, through several
share option plans, the grant of options to officers, management, key
employees and others of up to 3,302,236 of the Company's ordinary
shares. The options granted generally become fully exercisable after
four years of employment and expire eight years from the grant date of
the option plan under the terms they were granted.
F-15
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
A summary of the Company's employees share option activity, and
related information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1999
-------------------------- --------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Outstanding--at the beginning of the -- $ -- 1,830,941 $ 0.16
period................................
Granted................................. 1,840,566 0.16 1,437,170 1.30
Forfeited............................... (9,625) 0.07 (154,672) 0.18
------------ -------------- ----------- -------------
Outstanding--at the end of the period.... 1,830,941 $ 0.16 3,113,439 $ 0.68
============ ============== =========== =============
Exercisable options--at the end of the
period................................ -- -- 668,120 0.14
============ ============== =========== =============
</TABLE>
The options outstanding as of December 31, 1999 have been classified
by exercise price, as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- --------------------------------
OUTSTANDING WEIGHTED EXERCISABLE WEIGHTED
AS OF AVERAGE WEIGHTED AS OF AVERAGE
DECEMBER 31, REMAINING AVERAGE EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICE 1999 CONTRACTUAL LIFE PRICE 1999 PRICE
--------------- -------------- ---------------- --------------- ---------------- ---------------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$ 0.07 - $0.19 1,354,969 6.44 $ 0.11 582,544 $ 0.11
0.35 701,750 7.18 0.35 85,576 0.35
1.57 932,120 7.81 1.57 -- --
2.13 124,600 7.95 2.13 -- --
-------------- ---------------- --------------- ---------------- ---------------
3,113,439 7.07 $ 0.68 668,120 $ 0.14
============== ================ =============== ================ ===============
</TABLE>
Deferred stock compensation represents the excess of the market value
over the exercise price. Deferred stock compensation totaled $3,205
for 1999. Deferred stock compensation is amortized to the statements
of operations over the vesting period of four years.
Under SFAS No. 123, pro forma information regarding net loss and net
loss per share is required and has been determined as if the Company
had accounted for its employee stock option under the fair value
method of that Statement. The fair value for these options was
estimated at the date of grant using a minimum value option pricing
model with the following assumptions for 1998 and 1999: risk-free
interest rates of 6.00% and 5.75%, respectively, dividend yields of 0%
and an expected life of the option range between 1.5 to 4.5 years for
both periods.
Pro forma information under SFAS No. 123:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 8, 1997
(INCEPTION) TO YEAR ENDED
DECEMBER 31, --------------------
1997 1998 1999
-------------- --------- ---------
<S> <C> <C> <C>
Net loss as reported...................................... $ (662) $ (4,434) $ (9,078)
Pro forma net loss........................................ $ (662) $ (4,444) $ (9,131)
Pro forma basic and diluted net loss per share............ $ (0.30) $ (1.17) $ (2.35)
</TABLE>
F-16
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Weighted-average fair values and exercise prices of options whose
exercise price (1) equals, or (2) is less than the market price of the
stock on date of grant are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS GRANTED AT AN EXERCISE PRICE: 1998 1999
-------------------------------------------------------------------- ------- -------
<S> <C> <C>
Less than fair value at date of grant......................................... $ -- $ 2.75
======= =======
Equals to fair value at date of grant......................................... $ 0.03 $ 0.06
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
WEIGHTED-AVERAGE EXERCISE PRICE OF OPTIONS GRANTED AT AN EXERCISE PRICE OF: 1998 1999
--------------------------------------------------------------------------- ------- -------
<S> <C> <C>
Less than fair value at date of grant......................................... $ -- $ 1.34
======= =======
Equals to fair value at date of grant......................................... $ 0.16 $ 0.35
======= =======
</TABLE>
DIVIDENDS:
In the event that cash dividends are declared in the future, such
dividends will be paid in NIS or in foreign currency subject to any
statutory limitations. The Company does not intend to pay cash
dividends in the foreseeable future.
8. INCOME TAXES
TAX BENEFITS UNDER ISRAEL'S LAW FOR THE ENCOURAGEMENT OF CAPITAL
INVESTMENTS, 1959 ("THE LAW")
The Company has been granted the status of "Approved Enterprise" under
the Law in 1998.
According to the provisions of the Law, the Company has elected the
"alternative benefits"--waiver of grants in return for a tax exemption
and, accordingly, the Company's income in Israel is tax-exempt for a
period of two years commencing with the year it first earns taxable
income relating to each expansion program, and subject to corporate
taxes at the reduced rate of 10% to 25% (depending on the level of
non-Israel investments in the Company), for an additional period of
eight years.
As the Company currently has no taxable income, these benefits have
not yet commenced.
The tax-exempt profits that will be earned by the Company's "Approved
Enterprise" can be distributed to shareholders, without imposing a tax
liability to the Company only upon the complete liquidation of the
Company. 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 elected the alternative system of benefits. The
Company's board of directors has determined that such tax exempt
income will not be distributed as dividends.
The period of tax benefits, detailed above, is limited to the earlier
of 12 years from the commencement of production, or 14 years from the
approval date. Accordingly, the period relating to the Company's
approved enterprise will expire in 2012.
Should the Company derive income in Israel from sources other than the
approved enterprise during the relevant period of benefits, such
income will be taxable at regular corporate tax rate of 36%.
MEASUREMENT OF RESULTS FOR TAX PURPOSES
Results for tax purposes are measured and reflected in real terms in
accordance with the changes in the Israeli Consumer Price Index
("CPI"). As explained in Note 2, the consolidated financial
F-17
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
statements are presented in U.S. dollars. The difference between the
change in the Israeli CPI and in the NIS/U.S. dollar exchange rate
causes a difference between taxable income or loss and the income or
loss before taxes reflected in the consolidated 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.
TAX BENEFITS UNDER ISRAEL'S LAW FOR THE ENCOURAGEMENT OF INDUSTRY
(TAXATION), 1969
The Company is an "industrial company" under the above law and as such
is entitled to certain tax benefits, including accelerated rates of
depreciation on certain assets and deduction of expenses incurred in
respect of public issuance of securities and deduction of 12.5% per
annum of the cost of certain intangible property rights. The Company
has not utilized these tax benefits.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1999, the Company had approximately $4,700 of
Israeli net operating loss carryforwards. The Israeli loss
carryforwards have no expiration date. The Company expects that during
the period these tax losses are utilized, its income would be
substantially tax exempt.
Accordingly, there will be no tax benefit available from such losses
and no deferred income taxes have been included in these consolidated
financial statements.
As of December 31, 1999, the U.S. subsidiary had U.S. federal and
state net operating loss carryforwards for income tax purposes in the
amount of approximately $6,900, which can be carried forward and
offset against taxable income in various amounts between the years
2006 and 2019.
Utilization of U.S. net operating losses may be subject to substantial
annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses before
utilization.
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. Significant components of the Company's deferred tax assets
and liabilities are as follows:
DECEMBER 31,
------------------------
1998 1999
------------ -----------
Deferred tax assets:
U.S. operating loss carryforward....... $ 553 $ 2,428
Reserve and allowances................. 64 91
------------ -----------
Total deferred tax asset before
valuation allowance.................. 617 2,519
Valuation allowance....................... (617) (2,519)
------------ -----------
Net deferred tax asset.................... $ -- $ --
============ ===========
The Company's U.S subsidiary has provided valuation allowances in
respect of deferred tax assets resulting from tax loss carryforwards.
Management currently believes that since the Company has a history of
losses it is more likely than not that the deferred tax regarding the
loss carryforwards and other temporary differences will not be
realized in the foreseeable future.
F-18
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRE-TAX LOSS
PERIOD FROM
JUNE 8, 1997
(INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------
1997 1998 1999
------------- ------------- --------------
Domestic......... $ 662 $ 2,666 $ 3,890
Foreign.......... -- 1,768 5,188
------------- ------------- --------------
$ 662 $ 4,434 $ 9,078
============= ============= ==============
9. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
The Company manages its business on the basis of one reportable
segment, business infrastructure software, (see Note 1 for a brief
description of the Company's business) and follows the requirements of
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information."
The total revenues are attributed to geographic information, based on
the customers' location.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 8, 1997 NINE MONTHS
(INCEPTION) TO YEAR ENDED DECEMBER 31, ENDED
DECEMBER 31, -------------------------- SEPTEMBER 30,
1997 1998 1999 2000
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Revenues from sales to unaffiliated (UNAUDITED)
customers:
Israel.............................. $ -- $ -- $ 17 $ 89
United States....................... -- -- 595 3,479
Canada.............................. -- -- 156 129
Portugal............................ -- -- 230 73
Europe (excluding Portugal)......... -- -- 196 1,308
------------ ------------ ------------ ---------------
$ -- $ -- $ 1,194 $ 5,078
============ ============ ============ ===============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------
1997 1998 1999 2000
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Long-lived assets: (UNAUDITED)
Israel.............................. $ 101 $ 278 $ 420 $ 1,394
United States....................... -- 82 580 2,078
Europe.............................. -- -- -- 267
------------ ------------ ------------ --------------
$ 101 $ 360 $ 1,000 $ 3,739
============ ============ ============ ==============
</TABLE>
Major customer data as a percentage of total revenues:
NINE MONTHS
YEAR ENDED ENDED
DECEMBER SEPTEMBER 30,
31, 1999 2000
------------- --------------
(UNAUDITED)
Customer A..................... 19% 1%
Customer B..................... 12% 3%
Customer C..................... 10% 5%
Customer D..................... 10% 0%
Customer E..................... 0% 29%
Customer F..................... 0% 10%
F-19
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. SUBSEQUENT EVENTS (UNAUDITED)
PROPOSED PUBLIC OFFERING
On March 8, 2000, the Board of Directors authorized the Company to file
a registration statement with the United States Securities and Exchange
Commission for an initial public offering of its ordinary shares. In
connection with the initial public offering, all of the Company's
outstanding convertible preferred shares will be converted into
ordinary shares.
SERIES D PRIVATE PLACEMENT
In March 2000, the Company completed a private placement of 1,227,235
shares of Series D preferred shares at $12.63 per share resulting in
net cash proceeds of approximately $14,300. In the event of voluntary
or involuntary liquidation of the Company the holders of Series D
preferred shares are entitled to a liquidation preference of $12.63 per
share. Holders of Series D preferred shares are entitled to one vote
for each ordinary share into which the preferred shares are
convertible. Each preferred D share is convertible into an ordinary
share on a one-to-one basis, subject to adjustments for future
dilution. The Company reclassified 2,000,000 ordinary shares to
preferred "D" shares.
COMPANY NAME CHANGE
On June 5, 2000, Israeli Companies Registrar approved the Company's
name change from XACCT Technologies (1997) Ltd. to XACCT Technologies
Ltd.
SHARE OPTION PLAN
In April 2000, the Company adopted two share option plans as follows:
1. Section 3(i) Share Option Plan, reserving 700,000 ordinary shares
for future issuance of options to Israeli employees.
2. The 2000 Share Option Plan, reserving 5,300,000 ordinary shares
for future issuance of options to U.S. employees.
EMPLOYEE SHARE PURCHASE PLAN
In April 2000, the Company adopted the 2000 Employee Share Purchase
Plan, reserving 750,000 ordinary shares for future sale to employees.
EARLY EXERCISE OF OPTIONS
As of September 30, 2000, certain employees elected to early exercise
1,018,649 options to ordinary shares. The payment for the shares issued
as a result of such early exercise is subject to an installment
obligation and carries interest at an annual rate of 6.5%. The shares
purchased by the employees are deposited in escrow with a trustee and
are released to the employees by the trustee only upon the termination
of the vesting period applicable to such shares and upon the full
payment of all amounts due in respect of such shares.
Out of the 1,018,649 options that were early exercised, the Company
issued only 598,649 new shares, since there were 420,000 ordinary
shares that were previously issued to and held by a trustee.
F-20
<PAGE>
XACCT TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LOAN TO A SHAREHOLDER
In March 2000, the Company extended a loan to its Chief Executive
Officer in the amount of $175 with an interest rate of 6.45% per annum.
The principal plus interest on the loan are due upon the earlier of his
date of termination or two years from the date of the loan.
EXERCISE OF WARRANTS
During October 2000, certain shareholders exercised 112,503 B-1
warrants and 28,196 C-1 warrants, in consideration of approximately
$315 and $243, respectively.
AGREEMENTS WITH SPRINT/UNITED MANAGEMENT COMPANY ("SPRINT")
In October 2000, the Company entered into a master license agreement
with Sprint. According to this agreement, the Company will grant Sprint
a perpetual, non-exclusive, non transferable, worldwide right and
license to install, copy and use its software products.
In addition, in October 2000, the Company entered into a partnership
and marketing agreement with Sprint. In connection with this agreement
the Company issued to Sprint a warrant to purchase 175,000 ordinary
shares at an exercise price of $12.63 per share.
This warrant is fully vested, nonforfeitable and may be exercised, at
any time prior to the first to occur of the following:
(a) October 5, 2004.
(b) the sale, transfer or disposition of the Company's assets or
merger, or consolidation whereby the holders of the Company's
voting securities do not hold more than 50% of the voting
securities following consummation of the transaction.
The estimated fair value of the warrant, based on the fair value of the
warrant on the grant date, is $548 which will be amortized to sales and
marketing expenses over a period of one year. The fair value of this
warrant is determined using the Black-Scholes pricing model, as
required by SFAS No. 123 and EITF _____ 96-18, assuming risk free
interest rate of 5.75%, a volatility factor of 50%, dividend yields of
0% and an expected life of four years.
ESTABLISHMENT OF SUBSIDIARIES
During 2000, the Company established wholly-owned subsidiaries in
Europe (U.K., Sweden, Germany, France and Italy).
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[XACCT LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the securities being registered. All amounts shown are estimates except for
the SEC registration fee, the NASD filing fee and the Nasdaq National Market
fees.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee...................................................................... $ 19,800
NASD filing fee........................................................................... 8,000
NASDAQ National Market fees............................................................... 95,000
Blue Sky qualification fees and expenses.................................................. 15,000
Israeli stamp duty........................................................................ 500,000
Travel/road show expenses................................................................. 75,000
Printing and engraving expenses........................................................... 50,000
Transfer Agent fee........................................................................ 10,000
Accountant's fees and expenses............................................................ 400,000
Legal fees and expenses................................................................... 650,000
Directors and Officers Insurance.......................................................... 100,000
Miscellaneous............................................................................. 477,200
--------------
Total.................................................................................. $ 2,400,000
==============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Companies Law provides that an Israeli company cannot exonerate an
office holder from liability with respect to a breach of his or her duty of
loyalty, but may exonerate in advance an office holder from his or her liability
to the company, in whole or in part, with respect to a breach of his or her duty
of care. Our articles of association provide that, subject to any restrictions
imposed by the Companies Law, we may enter into an insurance contract providing
coverage for the liability of any of our office holders with respect to:
o a breach of his or her duty of care to us or to another person;
o a breach of his or her duty of loyalty to us, provided that the
office holder acted in good faith and had reasonable grounds to
assume that his or her act would not prejudice our interests; or
o a financial liability imposed upon him or her in favor of another
person with respect to an act performed by him or her in his or her
capacity as an office holder.
In addition, we may indemnify an office holder against the following
expenses or liabilities imposed upon him or her in his or her capacity as an
office holder:
o a financial liability imposed on him or her in favor of another
person by any judgment, including a settlement or an arbitrator's
award approved by a court; and
o reasonable litigation expenses, including attorneys' fees, incurred
by such office holder or imposed upon him or her by a court, in
relation to proceedings instigated by us against him or her or that
are instigated on our behalf or by another person, or as a result of
a criminal charge from which he or she was acquitted, or a criminal
charge in which he or she was convicted for a criminal offense that
does not require proof of intent.
The Companies Law provides that a company may not indemnify an office
holder nor enter into an insurance contract which would provide coverage for any
monetary liability incurred as a result of any of the following:
o a breach by the officer holder of his or her duty of loyalty unless
the office holder acted in good faith and had a reasonable basis to
believe that the act would not prejudice the company;
o a breach by the office holder of his or her duty of care if such
breach was committed intentionally or recklessly;
o an act or omission with the intent to unlawfully derive a personal
benefit; or
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o a fine levied against the office holder as a result of a criminal
offense.
Under the Companies Law, the shareholders of a company may amend its
articles of association to include either of the following provisions:
o a provision authorizing the company to grant in advance an
undertaking to indemnify an office holder, provided that the
undertaking is limited to specified classes of events which the board
of directors deem foreseeable at the time of grant and limited to an
amount determined by the board of directors to be reasonable under
the circumstances, or
o a provision authorizing the company to retroactively indemnify an
office holder.
In addition, pursuant to the Companies Law, indemnification of, and
procurement of insurance coverage for, a company's office holders must be
approved by the audit committee and the board of directors. In the case of
directors, additional approval by the shareholders is required.
Our articles of association allow for us to insure and indemnify office
holders to the fullest extent permitted by Israeli law, provided that the
insurance or indemnification is approved by the audit committee of our board of
directors and, if required by the Companies Law, also by our shareholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The share numbers below reflect (i) the 100 for 1 share split that
occurred on January 27, 1998, (ii) a rights offering in which the holders of
shares outstanding as of February 9, 1998 received one share for each share
outstanding held by them, (iii) a rights offering in which the holders of shares
outstanding as of January 29, 2000 received six shares for each share
outstanding held by them, and (iv) an increase of share capital, a bonus share
rights offering in which existing shareholders, option holders and warrant
holders as of April 24, 2000 received three preferred or ordinary shares for
each preferred or ordinary share, option or warrant held as of that date, and a
subsequent one share for four share consolidation, all of which occurred on
April 24, 2000, with the effect of increasing the nominal value of each share
from NIS 0.01 to NIS 0.04.
(1) From June 8, 1997 through September 30, 2000, we issued options to
purchase an aggregate of 5,995,765 ordinary shares to employees, officers,
directors, consultants and other service providers, and upon exercise of
compensatory options, we issued and sold an aggregate of 1,427,701 ordinary
shares to option holders of the Registrant for aggregate consideration of
U.S.$2,364,802.95, U.S.$2,264,847.41 which is in the form of an installment
obligation. As of September 30, 2000, 925,127 ordinary shares issued upon the
exercise of such options are subject to lien, possible confiscation by us or
transfer to the trustee of our section 102 Share Option Plan. The sales and
grants of the above securities are deemed to be exempt from registration under
the Securities Act of 1933, as amended (the "Securities Act"), in reliance on
either Rule 701 promulgated under Section 3(b) of the Securities Act, or on
Section 4(2) of the Securities Act, and were made without general solicitation
or advertising.
(2) On June 8, 1997, we issued and sold an aggregate of 1,890,000
ordinary shares to each of Eran Wagner and Limor Schweitzer for NIS 1,350. The
sales of these securities are deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, and were made
without general solicitation or advertising.
(3) On June 8, 1997, we issued and sold an aggregate of 420,000 ordinary
shares to Amon Evron & Co. Trust Company Ltd., which transferred the shares to
S. Friedman & Co. (Trusts) 1992, Ltd. on March 8, 2000, which held such shares
as trustee for certain future option holders, for NIS 300. On September 19,
2000, S. Friedman & Co. (Trusts) 1992, Ltd. transferred those shares to Charles
B. Gottlieb, to hold in joint escrow for Richard Van Hoesen and the company. The
sale of these securities by us is deemed to be exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act, and was
made without general solicitation or advertising.
(4) On June 9, 1997, we issued and sold an aggregate of 560,000 shares of
our Series A preferred shares to Ampal American Israel Corporation for an
aggregate purchase price of U.S.$400,000 and we issued warrants to purchase
287,000 preferred shares for U.S.$240,000 to the same investor. These preferred
shares are convertible into an equal number of ordinary shares, subject to
future adjustments for dilution. The sales of these securities are deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act, and were made without general solicitation or advertising.
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<PAGE>
(5) On June 9, 1997, we granted a fully vested warrant to purchase an
aggregate of 49,000 ordinary shares to Foresight Business and Consulting Ltd.
for an aggregate purchase price of U.S.$35,000. Subsequently, pursuant to the
terms of the warrant, on July 14, 1999, Foresight Business and Consulting Ltd.
transferred to Forstec Holdings (1999) Ltd. the right to purchase an aggregate
of 43,120 ordinary shares for an aggregate purchase price of U.S.$30,800. This
grant and the subsequent partial transfer of the warrant to purchase securities
are deemed to be exempt from registration under the Securities Act in reliance
on Section 4(2) of the Securities Act, and were made without general
solicitation or advertising.
(6) On June 9, 1997, we granted a fully vested warrant to purchase an
aggregate of 14,700 ordinary shares to Jerusalem Global Ltd. for an aggregate
purchase price of U.S.$10,500. Subsequently, pursuant to the terms of the
warrant, Jerusalem Global Ltd. transferred to Michael Eisenberg the right to
purchase an aggregate of 1,470 ordinary shares for an aggregate purchase price
of U.S.$1,050. This grant and the subsequent partial transfer of the warrant to
purchase securities are deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, and were made
without general solicitation or advertising.
(7) On June 22, 1997, we issued and sold 420,000 Series A preferred
shares to Technorov Holdings (1993) Ltd. for an aggregate purchase price of
U.S.$300,000 and we issued warrants to purchase 215,250 preferred shares for
U.S.$180,000 to the same investor. These preferred shares are convertible into
an equal number of ordinary shares, subject to future adjustments for dilution.
The sales of these securities are deemed to be exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act, and were
made without general solicitation or advertising.
(8) On June 23, 1997, we issued and sold an aggregate of 420,000 Series A
preferred shares to Israel Seed Limited Partnership and Israel Seed II L.P. for
an aggregate purchase price of U.S.$300,000 and we issued warrants to purchase
215,250 preferred shares for U.S.$180,000 to the same investors. These preferred
shares are convertible into an equal number of ordinary shares, subject to
future adjustments for dilution. The sales of these securities are deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act, and were made without general solicitation or advertising.
(9) On December 16, 1997, we issued and sold an aggregate of 140,000
Series A preferred shares to Israel Seed Limited Partnership and Israel Seed II
L.P. for an aggregate purchase price of U.S.$100,000. These preferred shares are
convertible into an equal number of ordinary shares, subject to future
adjustments for dilution. The sales of these securities are deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, and were made without general solicitation or advertising.
(10) On March 2, 1998, we issued and sold an aggregate of 717,500 Series
A preferred shares to Ampal American Israel Corporation, Technorov Holdings
(1993) Ltd., Israel Seed Limited Partnership and Israel Seed II L.P. upon
exercise of outstanding warrants for an aggregate purchase price of
U.S.$600,000. These preferred shares are convertible into an equal number of
ordinary shares, subject to future adjustments for dilution. The sales of these
securities are deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act, and were made without general
solicitation or advertising.
(11) On March 2, 1998, we issued and sold an aggregate of 1,288,000
Series A preferred shares to Ampal American Israel Corporation, Technorov
Holdings (1993) Ltd., Israel Seed Limited Partnership and Israel Seed II L.P.
for an aggregate exercise price of U.S.$1,196,000. These preferred shares are
convertible into an equal number of ordinary shares, subject to future
adjustments for dilution. The sales of these securities are deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, and were made without general solicitation or advertising.
(12) On March 2, 1998, we issued warrants to purchase an aggregate of
71,750 Series A preferred shares to Israel Seed Limited Partnership and Israel
Seed II L.P. for an aggregate exercise price of U.S.$66,625. These preferred
shares issuable upon exercise of the warrant are convertible into an equal
number of ordinary shares, subject to future adjustments for dilution. The
issuances of these warrants to purchase securities are deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, and were made without general solicitation or advertising.
(13) On March 18, 1998, we issued and sold an aggregate of 71,750 Series
A preferred shares to Israel Seed Limited Partnership and Israel Seed II L.P.
upon exercise of outstanding warrants for an aggregate purchase price of
U.S.$66,625. These preferred shares are convertible into an equal number of
ordinary shares, subject to future
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<PAGE>
adjustments for dilution. The sales of these securities are deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, and were made without general solicitation or advertising.
(14) On July 23, 1998, we issued and sold an aggregate of 63,455 ordinary
shares to Robert C. Hawk for an aggregate purchase price of U.S.$12,056,
pursuant to a restricted stock purchase agreement. The sale of these securities
is deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and was made without general solicitation or
advertising.
(15) On September 1, 1998, we granted a fully vested warrant to purchase
an aggregate of 17,920 shares of our ordinary shares to Gallagher Public
Relations Firm for an aggregate exercise price of U.S.$3,328. This grant of a
warrant to purchase securities is deemed to be exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act, and was
made without general solicitation or advertising.
(16) On October 29, 1998, we issued and sold an aggregate of (i)
3,971,240 Series B-1 preferred shares, (ii) 1,315,146 Series B-2 non-voting
preferred shares and (iii) warrants to purchase 792,925 Series B-1 preferred
shares to entities affiliated with Ampal American Israel Corporation, entities
affiliated with Israel Seed L.P., entities affiliated with Trident Capital,
entities affiliated with Eucalyptus Ventures L.P., and entities affiliated with
Technorov Holdings (1993) Ltd. for an aggregate purchase price of
U.S.$7,339,959. The Series B-1 preferred shares are convertible into an equal
number of voting ordinary shares and the Series B-2 non-voting preferred shares
are convertible into an equal number of non-voting ordinary shares, subject in
each case to future adjustment for dilution. The sales of these securities are
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and/or Rule 506 promulgated under the
Securities Act, and were made without general solicitation or advertising. Each
purchaser was a sophisticated investor and had access to all relevant
information necessary to evaluate the investment and represented to us that the
shares were being acquired for investment purposes.
(17) On November 1, 1998, we granted a fully vested warrant to purchase
an aggregate of 5,250 shares of our ordinary shares to Charles B. Gottlieb for
an aggregate exercise price of U.S.$975. This grant of an option to purchase
securities is deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act, and was made without general
solicitation or advertising.
(18) On January 21, 1999, we issued and sold an aggregate of (i) 428,624
Series B-1 preferred shares and (ii) warrants to purchase 64,288 Series B-1
preferred shares to WSG Capital L.P. for an aggregate purchase price of
U.S.$599,994. These preferred shares are convertible into an equal number of
ordinary shares, subject to future adjustments for dilution. The sales of these
securities are deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act and/or Rule 506 promulgated under
the Securities Act, and were made without general solicitation or advertising.
Each purchaser was a sophisticated investor and had access to all relevant
information necessary to evaluate the investment and represented to us that the
shares were being acquired for investment purposes.
(19) On May 18, 1999, we granted Robert C. Hawk an option to purchase
24,500 ordinary shares at a U.S.$0.35 per share exercise price, with 6.25% of
the options vesting quarterly beginning on May 18, 1999. This grant of an option
to purchase securities is deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, and was made
without general solicitation or advertising.
(20) On June 1, 1999, we issued and sold an aggregate of 1,470 voting
ordinary shares to Michael Eisenberg upon exercise of an outstanding warrant for
an aggregate purchase price of U.S.$1,050. The sale of these securities is
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and was made without general solicitation or
advertising.
(21) On July 18, 1999, we issued and sold an aggregate of 43,120 voting
ordinary shares to Forstec Holdings (1999) Ltd. upon exercise of an outstanding
warrant for an aggregate purchase price of U.S.$30,800. The sale of these
securities is deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act, and was made without general
solicitation or advertising.
(22) On June 1, 1999, we issued and sold an aggregate of 13,230 voting
ordinary shares to Jerusalem Global Ltd. upon exercise of an outstanding warrant
for an aggregate purchase price of U.S.$9,450. The sale of these securities is
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and was made without general solicitation or
advertising.
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<PAGE>
(23) On August 1, 1999, we issued and sold an aggregate of 24,500
ordinary shares to Robert C. Hawk for an aggregate exercise price of U.S.$8,575
upon exercise of his option. These shares are subject to repurchase until
vested. The sale of these securities is deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, and
was made without general solicitation or advertising.
(24) On October 7, 1999, we issued and sold an aggregate of (i) 3,839,906
Series C-1 preferred shares, (ii) 70,000 Series C-2 non-voting preferred shares
and (iii) warrants to purchase 1,172,962 Series C-1 preferred shares to entities
affiliated with Ampal American Israel Corporation, entities affiliated with
Israel Seed L.P., entities affiliated with Trident Capital, entities affiliated
with Eucalyptus Ventures L.P., Technology Crossover Ventures III L.P., Nissho
Iwai American Corporation and Deutsche Bank AG for an aggregate purchase price
of U.S.$20,799,973. The Series C-1 preferred shares are convertible into an
equal number of voting ordinary shares and the Series C-2 non-voting preferred
shares are convertible into an equal number of non-voting ordinary shares,
subject in each case to future adjustment for dilution. The sales of these
securities are deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act and/or Rule 506 promulgated
thereunder, and were made without general solicitation or advertising. Each
purchaser was a sophisticated investor and had access to all relevant
information necessary to evaluate the investment and represented to us that the
shares were being acquired for investment purposes.
(25) On December 21, 1999, we issued and sold an aggregate of (i) 93,989
Series C-1 preferred shares, and (ii) warrants to purchase 28,196 Series C-1
preferred shares to WSG Capital II L.P. for an aggregate purchase price of
U.S.$500,004. The Series C-1 preferred shares are convertible into an equal
number of voting ordinary shares, subject to future adjustments for dilution.
The sales of these securities are deemed to be exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act and/or Rule
506 promulgated thereunder, and were made without general solicitation or
advertising. Each purchaser was a sophisticated investor and had access to all
relevant information necessary to evaluate the investment and represented to us
that the shares were being acquired for investment purposes.
(26) On December 27, 1999, the unexercised portion of the warrant issued
on June 9, 1997 to Foresight Business and Consulting Ltd. was transferred to
Benny De-Kalo. Benny De-Kalo received a warrant to purchase 5,880 voting
ordinary shares at an aggregate exercise price of U.S.$4,200. The issuance of
this warrant to purchase securities is deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, and
was made without general solicitation or advertising.
(27) On January 31, 2000, we granted Charles B. Gottlieb an option to
purchase 10,500 ordinary shares at an exercise price of U.S.$3.00 per share,
with monthly vesting over a two year period beginning on January 1, 2000, with
no service related vesting. This grant of an option to purchase securities is
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and was made without general solicitation or
advertising.
(28) On March 8, 2000, we granted Charles B. Gottlieb an option to
purchase 10,000 ordinary shares at an exercise price of U.S.$3.00 per share,
with 12.5% of the options vesting quarterly beginning on January 1, 2000. This
option grant is subject to service and current service is terminable upon 90
days prior written notice. This grant of an option to purchase securities is
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and was made without general solicitation or
advertising.
(29) On March 22, 2000, we issued and sold an aggregate of 375,046 Series
B-1 preferred shares to entities affiliated with Trident Capital for an
aggregate exercise price of U.S.$1,050,129 upon exercise of outstanding
warrants. This sale was made in reliance on Section 4(2) of the Securities Act
and was made without general solicitation or advertising.
(30) On March 27, 2000, we issued and sold an aggregate of 1,227,235
Series D preferred shares to Sun Microsystems, Inc., Credit Suisse First Boston
Venture Fund I L.P., individuals and entities affiliated with Chase Securities
Inc. and individuals affiliated with U.S. Bancorp Piper Jaffray, Inc. for an
aggregate purchase price of approximately U.S.$15.5 million. The Series D
preferred shares are convertible into an equal number of voting ordinary shares,
subject to future adjustments for dilution. Credit Suisse First Boston
Corporation served as placement agent in connection with this offering. The
sales of these securities are deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act and/or Rule 506
promulgated under the Securities Act, and were made without general solicitation
or advertising. Each purchaser was a sophisticated investor and had access to
all relevant information necessary to evaluate the investment and represented to
us that the shares were being acquired for investment purposes.
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(31) On March 29, 2000, we issued and sold an aggregate of 32,144 Series
B-1 preferred shares to entities affiliated with WSG Capital, L.P. upon exercise
of outstanding warrants for an aggregate purchase price of U.S.$90,003. These
preferred shares are convertible into an equal number of ordinary shares,
subject to future adjustments for dilution. The sales of these securities are
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and were made without general solicitation
or advertising.
(32) On April 18, 2000, we issued and sold an aggregate of 80,361 Series
B-1 preferred shares to entities affiliated with Eucalyptus Ventures L.P. upon
exercise of outstanding warrants for an aggregate purchase price of
U.S.$225,011. These preferred shares are convertible into an equal number of
ordinary shares, subject to future adjustments for dilution. The sales of these
securities are deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act, and were made without general
solicitation or advertising.
(33) On April 19, 2000, we issued and sold an aggregate of 53,564 Series
B-1 preferred shares to entities affiliated with Israel Seed L.P. upon exercise
of outstanding warrants for an aggregate purchase price of U.S.$149,979. These
preferred shares are convertible into an equal number of ordinary shares,
subject to future adjustments for dilution. The sales of these securities are
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and were made without general solicitation
or advertising.
(34) On April 19, 2000, we issued and sold an aggregate of 21,431 Series
B-1 preferred shares to entities affiliated with Technorov Holdings (1993) Ltd.
upon exercise of outstanding warrants for an aggregate purchase price of
U.S.$60,007. These preferred shares are convertible into an equal number of
ordinary shares, subject to future adjustments for dilution. The sales of these
securities are deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act, and were made without general
solicitation or advertising.
(35) On April 19, 2000, we issued and sold an aggregate of 16,912 Series
C-1 preferred shares to entities affiliated with Israel Seed L.P. upon exercise
of outstanding warrants for an aggregate purchase price of U.S.$132,252. These
preferred shares are convertible into an equal number of ordinary shares,
subject to future adjustments for dilution. The sales of these securities are
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and were made without general solicitation
or advertising.
(36) On April 29, 2000, we issued and sold an aggregate of 80,366 Series
B-1 preferred shares to entities affiliated with Ampal American Israel
Corporation upon exercise of outstanding warrants for an aggregate purchase
price of U.S.$225,025. These preferred shares are convertible into an equal
number of ordinary shares, subject to future adjustments for dilution. The sales
of these securities are deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, and were made
without general solicitation or advertising.
(37) On June 11, 2000, we issued and sold an aggregate of 5,880 voting
ordinary shares to Mr. Benny DeKalo upon exercise of an outstanding warrant for
an aggregate purchase price of U.S.$4,200. The sale of these securities is
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and was made without general solicitation or
advertising.
(38) On September 3, 2000, we issued and sold an aggregate of 17,920
voting ordinary shares to Gallagher Public Relations Firm upon exercise of an
outstanding warrant for an aggregate purchase price of U.S.$3,328. The sale of
these securities is deemed to be exempt from registration under the Securities
Act in reliance on Section 4(2) of the Securities Act and was made without
general solicitation or advertising.
(39) On September 14, 2000, we granted Charles B. Gottlieb an option to
purchase 15,000 of our ordinary shares at an exercise price of U.S.$6.00. The
shares subject to this option vest quarterly over four years. This grant of an
option to purchase securities is deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, and was made
without general solicitation or advertising.
(40) On September 19, 2000, we issued and sold an aggregate of 21,430
Series B-1 preferred shares to entities affiliated with Technorov Holdings
(1993) Ltd. for an aggregate exercise price of U.S.$60,004 upon exercise of
outstanding warrants. This sale was made in reliance on Section 4(2) of the
Securities Act and was made without general solicitation or advertising.
(41) On September 19, 2000, we issued and sold and aggregate of 56,392
Series C-1 preferred shares to Globe LinQ International Fund I, LLC for an
aggregate exercise price of U.S.$485,253 upon exercise of outstanding
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warrants which were previously transferred from Nissho Iwai American
Corporation. This sale was made in reliance on Section 4(2) of the Securities
Act and was made without general solicitation or advertising.
(42) On October 4, 2000, we issued and sold an aggregate of 32,144 Series
B-1 preferred shares to entities affiliated with WSG Capital, LP upon exercise
of outstanding warrants for an aggregate purchase price of U.S.$90,003. These
preferred shares are convertible into an equal number of ordinary shares,
subject to future adjustments for dilution. The sales of these securities are
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and were made without general solicitation
or advertising.
(43) On October 4, 2000, we issued and sold an aggregate of 28,196 Series
C-1 preferred shares to entities affiliated with WSG Capital, LP upon exercise
of outstanding warrants for an aggregate purchase price of U.S.$242,626. These
preferred shares are convertible into an equal number of ordinary shares,
subject to future adjustments for dilution. The sales of these securities are
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and were made without general solicitation
or advertising.
(44) On October 5, 2000, we granted a fully vested warrant to purchase an
aggregate of 175,000 shares of our ordinary shares to Sprint/United Management
Company for an aggregate exercise price of U.S.$2,210,250, subject to adjustment
for subsequent dilutive issuances of capital stock. This grant of a warrant to
purchase securities is deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, and was made
without general solicitation or advertising.
(45) On October 22, 2000, we issued and sold an aggregate of 80,359
Series B-1 preferred shares to entities affiliated with Eucalyptus Ventures L.P.
upon exercise of outstanding warrants for an aggregate purchase price of
U.S.$225,005. These preferred shares are convertible into an equal number of
ordinary shares, subject to future adjustments for dilution. The sales of these
securities are deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act, and were made without general
solicitation or advertising.
(46) On November 6, 2000, we issued and sold an aggregate of 80,368
Series B-1 preferred shares to entities affiliated with Ampal American Israel
Corporation upon exercise of outstanding warrants for an aggregate purchase
price of U.S.$225,000. These preferred shares are convertible into an equal
number of ordinary shares, subject to future adjustments for dilution. The sales
of these securities are deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, and were made
without general solicitation or advertising.
Appropriate legends were affixed to the share certificates issued in the
transactions described above. Except as disclosed above, there were no
underwriters employed in connection with any transactions set forth in this Item
15.
II-7
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF
NUMBER DOCUMENT
--------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Memorandum of Association of XACCT Technologies (1997) Ltd.*
3.2 Articles of Association of XACCT Technologies Ltd., as amended on April 24, 2000*
3.3 Articles of Association of XACCT Technologies Ltd., as amended on October 3, 2000 (to be filed
pursuant to The Companies Law, 5759-1999, immediately after the closing of this offering)*
4.1 Specimen of Voting Ordinary Share Certificate*
4.2 Second Amended and Restated Rights Agreement, dated March 23, 2000, by and among the Company, the key
management and holders of preferred shares*
5.1 Opinion of S. Friedman & Co., Advocates and Notaries, as to the validity of the Shares*
9.1 Proxy by Marinera Ltd. in favor of Ampal American Israel Corporation, dated December 28, 1998*
9.2 Proxy by Inveco International Inc.--Profit Sharing Plan in favor of Ampal-American Israel Corporation,
dated December 28, 1998*
9.3 Form of Proxy Agreement entered into by certain purchasers of
Series D preferred shares in connection with the Series D financing*
9.4 Proxy by Richard A. Van Hoesen in favor of Charles B. Gottlieb, Adv., dated July 18, 2000*
9.5 Proxy by Stephanie G. Hawk, in favor of Robert C. Hawk, dated April 2000*
9.6 Proxy by R. Casey Hawk in favor of Robert C. Hawk, dated April 2000*
9.7 Proxy by Christopher G. Hawk in favor of Robert C. Hawk, dated April 2000*
10.1 1998 U.S. ISO Stock Option Plan and related agreements*
10.2 1998 Section 102 Share Option Plan and related agreements*
10.3 2000 Share Option Plan and related form agreements*
10.4 2000 Employee Share Purchase Plan*
10.5 Section 3(i) Share Option Plan*
10.6 Employment Agreement, dated January 1997, by and between the Registrant and Eric Gries*
10.7 Offer Letter, dated March 26, 1998, by and between the Registrant and Anil Uberoi*
10.8 Offer Letter, dated August 15, 1998, by and between the Registrant and Eran Wagner*
10.9 Offer Letter, dated December 28, 1999, by and between the Registrant and Limor Schweitzer*
10.10 Offer Letter, dated January 14, 2000, by and between the Registrant and Richard Van Hoesen (with
attachments)*
10.11 Lease Agreement, dated December 31, 1999, by and between the Registrant and Nichsei Crystal Lemischar
(Ramat-Gan)(1)*
10.12 Lease Agreement, dated November 12, 1999, by and between XACCT Technologies, Inc. and Princeton
Investment Group LLC*
10.13 Lease Agreement, dated January 28, 2000, by and between XACCT Technologies, Inc. and Princeton
Investment Group LLC*
10.14 Form of XIS End-User License Agreement*
10.15 Form of XACCTUSAGE 3.4 End-User License Agreement*
10.16 Form of Support and Maintenance Agreement*
10.17 Form of Support Agreement*
10.18 Form of Global Teaming Agreement*
10.19 Form of Value Added Partner Agreement*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Kost Forer & Gabbay, a Member of Ernst and Young International**
23.2 Consent of S. Friedman & Co. (included in Exhibit 5.1)*
24.1 Powers of Attorney*
27.1 Financial Data Schedule**
99.1 Consents from International Data Corporation, Insight Research and the Yankee Group with respect to
use of marketing information*
--------------
</TABLE>
(1) Translated in full; the original language version is on file with the
registrant and is available upon request.
* Previously filed.
** Previously filed. Refiled as updated.
II-8
<PAGE>
(b) Financial Statement Schedules.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange 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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, 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
of 1933, as amended, 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-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa
Clara, the State of California, on November 9, 2000.
XACCT TECHNOLOGIES LTD.
By: /s/ ERIC GRIES
------------------------------
Eric Gries
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
---------- ----- ------
<S> <C> <C>
* President, Chief Executive Officer and Director November 9, 2000
-----------------------------------
Eric Gries (Principal Executive Officer)
/s/ RICHARD VAN HOESEN Vice President and Chief Financial Officer November 9, 2000
-----------------------------------
Richard Van Hoesen (Principal Financial and Accounting Officer)
* Director and Chief Technology Officer November 9, 2000
-----------------------------------
Limor Schweitzer
* Director and Executive Vice President, November 9, 2000
-----------------------------------
Eran Wagner Technology
* Director November 9, 2000
-----------------------------------
Robert C. Hawk
* Director November 9, 2000
-----------------------------------
Nitsan Yanovski
* Director November 9, 2000
-----------------------------------
Jon Q. Reynolds, Jr.
* Director November 9, 2000
-----------------------------------
Todd Springer
</TABLE>
*By: /s/ RICHARD VAN HOESEN
----------------------------
Richard Van Hoesen
Attorney-in-fact
AUTHORIZED REPRESENTATIVE IN
THE UNITED STATES
XACCT Technologies, Inc.
By: /s/ ERIC GRIES
-------------------------------
Name: Eric Gries
Title: President & Chief Executive Officer
Date: November 9, 2000
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF
NUMBER DOCUMENT
--------- ----------------------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Memorandum of Association of XACCT Technologies (1997) Ltd.*
3.2 Articles of Association of XACCT Technologies Ltd., as amended on April 24, 2000*
3.3 Articles of Association of XACCT Technologies Ltd., as amended on October 3, 2000 (to be
filed pursuant to The Companies Law, 5759-1999, immediately after the closing of this
offering)*
4.1 Specimen of Voting Ordinary Share Certificate*
4.2 Second Amended and Restated Rights Agreement, dated March 23,
2000, by and among the Company, the key management and holders of
preferred shares*
5.1 Opinion of S. Friedman & Co., Advocates and Notaries, as to the validity of the
Shares*
9.1 Proxy by Marinera Ltd. in favor of Ampal American Israel Corporation, dated December 28,
1998*
9.2 Proxy by Inveco International Inc.--Profit Sharing Plan in favor
of Ampal-American Israel Corporation, dated December 28, 1998*
9.3 Form of Proxy Agreement entered into by certain purchasers of
Series D preferred shares in connection with the Series D financing*
9.4 Proxy by Richard A. Van Hoesen in favor of Charles B. Gottlieb, Adv., dated July 18, 2000*
9.5 Proxy Stephanie G. Hawk, in favor of Robert C. Hawk, dated April 2000*
9.6 Proxy by R. Casey Hawk in favor of Robert C. Hawk, dated April 2000*
9.7 Proxy by Christopher G. Hawk in favor of Robert C. Hawk, dated April 2000*
10.1 1998 U.S. ISO Stock Option Plan and related agreements*
10.2 1998 Section 102 Share Option Plan and related agreements*
10.3 2000 Share Option Plan and related form agreements*
10.4 2000 Employee Share Purchase Plan*
10.5 Section 3(i) Share Option Plan*
10.6 Employment Agreement, dated January 1997, by and between the Registrant and Eric
Gries*
10.7 Offer Letter, dated March 26, 1998, by and between the Registrant and Anil Uberoi*
10.8 Offer Letter, dated August 15, 1998, by and between the Registrant and Eran Wagner*
10.9 Offer Letter, dated December 28, 1999, by and between the Registrant and Limor
Schweitzer*
10.10 Offer Letter, dated January 14, 2000, by and between the Registrant
and Richard Van Hoesen (with attachments)*
10.11 Lease Agreement, dated December 31, 1999, by and between the Registrant and
Nichsei Crystal Lemischar (Ramat-Gan)(1)*
10.12 Lease Agreement, dated November 12, 1999, by and between XACCT Technologies,
Inc. and Princeton Investment Group LLC*
10.13 Lease Agreement, dated January 28, 2000, by and between XACCT Technologies,
Inc. and Princeton Investment Group LLC*
10.14 Form of XIS End-User License Agreement*
10.15 Form of XACCTUSAGE 3.4 End-User License Agreement*
10.16 Form of Support and Maintenance Agreement*
10.17 Form of Support Agreement*
10.18 Form of Global Teaming Agreement*
10.19 Form of Value Added Partner Agreement*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Kost Forer & Gabbay, a Member of Ernst and Young International**
23.2 Consent of S. Friedman & Co. (included in Exhibit 5.1)*
24.1 Powers of Attorney*
27.1 Financial Data Schedule**
99.1 Consents from International Data Corporation, Insight Research and the Yankee Group with
respect to use of marketing information*
--------------
</TABLE>
(1) Translated in full; the original language version is on file with the
registrant and is available upon request.
* Previously filed.
** Previously filed. Refiled as updated.
