<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 2000
REGISTRATION NO. 333-38804
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
ACCORD NETWORKS LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ISRAEL 3576 NOT APPLICABLE
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION) CLASSIFICATION CODE
NUMBER)
ACCORD NETWORKS LTD.
94 DERECH EM HAMOSHAVOT
P.O.B. 3654
PETACH-TIKVA 49130, ISRAEL
TELEPHONE: 972-3-925-1444
FACSIMILE: 972-3-921-1571
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND AGENT FOR SERVICE)
ACCORD NETWORKS, INC.
ATTENTION: JULES L. DEVIGNE, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
9040 ROSWELL ROAD, SUITE 450
ATLANTA, GEORGIA 30350-1877, USA
TELEPHONE: 770-641-4400
FACSIMILE: 770-641-4499
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
COPIES TO:
<TABLE>
<C> <S> <C> <C>
J. VAUGHAN CURTIS, ESQ. DAVID COHEN, ADV. DAVID C. CHAPIN, ESQ. BARRY LEVENFELD, ADV.
ALSTON & BIRD LLP YUVAL HORN, ADV. ROPES & GRAY YIGAL ARNON & CO.
ONE ATLANTIC CENTER DORON COHEN-DAVID COHEN ONE INTERNATIONAL PLACE 22 RIVLIN STREET
1201 WEST PEACHTREE STREET LAW OFFICES BOSTON, MASSACHUSETTS, USA 02110-2624 JERUSALEM, ISRAEL 91000
14 ABBA HILLEL SILVER
ATLANTA, GEORGIA, USA 30309-3424 ROAD TELEPHONE: 617-951-7000 TELEPHONE: 972-2-623-9200
TELEPHONE: 404-881-7000 RAMAT-GAN, ISRAEL 52506 FACSIMILE: 617-951-7050 FACSIMILE: 972-2-623-9236
TELEPHONE: 972-3-753-
FACSIMILE: 404-881-7777 1000
FACSIMILE: 923-3-753-
1001
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [_]
If this Form is filed to register additional securities for any offering
pursuant to Rule 462(b) under the Securities Act, please 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, please 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, please check the following box and list the Securities Act
registration statement 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: [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 20, 2000
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS PROHIBITED.
5,000,000 ORDINARY SHARES
[LOGO]
$ PER ORDINARY SHARE
--------------------------------------------------------------------------------
This is an initial public offering of ordinary shares of Accord Networks Ltd.
This is a firm commitment underwriting.
Accord expects that the price to the public in the offering will be between
$10.00 and $12.00 per ordinary share.
We have applied to include the ordinary shares on the Nasdaq National Market
under the symbol ACCD.
INVESTING IN OUR ORDINARY SHARES INVOLVES RISKS. SEE RISK FACTORS BEGINNING ON
PAGE 7.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Price to the public............................. $ $
Underwriting discount...........................
Proceeds to Accord..............................
</TABLE>
Accord and Michal and Gil Rosenfeld, the children of a founder of Accord, have
granted an over-allotment option to the underwriters. Under this option, the
underwriters may elect to purchase a maximum of 750,000 additional ordinary
shares from Accord and Michal and Gil Rosenfeld within 30 days following the
date of this prospectus to cover over-allotments.
--------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ISRAEL SECURITIES AUTHORITY HAS GRANTED US AN EXEMPTION FROM ISRAEL'S
PROSPECTUS PUBLICATION REQUIREMENTS APPLICABLE TO THIS OFFERING. YOU SHOULD NOT
INTERPRET THAT EXEMPTION AS ENDORSING THE MATTERS CONTAINED IN THIS PROSPECTUS
OR AS AN APPROVAL OF THEIR RELIABILITY OR ADEQUACY, NOR SHOULD YOU INTERPRET
THAT EXEMPTION AS AN EXPRESSION OF OPINION CONCERNING THE QUALITY OF THE
SECURITIES OFFERED BY THIS PROSPECTUS.
CIBC WORLD MARKETS
DAIN RAUSCHER WESSELS
U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is , 2000
<PAGE>
[Inside front cover page]
THE ACCORD(R) MGC-100
An Advanced Networking System that Enables Real-Time
Interactive Visual and Voice Communications
[Picture of the Accord(R) MGC-100 with arrows pointing to:]
Connects Users with Different Visual and Voice Communications Technology Across
Different Networks
Users Simultaneously Can See Up to Nine Other Participants On a Single Screen
Easy to Use and Flexible System for Managing Visual and Voice Communications
Sessions
Modules and Power Supplies Can Be Replaced While System is Operating
Can Be Expanded as Customer Usage Grows and New Technologies are Developed
[LOGO OF ACCORD NETWORKS]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 8
Forward-Looking Statements................................................ 16
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 17
Capitalization............................................................ 18
Dilution.................................................................. 19
Selected Consolidated Financial Data...................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 34
Management................................................................ 50
Related Party Transactions................................................ 61
Principal and Selling Shareholders........................................ 63
Description of Share Capital.............................................. 65
Shares Eligible for Future Sale........................................... 72
United States Federal Income Tax Considerations........................... 74
Israeli Taxation and Investment Programs.................................. 78
Conditions in Israel...................................................... 85
Underwriting.............................................................. 87
Validity of Ordinary Shares............................................... 90
Experts................................................................... 90
ISA Exemption............................................................. 90
Where You Can Find More Information....................................... 90
Enforceability of Civil Liabilities....................................... 91
Index to Consolidated Financial Statements................................ F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained in this prospectus. Before you
decide to invest in our ordinary shares, you should carefully read the entire
prospectus, including "Risk Factors" and our consolidated financial statements
and the notes to those financial statements.
ABOUT ACCORD
OUR BUSINESS
We develop, manufacture and distribute an advanced networking system that
enables real-time interactive visual communications. Our MGC-100 system allows
multiple parties to engage in visual communications across and between
different types of networks, transmission protocols and endpoints. Our MGC-100
allows users to connect to broadband and narrowband, circuit-switched and
packet-based networks. Our system supports endpoints utilizing Internet
protocol, or IP, asynchronous transfer mode, or ATM, and integrated service
digital network, or ISDN. Our system was designed to provide maximum
reliability, scalability and ease of use.
OUR INDUSTRY
The visual communications industry is undergoing dynamic changes as it expands
from traditional videoconferencing to broader visual communications
applications, including on-demand conferencing and visual call centers and help
desks. We believe the factors driving changes in the visual communications
industry include:
. affordable personal computers and television set-top boxes that enable
visual communication;
. the emergence of the Internet;
. greater network bandwidth; and
. competition among telecommunications service providers to enhance service
offerings.
END USERS OF OUR SYSTEM
We believe our system allows us to take advantage of these trends. Our system
is used for business communications, distance learning, or education and
training from remote locations, and telemedicine, or practicing medicine from
remote locations.
We sell our system through our direct sales force and through approximately 45
distribution partners, including:
. FVC.com;
. PictureTel;
. Tandberg; and
. VCON.
Our system is deployed by approximately 20 telecommunications service
providers, including:
. Deutsche Telekom;
. France Telecom;
. Global Crossing; and
. MCI WorldCom.
Telecommunications service providers include:
. inter-exchange carriers, or IXCs;
. local exchange carriers, or LECs;
. competitive local exchange carriers, or CLECs;
. Internet service providers, or ISPs; and
. application service providers, or ASPs.
Our system is deployed by more than 130 enterprise customers, including:
. Nortel Networks;
. Credit Suisse First Boston;
. Microsoft; and
. University of Notre Dame.
4
<PAGE>
Our system is intended to allow organizations to reduce the time and cost spent
on business travel, increase productivity and improve decision-making by
facilitating face-to-face interaction on a real-time basis.
RECENT DEVELOPMENTS
On June 16, 2000, we settled a patent infringement lawsuit brought against us
by Ezenia! Inc. by entering into a settlement agreement in which Enzenia! Inc.
has agreed to release all claims against us in exchange for a monetary
settlement.
OUR HISTORY AND GENERAL INFORMATION
We were organized under the laws of the State of Israel in 1992. Our principal
executive offices are located at 9040 Roswell Road, Suite 450, Atlanta, Georgia
30350-1877, where our telephone number is (770) 641-4400. Our facilities in
Israel are located at 94 Derech Em Hamoshavot, P.O.B. 3654, Petach-Tikva 49130,
Israel, where our telephone number is 011-972-3-925-1444. Our website is
located at www.accordnetworks.com. Information contained on our website is not
incorporated by reference into this prospectus, and you should not consider
that information a part of this prospectus.
THE OFFERING
GENERAL
<TABLE>
<C> <S>
Ordinary shares offered by Accord.................... 5,000,000 shares
Ordinary shares to be outstanding after the offering. 19,882,474 shares
Use of proceeds...................................... For general corporate
purposes, including
working capital, capital
expenditures, geographic
expansion and additional
sales and marketing
efforts, as well as
settlement of a patent
infringement lawsuit.
Proposed Nasdaq National Market symbol............... ACCD
</TABLE>
The number of ordinary shares to be outstanding after this offering is based on
the number of shares outstanding as of April 30, 2000 and excludes 4,423,312
ordinary shares issuable upon the exercise of outstanding options and a warrant
to purchase ordinary shares at a weighted average exercise price of $3.41 per
share. It also excludes 698,381 ordinary shares reserved as of April 30, 2000
for future grants and issuances under our share option plans.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pro forma amounts in the table below reflect the exercise of all warrants to
purchase preferred shares which were outstanding on April 30, 2000. The pro
forma amounts also reflect the conversion of all issued and outstanding
preferred shares into ordinary shares as if the preferred shares had been
converted immediately upon their issuance. Also reflected in the pro forma
amounts is a liability recorded as part of the settlement of the patent
infringement lawsuit with Enzenia! Inc. The pro forma as adjusted balance sheet
data in the table below reflects the sale of 5,000,000 ordinary shares offered
in this offering at an assumed initial public offering price of $11.00 per
share, after deducting the estimated underwriting discount and the estimated
offering expenses payable by us. The pro forma as adjusted balance sheet data
also reflects the anticipated application of the net proceeds from this
offering.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------- -----------------------
1997 1998 1999 1999 2000
---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product sales.......... $ 1,538 $ 12,172 $ 23,366 $ 4,563 $ 7,774
Support revenues....... 40 425 1,469 267 485
---------- ---------- ----------- ---------- -----------
Total revenues....... 1,578 12,597 24,835 4,830 8,259
Gross profit............ 611 8,120 17,325 3,422 5,818
Operating expenses:
Research and develop-
ment, net............. 2,515 2,439 4,109 1,081 1,517
Selling and marketing,
net................... 1,656 4,398 8,250 1,792 2,785
General and administra-
tive.................. 1,349 2,233 4,460 757 1,279
---------- ---------- ----------- ---------- -----------
Total operating ex-
penses.............. 5,520 9,070 16,819 3,630 5,581
Operating income (loss). (4,909) (950) 506 (208) 237
Net income (loss)....... $ (5,002) $ (980) $ 364 $ (239) $ 220
========== ========== =========== ========== ===========
Earnings (loss) per
share:
Basic.................. $ (3.92) $ (0.77) $ 0.28 $ (0.19) $ 0.12
========== ========== =========== ========== ===========
Diluted................ $ (3.92) $ (0.77) $ 0.02 $ (0.19) $ 0.01
========== ========== =========== ========== ===========
Weighted average number
of shares outstanding:
Basic.................. 1,277,067 1,277,067 1,318,410 1,277,067 1,858,076
Diluted................ 1,277,067 1,277,067 16,092,564 1,277,067 17,604,242
Pro forma earnings per
share:
Basic.................. $ 0.03 $ 0.02
=========== ===========
Diluted................ $ 0.02 $ 0.01
=========== ===========
Pro forma weighted aver-
age number of shares
outstanding:
Basic.................. 11,862,611 13,734,635
Diluted................ 16,092,564 17,604,242
<CAPTION>
MARCH 31, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents.................. $ 3,832 $ 3,832 $ 47,067
Working capital......... 11,084 4,584 54,319
Total assets............ 22,397 22,397 64,472
Total liabilities....... 7,525 14,025 7,525
Mandatorily redeemable
convertible preferred
shares................. 27,081 -- --
Stockholders' equity
(deficit).............. (12,209) 8,372 56,947
</TABLE>
6
<PAGE>
ABOUT THIS PROSPECTUS
Unless otherwise indicated, all information contained in this prospectus
assumes each of these events:
. The underwriters will not exercise their over-allotment option.
. All outstanding warrants to purchase preferred shares will be exercised
through a method referred to as net exercise. We assume the warrants to
purchase preferred shares will be exercised because if not exercised the
warrants to purchase preferred shares would terminate upon the completion
of this offering. Net exercise means that the warrant holder exercises his
warrant without making a cash payment. Instead, in return for surrendering
his warrant, he receives the number of shares subject to the warrant less
the number of shares with a fair market value equal to the aggregate
exercise price of the warrant. For the purposes of the calculations made in
this prospectus, we have assumed an initial public offering price of $11.00
per share.
. Our series A preferred shares, series B preferred shares, voting series C
preferred shares and non-voting series C preferred shares will be converted
into ordinary shares.
As used in this prospectus, the terms we, us, our and Accord mean Accord
Networks Ltd. and its subsidiaries unless the context indicates a different
meaning, and the term ordinary shares means our ordinary shares.
Our name, Accord, our logo and some of the titles of our system, technology and
service offerings mentioned in this prospectus are our service marks and
trademarks. All other brand names or trademarks appearing in this prospectus
are the property of their holders.
7
<PAGE>
RISK FACTORS
If any of the risks described below actually occurs, our business, financial
condition or results of future operations could be materially and adversely
affected. Our share price could then decline, and you could lose all or part of
your investment.
LITIGATION AND INFRINGEMENT RISKS
THIRD PARTIES MAY CLAIM THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD RESULT IN THE LOSS OF OUR RIGHTS, SUBJECT US TO LIABILITY AND
DIVERT MANAGEMENT'S ATTENTION.
We may be subject to adverse claims or additional litigation alleging
infringement of the intellectual property rights of others. Any adverse claims
or litigation, regardless of the merits of the claims or their outcome, could
be costly and cause diversion of management's attention. In the past we
received a letter, and we may receive additional letters, indicating that the
technology used in our system requires a third-party license. An adverse
outcome in any litigation alleging infringement could result in the loss of
proprietary rights, subject us to significant liabilities, require us to seek
licenses from third parties, which may not be available on commercially
reasonable terms or at all, or prevent us from manufacturing or selling our
system.
RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY
WE ARE AN EARLY-STAGE COMPANY AND OUR LIMITED OPERATING HISTORY MAKES
EVALUATING OUR BUSINESS AND PREDICTING OUR FUTURE RESULTS DIFFICULT. IF WE DO
NOT MEET FINANCIAL EXPECTATIONS, OUR ORDINARY SHARE PRICE WOULD LIKELY DECLINE.
We have a limited operating history on which to base an evaluation of our
business and prospects. As a result, evaluation of our business and prospects
may prove inaccurate. If our operating results fall below expectations of
securities analysts or investors, the market price of our ordinary shares will
likely decline. We began our research and development activities in 1994 and
commercially released the first version of our system in 1997. Because we are
an early stage company, we have not yet fully implemented our business model
and strategy, and therefore, it is difficult to evaluate whether we will be
successful.
We may be unable to successfully address the risks and uncertainties inherent
in a new business.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY OR MAINTAIN OUR
TECHNOLOGICAL ADVANTAGES, WHICH COULD CAUSE US TO LOSE OUR INTELLECTUAL
PROPERTY RIGHTS OR RESULT IN INCREASED COSTS.
Our success and ability to compete depend to a significant degree on our
internally developed proprietary technology. If we are unable to protect our
proprietary rights, we could lose them or incur increased costs. We attempt to
protect our technology through a combination of patent and trademark
applications, copyrights, trade secret and other intellectual property laws and
contractual obligations. We do not hold any patents for our existing system.
Our intellectual property protection measures may not be sufficient to prevent
misappropriation of our technology and our competitors may independently
develop technologies that are substantially equivalent or superior to our
technology. We also have foreign operations and the laws of many foreign
countries may not protect our intellectual property rights to the same extent
as the laws of the U.S.
8
<PAGE>
IF WE LOSE THE RIGHT TO LICENSE TECHNOLOGY WE USE IN OUR SYSTEM, OUR OPERATIONS
MAY BE DISRUPTED, OUR SALES MAY BE DELAYED AND WE MAY LOSE BUSINESS.
We license key technology from third parties that is incorporated into our
system, including operating systems and embedded visual, audio and data
software. Any interruption in the supply or support of any licensed technology
could disrupt our operations, delay our sales and result in the loss of
business. Some of our technology is licensed under agreements that are not
perpetual and that could expire.
WE DEPEND ON THIRD PARTIES TO UPDATE AND SUPPORT KEY TECHNOLOGY THAT WE USE IN
OUR SYSTEM, AND ANY INTERRUPTION IN THE ENHANCEMENT, SUPPLY OR SUPPORT OF THIS
TECHNOLOGY COULD CAUSE US TO LOSE CUSTOMERS OR FAIL TO ATTRACT NEW CUSTOMERS.
Because our system incorporates technology developed and maintained by third
parties, we depend on these third parties to deliver and support reliable
products, enhance their current products, develop new products on a timely and
cost-effective basis and respond to emerging industry standards and other
technological changes. If these third parties fail to do so, it could impede
our ability to enhance and update our system, which could cause us to lose
customers or fail to attract new customers and our revenue could decline.
IF REAL-TIME INTERACTIVE VISUAL COMMUNICATIONS APPLICATIONS ARE NOT DEVELOPED
AND ADOPTED FOR BUSINESS AND NON-BUSINESS PURPOSES THEN THE DEMAND FOR OUR
PRODUCTS WILL SLOW AND OUR REVENUES WILL DECLINE.
The future growth of our business depends in large part on the widespread
development and adoption of real-time interactive visual communications
applications for business and non-business purposes. If the development and
adoption of real-time interactive visual communications applications do not
occur, or occur more slowly than we anticipate, then the demand for our
products will slow and our revenues will decline.
A SIGNIFICANT PART OF OUR STRATEGY IS TO SELL TO TELECOMMUNICATIONS SERVICE
PROVIDERS, AND IF THAT MARKET FAILS TO DEVELOP AS WE ANTICIPATE, WE MAY NOT BE
ABLE TO INCREASE SALES OF OUR SYSTEM. IF WE FAIL TO GROW AS EXPECTED, OUR
ORDINARY SHARE PRICE WILL LIKELY DECLINE.
We believe our future growth in sales volume will depend, in large part, on the
expansion of visual communications service offerings beyond videoconferencing
by telecommunications service providers. If telecommunications service
providers do not expand their service offerings to include new visual
communications applications, we may not increase sales of our system, and we
may not grow as expected. If we do not meet growth expectations of securities
analysts or investors, our ordinary share price will likely decline.
OUR MARKET IS HIGHLY COMPETITIVE AND OUR MAIN COMPETITORS ARE LARGER THAN WE
ARE, WHICH MAY MAKE IT MORE DIFFICULT TO ACQUIRE AND RETAIN CUSTOMERS.
We compete in a market that is highly competitive, and we expect competition to
continue to intensify. Competitive pressure may make it difficult for us to
acquire and retain customers and may require us to reduce the price of our
system and services. As a result, our revenues could decline. Our principal
competitors include VideoServer, Inc., now known as Ezenia! Inc., Lucent,
RADVison Ltd. and CUseeMe Networks, Inc. Some of our competitors have longer
operating histories and significantly greater financial, marketing and other
resources than we do. These companies may have existing relationships with some
of our current and prospective customers. These companies also
9
<PAGE>
may be able to respond more quickly than we can to new or emerging technologies
and changes in customer requirements. We may not be able to compete
successfully with existing or new competitors.
BECAUSE WE DEPEND ON SALES OF OUR MGC-100 SYSTEM FOR ALL OF OUR REVENUE, WE ARE
PARTICULARLY SUSCEPTIBLE TO SUCCESSFUL COMPETITION, PRODUCT OBSOLESCENCE AND
DOWNTURNS IN THE VISUAL COMMUNICATIONS MARKET, WHICH COULD CAUSE OUR REVENUES
TO DECLINE.
Sales of our MGC-100 system and related services have historically accounted
for all of our revenue, and we expect this trend to continue. If sales of our
MGC-100 system and related services decline and if we do not develop new
systems and services, our revenues may decline, which could cause our ordinary
share price to fall. Dependence on a single system makes us particularly
susceptible to successful competition by others in the industry, to product
obsolescence and to downturns in the visual communications market.
TECHNOLOGICAL CHANGES COULD CAUSE OUR SYSTEM TO BECOME OBSOLETE OR REQUIRE US
TO REDESIGN OUR SYSTEM, WHICH COULD CAUSE US TO LOSE CUSTOMERS OR INCUR
SUBSTANTIAL COSTS.
The market in which we compete is characterized by:
. technological changes;
. frequent product and feature introductions;
. changes in customer demands;
. evolving industry standards; and
. emerging communications networks.
If we are unable to react to these events, we may lose customers or incur
substantial costs. We expect that the growth of real-time interactive visual
communications, as well as technology trends such as the adoption of new types
of communication networks and transmission protocols, will require us to
enhance and adapt our system to remain competitive. Enhancements and
adaptations to our system could be costly and time-consuming, and we may not be
able to enhance and adapt our system quickly or inexpensively enough to compete
successfully.
OUR QUARTERLY FINANCIAL PERFORMANCE IS LIKELY TO VARY SIGNIFICANTLY IN THE
FUTURE. OUR REVENUES AND OPERATING RESULTS IN ANY QUARTER MAY NOT BE INDICATIVE
OF OUR FUTURE PERFORMANCE, AND IT MAY BE DIFFICULT FOR INVESTORS TO EVALUATE
OUR PROSPECTS. IF WE DO NOT MEET QUARTERLY EXPECTATIONS, OUR ORDINARY SHARE
PRICE WOULD LIKELY DECLINE.
Our quarterly revenues and operating results are difficult to predict and we
expect them to vary significantly in the future. Our operating results in some
quarters may fall below the expectations of securities analysts or investors,
which would likely cause the market price of our ordinary shares to decline. We
have a lengthy sales cycle for our system, and it typically takes from one to
nine months after we first begin discussions with a prospective customer before
we receive an order from that customer. We also have a limited order backlog,
which makes revenues in any quarter substantially dependent upon orders we
receive and deliver in that quarter. Because of these factors, our revenues and
operating results in any quarter may not meet market expectations or be
indicative of future performance and it may be difficult for investors to
evaluate our prospects.
WE MAY BE UNABLE TO DELIVER PRODUCTS ON TIME OR TO GROW OUR BUSINESS BECAUSE OF
THE LIMITED SUPPLY OF KEY COMPONENTS IN OUR SYSTEM.
Several of the key components in our system are in limited supply. If we are
unable to obtain key components, we may not be able to deliver products to
customers on time, and
10
<PAGE>
customers may seek other sources for products similar to ours. Either of these
results could cause us to change our business, cause our revenue to decline or
impede our growth. In the past, we have experienced shortages in the supply of
flash memory components and several chips used in our system. We may be unable
to obtain sufficient supplies of our system's components in the future.
WE ACHIEVED PROFITABILITY FOR THE FIRST TIME IN 1999, AND WE MAY NOT BE ABLE TO
SUSTAIN IT. IF WE ARE UNABLE TO SUSTAIN OR INCREASE PROFITABILITY, OUR ORDINARY
SHARE PRICE WILL LIKELY DECREASE AND WE MAY BE UNABLE TO GROW OUR BUSINESS.
We have a history of losses and in 1999 achieved profitability for the first
time. We may not be able to sustain or increase profitability on a quarterly or
annual basis. Our inability to maintain profitability or positive cash flow
could result in disappointing financial results, impede implementation of our
growth strategy and cause the market price of our ordinary shares to decrease.
We incurred net losses of $3.0 million in 1996, $5.0 million in 1997, and
$980,000 in 1998.
SOME OF THE KEY COMPONENTS IN OUR SYSTEM COME FROM SOLE SOURCE SUPPLIERS. IF
THESE SUPPLIERS DELAY OR DISCONTINUE THE MANUFACTURE OF THESE COMPONENTS, RAISE
THEIR PRICES OR PRODUCE POOR QUALITY PRODUCTS, WE MAY LOSE CUSTOMERS OR
EXPERIENCE INCREASED COSTS.
We purchase a number of key components, including various chips, power supply
components and chassis components used in our system, from sole source
suppliers for which alternative sources are not readily available. If these
suppliers delay or discontinue manufacture of these components, raise their
prices or produce poor quality products, we may lose customers and experience
increased costs. We do not have any agreements that guarantee us a minimum
supply of these components from our sole source suppliers. If we are unable to
obtain sufficient quantities of these components or to locate alternative
suppliers, we may experience delays in shipping our system or be required to
redesign our system to use other components that are more readily available or
are higher quality. If we do find alternative suppliers, it may be on
unacceptable terms. Any of these results would lead to lower margins or less
competitive pricing.
WE DEPEND ON THIRD PARTY SUBCONTRACTORS TO PARTIALLY ASSEMBLE OUR SYSTEM, WHICH
COULD RESULT IN SYSTEM DELIVERY DELAYS, LOSS OF CUSTOMERS AND LOSS OF REVENUE.
We contract with a limited number of independent subcontractors to partially
assemble the modules and chassis used in our system. Any significant delays in
the delivery of products to us by the independent subcontractors could cause
delivery delays to our customers, which could result in the loss of both
customers and revenue. Our subcontractors could experience financial,
operational, production or quality assurance difficulties or a catastrophic
event that reduced or interrupted delivery of supplies to us. Establishing
alternative arrangements could take several months. We do not know that
alternative subcontracting sources will be able to meet our future requirements
or that existing or alternative sources will be available to us at favorable
prices, if at all.
OUR SYSTEM MAY SUFFER FROM DEFECTS AND ERRORS, WHICH COULD DELAY MARKET
ACCEPTANCE, DAMAGE OUR CUSTOMER RELATIONSHIPS AND REPUTATION, AND INCREASE
SERVICE AND WARRANTY COSTS.
Software and hardware systems as complex as ours may contain undetected errors
or defects, especially when first introduced or when new versions are released.
Our system may not be
11
<PAGE>
free from errors or defects after commercial shipments have begun. Any errors
or defects that are discovered after commercial release could result in:
. delay in market acceptance;
. diversion of development resources;
. damage to our customer relationships or reputation; and
. increased service and warranty costs.
IF WE ARE UNABLE TO EXPAND OUR INTERNATIONAL SALES AND OPERATIONS, OUR REVENUES
MAY NOT GROW AS EXPECTED WHICH COULD CAUSE THE PRICE OF OUR ORDINARY SHARES TO
DECLINE.
Our ability to increase sales of our system will depend in part on the
expansion of our international sales and operations. If we are unsuccessful in
expanding our international sales and operations, our sales and revenue may not
grow as expected. If we do not meet the growth expectations of securities
analysts and investors, the market price of our ordinary shares will likely
decline. Approximately 20.0% of our revenues in 1999 were derived from sales to
customers outside of North America, primarily in Europe and Asia. We intend to
expand our sales activities in these and other regions. International sales of
visual communications networking equipment are subject to a number of risks
that could prevent us from selling our system in a particular country,
including:
. conflicting and changing governmental laws and regulations relating to
imports and the use of communications equipment;
. difficulties in collecting payments from our customers; and
. foreign currency exchange rate fluctuations.
IF WE DO NOT ATTRACT AND RETAIN A SKILLED WORKFORCE, OUR CUSTOMER SUPPORT AND
PRODUCT DEVELOPMENT OPERATIONS WILL SUFFER AND WE MAY NOT BE ABLE TO SUSTAIN OR
GROW OUR BUSINESS.
We believe that our future success will depend on our ability to attract and
retain skilled engineering and customer support personnel. If we are unable to
hire or retain these individuals, our customer support and product development
operations will suffer and we may not be able to sustain or grow our business.
The market for qualified personnel in the technology industry is highly
competitive and we have experienced difficulty in recruiting qualified
personnel. Recruiting qualified personnel is an expensive, competitive and
time-consuming process.
OUR GROWTH WILL CONTINUE TO PLACE A SIGNIFICANT STRAIN ON OUR RESOURCES. IF WE
ARE UNABLE TO MANAGE OUR EXPANDING OPERATIONS OUR REVENUES MAY NOT INCREASE,
OUR COST OF OPERATIONS MAY RISE AND WE MAY NOT SUSTAIN PROFITABILITY.
We have rapidly expanded our operations both in the U.S. and abroad and
anticipate that further expansion will be required to execute our growth
strategy. If we fail to successfully manage the challenges our growth poses,
our revenues may not increase, our cost of operations may rise and we may not
remain profitable. Our research and development facilities are located in
Israel, and our directors, executive officers and other key employees are
located in the United States, Israel and the United Kingdom. We also maintain
offices in China and we plan to open offices in other countries to market and
sell our system in those countries and surrounding regions. Our rapid growth
and international expansion has placed significant demands on our management,
financial, technical and other resources. These demands are likely to continue
to increase.
12
<PAGE>
RISKS RELATED TO AN INVESTMENT IN OUR ORDINARY SHARES
OUR ORDINARY SHARE PRICE MAY BE VOLATILE BECAUSE WE ARE A TECHNOLOGY COMPANY,
AND YOU MAY NOT BE ABLE TO RESELL ORDINARY SHARES AT OR ABOVE THE OFFERING
PRICE.
Our ordinary shares have never been publicly traded, and an active trading
market in our ordinary shares may not develop or be sustained after this
offering. The price at which our ordinary shares will trade after this offering
is likely to be volatile, particularly because we are a technology company, and
you may not be able to resell your ordinary shares at or above the offering
price. We will determine the initial public offering price through negotiations
with the underwriters, and this may not be indicative of prices that will
prevail in the trading market.
FUTURE SALES OF OUR ORDINARY SHARES MAY DEPRESS OUR SHARE PRICE, EVEN IF OUR
BUSINESS IS DOING WELL.
Sales of our ordinary shares in the public market following this offering could
adversely affect the market price of our ordinary shares. Of the 19,882,474
ordinary shares that will be outstanding upon the closing of this offering:
. all of the ordinary shares sold in this offering will be freely tradeable
in the public market;
. approximately 14,882,474 additional ordinary shares may be sold after the
expiration of 180-day lock-up agreements, subject to the limitations and
conditions of Rule 144; and
. approximately 2,191,675 additional ordinary shares may be sold upon the
exercise of options and warrants after the expiration of 180-day lock-up
agreements, assuming completion of this offering by June 30, 2000.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION AND PAY A HIGHER PRICE FOR
OUR ORDINARY SHARES THAN EXISTING SHAREHOLDERS.
The initial public offering price will be substantially higher than the pro
forma tangible book value per share of our outstanding ordinary shares and the
price per share paid by existing shareholders. If you purchase our ordinary
shares in this offering, the shares you buy will experience an immediate and
substantial dilution in tangible book value per share. The ordinary shares
owned by our existing shareholders will receive a material increase in the
tangible book value per share. The dilution to investors in this offering will
be approximately $8.14 per share, assuming an initial public offering price of
$11.00 per share. Purchasers will also suffer additional dilution upon the
exercise of outstanding options and warrants.
OUR EXECUTIVE OFFICERS, DIRECTORS AND THEIR AFFILIATES WILL OWN A LARGE
PERCENTAGE OF OUR VOTING SHARES AFTER THIS OFFERING, AND THEY MAY VOTE THEIR
SHARES IN WAYS IN WHICH YOU DISAGREE.
Upon the completion of this offering, executive officers, directors and their
affiliates will own, in the aggregate, approximately 31.8% of our outstanding
ordinary shares. As a result, these shareholders will be able to exercise
significant control over all matters requiring shareholder approval, including
the election of directors and the approval of significant corporate
transactions, and they may vote their shares in ways with which you disagree.
This concentration of ownership may delay, deter or prevent transactions that
would result in a change of control, which in turn could reduce the market
price of our ordinary shares.
13
<PAGE>
RISKS RELATING TO OPERATIONS IN ISRAEL
POTENTIAL POLITICAL, ECONOMIC AND MILITARY INSTABILITY IN ISRAEL MAY HARM OUR
ABILITY TO PRODUCE AND SELL OUR SYSTEM.
Our principal research and development and manufacturing facilities and many of
our suppliers are located in Israel. Any future armed conflicts or political
instability in the region could impair our ability to produce and sell our
system and could disrupt research or developmental activities. Political,
economic and military conditions in Israel directly affect our operations.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors. A state of
hostility, varying in degree and intensity, has led to security and economic
problems for Israel. The future of peace efforts between Israel and its Arab
neighbors remains uncertain. Several countries still restrict business with
Israel and Israeli companies. These restrictive laws and policies may have an
adverse impact on our operating results, financial condition or the expansion
of our business.
IF OUR KEY PERSONNEL ARE REQUIRED TO PERFORM MILITARY SERVICE, WE WILL BE
DEPRIVED OF THEIR SERVICES AND OUR OPERATIONS MAY BE DISRUPTED.
Many of our executive officers, directors and employees in Israel are obligated
to perform annual military reserve duty and are subject to being called to
active duty at any time under emergency conditions. Our operations could be
disrupted by the absence for a significant period of one or more of our
executive officers or key employees due to military service. Any disruption in
our operations could negatively affect our profitability.
BECAUSE OUR REVENUES ARE GENERATED IN U.S. DOLLARS AND A SIGNIFICANT PORTION OF
OUR EXPENSES ARE INCURRED IN NEW ISRAELI SHEKELS, OUR RESULTS OF OPERATIONS MAY
BE ADVERSELY AFFECTED BY INFLATION AND CURRENCY FLUCTUATIONS.
We generate our revenues in U.S. dollars but incur a significant portion of our
expenses, principally salaries and related personnel expenses, in new Israeli
shekels, commonly referred to as NIS. As a result, we are exposed to the risk
that the rate of inflation in Israel will exceed the rate of devaluation of the
NIS in relation to the dollar or that the timing of any devaluation may lag
behind inflation in Israel. If the dollar cost of our operations in Israel
increases, our dollar-measured results of operations will be adversely
affected. Our operations also could be adversely affected if we are unable to
protect ourselves from currency fluctuations in the future.
THE GOVERNMENT GRANTS WHICH WE RECEIVE AND TAX BENEFITS TO WHICH WE ARE
ENTITLED REQUIRE US TO MEET SEVERAL CONDITIONS AND MAY BE TERMINATED OR REDUCED
IN THE FUTURE, WHICH WOULD INCREASE OUR COSTS OR TAXES.
We receive research and development grants and are entitled to tax benefits
under Israeli government programs, particularly as a result of the approved
enterprise status of our existing facilities in Israel. The termination or
reduction of these programs and the tax benefits could cause our costs to
increase, which could prevent us from maintaining profitability. From 1995
through March 31, 2000, we received or accrued research and development grants
from the government of Israel totaling approximately $6.8 million, and we have
paid or accrued royalties in an aggregate amount of $1.8 million. The Israeli
government has reduced the benefits available under these programs in recent
years and has indicated that it may reduce or eliminate these benefits in the
future. We have submitted and may submit in the future requests for expansion
of our approved enterprise programs or for new programs. These requests might
not be approved. Some of these programs restrict our ability to manufacture
particular products or transfer particular technology outside of Israel.
14
<PAGE>
PROPOSED TAX REFORM IN ISRAEL MAY REDUCE OUR TAX BENEFITS WHICH COULD
NEGATIVELY AFFECT OUR PROFITABILITY.
On May 4, 2000, a committee chaired by the director general of the Israeli
ministry of finance issued a report recommending a widespread reform in
Israel's tax system. If the reform is adopted as recommended in the report,
some of the tax benefits to approved enterprises such as ours may be reduced
and purchasers of our ordinary shares may have to pay higher taxes in the
future. A reduction in the tax benefits available to us could negatively affect
our profitability. The Israeli cabinet has approved the recommendation in
principle, but implementation of the reform requires legislation by Israel's
parliament. We cannot be certain whether the proposed reform will be adopted or
when it will be adopted. We also do not know what form any reform will
ultimately take or what effect it will have on us or on persons who purchase
our ordinary shares.
IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND
DIRECTORS AND SOME OF THE EXPERTS NAMED IN THIS PROSPECTUS.
Service of process upon Accord, which is incorporated in Israel, and upon our
directors and officers and our Israeli auditors, some of whom reside outside
the United States, may be difficult to obtain within the United States. Because
many of our assets and some of our directors and officers are located outside
the United States, any judgment obtained in the United States against us or any
of these directors and officers may not be collectible within the United
States.
UNCERTAINTIES ABOUT THE NEW ISRAELI COMPANIES LAW MAY INHIBIT TAKEOVER ATTEMPTS
OR OTHER CORPORATE DECISIONS WHICH COULD DELAY OR PREVENT A TRANSACTION IN
WHICH SHAREHOLDERS MIGHT RECEIVE A PREMIUM OVER MARKET PRICE FOR THEIR ORDINARY
SHARES.
The new Israeli Companies Law, which became effective on February 1, 2000, has
brought about significant changes to Israeli corporate law. Under this new law,
there are uncertainties about corporate governance in some areas. These
uncertainties could delay or prevent takeover attempts or other transactions in
which shareholders might receive a premium over market price for their ordinary
shares. The uncertainties will persist until this new law has been adequately
interpreted and these uncertainties could inhibit takeover attempts or other
transactions and inhibit other corporate decisions.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All statements about
future events, our future financial performance and operating results, our
business strategy and our financing plans are forward-looking statements. In
some cases, you can identify forward-looking statements by terminology, such as
use of the words may, will, should, expect, intend, plan, anticipate, believe,
estimate, predict, potential or continue, the negative of these terms or other
comparable terminology. These statements are only predictions. Known and
unknown risks and uncertainties could cause actual results to differ materially
from those contemplated by the statements.
In evaluating these forward-looking statements, you should specifically
consider various factors, including the risks outlined under Risk Factors.
These factors may cause our actual results to differ materially from any
forward-looking statement. 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. 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 or to changes in our
expectations.
16
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of the ordinary
shares offered in this offering will be approximately $48.6 million. If the
underwriters over-allotment option is exercised in full, the net proceeds to us
will be approximately $56.6 million. We will not receive any of the proceeds
from the sale of ordinary shares by Michal and Gil Rosenfeld if the over-
allotment option is exercised. To estimate net proceeds, we are assuming that
the public offering price will be $11.00 per share. Net proceeds is what we
expect to receive after we pay the underwriting discount and other estimated
expenses for this offering.
The principal purposes of this offering are to:
. increase our working capital;
. create a public market for our ordinary shares;
. facilitate our future access to the public capital markets; and
. increase our visibility in the real-time interactive visual communications
marketplace.
We plan to pay approximately $6 million of the net proceeds of this offering to
Ezenia! Inc. as part of the settlement of a patent infringement lawsuit. We
have no current specific plans for the remainder of the net proceeds of this
offering. As a result, we will retain broad discretion in the allocation and
use of the net proceeds of this offering. We intend to use the remainder of the
net proceeds primarily for general corporate purposes, including working
capital, capital expenditures, geographic expansion and additional sales and
marketing efforts. Pending the intended uses of the net proceeds, we will
invest the net proceeds in short-term, interest bearing, investment-grade
securities.
DIVIDEND POLICY
We have never paid dividends to our shareholders and we have no current plans
to pay dividends in the future. We intend to reinvest earnings in the continued
development and expansion of our business. We may only pay dividends, other
than bonus shares or stock dividends, out of retained earnings, as calculated
under Israeli law.
Because of our status as an approved enterprise under Israeli law, the payment
of dividends may subject us to Israeli taxes to which we would not otherwise be
subject. If we decide to distribute cash dividends out of income that has been
exempt from tax, we would be liable for corporate tax on the amount
distributed.
17
<PAGE>
CAPITALIZATION
The table below shows as of March 31, 2000:
. our actual capitalization;
. our pro forma capitalization assuming the exercise of all outstanding
warrants to purchase preferred shares by net exercise at an assumed
initial public offering price of $11.00 per share, the conversion of all
issued and outstanding preferred shares into ordinary shares, the
conversion of 5,000,000 authorized but unissued ordinary shares into
5,000,000 preferred shares, and the settlement of a patent infringement
lawsuit; and
. our pro forma capitalization as adjusted to reflect the sale of our
ordinary shares in this offering at an assumed initial public offering
price of $11.00 per share, after deducting the estimated underwriting
discount and our estimated offering expenses, and to reflect the
anticipated use of the net proceeds from this offering.
The number of ordinary shares outstanding after this offering on a pro forma as
adjusted basis is 19,882,474 as of March 31, 2000 and excludes:
. 4,251,312 ordinary shares issuable upon the exercise of options to
employees, directors and consultants and warrants to a financial
institution outstanding at March 31, 2000 at a weighted average exercise
price of $3.16 per share; and
. 870,381 additional ordinary shares reserved for issuance under our share
option plans.
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -------------
(In thousands, except share data)
<S> <C> <C> <C>
Cash and cash equivalents............ $ 3,832 $ 3,832 $ 47,067
=========== =========== ===========
Mandatorily redeemable convertible
preferred shares:
Series A preferred shares, NIS 0.01:
3,750,000 shares authorized,
actual; 3,690,030 shares issued and
outstanding; none authorized issued
and outstanding, pro forma and pro
forma as adjusted.................. $ 5,251 $ -- $ --
Series B preferred shares, NIS 0.01:
8,500,000 shares authorized,
actual; 6,935,954 shares issued and
outstanding; none authorized issued
and outstanding, pro forma and pro
forma as adjusted.................. 15,445 -- --
Voting series C preferred shares,
NIS 0.01: 691,825 shares
authorized, actual; 691,825 shares
issued and outstanding; none
authorized issued and outstanding,
pro forma and pro forma as
adjusted........................... 3,100 -- --
Non-voting series C preferred
shares, NIS 0.01: 733,614 shares
authorized, actual; 733,614 shares
issued and outstanding; none
authorized issued and outstanding,
pro forma and pro forma as
adjusted........................... 3,285 -- --
----------- ----------- -----------
Total mandatorily redeemable
convertible preferred shares....... 27,081 -- --
----------- ----------- -----------
Stockholders' equity:
Ordinary shares, NIS 0.01:
41,324,561 shares authorized,
actual, 50,000,000 authorized pro
forma and pro forma as adjusted;
1,871,263 shares issued and
outstanding actual, 14,882,474
issued and outstanding pro forma,
and 19,882,474 shares issued and
outstanding pro forma as adjusted.. 6 38 50
Preferred shares, NIS 0.01: none
authorized, actual, 5,000,000
authorized pro forma and pro forma
as adjusted; none issued and
outstanding actual, pro forma and
pro forma as adjusted.............. -- -- --
Warrants and options................ 122 118 118
Additional paid-in capital.......... 163 27,216 75,779
Accumulated deficit................. (12,500) (19,000) (19,000)
----------- ----------- -----------
Total stockholders' equity
(deficit).......................... (12,209) 8,372 56,947
----------- ----------- -----------
Total capitalization............. $ 14,872 $ 8,372 $ 56,947
=========== =========== ===========
</TABLE>
18
<PAGE>
DILUTION
PRO FORMA NET TANGIBLE BOOK VALUE
Our pro forma net tangible book value as of March 31, 2000 was $8.4 million, or
$0.56 per ordinary share. Pro forma net tangible book value is calculated by
subtracting our total liabilities from the amount of our tangible assets and
then dividing that number by 14,882,474 pro forma ordinary shares outstanding.
We calculated pro forma net tangible book value assuming that all outstanding
warrants to purchase preferred shares will be exercised by net exercise and
that all issued and outstanding preferred shares will be converted into
ordinary shares. We also assumed in calculating pro forma net tangible book
value the settlement of a patent infringement lawsuit.
DILUTION AFTER THIS OFFERING
Dilution in pro forma net tangible book value per share represents the
difference between the price per share paid by purchasers of our ordinary
shares in this offering and the pro forma net tangible book value per share
immediately after this offering.
Assuming our sale of 5,000,000 ordinary shares in this offering at an assumed
initial public offering price of $11.00 per share and after the deduction of
the underwriting discount and estimated offering expenses, our pro forma as
adjusted net tangible book value as of March 31, 2000 would have been
approximately $56.9 million or $2.86 per share. This represents an immediate
increase in net tangible book value to existing shareholders of $2.30 per
ordinary share and an immediate dilution of $8.14 per ordinary share to new
investors.
The table below illustrates this per ordinary share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per ordinary share....... $11.00
Pro forma net tangible book value per ordinary share at March
31, 2000...................................................... $0.56
Increase per ordinary share attributable to new investors...... 2.30
-----
Pro forma as adjusted net tangible book value per ordinary
share after this offering..................................... 2.86
------
Dilution per ordinary share to new investors................... $ 8.14
======
</TABLE>
DIFFERENCES BETWEEN NEW AND EXISTING SHAREHOLDERS IN SHARES HELD AND AMOUNTS
PAID
The table below shows the number of shares purchased from us, the total
consideration paid and the average price paid per share by our existing
shareholders compared to our new investors in this offering. This table assumes
the exercise of all outstanding warrants to purchase preferred shares, the
conversion of all of our issued and outstanding preferred shares, including
those issued upon exercise of the warrants, into 13,011,211 ordinary shares and
an initial public offering price of $11.00 per ordinary share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders...... 14,882,474 74.85% $25,549,000 31.72% $ 1.72
New investors.............. 5,000,000 25.15 55,000,000 68.28 11.00
---------- ----- ----------- -----
Total..................... 19,882,474 100.0% $80,549,000 100.0%
========== ===== =========== =====
</TABLE>
19
<PAGE>
OPTIONS AND WARRANTS
As of March 31, 2000, there were options and warrants outstanding to purchase a
total of 4,251,312 ordinary shares, at a weighted average exercise price of
$3.16 per ordinary share, and approximately 870,381 additional ordinary shares
reserved for future grants and issuances under our share option plans. If any
of these options or warrants are exercised, there will be further dilution to
new investors.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
We derived the selected consolidated financial data shown below from our
consolidated financial statements and related notes. Our audited consolidated
financial statements for the years ended December 31, 1997, 1998 and 1999 and
the unaudited consolidated financial statements for the three months ended
March 31, 1999 and 2000 are included elsewhere in this prospectus. Kesselman &
Kesselman, a member firm of PricewaterhouseCoopers International Limited,
independent certified public accountants in Israel audited our consolidated
financial statements for each of the years in the five-year period ended
December 31, 1999.
Our consolidated financial statements have been prepared according to U.S.
generally accepted accounting principles. In the opinion of our management, the
consolidated statement of operation data for the three-month periods ended
March 31, 1999 and 2000 and the consolidated balance sheet data as of March 31,
2000 include all adjustments, consisting only of normal recurring adjustments,
that are necessary for the fair presentation of our results of operations and
financial position for those periods.
Historical results are not necessarily indicative of future results and the
results for interim periods are not necessarily indicative of the results that
may be expected for the entire year. You should read our selected financial
data with our consolidated financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
21
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales.................... $ -- $ -- $ 1,538 $ 12,172 $ 23,366
Support revenues................. -- -- 40 425 1,469
----------- ----------- ----------- ----------- -----------
Total revenues.................. -- -- 1,578 12,597 24,835
----------- ----------- ----------- ----------- -----------
Cost of revenues:
Product sales.................... -- -- 442 2,954 5,329
Support revenues................. -- -- 525 1,523 2,181
----------- ----------- ----------- ----------- -----------
Total cost of revenues.......... -- -- 967 4,477 7,510
----------- ----------- ----------- ----------- -----------
Gross profit...................... -- -- 611 8,120 17,325
Operating expenses:
Research and development, net.... 2,790 1,664 2,515 2,439 4,109
Selling and marketing, net....... -- 1,064 1,656 4,398 8,250
General and administrative....... 927 485 1,349 2,233 4,460
----------- ----------- ----------- ----------- -----------
Total operating expenses........ 3,717 3,213 5,520 9,070 16,819
----------- ----------- ----------- ----------- -----------
Operating income (loss)........... (3,717) (3,213) (4,909) (950) 506
Interest and other income
(expenses), net.................. 36 185 (93) (30) (142)
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes........................... (3,681) (3,028) (5,002) (980) 364
Income taxes...................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)................ $ (3,681) $ (3,028) $ (5,002) $ (980) $ 364
=========== =========== =========== =========== ===========
Earnings (loss) per share:
Basic............................ $ (3.16) $ (2.42) $ (3.92) $ (0.77) $ 0.28
=========== =========== =========== =========== ===========
Diluted.......................... $ (3.16) $ (2.42) $ (3.92) $ (0.77) $ 0.02
=========== =========== =========== =========== ===========
Weighted average number of shares
outstanding:
Basic............................ 1,164,769 1,249,378 1,277,067 1,277,067 1,318,410
Diluted.......................... 1,164,769 1,249,378 1,277,067 1,277,067 16,092,564
Pro forma earnings per share:
Basic............................ $ 0.03
===========
Diluted.......................... $ 0.02
===========
Pro forma weighted average number of shares outstanding:
Basic............................ 11,862,611
Diluted.......................... 16,092,564
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 2000
---------- ------------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales.................... $ 4,563 $ 7,774
Support revenues................. 267 485
---------- ------------
Total revenues.................. 4,830 8,259
---------- ------------
Cost of revenues:
Product sales.................... 977 1,807
Support revenues................. 431 634
---------- ------------
Total cost of revenues.......... 1,408 2,441
---------- ------------
Gross profit...................... 3,422 5,818
Operating expenses:
Research and development, net.... 1,081 1,517
Selling and marketing, net....... 1,792 2,785
General and administrative....... 757 1,279
---------- ------------
Total operating expenses........ 3,630 5,581
---------- ------------
Operating income (loss)........... (208) 237
Interest and other income
(expenses), net.................. (31) (17)
---------- ------------
Income (loss) before income
taxes........................... (239) 220
Income taxes...................... -- --
---------- ------------
Net income (loss)................ $ (239) $ 220
========== ============
Earnings (loss) per share:
Basic............................ $ (0.19) $ 0.12
========== ============
Diluted.......................... $ (0.19) $ 0.01
========== ============
Weighted average number of shares
outstanding:
Basic............................ 1,277,067 1,858,076
Diluted.......................... 1,277,067 17,604,242
Pro forma earnings per share:
Basic............................ $ 0.02
============
Diluted.......................... $ 0.01
============
Pro forma weighted average number of shares outstanding:
Basic............................ 13,734,635
Diluted.......................... 17,604,242
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
------ ------ ------- ------- ------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $1,077 $2,009 $ 2,099 $ 1,436 $ 5,787 $ 3,832
Working capital......... 949 2,613 3,775 4,890 10,682 11,084
Total assets............ 2,110 4,287 7,388 10,113 20,498 22,397
Total liabilities....... 276 1,068 8,810 3,771 7,042 7,525
Mandatorily redeemable
convertible preferred
shares................. 5,249 10,315 10,676 19,415 25,916 27,081
Stockholders' deficit... (3,415) (7,096) (12,098) (13,073) (12,460) (12,209)
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
General. We develop, manufacture, market and support an advanced visual
communications networking system. Our MGC-100 system connects individuals at
different locations, among different combinations of network and endpoint
types, to enable visual, audio and data communications.
We were incorporated under the laws of the State of Israel in 1992. From our
incorporation until 1997, we were a development stage company primarily engaged
in research and development, establishing relationships with suppliers and
potential customers and recruiting personnel. We incorporated a subsidiary,
Accord Networks, Inc., in the United States in 1995, and a subsidiary, Accord
Networks (UK) Limited, in the United Kingdom in 1998. We established offices in
Beijing and Shanghai, China in 1999. Our research and development and
manufacturing facilities are located in Petach Tikva, Israel, a suburb of Tel
Aviv. Our executive offices and North American sales, marketing and customer
support operations are located in Atlanta, Georgia. Our international sales,
marketing and customer support operations are located in London, England.
Revenue. We generate revenue from sales of our MGC-100 system and from support
services. We first recognized revenue from the sale of our MGC-100 system in
the third quarter of 1997. Revenue increased from $12.6 million in 1998 to
$24.8 million in 1999, and from $4.8 million in the first quarter of 1999 to
$8.3 million in the first quarter of 2000. Our employee headcount to support
this growth has increased from 68 at September 30, 1997 to 180 at March 31,
2000. We have been profitable in each quarter since the second quarter of 1999.
Net losses totaled $5.0 million in 1997 and $980,000 for 1998. We generated net
income of $364,000 in 1999 and $220,000 in the first quarter of 2000. We had an
accumulated deficit of $12.7 million as of December 31, 1999 and $12.5 as of
March 31, 2000.
In 1999, our top three customers accounted for 25.1% of our total revenue. None
of these customers individually accounted for more than 10.0% of our revenues
over that period. We expect that our largest customers may change from period
to period.
We expect that the growth of our business will result in an increase of our
inventory and accounts receivable levels and our capital expenditures. We
intend to meet these anticipated increases in capital expenditures and working
capital with cash generated from operations and proceeds from this offering.
In 1999, we derived approximately 94.1% of our revenue from sales of our
system. The balance of our revenue during this period was from support
services. Revenue from sales of our system is recognized upon shipment provided
that:
. signed documentation such as a signed contract, purchase order or letter
agreement has been received;
. we have no uncertainties about the sale;
. the amount of the sale is fixed and determinable; and
. collection is probable.
23
<PAGE>
Revenue from technical support and maintenance contracts is deferred and
recognized ratably over the period of the related agreements. Estimated
warranty costs for a system are recorded at the time of revenue recognition
from the sale of the system. Warranty periods are generally three months for
software and twelve months for hardware from shipment date.
Working capital and cost of revenue. In the third quarter of 1999, we began a
program to manage our working capital. The initial focus of this effort has
been to significantly improve the management of our trade accounts receivable
and to improve our days sales outstanding. This effort includes:
. adding resources to focus on the collection of accounts receivable;
. adoption of standard financial policies, procedures and practices relating
to customer credit approvals, credit limits, payment terms and collection
management;
. emphasis on and incentives to promote closing of sales earlier in the
quarter; and
. reducing the length of customer payment periods.
Our cost of revenue includes all costs of producing our system, including:
. costs of materials;
. manufacturing and assembly costs;
. direct and indirect labor costs and warranty costs;
. the allocation of appropriate overhead costs; and
. materials, travel and labor costs related to personnel engaged in our
support services operations.
Manufacturing. Our manufacturing operations consist primarily of:
. materials planning and procurement;
. quality control of components;
. kit assembly; and
. integration, final assembly and testing of fully-configured systems in our
Israel facility.
We contract with a limited number of independent contractors who partially
assemble the modules and chassis we use in our system and who adhere to the
specifications that we provide. We configure the hardware and software to meet
a variety of customer requirements and complete system integration, assembly
and testing.
Research and development. Our research and development expenses consist
primarily of:
.salaries and related personnel costs;
.contract engineering;
.purchased software;
.development-related raw materials;
.depreciation of equipment; and
.an allocation of appropriate overhead costs.
All research and development costs are expensed as incurred. As of March 31,
2000, we employed 71 engineers located in our Israel facility. We expect to
increase our investment in research and
24
<PAGE>
development, primarily through hiring additional employees to develop new
technologies and systems. We anticipate that these costs will increase in
absolute dollar terms.
Our research and development expenditures are net of funds received from the
office of the chief scientist of the Israeli ministry of industry and trade,
known as the OCS, and from the Israel--U.S. binational industrial research and
development foundation, known as BIRD. The table below outlines gross research
and development expenditures, OCS and BIRD funding amounts and net research and
development expenditures for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------------- MARCH 31, TOTAL ALL
1995 1996 1997 1998 1999 2000 PERIODS
------ ------ ------ ------ ------ ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Research and development
expenses, gross........ $3,410 $3,060 $3,711 $3,585 $5,732 $2,341 $21,839
OCS and BIRD funding.... 620 1,396 1,196 1,146 1,623 824 6,805
------ ------ ------ ------ ------ ------ -------
Research and
development expenses,
net.................... $2,790 $1,664 $2,515 $2,439 $4,109 $1,517 $15,034
====== ====== ====== ====== ====== ====== =======
</TABLE>
Royalties. We pay royalties to the OCS and BIRD for research and development
grants received from them. These royalties range from 3.0% to 5.0% of total
revenue derived from the products developed as a result of research projects
funded by OCS and BIRD. These expenditures are included in sales and marketing
expense. From 1992 to March 31, 2000, we expensed $1.8 million of these grants
and, as of March 31, 2000, our contingent liability for these future royalties
totaled $5.4 million. We expect that our future research and development
expenditures will be funded by continued grants from the OCS and by internal
funds.
Sales and marketing expenses. Sales and marketing expenses consist primarily of
salaries and commissions for those engaged in sales and marketing of our system
as well as related trade shows, promotional materials and public relations
expenses. Sales and marketing expenses also include royalties paid to OCS and
BIRD for grants received for research and development. Historically, sales and
marketing expenses also included the royalties we paid on marketing grants we
received from the Israeli government through the fund for the encouragement of
marketing activities. As of December 31, 1999, the entire royalty commitment
for these grants was paid or accrued. We do not intend to apply for future
grants under this program.
We sell our system worldwide through a direct sales force as well as through
resellers. As of March 31, 2000, we employed 38 sales and marketing staff. We
expect sales and marketing expenses to increase in absolute dollars as we add
sales personnel and increase our sales and marketing efforts.
General and administrative expenses consist primarily of
. salaries and related personnel expenses for executive, financial,
accounting, legal, management information systems and human resources
personnel;
. employee benefits;
. corporate facility costs; and
. depreciation, amortization and general administrative expenses.
We expect general and administrative expenses in future periods to increase in
absolute dollars as we add personnel and incur additional costs related to the
anticipated growth of our business and operations as a public company.
25
<PAGE>
Israeli companies are generally subject to income tax at the corporate rate of
36.0%. However, we are eligible for tax benefits that should result in our
income being taxed at a significantly lower rate for several years after we
begin to report taxable income.
Currency. We use the U.S. dollar as our functional currency. Transactions and
balances originally valued in U.S. dollars are presented at their original
amounts. All transaction gains and losses from the re-measurement of monetary
balance sheet items valued in non-dollar currencies are included in the
statement of operations as interest and other income (expenses), net.
Substantially all of our production costs are comprised of our costs of
materials, which are incurred in U.S. dollars. The balance of our production
costs are incurred in Israeli currency. Most of our marketing expenses are
incurred outside of Israel in U.S. dollars.
RESULTS OF OPERATIONS
The table below shows the percentage relationships of items from our
consolidated statements of operations, as a percentage of total revenues for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- -----------------
1997 1998 1999 1999 2000
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales.......... 97.5 % 96.6 % 94.1 % 94.5 % 94.1 %
Support revenues ...... 2.5 3.4 5.9 5.5 5.9
-------- ------- ------- ------- -------
Total revenues....... 100.0 100.0 100.0 100.0 100.0
-------- ------- ------- ------- -------
Cost of revenues:
Product sales.......... 28.0 23.4 21.4 20.2 21.9
Support revenues....... 33.3 12.1 8.8 9.0 7.7
-------- ------- ------- ------- -------
Total cost of
revenues............ 61.3 35.5 30.2 29.2 29.6
-------- ------- ------- ------- -------
Gross profit............. 38.7 64.5 69.8 70.8 70.4
Operating expenses:
Research and
development, net...... 159.4 19.4 16.5 22.3 18.4
Selling and marketing,
net................... 104.9 34.9 33.2 37.1 33.7
General and
administrative........ 85.5 17.7 18.0 15.7 15.5
-------- ------- ------- ------- -------
Total operating
expenses............ 349.8 72.0 67.7 75.1 67.6
-------- ------- ------- ------- -------
Operating profit (loss).. (311.1) (7.5) 2.1 (4.3) 2.8
Interest and other income
(expenses), net......... (5.9) (0.2) (0.6) (0.6) (0.1)
-------- ------- ------- ------- -------
Income (loss) before
income taxes.......... (317.0) (7.7) 1.5 (4.9) 2.7
-------- ------- ------- ------- -------
Net income (loss) for the
year.................... (317.0)% (7.7)% 1.5 % (4.9)% 2.7 %
======== ======= ======= ======= =======
</TABLE>
26
<PAGE>
Revenue based on geographic location is shown below:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ----------------
1997 1998 1999 1999 2000
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
North America................ 74.9% 77.7% 80.1% 79.5% 67.5%
Europe....................... 21.0 20.3 16.3 20.0 15.4
Far East..................... 4.1 0.4 2.1 -- 10.7
Israel....................... -- 1.6 1.5 0.5 6.4
-------- -------- -------- ------- -------
Total.................... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======= =======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Total Revenues. Total revenues increased 71.0% to $8.3 million in the quarter
ended March 31, 2000 from $4.8 million in the quarter ended March 31, 1999.
Increased revenues were due to sales to new customers as well as increased
sales to existing customers.
Gross Profit. Our gross profit increased to $5.8 million in the quarter ended
March 31, 2000 from $3.4 million in the quarter ended March 31, 1999. Gross
margin decreased from 70.8% in the quarter ended March 31, 1999 to 70.4% in the
quarter ended March 31, 1999. The increase in gross profit was due primarily to
increased sales.
Research and Development Expenses, Net. Our research and development expenses,
net, increased 40.3% to $1.5 million, or 18.4% of total revenues, in the
quarter ended March 31, 2000 from $1.1 million, or 22.4% of total revenues, in
the quarter ended March 31, 1999. The increase in absolute dollars in the
quarter ended March 31, 2000 was due primarily to the addition of personnel in
our research and development organization.
Selling and Marketing Expenses, Net. Selling and marketing expenses, net,
increased 55.4% to $2.8 million, or 33.7% of total revenues, in the quarter
ended March 31, 2000 from $1.8 million, or 37.1% of total revenues, in the
quarter ended March 31, 1999. The increase in absolute dollars reflects a
higher selling and marketing headcount, higher compensation costs, including
commissions, and higher travel costs.
General and Administrative Expenses. General and administrative expenses
increased 69.0% to $1.3 million, or 15.5% of total revenues, in the quarter
ended March 31, 2000 from $757,000, or 15.7% of total revenues, in the quarter
ended March 31, 1999. The increase in absolute dollars was primarily due to the
addition of personnel in the finance and MIS organizations, and increased legal
fees related to the defense of the patent infringement lawsuit.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Total Revenues. Total revenues increased 97.2% to $24.8 million in 1999 from
$12.6 million in 1998. Of this increase, 82.6% was due to an increase in sales
of our system in North America.
Gross Profit. Our gross profit increased to $17.3 million in 1999 from $8.1
million in 1998. Gross margin increased to 69.8% in 1999 from 64.5% in 1998.
The increase in our gross margin was the result of a 97.2% increase in revenues
from system sales and an increase in the gross margin for system sales from
75.7% to 77.2%. The improvement in system gross profit percentage was due
primarily to lower purchasing costs of materials. Additionally, the increase in
our gross margin was affected by a lower cost of support, with support revenues
increasing 246%, while support costs increased by 43.2%.
27
<PAGE>
Research and Development Expenses, Net. Our research and development expenses,
net, increased 68.5% to $4.1 million, or 16.5% of total revenues, in 1999 from
$2.4 million, or 19.4% of total revenues, in 1998. This increase in absolute
dollars was due primarily to hiring additional research and development
personnel for ongoing development projects.
Selling and Marketing Expenses, Net. Selling and marketing expenses increased
87.6% to $8.2 million, or 33.2% of total revenues, in 1999 from $4.4 million,
or 34.9% of total revenues, in 1998. This increase in absolute dollars reflects
a 120% increase in payroll expenses due to the addition of sales and marketing
personnel, a 190% increase in additional marketing, advertising and promotional
activities undertaken to acquire new customers, and a 103% increase in
royalties paid to the OCS and BIRD due to increased sales. We also expanded our
sales regions geographically to include Asia Pacific during 1999.
General and Administrative Expenses. General and administrative expenses
increased 99.7% to $4.5 million, or 18.0% of total revenues, in 1999 from $2.2
million, or 17.7% of total revenues, in 1998. This increase in absolute dollars
was primarily due to an 85.4% increase in payroll expenses due to the addition
of management and administrative staff to support our growth and expansion
strategy as well as litigation expenses related to the defense of the patent
infringement lawsuit.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total Revenues. Total revenues increased 698% to $12.6 million in 1998 from
$1.6 million in 1997. Of this increase, 78.1% was due primarily to an increase
in sales of our system in North America.
Gross Profit. Our gross profit increased to $8.1 million in 1998 from $611,000
in 1997. Gross margin increased to 64.5% in 1998 from 38.7% in 1997. The
increase in our gross margin was the result of increased revenues from system
sales and an increase in the gross margin for system sales from 71.3% to 75.7%.
The improvement in system gross margin was due primarily to lower purchasing
costs of materials. Additionally, the increase in our gross margin was affected
by a lower cost of support, with support revenue increasing 963%, while support
costs increased by 190%.
Research and Development Expenses, Net. Research and development expenses, net,
were $2.4 million, or 19.4% of total revenues, in 1998 compared to $2.5
million, or 159% of total revenues, in 1997. In absolute dollars, research and
development expenses, net, remained relatively constant. While we increased our
investment in research and development personnel by 2.7%, this additional
investment was offset by a 17.6% reduction in costs resulting from lower costs
of subcontractor work and materials consumed in research and development.
Selling and Marketing Expenses, Net. Selling and marketing expenses increased
166% to $4.4 million, or 34.9% of total revenues, in 1998 from $1.7 million, or
105% of total revenues, in 1997. This increase reflects a 123% increase in
payroll expenses due to the addition of sales and marketing personnel, a 171%
increase in additional marketing, advertising and promotional activities
undertaken to acquire new customers, and a 418% increase in royalties paid to
the OCS and BIRD due to increased sales. We also expanded our sales activities
internationally in 1998 by opening our international sales, marketing and
support operations in London, England.
General and Administrative Expenses. General and administrative costs increased
65.5% to $2.2 million, or 17.7% of total revenues, in 1998 from $1.3 million,
or 85.5% of total revenues, in 1997. This increase was primarily due to the
addition of management and administrative staff to support our growth and
expansion strategy.
28
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The table below shows unaudited quarterly results of operations in U.S. dollar
amounts and as a percentage of total revenues for the periods indicated. We
have prepared this information on a basis consistent with our audited
consolidated financial statements and included all adjustments that we consider
necessary for a fair presentation of the information for the periods indicated.
Results of operations for any fiscal quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999 1999 1999 1999 2000
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS)
Revenues:
Product sales............... $2,081 $2,902 $3,305 $3,884 $4,563 $5,259 $6,180 $7,364 $7,774
Support revenues............ 15 129 115 166 267 287 354 561 485
------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenues............. 2,096 3,031 3,420 4,050 4,830 5,546 6,534 7,925 8,259
------ ------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Product sales............... 559 697 793 905 977 1,178 1,460 1,714 1,807
Support revenues............ 312 332 393 486 431 494 566 690 634
------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenues..... 871 1,029 1,186 1,391 1,408 1,672 2,026 2,404 2,441
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit................. 1,225 2,002 2,234 2,659 3,422 3,874 4,508 5,521 5,818
Operating expenses:
Research and development,
net........................ 483 562 642 752 1,081 889 1,095 1,044 1,517
Selling and marketing, net.. 887 1,104 1,041 1,366 1,792 1,861 1,982 2,615 2,785
General and administrative.. 546 494 524 669 757 931 1,231 1,541 1,279
------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses... 1,916 2,160 2,207 2,787 3,630 3,681 4,308 5,200 5,581
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating profit (loss)...... (691) (158) 27 (128) (208) 193 200 321 237
Interest and other income
(expenses), net............. (68) -- 21 17 (31) (16) 14 (109) (17)
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes...................... (759) (158) 48 (111) (239) 177 214 212 220
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) for the
quarter.................... $ (759) $ (158) $ 48 $ (111) $ (239) $ 177 $ 214 $ 212 $ 220
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999 1999 1999 1999 2000
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF TOTAL REVENUES:
Revenues:
Product sales............... 99.3 % 95.7 % 96.6% 95.9 % 94.5 % 94.8 % 94.6% 92.9 % 94.1 %
Support revenues............ 0.7 4.3 3.4 4.1 5.5 5.2 5.4 7.1 5.9
------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenues............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Product sales............... 26.7 23.0 23.1 22.3 20.2 21.2 22.3 21.6 21.9
Support revenues............ 14.9 11.0 11.5 12.1 9.0 8.9 8.7 8.7 7.7
------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenues..... 41.6 34.0 34.6 34.4 29.2 30.1 31.0 30.3 29.6
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit................. 58.4 66.0 65.4 65.6 70.8 69.9 69.0 69.7 70.4
Operating expenses:
Research and development,
net........................ 23.0 18.6 18.8 18.5 22.3 16.0 16.8 13.2 18.4
Selling and marketing, net.. 42.3 36.4 30.5 33.7 37.1 33.6 30.4 33.0 33.7
General and administrative.. 26.1 16.3 15.3 16.5 15.7 16.8 18.8 19.4 15.5
------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses... 91.4 71.3 64.6 68.7 75.1 66.4 66.0 65.6 67.6
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating profit (loss)...... (33.0) (5.3) 0.8 (3.1) (4.3) 3.5 3.0 4.1 2.8
Interest and other income
(expenses), net............. (3.2) -- 0.6 0.4 (0.6) (0.3) 0.2 (1.4) (0.1)
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes...................... (36.2) (5.3) 1.4 (2.7) (4.9) 3.2 3.2 2.7 2.7
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) for the
quarter.................... (36.2)% (5.3)% 1.4% (2.7)% (4.9)% 3.2% 3.2% 2.7% 2.7 %
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
29
<PAGE>
Our quarterly operating results have varied significantly in the past.
Therefore, revenues and profitability, if any, in any particular period may be
lower than revenues and profitability, if any, in a preceding or comparable
period. Period-to-period comparisons of our results of operations may not be
meaningful and you should not rely upon them as indications of our future
performance. Our revenue and results of operations may continue to fluctuate
for a number of reasons, including:
. the timing, nature and cost of expansion efforts in both new and existing
markets and related expenses;
. the timing of new system, product and service introductions and customer
responses to those introductions;
. our ability to attract new customers and retain existing customers;
. our ability to manufacture and deliver our system in a timely manner;
. our ability to sustain or improve our cost as a percentage of revenue; and
. changes in the level of marketing and other operating expenses to support
future growth.
Revenues. Quarterly revenues increased in each of the periods shown above due
to increased sales of our system.
Gross Profit and Gross Profit Margin. In each of the eight quarters ending
March 31, 2000, we have maintained gross margins above 65 percent. Our gross
profit and gross margin of the systems we sell vary from quarter to quarter due
to:
. changes in cost of materials purchased from third parties;
. number of systems sold through reseller distribution channels versus
systems sold directly;
. changes in the configuration of systems sold as well as the sale of spare
parts and additional hardware components to existing customers; and
. discounts negotiated with large resellers.
Operating Expenses. Research and development expenses increased generally in
actual dollars, while decreasing as a percentage of total revenues in each
quarter of 1998 and 1999. In the quarters ended March 31, 1999, research and
development costs increased due to an increase in the required provision for
severance pay as a result of increases in salary. For the quarter ended March
31, 2000, research and development costs increased due to an increase in
headcount and salaries.
For the quarter ended March 31, 1999, we experienced a rapid increase in
selling and marketing expenses because of a significant expansion of our sales
force. In the six months ended September 30, 1999, selling and marketing
expenses as a percentage of revenue decreased due to increased revenues. In the
three months ended December 31, 1999 and March 31, 2000, sales and marketing
expenses as a percentage of revenue increased due to an expansion of our sales
force in our international markets.
General and administrative expenses increased in both dollar and percentage
terms in the quarter ended December 31, 1999 when compared to the prior
quarters, primarily due to costs from recruiting and hiring additional
resources to strengthen our financial and systems expertise.
Operating expenses increased in absolute dollars in each of the quarters
presented above. As a percentage of revenue, total operating expenses decreased
in the year ended December 31, 1999 due to increased sales of our system.
30
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Equity and grants
We initially financed our operations primarily through sales of equity and the
receipt of grants from OCS and BIRD to fund research and development. Before
this offering, we sold convertible preferred shares in six private placement
transactions realizing aggregate gross proceeds of approximately $24.5 million
in cash, including $3.8 million before 1996, $5.2 million in March 1996, $9.0
million in March 1998 and $6.5 million in August 1999. During December 1999 and
January 2000, warrants to purchase 583,705 series B preferred shares were
exercised and we received payment of approximately $1.3 million for those
shares. Holders of our preferred shares have preferred rights if we are
liquidated or if specified liquidation events occur. Because these events are
not solely within our control, the preferred shares have been presented outside
of permanent equity as mandatorily redeemable convertible preferred shares.
These shares will automatically convert to ordinary shares upon completion of
this offering, and be included in permanent shareholders' equity.
Bank financing activities
As of March 31, 2000, we had $3.8 million in cash and cash equivalents. In
April 1999, we established a revolving line of credit with Bank Hapoalim B.M.
that provides up to $4.0 million in credit availability for a period of 24
months. Borrowings under this credit facility are secured by a floating charge
on all of our current and future assets and by fixed charges on our goodwill,
on any amounts not paid on our shares when shares are issued and on any notes
and securities that we may deposit with the bank. Borrowings under this credit
facility bear interest at a rate equal to the London inter-bank offer rate, or
LIBOR, plus 1.5%. There were no borrowings outstanding under this line of
credit at March 31, 2000.
Operating activities
In the first three months of 2000, cash used for operating activities was $2.0
million as compared to $735,000 for the first three months of 1999. Cash
provided by operating activities was $21,000 in 1999. Cash used for operating
activities was $1.9 million in 1998 and $6.1 million in 1997.
Investing activities
Cash used for investing activities was $1.0 million for the first three months
of 2000 and $212,000 for the first three months of 1999. Cash used for
investing activities was $1.4 million in 1999, $1.0 million in 1998, and
$513,000 in 1997. The net cash used for investing activities reflects purchases
of fixed assets, primarily for computer equipment, including workstations and
servers to support our new offices, our increased research and development
efforts, and our increased employee base.
Financing activities
Cash provided by financing activities in the first three months of 2000 was
$1.0 million. Cash provided by financing activities was $5.7 million in 1999,
$2.2 million in 1998, and $6.7 million in 1997. The net increase in cash
provided by financing activities primarily reflects the private sales of
convertible preferred shares, which was used to pay down our $4.0 million line
of credit with Bank Hapoalim B.M.
Capital expenditures and cash needs
Capital expenditures will be incurred to:
. expand into new geographic markets worldwide with the opening of new sales
and support offices;
31
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. provide the capital equipment necessary to support increased assembly and
shipment of systems;
. provide the capital equipment necessary to support increased personnel and
activities in research and development; and
. make additions and improvements to our worldwide management information
systems.
We believe that the net proceeds of this offering, our existing cash balances
and our short-term investments will be sufficient to meet our anticipated cash
needs for working capital and capital expenditure requirements for the next 12
to 18 months. After that time, if we do not have sufficient cash available to
finance our operations, we may be required to obtain additional debt or equity
financing.
EFFECTIVE CORPORATE TAX RATES
Our production facilities have been granted approved enterprise status under
the Israeli Law for Encouragement of Capital Investments, 1959, and
consequently are eligible for tax benefits for the first several years in which
we generate taxable income from these facilities. The income derived from our
facilities that have been granted approved enterprise status is exempt from
income tax in Israel for two years beginning in the year in which the specific
approved enterprises first generate taxable income. Following this two-year
period, our approved enterprises are subject to corporate tax at a reduced rate
of at most 25.0% for up to eight additional years, subject to some conditions
and time limitations. A committee chaired by the director general of the
Israeli ministry of finance has recently proposed tax reform which if adopted
could reduce or cancel these benefits in the future. Since we have incurred tax
losses through December 31, 1999, the period of benefits has not yet begun. If
we operate under more than one approval or if our capital investments are only
partly approved, our effective tax rate will be a weighted combination of the
various applicable tax rates.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Since the majority of our revenue are paid in or linked to the U.S. dollar, we
believe that inflation and fluctuation in the new Israeli shekels/U.S. dollar
exchange rate has no material effect on our revenue. However, a portion of the
cost of our Israeli operations, mainly personnel and facility-related, is
incurred in NIS. Because some of our costs are in NIS, inflation in Israel and
U.S. dollar exchange rate fluctuations do have some influence on our expenses
and, as a result, on our net income. Our NIS costs, as expressed in U.S.
dollars, are influenced by the extent to which any increase in the rate of
inflation in Israel is not offset, or is offset on a delayed basis, by a
devaluation of the NIS in relation to the U.S. dollar.
In 1997 and 1998, the rate of devaluation of the NIS against the U.S. dollar
has exceeded the rate of inflation, a reversal from prior years. This was not
the case in 1999 and in the first three months of 2000. We cannot be certain
how this matter will develop in the future and we may be materially adversely
affected in the future if inflation in Israel exceeds the devaluation of the
NIS against the U.S. dollar, or if the timing of the devaluation lags behind
increases in inflation in Israel.
We do not engage in any hedging or other transactions intended to manage risks
relating to foreign currency exchange rate or interest rate fluctuations. At
December 31, 1999, we did not own any market risk sensitive instruments except
for our revolving line of credit. However, we may in the future undertake
hedging or other similar transactions or invest in market risk sensitive
instruments if management determines that it is necessary or advisable to
offset these risks.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Our financial market risk includes risks related to international operations
and related foreign currencies. We anticipate that sales outside of North
America will continue to account for a significant portion of our consolidated
revenue. To date, all sales have been valued in U.S. dollars. In future
periods, we expect our sales to be principally valued in U.S. dollars and
therefore will not be subject to foreign currency exchange risk.
We value expenses of our international operations in each country's local
currency and therefore are subject to foreign currency exchange risk. However,
through December 31, 1999 we have not experienced any significant negative
impact on our operations as a result of fluctuations in foreign currency
exchange rates. We do not use financial instruments to hedge operating expenses
in Israel, the United Kingdom or China that are valued in local currency. We
intend to assess the need to utilize financial instruments to hedge currency
exposures on an ongoing basis.
We do not use derivative financial instruments for speculative trading
purposes, nor do we hedge our foreign currency exposure to offset the effects
of changes in foreign exchange rates.
Our exposure to market risks for changes in interest rates relates primarily to
our credit facility. At March 31, 2000, our financial market risk related to
this debt was immaterial. Our general policy is to limit the risk of principal
loss and ensure the safety of invested funds by limiting market and credit
risk.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.133, Accounting for Derivatives and Hedging
Activities, or SFAS No. 133, which establishes accounting and reporting
standards for derivative instruments, including derivative instruments imbedded
in other contracts, known as derivatives, and for hedging activities. We will
adopt SFAS No.133 as required by SFAS No. 137, Deferral of the effective date
of the FASB Statement No. 133, in 2001. The adoption of SFAS No. 133 is not
expected to have an impact on our financial condition or results of operations.
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BUSINESS
OVERVIEW
We develop, manufacture and distribute an advanced networking system that
enables real-time interactive visual communications. Our system, the MGC-100,
connects people at different locations and endpoints, across packet-based,
circuit-switched, and broadband and narrowband networks, using Internet
protocol, or IP, integrated services digital network, or ISDN, and asynchronous
transfer mode, or ATM.
Our system provides a broad range of video, audio and data communication
capabilities to telecommunications service providers, business enterprises, and
governmental and educational institutions. These capabilities include business
communications, distance learning and training, telemedicine and telecommuting,
or working outside the office. As broadband, or high-speed, access to the
Internet and corporate networks becomes more widespread, we believe our system
will also enable a variety of new visual communications applications, such as
visual electronic business applications, visual call centers and help desks,
visual online discussion, or chat, rooms, and on-demand business and personal
visual communications.
Our MGC-100 system provides:
. Multiple network connectivity--the ability to seamlessly connect existing
circuit switched networks with emerging packet-based and broadband
networks, along with a design capability that allows for connections with
new networks and standards as they are developed;
. Comprehensive transcoding--ensures communication among endpoints with
different video, audio and data parameters and bandwidth capabilities,
allowing for optimal performance at each endpoint;
. Continuous presence--allows participants to simultaneously view multiple
sites on a single screen in six different visual image layouts which can be
changed at any time throughout a visual communications session;
. Easy-to-use interface--allows simplified and more reliable visual
communications session set up, control, troubleshooting and billing, which
can be managed remotely over the Internet or by telephone; and
. Video and audio processing and data routing--allows participants in
multiple locations to see, hear and share information with one another as
if they were all physically in the same room.
INDUSTRY BACKGROUND
The real-time interactive visual communications industry is undergoing dynamic
changes as it expands from traditional videoconferencing to broader visual
communications applications, including on-demand conferencing, visual
electronic business, visual call centers and help desks, visual banking and
visual chat rooms. We believe the primary factors driving these changes are:
. the widespread availability of affordable endpoints, including personal
computers, or PCs, capable of supporting desktop visual communications;
. advances in network transmission and the emergence of the Internet, which
will continue to enable new visual communications applications; and
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. greater bandwidth capabilities and increased competition among
telecommunications service providers, which we believe will lead to a
demand for, and an increase in, visual communications service offerings as
a means of competitive differentiation and effective use of capital and
infrastructure.
Increase in the Availability and Affordability of Endpoints
The increase in the number of endpoints supporting visual communications has
created a need for sophisticated networking technologies that allow multiple
locations to be connected into the same visual communications session. In its
early stages, videoconferencing was limited to connections between only two
locations. Over time, videoconferences needed to be conducted among multiple
sites, which resulted in the development of the multi-point control unit, known
as the MCU, which integrates and delivers video transmissions to and from
multiple sites and facilitates multi-point communications. Large-scale, multi-
party conferencing was initially difficult because first generation MCUs were
incompatible with endpoints and MCUs from different manufacturers. The
International Telecommunications Union, known as the ITU, addressed this
problem by introducing standards for conferencing over switched digital circuit
networks. This led to increased demand for visual communications equipment as
end-users began purchasing videoconferencing equipment with the knowledge that
equipment from one manufacturer was compatible with equipment from another
manufacturer.
As visual communications technology has matured, equipment prices have
declined. Functionality that was once only available in a $70,000 room-based
videoconferencing system may now be purchased in the form of commercial desktop
videoconferencing endpoints for approximately $500. International Data
Corporation forecasts that these lower price endpoints will drive a 51.0%
compounded annual growth rate in the endpoint market. International Data
Corporation defines the endpoint market as commercial desktop
videoconferencing, commercial compact videoconferencing systems and consumer
integrated videoconferencing products, such as video phones. International Data
Corporation excludes high-end solutions, such as older generation, or legacy,
room-based systems, from its definition of the endpoint market. This forecasted
growth will result in worldwide endpoint shipments growing from 398,000 units
in 1999 to 2.1 million in 2003.
Over the last several years, PCs capable of supporting desktop visual
communications have become widely available. International Data Corporation
estimated that more than 80 million of these PCs were shipped worldwide in
1998, and forecasts that shipments will grow to 168 million in 2003.
As endpoint usage continues to grow, including continued growth in the number
of PCs supporting visual communications applications, we expect that demand for
advanced switching and networking systems that support multi-point visual
communications will also grow.
Advances in Network Transmission
Concurrent with the development and widespread availability of PCs supporting
desktop visual communications, there have been significant advances in network
transmission as carriers have moved from dedicated leased line networks to
circuit switched networks, and then to packet-based networks. As a result,
real-time interactive visual communications can be conducted over a diverse set
of protocols, including ISDN, ATM and IP. In this multi-protocol environment,
multiple party visual communication requires a networking system that handles
multiple protocols. Traditional
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solutions have not met these demands because they have generally been designed
to handle specific protocols. As a result, users of traditional solutions are
required to purchase additional equipment to handle protocol conversions,
known as gateways, so that disparate endpoints can communicate over different
networks. A diagram of traditional videoconferencing architecture appears
below.
[DIAGRAM]
[The diagram shows two sets of videoconferencing endpoints at the top of the
diagram and three boxes representing two multi-point control units for
different standards governing visual communications connected through one box
representing a gateway at the bottom of the diagram. At the top left are three
video screens with a video camera on top of each titled "H.320 Endpoints," and
at the top right are three networked computers with a video camera on top of
each titled "H.323 Endpoints." A line is drawn down from the video screens to
a bubble representing the ISDN protocol. A line then travels down from the
ISDN protocol to the first of two boxes representing the MCU, and horizontally
through the gateway box to the second MCU box. Those boxes are called "H.320
MCU," "H.320-H.323 Gateway" and "H.323 MCU." An individual computer is
connected to each of the three boxes. The line then travels up from the H.323
box to a bubble representing the IP protocol, and continues up to the three
H.323 endpoint computers.]
This architecture has several limitations because it:
. lacks scalability;
. increases the cost and complexity of the solution;
. lacks redundancy;
. requires multiple management systems for set up and control;
. adds multiple points of failure; and
. fails to provide optimal operations and connections across multiple
networks.
We expect the emergence of the Internet and intranets, coupled with the
widespread installation of PCs supporting desktop visual communications
applications, to lead to a variety of new visual communications applications.
The ITU has introduced H.323 standards governing visual communications over
networks using IP, which includes the Internet, corporate intranets and local
area networks, or LANs. Increasing numbers of business enterprises,
governmental agencies,
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healthcare and educational institutions and their employees rely on IP-based
networks to access e-mail, engage in electronic commerce, and telecommute. It
is expected that this reliance on IP networks will cause a migration from
conferencing over ISDN networks using a standard known as H.320 to visual
communications over IP networks using H.323 standards. We believe the migration
to H.323 standards will lead to a variety of new visual communications
applications, such as visual electronic business, visual call centers and help
desks and visual chat rooms. Also, we expect this reliance to lead to migration
from operator controlled conferencing to on-demand visual communications
controlled by the end user through a PC that is enabled for desktop visual
communications. We believe these trends will lead to visual communications that
are as easy and reliable as a telephone call or using the Internet.
Increased Bandwidth Capabilities and Competition in the Telecommunications
Industry
Fueled by the growth of the Internet, IP intranets, IP networks and increases
in data traffic, there have been significant increases in demand by business
enterprises and individual consumers for broadband, or high speed, access to
the Internet and to corporate networks. According to Ryan, Hankin & Kent, a
leading market research and consulting firm, public network bandwidth will have
to increase by over 2,000% between 1998 and 2002 to satisfy expected Internet
and other data traffic requirements. Business enterprises and individual
consumers are seeking low-cost, high speed access to bandwidth-intensive
Internet content, applications and services, such as highly graphical web sites
and audio and visual data.
Telecommunications service providers are responding to the demand for broadband
by providing comprehensive broadband services based on a variety of
technologies, including cable modems, digital subscriber line, or DSL,
wireless, and fiber optics. According to Ryan, Hankin & Kent, more than $6.9
billion was invested in the United States alone in 1998 in building and
enhancing the transmission capability of public networks. Forrester Research
estimates that broadband subscribers will grow from 2.6 million in 1999 to 27.4
million in 2003.
Worldwide deregulation of the telecommunications industry has increased
competition among all types of telecommunications service providers. We believe
the increased competition will lead to new visual communications service
offerings. Global regulatory changes are increasing the number of competitors
in the access portion of the network and are further accelerating the need for
service providers to upgrade their networks and increase their service
offerings. CLECs, ISPs, satellite operators, cable operators and utilities are
competing with incumbent telephone carriers for customers. We believe this
increase in competition, coupled with the emergence of broadband technologies,
will continue to lead to more high-bandwidth service offerings, such as visions
communications applications, as telecommunications service providers seek to
use the broadband capacity of their networks, differentiate themselves from
their competition, and create new sources of revenue. DataQuest estimates that
telecommunication service provider video service revenue will grow from $469.1
million in 1998 to $1.6 billion in 2002.
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OUR SOLUTION
We have developed an advanced networking system that enables real-time
interactive visual communications. Through our system, multiple parties can
engage in visual communications across and between different types of networks
and endpoints. A diagram of our solution appears below:
[DIAGRAM]
[The diagram shows three sets of videoconferencing endpoints at the top of the
diagram, and Accord's MGC-100 system at the bottom of the diagram. At the top
left, three video screens with a video camera on top of each titled "H.320
Endpoints" are connected by a line to a bubble representing the ISDN protocol,
which is then connected to the MGC-100. At the top middle, three networked
computers with a video camera on top of each titled "H.323 Endpoints" are
connected by a line to a bubble representing the IP protocol. A separate
individual computer is also connected to the IP protocol bubble. A line then
goes from the IP protocol bubble to the MGC-100. At the top right are a video
screen, a single computer and three networked computers, each with a video
camera on top, titled "H.323, H.320, ATM Endpoints." Lines travel from the
video screen and computer to a bubble representing the ATM protocol. The ATM
protocol is connected by lines to the MGC-100.]
Key benefits of our system include that the MGC-100:
Provides an integrated solution. Our system connects participants at multiple
locations, among different combinations of networks and types of endpoints, to
enable real-time interactive visual communications. Our transcoding
capabilities, or our ability to identify and process all transmission aspects
of each endpoint, signal, network and protocol, allow different endpoint types
to participate in the same visual communications session without additional
set-up or management complexity.
Designed with a scalable architecture. Our system is designed with a scalable
architecture, which allows for continued growth as customer usage increases
and new technologies, standards and network types are developed. The structure
of our system allows our customers to easily incorporate new technologies,
standards and network protocols as they emerge. We believe this modular
architecture increases the life-cycle and continued demand for our system and
positions us to benefit from the shift to next-generation, packet-based
network architectures without requiring users to purchase complex hardware and
software upgrades or system replacements.
Maximizes system availability and ease of maintenance. Our system is designed
with features that enable quick problem resolution, allow for maximum
availability, and provide a lower cost of ownership. These features include:
. remote problem assessment and resolution through an IP connection;
. front-accessible modules that are hot-swappable, which means that a failed
module can be replaced while the system is in operation without
interrupting ongoing communications;
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. software upgrades remotely over the Internet that allow for fast and easy
implementation of newly released features without the need for on-site
maintenance;
. modules that automatically update the configuration of the system resources
during operation without user intervention; and
. continuous real-time monitoring of system status.
Designed with a flexible and easy-to-use management system. Our system is
designed with an easy-to-use graphical user interface that provides immediate
detailed information about visual communications sessions, networks, endpoints
and system resources. Our management system offers an integrated scheduling
system that reserves capacity on the system, sets up visual communications
sessions, and provides backup for external reservation systems. Visual
communications sessions over our system can be managed by dial up connection
using touch tone or a live operator, or over the Internet through a web-based
graphical user interface.
Provides connectivity to Internet protocol networks. The architecture of our
MGC-100 system provides connectivity over IP networks. Our architecture also
allows our customers to use a large number of simultaneous advanced visual
applications, such as continuous presence, comprehensive transcoding and system
management over IP and other protocols. Also, our system has an open
application programming interface that allows third parties to create software
applications to interface with our system. We believe that this IP connectivity
and application programming interface provides telecommunication service
providers with additional revenue opportunities as visual communications are
increasingly conducted over IP networks.
OUR STRATEGY
Our objective is to use our system to continue to facilitate real-time
interactive visual communications and enable emerging IP broadband applications
using video, audio and data. To achieve this objective we intend to pursue
these key strategies:
Continue to enable innovative visual communications capabilities and
applications. We believe our system will provide a single platform for the
creation and delivery of innovative visual communications applications as
visual communications develop from traditional videoconferencing to broader
applications over IP networks. We intend to continue to take advantage of the
growth of the Internet by working directly with our customers and strategic
partners to develop features and functionality for visual communications
applications over IP networks. Our system is designed to enable future
applications over IP networks, including visually-enabled electronic business
applications, visual call centers and help desks to enhance customer service
and support over the Internet, visual banking centers, visual online
discussion, or chat rooms, on-demand business and personal conferencing, and
additional distance learning, telemedicine and telecommuting applications,
which we expect to emerge over the next two years. However, our ability to
enable these applications will depend upon whether they are adopted for
widespread personal and business purposes.
Focus on supporting our installed base of customers. We focus on providing
superior customer service and support to complement our MGC-100 system, which
we believe builds customer satisfaction and loyalty. We believe our existing
customers will expand their use of real-time interactive visual communications
and build out their networks. We intend to take advantage of our
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superior system, service and support by continuing to sell new systems and
additional capabilities to them. We also plan to reach customers that need to
replace older generation equipment as they expand their IP networks and begin
to use and offer a broader range of visual communication applications beyond
videoconferencing.
Maintain and expand our strong position in the telecommunication service
provider market. We believe our system provides a flexible integrated platform
for the creation and delivery of new services by telecommunication service
providers that want to develop additional revenue sources and maximize their
investments to increase bandwidth. As a result, we are focused on delivering
visual communications network solutions to telecommunication service providers
as they expand their service offerings. As telecommunication service providers
build out their networks, we expect increased opportunities for sales of
systems to new and existing telecommunication service provider customers and
for recurring sales of additional capabilities to their existing systems. We
will also continue to invest in sales and marketing efforts to increase our
business with existing and new telecommunication service provider customers.
Expand global distribution. We will continue to expand the size of our sales
force worldwide. We are pursuing a direct and indirect sales strategy focused
on telecommunication service providers, business enterprises, healthcare and
educational institutions and government agencies, primarily in North America.
We have also established sales and distribution channels in Europe and Asia,
and we expect to establish sales and distribution channels in Sweden, Singapore
and Australia in 2000. We intend to further broaden our geographic reach to
areas we do not serve. We intend to continue to strengthen our existing
relationships with resellers and pursue additional relationships with selected
resellers throughout the world to expand our global distribution. For example,
we recently entered into a reseller agreement with PictureTel Corporation,
which we believe will strengthen our global distribution. We will also continue
to seek strategic relationships with partners who have marketing capabilities
that can complement and enhance our market position.
Expand our technology leadership. We believe that our system differentiates our
solution from the limited capability products that our competitors offer and
gives us an advantage in the marketplace. We intend to further develop our
highly advanced technology by continuing to make investments in our research
and development efforts. For example, in 2000 we intend to introduce the MGC-
50, a less expensive version of our system for customers who demand less
capacity. We have entered into, and will continue to pursue, joint development
arrangements and other initiatives that will allow us to continue to develop
high quality solutions to meet the demands of the marketplace. For example, we
have an agreement with FVC.com under which we integrated their ATM technology
into our system, and they resell our system. We also have an agreement with
France Telecom under which they have funded our development of on-demand
conferencing.
SYSTEM AND TECHNOLOGY
Architecture
The MGC-100 consists of a main control module, or component, up to three power
supply modules, one or more network modules, multiplexer modules, which process
video, audio and data information according to the parameters of the particular
communications session, and video, audio and data modules. All of these modules
communicate across what is known as the backplane, which is a high-speed
electronic path or route over which information travels and to which all of the
separate modules connect.
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The network modules allow connectivity to circuit switched, packet-based and
broadband networks, including ISDN, ATM and IP. The video, audio and data
modules process each type of signal received from and transmitted back to
multiple endpoints. All of these modules communicate across the backplane and
are controlled by the main control module.
Transcoding
Our system automatically transcodes video algorithms, line rates or bandwidths,
frame rates and video resolution, as well as different audio algorithms and
different data transfer rates. This means that our system automatically
determines and matches all of the communication parameters of each endpoint,
which allows our system to support, in the same session, multiple endpoints
that communicate video, audio and data signals according to different
parameters. These transcoding capabilities make visual communications sessions
between multiple participants over our system easy to establish. They also
ensure that each endpoint in a visual communication session is optimally used.
Continuous Presence
As our system performs full transcoding, it receives audio, video and data
transmissions and automatically processes the input and sends a composite image
transmission back to the endpoints in a variety of continuous presence formats.
The variety of visual layouts includes:
. a single window;
. two side-by-side or above-and-below windows;
. four symmetrical windows in screen quadrants;
. six windows in an arrangement where one window is substantially full-screen
and the other five are smaller windows positioned around the edges of the
predominant window; and
. nine symmetrical windows.
Our continuous presence capability also allows the layout to be modified during
an on-going visual communications session without interruption. A single
transcoding/continuous presence video module in our system can support
continuous presence and transcoding for multiple sessions at the same time.
Management Interface
Our management interface allows participants and operators to reserve, set-up,
participate in, and monitor visual communications sessions. It also allows end-
users of our system to troubleshoot or repair our system while in operation.
This can all be managed over the Internet through a web-based graphical user
interface, or by dial-up connection using touch tone capability or a live
operator. These management tools can also be utilized to change visual layouts,
connect other participants, and monitor all aspects of an ongoing visual
communications session.
RESEARCH AND DEVELOPMENT
We have assembled a team of experienced design engineers with expertise in
numerous disciplines including system design, high speed digital design and
processing, real-time embedded software, audio and visual algorithms, and real-
time control software and operating systems. As of March 31, 2000, we employed
71 engineers or other research personnel at our research and development
facility in Petach Tikva, Israel. Our future success is dependent on our
ability to continue to rapidly deliver innovative real-time interactive visual
communications solutions.
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Our research and development efforts are focused on sustaining and enhancing
our existing system and developing innovative new solutions in the evolving
real-time interactive visual communications market. We believe that introducing
new products and systems in a timely fashion is critical for us to meet the
demands of our customer base and to quickly adapt to the constantly emerging
needs in the market. We emphasize early and frequent interaction between our
research and development engineers and customers to arrive at unique solutions
to meet specific system requirements. We have implemented an Internet-based
software system that serves as a conduit for interactions between our customers
and our support and research and development personnel for purposes of
troubleshooting and facilitating customer requests for additional features or
improvements. Customer feedback is also obtained from resellers and through
participation in industry events, organizations, and standard bodies. We intend
to continue to make significant investments in research and development that
will support technological innovation.
CUSTOMERS
We sell to customers directly and through resellers. The list of end users
shown below includes customers to whom we sell directly and end users that
purchase our system through resellers. Our direct customers shown below are
each responsible for revenues in excess of $200,000 since our incorporation and
are representative of the various types of customers that purchase our system.
The end users shown below that purchase our system through resellers are also
representative of the various types of customers that purchase our system. Our
direct customers listed below are indicated with an *. The end-users of our
system include:
. Telecommunications Service Providers. Telecommunications service providers
typically use our system to provide traditional videoconferencing services.
We believe, however, that telecommunications service providers will
increasingly use our system to offer more advanced visual communications
applications to make effective use of their broadband network capabilities,
differentiate themselves from their competition and create new sources of
revenue. Some of our telecommunications service provider customers include:
<TABLE>
<S> <C>
ACT Teleconferencing* MCI WorldCom*
British Telecom* NTT Phoenix
Deutsche Telekom* PictureTel*
France Telecom* PQ Networks*
Geoconference* South Africa PTT
Global Access* Sprint Communications*
Global Crossing* V-Span*
Inview* Video Web*
Korea Telecom VirtuaLINK*
1-800 Video On*
</TABLE>
. Business Enterprises. Business enterprises use our system for a variety of
specific business applications, including business conferences, training
and education, and customer and client services and support. Some of our
business enterprise end-users include:
<TABLE>
<S> <C>
BHF Bank Lockheed Martin*
Credit Suisse First Boston Microsoft*
Donaldson, Lufkin & Jenrette Nortel Networks*
Goldman Sachs Raytheon*
Halaba Bank United Bank of Switzerland*
Holland & Knight World Bank
</TABLE>
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. Government Agencies. Government agencies use our system to communicate
within and between government agencies and as means of training and
education. Some of our government agency end-users include:
<TABLE>
<S> <C>
Lawrence Berkeley Laboratories State of Minnesota
U.S. State Department State of Wyoming
Florida National Guard
</TABLE>
. Institutions. Educational institutions use our system to provide distance
learning, and healthcare institutions, such as hospitals and health
maintenance organizations, use our system for telemedicine and training.
Some of our education and healthcare institution end-users include:
<TABLE>
<S> <C>
Education: Healthcare:
Louisiana State University Bassett Healthcare*
MoreNET* Blue Cross/Blue Shield
Oklahoma State University Continuum Healthcare
Temple University Kaiser Permanente
Tulane University St. Jude Hospital
U.C. Davis Veterans Administration Hospitals
University of Notre Dame*
University of Texas
Virginia Community College Systems*
</TABLE>
CUSTOMER CASE STUDIES
Below are specific examples of how four of our customers use our system to
solve their real-time interactive visual communications needs. None of the
customers mentioned below are actively endorsing or promoting our system.
Credit Suisse First Boston
Credit Suisse First Boston is a global investment banking firm, with
approximately 15,500 employees and operations in over 60 offices across more
than 30 countries. Credit Suisse First Boston uses real-time interactive visual
communications to conduct worldwide executive meetings, analyst briefings,
corporate presentations, staff meetings and interviews. For several years,
Credit Suisse First Boston worked with an outside service provider for
management of its multi-point conferencing. As Credit Suisse First Boston's
volume of use increased, it decided to purchase its own system. After an
extensive evaluation process, Credit Suisse First Boston purchased an MGC-100
system in December 1998. Within one month, we had installed our system at
Credit Suisse First Boston's Madison Avenue location in New York, we had
trained Credit Suisse First Boston personnel, and Credit Suisse First Boston
was using our system to manage visual communications. Credit Suisse First
Boston also has deployed an additional MGC-100 system in Singapore.
University of Notre Dame
The University of Notre Dame uses real-time interactive visual communications
to connect students and professors located on campus with students in cities
around the United States and the world. The backbone of Notre Dame's visual
communications network is our MGC-100 system. Notre Dame utilizes both H.320
and H.323 standards to connect students in a variety of locations over ISDN
digital telephone lines, a dedicated educational local area network, and over
the Internet. For example, Notre Dame offers an executive master of business
administration program that uses two way video/audio from its campus in South
Bend, Indiana to Indianapolis, Indiana, Toledo, Ohio and two sites in Chicago,
Illinois. Notre Dame also uses our MGC-100 system to connect students between
campuses in London and the United States over the Internet.
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Deutsche Telekom AG
Deutsche Telekom AG uses our MGC-100 system to offer real-time interactive
visual communications services to its customers. Deutsche Telekom also uses our
system for internal visual communications, such as business meetings, training
and distance learning. Deutsche Telekom benefits from the transcoding
capabilities of our system, which allow easy set-up of sessions between
endpoints that are using different systems and speeds. Another important
benefit to Deutsche Telekom is the ability of our system to connect to
different network types, such as ISDN, ATM and IP, all within a single
platform.
France Telecom
France Telecom, one of the world's leading telecommunications carriers, has
chosen our system to support its on-demand visual communications service
offerings. This service, which France Telecom began offering in the first
quarter of 2000, will allow people to initiate and control their own on-demand
sessions without the need of an operator and without reserving a session in
advance. France Telecom believes that this service is the first step toward a
variety of applications for businesses and consumers that will extend their
visual communications service offerings beyond traditional videoconferencing.
SALES AND MARKETING
We sell our system worldwide through distribution channels that include direct
sales and traditional distributor or reseller sales. Our sales teams are
supported with marketing programs, educational programs and field, telephone
and web-based technical support. Our sales responsibilities are divided into
four geographic regions: Americas, Europe, Middle East and Africa, and Asia.
Our sales efforts in each region are directed by vice-presidents who are
responsible for relationships with targeted customers. We also employ a sales
director who is responsible for relationships with the U.S. government and a
sales director who is responsible for our major accounts. Our sales teams sell
directly to network and telecommunications service providers, business
enterprises, healthcare and educational institutions, government agencies and
resellers. Our sales teams also consist of sales and systems engineering
personnel who are experienced and knowledgeable about our system and the
technologies we provide and support.
We have list prices for our system, service and support. We offer price
discounts based on a variety of factors, including potential volumes expected
from a customer, actual volumes of sales to a customer in previous quarters,
reciprocal discounts offered to us, competitive pressures and the timing of
orders.
Our resellers sell our system to business enterprises, healthcare and
educational institutions and government agencies and act as the initial
customer service contact for the systems they sell. Sales through resellers
accounted for approximately 52.3% of our revenue in 1998 and 52.5% in 1999. We
establish relationships with resellers through written agreements that provide
prices, discounts and other material terms and conditions under which the
reseller is eligible to purchase our system for resale. These agreements
generally do not grant exclusivity to the resellers, prevent the resellers from
carrying competing product lines or require the resellers to sell any
particular dollar amount.
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Some of our resellers include:
<TABLE>
<S> <C>
Adcom PictureTel
Ashton Communications Sony
CBCI Telecon Symtech Solutions
Clover Technologies Tandberg
Designs That Compute VCON
FVC.com ViewTech
GTE W2COM, LLC
Intervu
</TABLE>
We have a variety of marketing programs and initiatives to support the sale and
distribution of our system, which include:
. issuing press releases about system enhancements, upgrades and significant
customer relationships;
. participating in seminars and major industry conferences and trade shows;
. participating in major industry organizations; and
. marketing directly to existing and prospective customers.
The audience for these activities includes our sales organization, strategic
development and distribution partners and authorized resellers, existing and
prospective customers, the trade press, analysts and others who are influential
in the industry. We also retain, on a monthly basis, an outside marketing firm
in the United Kingdom that supports our international marketing efforts.
As of March 31, 2000 our direct sales and marketing staff consisted of 38 full-
time employees.
CUSTOMER SERVICE AND SYSTEM SUPPORT
We focus on customer service and support for our resellers and end-user
customers. We believe that the responsiveness and expertise of our customer
service and support personnel is critical to our goal of developing and
maintaining long-term customer relationships and ensuring customer loyalty and
satisfaction. We staff customer support centers in the United States, United
Kingdom, Israel and China. Our customer support centers are responsible for on-
site and remote system installation, customer training, diagnostics and
troubleshooting, coordinating with customers concerning system updates,
upgrades and enhancements, and coordinating with our research and development
staff.
System installation and testing is typically completed in one day. Our
customers complete a site survey form that we provide before delivery and
installation of our system. This site survey includes an analysis of overall
site conditions, network infrastructure and parameters, as well as the
necessary connections for the system. Our customer support representative
performs the on-site installation based on the site survey. Once installed, our
customer support representative brings the system on-line, completes testing to
ensure that the installation was successful, and trains the end-user in the
operation of the system.
We offer comprehensive technical support programs that are designed to meet a
variety of customer requirements. These programs include:
. Standard Support. This level of support is designed for organizations that
have a technical support staff and well-equipped support centers. Standard
support during normal business hours
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includes software fixes through the current release, four hour remote
response time, and problem analysis and resolution over the Internet or a
telephone hotline. After-hours support, next-day parts replacement and on-
site support are also available at additional cost.
. Premier Support. This level of support includes all basic support services,
plus next-day hardware replacement, remote software updates and
installation assistance, and two hour remote response time.
. Premier Plus Support. This level of support includes all basic and premier
support services, plus on-site installation, when necessary.
Warranties on our hardware products generally extend for one year, and
warranties for software products generally extend for 90 days.
MANUFACTURING
Our manufacturing operations consist primarily of materials planning and
procurement, quality control of components, kit assembly and integration,
final assembly, and testing of fully-configured systems. We contract with a
limited number of independent contractors who partially assemble the modules
and chassis we use in our system from kits provided by us and who adhere to
specifications that we provide. This strategy allows us to reduce costly
investment in manufacturing infrastructure and to use the expertise of our
independent contractors, which have each received the International Standard
Organization, or ISO 9002, certification for quality. We configure the
hardware and software to meet a variety of customer requirements, complete
final system assembly and test the system to ensure it operates properly.
We have no minimum supply commitments from our vendors and generally purchase
components on a purchase order basis. Although we generally use standard parts
and components for our system, some of the key components are available only
from sole sources or from limited sources, including various chips, power
supply components and chassis components. Even where multiple sources are
available, we typically obtain components from only one vendor to maintain
quality control and enhance our working relationship with our key suppliers.
COMPETITION
We compete in a market that is highly competitive and rapidly changing. We
believe that competition may increase substantially as the introduction of new
technologies, the deployment of new networks and potential regulatory changes
create new opportunities for established and emerging companies in the
industry. Our principal competitors include VideoServer, now known as Ezenia!,
Lucent, RADVision and CUseeMe Networks, Inc. We believe that none of these
competitors individually are dominant in the market. We believe that the
features, functionality and technology in our system gives us a competitive
advantage in this market. However, we expect that competition for systems and
products that enable real-time interactive visual communications will grow as
more companies focus on this market and begin to develop applications and
networking solutions.
Many of our current and potential competitors are larger than we are and have
significantly greater financial, sales and marketing, technical, manufacturing
and other resources as well as more established channels of distribution. As a
result, these competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their systems and
products. Our competitors
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may enter our existing or future markets with solutions that may be less
costly, provide higher performance or additional features or be introduced
earlier than our solutions.
We believe our future success will depend on our ability to compete
successfully against our competitors based on many factors including:
. the breadth of networks supported through an integrated platform;
. system scalability, performance and features;
. ease of installation and use;
. system reliability, quality of service and technical support;
. the success and timing of new equipment and system developments;
. price and time to market; and
. sales and distribution capabilities and strength of brand name.
INTELLECTUAL PROPERTY
General. Our success and ability to compete are dependent on our ability to
develop and maintain the proprietary aspects of our technology. We rely on a
combination of trademark, copyright, trade secret and other intellectual
property laws, employee and third-party nondisclosure agreements, licensing and
other contractual arrangements and have also applied for patent protection to
protect our proprietary technology and intellectual property. These legal
protections afford only limited protection for our proprietary technology and
intellectual property.
Patents and Other Intellectual Property Protections. We do not hold any patents
for our system. We have filed six utility patent applications relating to
future improvements, enhancements and features of our system with the U.S.
Patent and Trademark Office. We also intend to file corresponding utility
patent applications for these future improvements, enhancements and features
with the Receiving Office of the Patent Cooperation Treaty, or PCT, which would
permit us to seek patent protection in up to 103 PCT member countries. Our
pending patent applications may not result in the issuance of any patents. Even
as we develop a patent portfolio, any patent that might be issued in the future
could be invalidated or circumvented or fail to provide us any meaningful
protection.
We cannot be certain that we can meaningfully protect our intellectual
property. Others may independently develop intellectual property substantially
equivalent to ours or gain access to our trade secrets or intellectual
property. We also cannot be certain that others will not disclose our
intellectual property or trade secrets to our competitors. Our failure to
protect our intellectual property effectively could result in our losing our
proprietary rights and our incurring increased costs.
Licenses. We license technology and software, such as operating systems and
embedded visual, audio and data software from third parties for incorporation
into our system and we expect to continue to enter into these types of
agreements for future products. Our licenses are either perpetual or for
specific terms and may result in royalty payments to third parties, the cross-
license of technology by us or payment of other consideration. If our
arrangements are not concluded on commercially reasonable terms, our business,
financial condition and results of operations could be materially adversely
affected.
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Claims of Infringement. In November 1998, we received a letter from a third
party alleging that our system supports standards that may fall within the
scope of one of the third party's patents relating to the G.722 standard, a
high quality audio algorithm. These letters are not uncommon in the industry
and are dealt with according to normal business practices. The third party has
offered to license this technology to us and we are discussing obtaining a
license from them. However, we cannot assure you that we will be able to enter
into a license for this technology on commercially reasonable terms. If we
cannot reach an agreement on a license, we cannot assure you that this third
party will not begin an infringement action against us. If a claim is brought
against us, we cannot assure you that we would prevail, and any adverse outcome
could require us to pay royalties to the third party or suffer other damages or
remedies.
EMPLOYEES
As of March 31, 2000, we had 180 full-time employees, including 108 in Israel,
53 in the U.S. and 19 in other countries. None of our U.S. employees is covered
by a collective bargaining agreement and we believe that our relations with our
employees are good.
Israeli employment law and collective bargaining agreements
Israeli law and some of the provisions of collective bargaining agreements
between the Histadrut, or the General Federation of Labor in Israel, and the
Coordinating Bureau of Economic Organizations, or the Israeli federation of
employers' organizations, apply to our Israeli employees. These laws and
provisions cover a wide range of areas and provide minimum employment standards
including the maximum length of the work day and work week, minimum wages,
contributions to a pension fund, insurance for work-related accidents,
procedures for dismissing employees, and determination of vacation and
severance pay. Under these provisions, the wages of most of our employees are
subject to cost of living adjustments, based on changes in the Israeli consumer
price index. The amounts and frequency of these adjustments are periodically
modified. Israeli law generally requires the payment of severance upon the
retirement or death of an employee or upon termination of employment by the
employer or, in some circumstances, by the employee. We fund our ongoing
severance obligations by making monthly payments for insurance policies.
Employee insurance plans
A general practice in Israel that we follow, although not legally required, is
the contribution of funds on behalf of employees to an individual insurance
policy. This policy provides a combination of savings plan, insurance and
severance pay benefits to the insured employee. It provides for payments to the
employee upon retirement or death and secures a substantial portion of the
severance pay, if any, to which the employee is legally entitled upon
termination of employment. Each participating employee contributes an amount
equal to 5.0% of the employee's base salary, and the employer contributes
between 13.3% and 15.8% of the employee's base salary. All of our full-time
Israeli employees participate in this benefit package. We also provide some
employees with an education fund, to which each participating employee
contributes an amount equal to 2.5% of the employee's base salary, and the
employer contributes an amount equal to 7.5% of the employee's base salary.
FACILITIES
We lease approximately 15,690 square feet under two leases in an office
building in Atlanta, Georgia for our headquarters. Both leases expire on
December 31, 2003.
Our research and development and manufacturing operations are located in Petach
Tikva, Israel, where we lease approximately 31,300 square feet under a lease
expiring in April 2005.
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We also lease approximately 7,680 square feet under two leases in an office
building in Atlanta, Georgia, which was previously our corporate headquarters
and is now vacant. We plan to sublease this office space. One of these leases
for approximately 6,430 square feet expires in 2002, and a sublease for
approximately 1,250 square feet expires in September 2000.
We believe that the new and current facilities will be adequate to accommodate
our anticipated expansion of operations over the next 12 months.
LEGAL PROCEEDINGS
On November 20, 1998, VideoServer, Inc., now known as Ezenia! Inc., filed a
patent infringement claim against our U.S. subsidiary, Accord Networks, Inc.,
in the United States District Court, District of Massachusetts, alleging that
our subsidiary had and was willfully and deliberately infringing on one of
Ezenia! Inc.'s patents. The plaintiff later amended its complaint to allege
that our subsidiary also had and was willfully and deliberately infringing on
other patents. On June 10, 1999, we were added as a defendant in the lawsuit.
On June 16, 2000, we, our subsidiary and the plaintiff entered into a written
settlement agreement and the court entered an order dismissing the case. The
settlement agreement includes the following terms:
. We paid Ezenia! Inc. $500,000 when the settlement agreement was signed, and
will pay an additional $6 million within seven days of our receipt of the
net proceeds of this offering;
. If, by September 30, 2000, we have not paid the balance of the $6 million
under the settlement agreement, we will make quarterly payments of $1
million beginning on October 30, 2000, until the unpaid balance of the $6
million has been paid;
. We, our subsidiary and Ezenia! Inc. have executed mutual releases of all
claims concerning the lawsuit that we may now have or ever had against each
other;
. Ezenia! Inc. agrees it will not sue us, our subsidiary or any of our
customers for infringement of any patents involved in the litigation; and
. We, our subsidiary and Ezenia! Inc. agree not to sue one another or any of
each other's customers for infringement of any other patents held by us,
our subsidiary or Ezenia! Inc. for three years from the date of the written
settlement agreement. We also agree not to later sue one another for any
alleged infringement claims or damages for alleged infringement that may
arise during those three years.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors of Accord Networks Ltd. and their ages as
of March 31, 2000, are:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------ --- ---------------------------------------------------------
<S> <C> <C>
Jules L. DeVigne........ 60 Chairman, Chief Executive Officer and Director
Sigi Gavish............. 49 Chief Technology Officer and Director
Philip B. Keenan........ 37 Senior Vice President, Worldwide Sales and Marketing
Amnon Shachar........... 48 Senior Vice President, General Manager, Israel Operations
David P. Gallagher...... 50 Vice President Business Development
Jeffrey B. Bradley...... 57 Chief Financial Officer
Matty Karp.............. 50 Director
Jos C. Henkens.......... 47 Director
</TABLE>
Jules L. DeVigne has served as chief executive officer and as a director of
Accord Networks Ltd. since May 1997 and as chairman since June 1999. Before
joining Accord, Mr. DeVigne served as vice president, worldwide sales for
VideoServer, Inc. from October 1992 until May 1997. Mr. DeVigne also served as
president of Innovative Technology, a manufacturer of voicemail and interactive
voice response systems, from March 1990 until June 1992, and as senior vice
president of sales and marketing of Netrix Corporation, a manufacturer of wide
area networks, from February 1989 until March 1990. Mr. DeVigne has also held
various sales and executive management positions with Paradyne Corporation and
International Business Machines Corporation.
Sigi Gavish co-founded Accord Networks Ltd. in 1992 and serves as its chief
technology officer and a director. Before founding Accord Networks Ltd., Mr.
Gavish spent sixteen years working for Tadiran Telecommunications, Israel's
largest telecommunications company, where he managed numerous research and
development projects and served as chief engineer of Tadiran's first generation
of ISDN-compatible PBXs that integrate voice, data and video communications.
Since 1992, Mr. Gavish has represented the Israeli electronics industries on
two technical committees of the European Telecommunications Standards
Institute. Mr. Gavish holds a B.S.C. degree in electrical engineering from the
Technion Israel Institute of Technology.
Philip B. Keenan has served as senior vice president, worldwide sales and
marketing of Accord Networks Ltd. since April 1998. Before joining Accord, Mr.
Keenan served as the vice president of international sales for VideoServer,
Inc. from May 1994 until February 1998.
Amnon Shachar has served as the senior vice president and general manager,
Israel operations of Accord Networks Ltd. since January 2000. Before joining
Accord, Mr. Shachar served as vice president of research and development,
engineering and support at Karat Digital Press, a joint venture between Scitex
and KBA from 1997 to 1999. Mr. Shachar also held a variety of technology
managerial positions, his last position as a colonel, within a technological
unit of the Israeli Defense Forces from 1973 to 1997. Mr. Shachar holds a
B.S.C. degree in electrical engineering from the Technion Israel Institute of
Technology and an executive M.B.A. from the University of Tel Aviv.
David P. Gallagher has served as vice president, business development since
September 1998. Before joining Accord Networks Ltd., Mr. Gallagher was
president of Galmark, a consulting firm focused on the strategic growth of
high-tech companies from January 1997 until August 1998. Mr. Gallagher also
served as the vice president of business development and marketing at TechForce
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Corporation from January 1997 until August 1998 and as vice president of
marketing and North American sales at FiberCom Corporation from December 1988
until February 1994.
Jeffrey B. Bradley has served as chief financial officer of Accord Networks
Ltd., since July 1999. Mr. Bradley has also served as a partner of Tatum CFO
Partners, a firm of professional chief financial officers, since 1997. Mr.
Bradley served as executive vice president, chief financial officer and acting
chief operating officer of Metals Recycling Technologies Corp., a company that
developed chemical processing technology for waste products generated from
steel companies, from 1995 until 1997 and as executive vice president and chief
financial officer of The Landmarks Group, a real estate development company,
from 1982 until 1994. Mr. Bradley holds a B.S. in accounting and a M.B.A. in
finance and marketing from Bowling Green State University. Mr. Bradley is a
certified public accountant and a member of the AICPA and the Financial
Executives Institute.
Matty Karp has served as one of our directors since 1994. Mr. Karp has been
chief executive officer of Concord Technology Ltd. since 1997. Since 1994, Mr.
Karp has served as chief executive officer of Nitzanim Fund (1993) Ltd., chief
executive officer of Kardan Technologies, Ltd. and active chairman of Concord
Ventures. Between 1979 and 1994, Mr. Karp held various executive positions at
Elbit Ltd., an Israeli electronics manufacturer, most recently the position of
senior executive.
Jos C. Henkens has served as one of our directors since 1997 and has
participated as an observer in board meetings since 1996. Mr. Henkens has been
a general partner of Advanced Technology Ventures since 1983. Mr. Henkens also
serves as a director of Actel Corporation and Credence Systems Corporation, as
well as a number of private corporations.
BOARD OF DIRECTORS
Election of directors
Our articles of association, which will become effective upon the closing of
this offering, authorize up to ten directors, including external directors.
Upon the close of this offering, the board of directors will be divided into
three classes, except for external directors who will not form a part of any
class and who will be elected according to the Companies Law. The three classes
of directors are called class I, class II and class III. One class will be
elected each year by shareholders at our annual general meeting and will have a
term of approximately three years. The initial class I term will expire at the
annual general meeting of shareholders in 2001, the initial class II term will
expire at the annual general meeting of shareholders in 2002, and the initial
class III term will expire at the annual general meeting of shareholders in
2003. Mr. Henkens will be the initial class I director, Messrs. DeVigne and
Gavish will be the initial class II directors and Mr. Karp will be the initial
class III director. Vacancies on the board of directors may be filled by a
majority of the directors then in office. A director so chosen will hold office
until the next annual general meeting.
An annual general meeting is held at least once in every calendar year, but not
more than fifteen months after the last preceding annual general meeting. There
are no family relationships among any of our directors, officers or key
employees.
Chairman of the board
The Companies Law generally provides that, beginning three months after a
company's shares are first listed for trading on a stock exchange, the general
manager of that company may not serve as the chairman of its board of
directors. However, by a majority vote of the shareholders that includes at
least two-thirds of the shareholders who are not controlling shareholders, the
chairman of the
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board of directors may fill the position of managing director or exercise his
authorities. The shareholders may resolve to authorize the chairman to fill the
position of managing director or to exercise his authorities for a period which
is not longer than three years from the date of the resolution. Our board of
directors has recommended that the shareholders adopt a resolution authorizing
the chairman of our board of directors to continue filling the position of
chief executive officer.
INDEPENDENT AND EXTERNAL DIRECTORS
Nasdaq requirements
Under the Nasdaq National Market rules, we are required to have at least three
independent directors on our board of directors.
Companies Law requirements
Under the Companies Law and its regulations, Israeli companies whose shares
have been offered to the public in, or that are publicly traded outside of,
Israel are required to appoint at least two natural persons as external
directors. No person may be appointed as an external director if the person or
the person's relative, partner, employer or any entity under the person's
control, had within the preceding two years any affiliation with the company or
with any entity controlling or controlled by or under common control with the
company. The term affiliation includes:
. an employment relationship;
. a business or professional relationship maintained on a regular basis;
. control; and
. service as an office holder.
No person may serve as an external director if the person's position or other
business activities create, or may create, a conflict of interest with the
person's responsibilities as an external director or interfere with the
person's ability to serve as an external director. If, at the time of election
of an external director, all other directors are of the same gender, the
external director to be elected must be of the other gender.
External directors are elected by the shareholders at a general meeting. To be
elected, an external director must receive the approval of a simple majority of
the shareholders, provided that the majority includes at least one-third of the
non-controlling shareholders who are present and voting or that the non-
controlling shareholders who vote against the election hold one percent or less
of the voting power of the company. The Israeli minister of justice can
determine a different percentage.
External directors are elected for a term of three years and may be re-elected
for one additional three year term. Each committee of a company's board of
directors that has the authority to exercise powers of the board of directors
is required to include at least one external director and its audit committee
must include all external directors.
Under the provisions of the Companies Law, we are required to designate the
initial external directors at a shareholders' meeting to be convened not later
than three months from the completion of this offering. We intend to comply
with this requirement.
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Under the Companies Law an external director cannot be dismissed from office
unless one of the events described below occurs:
. the board of directors determines that the external director no longer
meets the statutory requirements for holding the office or that he is in
breach of his fiduciary duties. The shareholders must then vote to remove
the external director after he has been given the opportunity to present
his position. The majority required to remove an external director is the
same majority required to appoint him.
. a court determines, upon a request of a director or a shareholder, that the
external director no longer meets the statutory requirements of an external
director or that he is in breach of his fiduciary duties to the company.
. a court determines, upon a request of the company or a director,
shareholder or creditor of the company, that the external director is
unable to fulfill his duty or has been convicted of specified crimes.
SUBSTITUTE DIRECTORS
Our articles of association, which will become effective upon the closing of
this offering, provide that, subject to the approval of a majority of the
directors, any director may appoint another person to serve as a substitute
director and may remove the substitute director. Any substitute director
possesses all the rights and obligations of the director who appointed him,
except that the substitute may not in turn appoint a substitute and has no
standing at any meeting at which the appointing director is present. 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 a substitute
director does not in itself diminish the responsibility of the appointing
director as a director. A person who is not qualified to be appointed as a
director, or a person who already serves as a director or a substitute
director, may not be appointed as a substitute director.
AUDIT COMMITTEE
Our audit committee of the board of directors consists of Messrs. Karp and
Henkens. Mr. Henkens intends to resign as a member of the audit committee after
we appoint external directors. The Companies Law requires public companies to
appoint an audit committee comprised of at least three directors including all
of the external directors. The chairman of the board of directors, any director
employed by or providing other services to a company and a controlling
shareholder or any relative of a controlling shareholder, may not be a member
of the audit committee. The responsibilities of the audit committee include
identifying flaws in the management of a company's business, making
recommendations to the board of directors of how to correct them and deciding
whether to approve actions or transactions which by law require audit committee
approval. An audit committee may not approve an action or transaction with a
controlling shareholder or with an office holder unless at the time of approval
two external directors are serving as members of the audit committee and at
least one of them was present at the meeting in which the approval was granted.
COMPENSATION COMMITTEE
Our compensation committee consists of Messrs. Karp and Henkens. The
compensation committee reviews and evaluates the salaries, supplemental
compensation and benefits of our officers, reviews general policy matters
relating to compensation and benefits of our employees and makes
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recommendations concerning these matters to the board of directors. The
compensation committee is also authorized to administer our employee option
plans. Under the Companies Law, the compensation committee may only make
recommendations to the board of directors about the grant of options and may
need to seek the approval of the audit committee, the board of directors and
the shareholders for specified compensation decisions.
INTERNAL AUDITOR
Under the Companies Law, the board of directors of a public company must
appoint an internal auditor suggested by the audit committee. The role of the
internal auditor includes examining whether the company's actions comply with
the law and with orderly business procedures. Under the Companies Law, the
internal auditor may not be:
. a 5% or more shareholder;
. someone who has the power to appoint one or more directors or to appoint
the general manager;
. an office holder in the company; or
. a relative of any of these persons.
A company's internal auditor may not be the company's independent accountant or
its representative.
OFFICE HOLDERS
The Companies Law provides for the duty of care and fiduciary duties that an
office holder owes to a company. The term office holder as defined in the
Companies Law includes a director, managing director, general manager, chief
executive officer, executive vice president, vice president, other managers
directly subordinate to the managing director, and any other person fulfilling
or assuming any of these positions or responsibilities regardless of the
person's title. The fiduciary duties of an office holder to the company in
which he holds office include:
. avoiding any conflict of interest between the office holder's position with
the company and his personal affairs;
. avoiding any competition with the company;
. avoiding exploiting any business opportunities of the company to receive
personal advantage for himself or others; and
. revealing to the company any information or documents relating to the
company's affairs which the office holder receives due to his position in
the company.
The Companies Law also requires disclosure by an office holder to the company
if an office holder is aware of a personal interest in any transaction or
proposed transaction of the company, including, generally, a personal interest
of some relatives in an extraordinary transaction.
Each person listed in the table under "Management" above is an office holder.
Under the Companies Law, all compensation arrangements for office holders who
are not directors require approval of the board of directors. Arrangements for
the compensation of directors generally require audit committee, board of
directors, and shareholder approval.
APPROVAL OF RELATED PARTY TRANSACTIONS
The Companies Law requires that transactions between a company and its office
holders or that benefit its office holders be approved as provided for in the
Companies Law and the company's articles of association. The approval of a
majority of the disinterested members of the audit committee and of the board
of directors is generally required and, in some circumstances, shareholder
approval may also be required.
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Disclosure by office holders
The Companies Law also requires that an office holder of a company promptly
disclose to the company any personal interest that he may have in an existing
or proposed transaction by the company. He must disclose related material
information and documents that he has about the existing or proposed
transaction. The office holder must also disclose the interests of any entity
in which he is a 5% or greater shareholder, director or general manager, or in
which he has the power to appoint one or more directors or the general manager.
If the transaction is an extraordinary transaction, the office holder must also
disclose any personal interest of his spouse, siblings, parents, grandparents,
descendants, spouse's descendants and the spouses of any of these people. This
disclosure must be made no later than the first meeting of the board of
directors at which the transaction is discussed. The disclosure is made to the
board of directors and to the audit committee if it must approve the
transaction. In those circumstances in which shareholder approval is also
required, shareholders have the right to review any documents in the company's
possession related to the proposed transaction. However, the company may
prohibit a shareholder from reviewing the documents if the company believes the
request was made in bad faith, the documents include trade secrets or patents
or their disclosure could harm the company's interests.
Approval procedure
After the office holder complies with these disclosure requirements, the
company may approve the transaction under the provisions of applicable law and
its articles of association. If the transaction is with an office holder or
with a third party in which the office holder has a personal interest, the
approval must confirm that the transaction is not adverse to the company's
interest. Our articles of association, which will become effective upon the
closing of this offering, provide that related party transactions that are not
extraordinary transactions require approval by our board of directors, and any
additional approvals required by the Companies Law. If the transaction is an
extraordinary transaction, then, it must be approved as required by the
articles of association and must also be approved by our audit committee and
board of directors. An extraordinary transaction is a transaction:
. other than in the ordinary course of business;
. on terms other than on market terms; or
. that is likely to have a material impact on the company's profitability,
assets or liabilities.
In some circumstances, shareholder approval is required. A director with a
personal interest in any matter may not generally be present at any audit
committee or board of directors meeting where the matter is being approved, and
may not vote on the matter.
Transactions with controlling shareholders
The Companies Law extends the disclosure requirements applicable to an office
holder to a controlling shareholder in a public company. A shareholder that
holds 25.0% or more of the voting rights in a company would also be considered
a controlling shareholder for the purposes of these disclosure requirements if
no other shareholder holds more than 50.0% of the voting rights. If two or more
shareholders are interested parties in the same transaction their shareholdings
shall be combined for the purposes of calculating percentages. Some
transactions between a public company and a controlling shareholder, or
transactions in which a controlling shareholder has a personal interest but
which are between a public company and another entity, require the approval of
the audit committee,
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<PAGE>
the board of directors and the shareholders. If required, shareholder approval
must include at least one-third of the shareholders who have no personal
interest in the transaction and are present and voting at the meeting.
Alternatively, the total shareholdings of the disinterested shareholders who
vote against the transaction must not represent more than one percent of the
voting rights in the company. The Israeli minister of justice may determine a
different percentage.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Companies Law provides that a company may include in its articles of
association provisions which allow it to:
. enter into a contract to insure the liability of an office holder of the
company by reason of acts or omissions committed in his capacity as an
office holder of the company for:
. the breach of his duty of care to the company or any other person;
. the breach of his fiduciary duty to the company to the extent he acted in
good faith and had a reasonable basis to believe that the act would not
prejudice the interests of the company; and
. monetary liabilities or obligations which may be imposed upon him in
favor of other persons.
. indemnify an office holder of the company by reason of acts or omissions
committed in his capacity as an office holder, for:
. monetary liabilities or obligations imposed upon him under a court
judgment, including a compromise judgment or an arbitrator's decision
approved by a court; and
. reasonable litigation expenses, including attorney's fees, actually
incurred by the office holder or imposed upon him by a court, in an
action, suit or proceeding brought against him by or on behalf of the
company or by other persons, or in a criminal action from which he was
acquitted, or in which he was convicted if the criminal action does not
require proof of criminal intent.
The Companies Law provides that a company's articles of association may provide
for indemnification of an office holder in advance of the office holder being
found liable or after he is found liable. However, any advance undertaking to
indemnify must be limited to types of occurrences which the board of directors
can reasonably foresee at the time the undertaking to indemnify is given and to
an amount that the board of directors determines is reasonable in the
circumstances.
The Companies Law provides that a company may not indemnify, exempt or enter
into an insurance contract which would provide coverage for the liability of,
an office holder for:
. a breach of his fiduciary duty, except to the extent described above;
. a breach of his duty of care, if the breach was done intentionally,
recklessly or with disregard of the circumstances of the breach or its
consequences;
. an act or omission done with the intent to unlawfully realize personal
gain; or
. a fine or monetary settlement imposed upon him.
Indemnification of, and procurement of insurance coverage for, an office holder
of a company requires, under the Companies Law, the approval of the company's
audit committee and board of directors, and, in some circumstances, including
if the office holder is a director, the approval of the company's shareholders.
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<PAGE>
We have agreed to indemnify each of our office holders to the extent permitted
by the Companies Law and intend to purchase a directors' and officers'
liability insurance policy. The insurance policy includes coverage relating to
the offering of the ordinary shares described in this prospectus. In October
1999 and April 2000, our board of directors authorized us to enter into
indemnification agreements with each of our office holders. Our shareholders
approved these agreements in December 1999 and May 2000. The indemnification
agreements generally provide that, subject to specified conditions and
limitations, we will indemnify our office holders for all amounts they must
pay, including reasonable legal expenses, if they are involved in legal
proceedings or found liable for any act or omission made in their capacity as
office holders. Obligations that result from the offering of the ordinary
shares described in this prospectus would also be covered by the
indemnification agreements.
COMPENSATION OF OFFICERS AND DIRECTORS
Compensation
The aggregate direct compensation we paid to all of our directors and executive
officers as a group, which included 8 persons, in 1999 was $1,319,516. Our
directors can be paid for their services as directors to the extent this
compensation is approved under the Companies Law. This approval generally
requires the approvals of the audit committee, the board of directors and the
shareholders. On April 30, 2000, our board of directors approved, and on
May 25, 2000 our shareholders approved, a director compensation plan. The
director compensation plan provides for the payment, beginning as of the close
of this offering, to each director who is not an employee of ours or an
external director under the Companies Law an annual fee of $10,000. The
director compensation plan also provides for payment of fees of $1,000 for each
board meeting and $500 for each board committee meeting in which the director
participates, plus value added tax, if applicable. The directors are also
entitled to reimbursement for expenses incurred for each board or committee
meeting attended. Directors have also been granted options to purchase our
ordinary shares. External directors are entitled to compensation only as
provided in regulations set by the Israeli minister of justice, and are
otherwise prohibited from receiving any other compensation, directly or
indirectly, other than indemnification or director liability insurance.
Benefits
During 1999, we accrued pension, retirement or similar benefits for the same
group in the aggregate amount of $28,665. This does not include amounts we
spent for automobiles made available to our officers, expenses including
business, travel, professional and business association dues and expenses
reimbursed to officers and other fringe benefits commonly reimbursed or paid by
companies in Israel. During 1999, one of our directors, Mr. DeVigne, exercised
options for 325,463 ordinary shares. As of April 30, 2000, our directors and
executive officers held options and warrants to purchase an aggregate of
1,594,236 ordinary shares.
SHARE OPTION PLANS
1995 Employee Share Ownership and Option Plan
General. Our board of directors adopted an employee share ownership and option
plan on March 29, 1995. The plan provides for the grant of options to our
employees and advisors, including our directors, and the employees and advisors
of our subsidiaries. The maximum number of ordinary shares subject to the
employee option plan is 3,600,000 ordinary shares. As of April 30, 2000, we
have granted options to purchase 3,556,119 shares under this employee option
plan. The exercise price of options granted under the employee option plan is
determined in the discretion of our board of directors.
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<PAGE>
Tax consequences. The options or the resulting shares granted to Israeli
employees are deposited with a trustee for at least two years. Under Section
102 of the Israel Income Tax Ordinance and its rules, the tax to the employee
from the grant and exercise of options is deferred until the transfer of the
options or ordinary shares from the trust to the employee's name or until the
sale of the options or ordinary shares. Upon sale by the employee, the employee
will recognize capital gain and we will recognize a related expense for tax
purposes.
Administration and vesting. The employee option plan is administered by our
board of directors or the compensation committee of our board of directors.
Options approved on or before December 2, 1998 usually vest over a period of
four years, allowing the employee to exercise 50.0% of the option after two
years, 75.0% after three years and 100.0% after four years. Options approved
after December 2, 1998 usually vest over a period of four years so that 25.0%
of the options vest after one year and additional shares vest quarterly, unless
a different vesting schedule is determined for specific grants. To conform our
employee option plan for our non-Israeli employees, in December 1998 we
approved the form of option agreement for non-Israeli employees that is
substantially similar to the Israeli option agreement except that the options
and shares issued upon exercise of the options are not held by a trustee.
Exercise of options. Employees who hold unexercised options under this plan
who stop working for us for any reason may request that the trustee of the
share plan exercise their options for them during the three month period
following the termination of their employment. At the end of that three month
period, the options will terminate, unless extended by the board of directors
in its discretion. If an employee dies after he is entitled to exercise
options, but before the options have lapsed, the trustee may exercise the
options for the employee's beneficiary for the same period as the options were
exercisable on the date that the employee died.
2000 Share Ownership and Option Plan
General. On January 26, 2000, our board of directors adopted the 2000 Accord
Networks Ltd. share ownership and option plan, which provides for the grant of
options to our employees, directors, consultants and other service providers
and to those of our subsidiaries. The plan was approved by our shareholders on
March 23, 2000. The maximum number of ordinary shares subject to the plan is
750,000. As of January 1 of each year beginning January 1, 2001, the total
number of shares reserved for the plan will be automatically increased by the
number of shares equal to 4% of the total number of shares reserved for the
plan. As of April 30, 2000, we have granted options to purchase 538,500
ordinary shares under the plan. The exercise price of options granted under the
plan is determined in the discretion of our board of directors. Grants to
Israeli employees are also generally made under Section 102 of the Israel
Income Tax Ordinance.
Exercise of options. Persons who hold unexercised options granted under this
plan who stop working for us for any reason other than termination in specified
circumstances may exercise their options for 30 days after they stop working.
If the person stops working for us for the specified reasons, his options will
expire upon his termination of employment. Persons holding unexercised options
who die, are disabled or retire with board approval after age 60 are entitled
to exercise their options for a year after they stop working. Unexercised
options will terminate if not exercised in the times specified for each
situation.
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2000 Share Option Plan
General. On January 26, 2000, our board of directors adopted the Accord
Networks Ltd. 2000 share option plan, which provides for the grant of options
to our employees and consultants, and to those of our subsidiaries. The plan
was approved by our shareholders on March 23, 2000. The maximum number of
ordinary shares subject to the plan is 750,000. As of January 1 of each year
beginning January 1, 2001, the total number of shares reserved for the plan
will be automatically increased by the number of shares equal to 4% of the
total number of shares reserved for the plan. This plan is intended primarily
for our non-Israeli employees. Grants to employees under this plan may be
either incentive stock options within the meaning of the U.S. Internal Revenue
Code of 1986, or nonstatutory stock options. An option may qualify as an
incentive stock option under the U.S. tax code if:
. the option is granted to an employee of a company or of a parent or
subsidiary company;
. the employee exercises the option while he is an employee or within three
months after termination, other than in the case of permanent and total
disability or death, which allow for longer periods of exercise;
. the option is granted under a plan approved by the shareholders of the
company within 12 months before or after the plan is adopted;
. the option is granted within 10 years from the earlier of the date the plan
is adopted or the date the plan was approved by the shareholders;
. the option is not exercisable after 10 years from the date of grant, or
five years if the employee at the time the option is granted, owns shares
equal to 10% or more of the total combined voting power of all classes of
share capital of the company;
. the option price is at least 100% of the fair market value of the
underlying ordinary shares on the date of grant, or 110% if the option
holder, at the time the option is granted, owns shares equal to 10% or more
of the total combined voting power of all classes of share capital of the
company;
. the fair market value of the option shares, as determined on the date of
grant, that may be purchased for the first time in any calendar year may
not exceed $100,000. If this limit is exceeded, the excess option shares
will not be treated as being grated under an incentive stock option.
As of April 30, 2000, we have granted options to purchase 457,000 ordinary
shares under the plan. The exercise price of options granted under the plan is
determined in the discretion of our board of directors. That discretion is,
however, limited by some of the provisions concerning incentive stock options.
Exercise of options. Persons who hold unexercised options under this plan who
stop working for us for any reason other than termination in specified
circumstances may exercise their options that were vested on the date of
termination during the time specified in their option agreement. If the person
stops working for us for the specified reasons, all options will expire upon
the termination of employment. If an option holder dies, the options vested on
the date of death may be exercised by the option holder's estate or whoever
inherits the option during the time specified in their option
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<PAGE>
agreement. Any options that are not vested on the date of termination or death
will immediately revert to the option plan.
2000 Non-Employee Director Stock Option Plan
General. On January 26, 2000, our board of directors adopted the Accord
Networks Ltd. 2000 non-employee director stock option plan, which provides that
we grant our non-employee directors:
. an option to purchase 25,000 shares on the later of the date of approval of
the plan by our shareholders, or the date the person first becomes a non-
employee director; and
. an option to purchase 2,500 shares each year the non-employee director
serves as a director.
The plan was approved by our shareholders on March 23, 2000.
Limitations on grants. The maximum number of ordinary shares subject to the
plan is 200,000. The exercise price of options granted under the plan is the
fair market value of our ordinary shares on the date of grant. If there is no
established market for our ordinary shares on the date of grant, the exercise
price is determined in good faith by our board of directors and is subject to
shareholder approval. In this case, audit committee approval may also be
required.
Administration of the plans
The 2000 share ownership and option plan and the 2000 share option plan are
managed by the compensation committee of our board of directors, which makes
recommendations to the board of directors about the grant of options. Options
granted under the 2000 non-employee director stock option plan are automatic,
and vest 25% per year over four years. The vesting schedule of options granted
under the employee share option plans is spread over four years, so that 25% of
the options may be exercised after one year and additional shares may be
exercised on the last day of each of the 12 successive three-month periods. Any
unexercised vested options granted to a director under the 2000 non-employee
director stock option plan will terminate on the earlier of three months after
termination of a directorship for other than specified reasons or expiration of
the option term. If the directorship is terminated for the specified reasons,
all options expire upon termination. If the director dies, the director's
successors may have up to one year to exercise options which had vested at the
time of death.
401(K) PLAN
Our U.S. subsidiary established a tax-qualified cash or deferred profit sharing
plan or 401(k) plan covering all of our eligible full-time employees in the
U.S. in August 1997. Under the plan, participants may elect to contribute,
through salary reductions, up to 15.0% of their annual compensation, subject to
a statutory maximum. We will make matching contributions each year on a
discretionary basis to fund the 401(k) plan. The 401(k) plan is designed to
qualify under Section 401 of the Internal Revenue Code of 1986 so that
contributions to the plan and income earned on plan contributions are not
taxable to employees until withdrawn from the 401(k) plan. Contributions by us
will be deductible by us when made.
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RELATED PARTY TRANSACTIONS
FINANCINGS
July 1997
In July 1997, we entered into a loan agreement with various entities and
individuals, including those managed by SVM STAR Venture Capital Management
Ltd. and by SVM STAR Ventures Management GmbH No. 3, Nitzanim Fund (1993) Ltd.,
Gilde IT Fund B.V., Advanced Technology Ventures IV, L.P., Sigi Gavish and two
of our former directors, under which we were loaned $4.0 million at six-month
LIBOR, plus 1.0%. In March 1998, all outstanding principal indebtedness under
the loan agreement was converted into series B preferred shares at a conversion
price of $2.24 per share. Upon conversion of the loans, we also issued warrants
to these entities to purchase additional series B preferred shares at an
exercise price of $2.24 per share.
October 1997
In October 1997, we entered into an investment and loan agreement with various
entities, including entities managed by SVM STAR Venture Capital Management
Ltd. and by SVM STAR Ventures Management GmbH No. 3, Gilde IT Fund B.V.,
Advanced Technology Ventures IV, L.P., K. T. Concord Venture Fund (Cayman),
L.P. and K.T. Concord Venture Fund (Israel), L.P., under which we borrowed $1.9
million at six-month LIBOR, plus 1.0%. In March 1998, all outstanding principal
indebtedness under the investment and loan agreement was converted into series
B preferred shares and pre-emptive rights were exercised by some of our
shareholders. The conversion price and the purchase price was $2.24 per share.
With this conversion and share purchase, we also issued warrants to these
entities to purchase additional series B preferred shares at an exercise price
of $2.24 per share.
March 1998
In March 1998 we entered into a subscription agreement with K.T. Concord
Venture Fund (Cayman), L.P. and K.T. Concord Venture Fund (Israel), L.P. under
which these two funds invested a total of $3.0 million in us, including the
amounts they loaned us in October 1997. At the same time all the loans made to
us in July 1997 and October 1997 were converted into series B preferred shares
and some of our shareholders exercised their pre-emptive rights to buy shares.
The purchase price and the conversion price of the shares was $2.24 per share.
As a result, we issued an aggregate of 4,017,428 series B preferred shares to
16 investors and warrants to purchase an aggregate of 1,205,228 series B
preferred shares at an exercise price of $2.24 per share to 20 entities.
In November 1999, we repaid Nitzanim Fund (1993) Ltd. the outstanding balance
of $250,000 under an interest-free loan made to us in October 1994.
We do not know whether or not the transactions listed above were on terms no
less favorable than we could have obtained from unaffiliated parties.
REGISTRATION RIGHTS
The entities affiliated with
. Nitzanim (1993) Fund Ltd.;
. the Concord Venture Funds;
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. SVM STAR Venture Capital Management Ltd.;
. SVM STAR Ventures Management GmbH No. 3;
. Gilde IT Fund B.V.;
. Advanced Technology Ventures IV, L.P.;
. VTEL Corporation;
. Courses Investments in Technology Ltd.;
. Manakin Investments B.V.; and
. Norwest Equity Capital LLC
are entitled to demand registration rights for the ordinary shares they will
hold upon the closing of this offering. They and some of our directors and
officers are also entitled to have their shares included in registration
statements we may file with the Securities and Exchange Commission in the
future.
OTHER RELATED PARTY TRANSACTIONS
In October 1998, we terminated a joint research and development agreement with
VTEL Corporation. This agreement, which was entered into in 1995, obligated us
to undertake joint development work and to pay royalties to VTEL upon the sale
of products and systems which arose from our joint development efforts. In
March 1999, we issued VTEL 397,673 series A preferred shares in full and final
satisfaction of the anti-dilution rights provided under a subscription
agreement dated June 14, 1995.
Matty Karp, a member of our board of directors, is chief executive officer of
Nitzanim Fund (1993) Ltd. and Concord K.T. Investment Partners Ltd. Nitzanim
Fund (1993) Ltd. and affiliates of Concord K.T. Investment Partners Ltd. are
some of our shareholders. Mr. Karp is also a member of the board of directors
of Galileo Technology Ltd., whose wholly-owned subsidiary, Galileo Technology,
Inc., is a supplier of the chips we use in our system. We purchased $16,427
worth of processors from Galileo in 1998 and $30,845 in 1999.
Jos Henkens, a member of our board of directors, is a general partner of one of
our shareholders, Advanced Technology Ventures IV, L.P.
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PRINCIPAL AND SELLING SHAREHOLDERS
The table below contains information about beneficial ownership of our ordinary
shares as of April 30, 2000, and as adjusted to reflect the sale of the
ordinary shares offered in this offering by:
. each person who beneficially owns 5% or more of the ordinary shares;
. each person who may be selling shares in the offering; and
. all our executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
------------------------ ------------------ ---------- ----------
<S> <C> <C> <C>
Entities affiliated with
Nitzanim Fund (1993) Ltd.
and Concord K.T. Investment
Partners Ltd............... 3,190,275(1) 21.4% 16.0%
Entities managed by SVM STAR
Venture Capital Management
Ltd. and SVM STAR Ventures
Management GmbH No. 3...... 2,010,217(2) 13.5 10.1
Advanced Technology Ventures
IV, L.P.................... 1,631,158(3) 11.0 8.2
Gilde IT Fund B.V........... 1,620,768(4) 10.9 8.2
Norwest Equity Capital
L.L.C...................... 1,370,614(5) 9.2 6.9
VTEL Corporation............ 1,301,092(6) 8.7 6.5
Sigi Gavish................. 795,836(7) 5.3 4.0
Gil Rosenfeld............... 347,918(8) 2.3 1.7
Michal Rosenfeld............ 347,918(8) 2.3 1.7
All executive officers and
directors as a group....... 1,501,217(9) 10.1 7.6
</TABLE>
------------------
(1) Includes:
. 1,531,024 ordinary shares held by Nitzanim Fund (1993) Ltd., of which
76,102 ordinary shares are issuable upon the exercise of share purchase
warrants within 60 days of April 30, 2000;
. 1,371,665 ordinary shares held by K.T. Concord Venture Fund (Cayman)
L.P., of which 264,509 ordinary shares are issuable upon the exercise of
share purchase warrants within 60 days of April 30, 2000;
. 274,201 ordinary shares held by K.T. Concord Venture Fund (Israel) L.P.,
of which 52,876 ordinary shares are issuable upon the exercise of share
purchase warrants within 60 days of April 30, 2000;
. 11,192 ordinary shares held by K.T. Concord Venture Advisors (Cayman)
L.P. of which 2,158 ordinary shares are issuable upon the exercise of
share purchase warrants within 60 days of April 30, 2000; and
. 2,193 ordinary shares held by K.T. Concord Venture Advisors (Israel) L.P.
of which 422 ordinary shares are issuable upon the exercise of share
purchase warrants within 60 days of April 30, 2000.
The general partner and investment manager of the Concord entities is
Concord K.T. Investment Partners Ltd. Matty Karp, one of our directors, is a
principal of this entity and president of Nitzanim Fund (1993) Ltd. and may
beneficially own these shares, under the securities laws but disclaims
beneficial ownership of them. The address for each of these entities is 85
Medinat Hayehudim Street, 7th Floor, P.O. Box 4011, Herzelia Pituach 46140,
Israel.
(2) Includes:
. 937,160 ordinary shares held by STAR Management of Investments (1993)
Limited Partnership, of which 73,461 ordinary shares are issuable upon
the exercise of share purchase warrants within 60 days of April 30, 2000;
. 565,869 ordinary shares held by SVE STAR Ventures Enterprises No. III
GbR, of which 44,356 ordinary shares are issuable upon the exercise of
share purchase warrants within 60 days of April 30, 2000;
. 249,069 ordinary shares held by SVM STAR Ventures Management GmbH Nr. 3 &
Co. Beteiligungs KG, of which 19,523 ordinary shares are issuable upon
the exercise of share purchase warrants within 60 days of April 30, 2000;
. 210,776 ordinary shares held by SVE STAR Ventures Enterprises No. II GbR,
of which 16,522 ordinary shares are issuable upon the exercise of share
purchase warrants within 60 days of April 30, 2000; and
. 47,343 ordinary shares held by SVE STAR Ventures Enterprises No. IIIA GbR
of which 3,711 ordinary shares are issuable upon the exercise of share
purchase warrants within 60 days of April 30, 2000.
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SVM STAR Venture Capital Management Ltd. manages the investments of STAR
Management of Investments (1993) Limited Partnership, and SVM STAR Ventures
Management GmbH No. 3 manages the investments of the other STAR entities
listed above. Dr. Meir Barel is the sole director and primary owner of SVM
STAR Venture Capital Management Ltd. and SVM STAR Ventures Management GmbH
No. 3 and may beneficially own these shares under securities laws but
disclaims beneficial ownership of them. The address for STAR Management of
Investments (1993) Limited Partnership is 11 Galgaley Haplada, Building 3,
Herzelia 46733, Israel, and the address for the other STAR entities listed
above is Possartstrasse No. 9, D-81679 Munich, Germany.
(3) Includes 1,631,158 ordinary shares held by Advanced Technology Ventures IV,
L.P., of which 122,001 ordinary shares are issuable upon the exercise of
share purchase warrants within 60 days of April 30, 2000. Jos C. Henkens,
one of our directors, is a general partner of Advanced Technology Ventures
IV, L.P. and may beneficially own these shares under the securities laws,
but disclaims beneficial ownership of them. The address of Advanced
Technology Ventures IV, L.P. is 485 Romona Street, Suite 200, Palo Alto,
California 94301.
(4) Includes 1,620,768 ordinary shares held by Gilde IT Fund B.V., of which
121,611 ordinary shares are issuable upon the exercise of share purchase
warrants within 60 days of April 30, 2000. The address of Gilde is
Newtonlaan 91, P.O. Box 85067, 3508 AB Utrecht, Netherlands.
(5) Itasca NEC, L.L.C., or Itasca, is the managing member of Norwest Equity
Capital, L.L.C., or Norwest, and has sole voting and investment power of
the shares. Under the securities laws, the managing members of Itasca
beneficially own the shares held by Norwest and therefore have voting and
investment power of the shares. The members of Itasca disclaim beneficial
ownership of the shares held by Norwest, except to the extent of their
direct pecuniary interest in the shares. The address of Norwest Equity
Capital L.L.C. is 245 Lytton Avenue, Suite 250, Palo Alto, California
94301.
(6) The address of VTEL Corporation is 108 Wild Basin Road, Austin, Texas
78746.
(7) Includes:
. 48,780 ordinary shares subject to warrants that are exercisable within 60
days of April 30, 2000; and
. 100,000 ordinary shares subject to options exercisable within 60 days of
April 30, 2000.
(8) If the underwriters exercise the over-allotment option in full, Gil
Rosenfeld and Michal Rosenfeld will each sell 48,500 ordinary shares.
Following the exercise of the underwriters' over allotment option, Gil
Rosenfeld will beneficially own 299,418 ordinary shares, or 1.5% of our
ordinary shares after this offering and Michal Rosenfeld will beneficially
own 299,418 ordinary shares, or 1.5% of our ordinary shares after this
offering. Gil and Michal Rosenfeld are the son and daughter of Gideon
Rosenfeld who was a co-founder and former executive officer and director of
Accord Networks Ltd. Neither Gil nor Michal Rosenfeld is an employee,
officer or director of Accord.
(9) Includes:
. 48,780 ordinary shares subject to warrants that are exercisable within 60
days of April 30, 2000; and
. 479,918 ordinary shares subject to options exercisable within 60 days of
April 30, 2000.
Does not include shares beneficially owned by entities affiliated with
Nitzanim Fund (1993) Ltd. or Concord K.T. Investment Partners Ltd., of which
one of our directors, Matty Karp, is affiliated, or shares beneficially
owned by Advanced Technology Ventures IV, L.P., of which one of our
directors, Jos Henkens, is affiliated. Mr. Karp and Mr. Henkens disclaim
beneficial ownership of the shares held by these entities.
The shares that may be issued under options or warrants within 60 days of
April 30, 2000 are treated as outstanding only for purposes of determining the
percentage ownership of the person or group holding the option or warrant but
not for any others. The calculation of ownership percentage for each listed
holder assumes the net exercise of warrants to purchase preferred shares and
the conversion of all issued and outstanding preferred shares into ordinary
shares. As of April 30, 2000, there were 14,882,474 of our ordinary shares
issued and outstanding, assuming the net exercise of all outstanding warrants
to purchase preferred shares and the conversion of all issued and outstanding
preferred shares to ordinary shares.
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DESCRIPTION OF SHARE CAPITAL
A summary of the material provisions governing our share capital is explained
below. This summary is not complete and should be read with our memorandum of
association and articles of association, which will become effective upon the
closing of this offering, copies of which have been filed as exhibits to the
registration statement of which this prospectus forms a part.
Our authorized share capital will consist, upon the closing of this offering,
of 50,000,000 ordinary shares and 5,000,000 preferred shares.
As of April 30, 2000, there were 14,882,474 ordinary shares outstanding and
held of record by 34 shareholders. This outstanding share number assumes that
upon the closing of this offering:
. warrants to purchase 959,788 preferred shares will be exercised by net
exercise; and
. all outstanding series A preferred shares, series B preferred shares,
voting series C preferred shares and non-voting series C preferred shares,
including those issued upon exercise of warrants, will be converted into a
total of 13,011,211 ordinary shares.
DESCRIPTION OF ORDINARY SHARES
All issued and outstanding ordinary shares are, and the ordinary shares offered
in this offering, when issued and paid for will be, duly authorized, validly
issued, fully paid and non-assessable. Upon completion of this offering the
ordinary shares will not have preemptive rights. Neither our memorandum of
association, 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 for subjects of nations which are in a state of war with
Israel.
DESCRIPTION OF PREFERRED SHARES
Upon completion of this offering, our board of directors will have the
authority to issue up to 5,000,000 preferred shares in one or more series and
to fix the rights, preferences, powers and restrictions of the preferred shares
without shareholder approval. Our board of directors will be able to set the:
. dividend rights;
. dividend rates;
. conversion rights;
. voting rights;
. terms of redemption and redemption prices;
. liquidation preferences; and
. the number of shares constituting any series.
The issuance of preferred shares could delay, defer or prevent a change in
control and could adversely affect the voting power of the holders of ordinary
shares. We have no plans to issue any preferred shares. Although Israeli law
does not prohibit the issuance of preferred shares with rights which were not
approved by shareholders at the time the preferred shares were authorized, this
matter has not been determined by Israeli courts. As a result, if preferred
shares were issued with rights, preferences and powers that were different from
the rights of the ordinary shares, there can be no assurance that, if
challenged in legal proceedings, the legality of the issuance of the preferred
shares would be upheld by an Israeli court.
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ELECTION OF DIRECTORS
Our ordinary shares do not have cumulative voting rights in the election of
directors. As a result, the holders of ordinary shares that represent more than
50% of the voting power represented at a shareholders meeting and voting at the
meeting have the power to elect all of the directors up for election, subject
to specific requirements under the Companies Law for the election of external
directors.
DIVIDEND AND LIQUIDATION RIGHTS
We may distribute a dividend only out of profits available for dividends as
determined by the Companies Law, provided that there is no reasonable concern
that the distribution will prevent us from being able to meet our existing and
anticipated obligations when they become due. Generally, under the Companies
Law, the decision to distribute dividends and the amount to be distributed is
made by the board of directors. Our articles of association, which will be
effective upon the closing of this offering, authorize our board of directors
to determine the amount and time for payment of any dividends, and the record
date for determining the shareholders entitled to receive the dividends,
provided the date is not before the date of the resolution to distribute the
dividend. The ordinary shares offered by this prospectus, when issued and paid
for, will be entitled to their full proportionate share of any cash or share
dividend declared from the date of completion of this offering. Subject to the
rights of the holders of shares with preferred rights that may be outstanding
in the future, the holders of ordinary shares are entitled to participate in
the payment of dividends. If we are wound up, holders of ordinary shares will
also be entitled to participate in the distribution of assets remaining after
the payment of our liabilities. In either situation, the holders of ordinary
shares will receive the dividends or distributions in proportion to the amount
paid up or credited on account of the stated value, referred to as nominal
value, we assigned to our shares in our memorandum of association and articles
of association, without considering any premium those holders might have paid
in excess of that nominal value.
VOTING
Holders of our ordinary shares have one vote for each ordinary share held on
all matters submitted to a vote of shareholders. These rights may be affected
by the future grant of any special voting rights to the holders of a class of
shares with preferential rights that may be authorized or issued in the future.
Upon completion of this offering, all of the issued and outstanding preferred
shares will convert into ordinary shares and there will be 5,000,000 authorized
but unissued preferred shares. The board of directors will have the authority
to issue the preferred shares, without further vote or action by the
shareholders, in one or more series and to fix the rights, preferences, and
restrictions of the preferred shares.
SHAREHOLDER MEETINGS
We must hold an annual general meeting once every calendar year at a time,
which may not be more than 15 months after the last preceding annual general
meeting, and at a place determined by our board of directors. The board of
directors may, in its discretion, convene additional shareholder meetings and
must convene a meeting upon the demand of:
. two directors or one quarter of the directors in office, or
. the holder or holders of five percent of our issued share capital and one
percent of our voting rights or the holder or holders of five percent of
our voting rights.
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QUORUM
Our articles of association, which will become effective upon the closing of
this offering, provide that the quorum required for a general meeting of
shareholders consists of at least two shareholders present in person or by
proxy who hold or represent between them shares conferring at least 50.0% of
our voting rights. According to our articles of association, if a meeting is
convened by our board of directors upon the demand of the shareholders or upon
the demand of less than 50.0% of the directors then in office or by those
directors or shareholders and no quorum is present, it will be cancelled. If a
meeting is otherwise called and no quorum is present, the meeting will be
adjourned to the same day of the next week at the same time and place, or at a
time and place as the directors may determine. At an adjourned meeting, any
shareholders present in person or by proxy will constitute a quorum even if
shares conferring less than 50.0% of our voting rights are represented.
RESOLUTIONS
Resolutions must be made by the shareholders at a general meeting when they
involve:
. amending our articles of association;
. assuming the authority of the board of directors in some circumstances;
. appointing auditors;
. appointing external directors;
. approving specified transactions;
. increasing or decreasing our registered share capital; or
. approving a merger with another company.
A company may determine in its articles of association additional matters for
which resolutions must be made by the shareholders in a general meeting. Some
corporate actions, such as a merger or liquidation, may also require the prior
approval of an Israeli court.
Shareholders' duties
Under the Companies Law, a shareholder has a duty to act in good faith towards
the company in which he holds shares and towards other shareholders and to
refrain from abusing his power in the company, including when voting in the
general meeting of shareholders on:
. any amendment to the articles of association;
. an increase of the company's authorized share capital;
. a merger; or
. approval of some of the acts and transactions which require shareholder
approval as specified in the Companies Law.
A shareholder has the general duty to refrain from depriving the other
shareholders of their rights.
Also, a shareholder is under a duty to act in fairness towards the company
when:
. the shareholder is a controlling shareholder;
. the shareholder knows that his vote will be decisive at a general or class
meeting; or
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. the shareholder, under the provisions of the articles of association, has
the power to appoint or prevent the appointment of an office holder in the
company or who has any other specified powers.
Shareholder approval
Unless otherwise provided by the Companies Law or by the articles of
association, shareholder resolutions are adopted if approved by the holders of
a simple majority of the voting rights represented at a meeting at which a
quorum is present and voting on the resolution.
Our articles of association, which will become effective upon the closing of
this offering, provide for a simple majority in all matters other than as
described below:
. The amendment or replacement of our memorandum of association or of our
articles of association will require the affirmative vote of at least 75%
of the voting rights represented at the meeting and voting on the
resolution. However, changes of our name or changes in our share capital
will require only a simple majority.
. Any change in our board of directors' authority to issue preferred shares
and to fix the rights of those preferred shares or any change to the number
or method of appointment of directors will require the affirmative vote of
at least two-thirds of our outstanding voting rights, and 75% of the voting
rights represented at the meeting and voting on the resolution.
Upon completion of this offering, our executive officers, directors, affiliates
of directors and five percent or greater shareholders will own beneficially an
aggregate of approximately 63.5% of our outstanding ordinary shares.
TRANSFER OF SHARES AND NOTICES
Fully paid ordinary shares are issued in registered form and may be transferred
freely under our articles of association which will become effective upon the
closing of this offering unless the transfer is restricted or prohibited by
another instrument or applicable law. Under the Companies Law, shareholder
meetings generally require prior notice of at least 21 days.
According to our articles of association, ordinary share certificates issued in
the names of two or more persons are deliverable to the person first named in
the share register. If two or more of these persons vote, only the vote of the
person whose name first appears in the share register will be accepted. Notices
may be given only to the person whose name first appears in the share register.
If two or more persons jointly hold a share, either of them may give effective
receipts for any dividend payable or property distributable on those shares.
MODIFICATION OF CLASS RIGHTS
Under the Companies Law, unless our articles of association provide otherwise,
if at any time our share capital is divided into different classes of shares,
no change may be made to our articles of association that would adversely
affect the rights attached to any class without the sanction of a separate
general meeting of the holders of the shares of that class. Our articles of
association, which will become effective upon the closing of this offering,
provide that we may modify the rights, privileges, restrictions and provisions
of the shares of any class, by a resolution of the shareholders adopted by a
simple majority of the voting rights represented, personally or by proxy, and
voting, unless otherwise provided by the terms of issue of the shares of that
class. To be approved, we must
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also receive either the consent in writing of the holders of three-fourths of
the issued shares of that class or a resolution passed by a simple majority of
those present, personally or by proxy, and voting at a separate general meeting
of the holders of the shares of that class, unless otherwise provided by the
terms of issue of the shares of that class.
REGISTRATION RIGHTS
After the offering, the holders of 17,964,638 ordinary shares will be entitled
to registration rights under the Securities Act. At any time after 180 days
following the closing of the offering, we are required to use our best efforts
to file under the Securities Act a registration statement covering all
registrable shares requested to be registered if both of the requirements
listed below are met:
. The request is made by a shareholder who held as of June 22, 1999 at least
350,000 preferred shares or ordinary shares into which preferred shares
were converted and who holds at the time of the request at least 350,000
ordinary shares into which preferred shares were converted. We refer to
these shareholders as initiating holders.
. The number of registrable shares requested to be registered equals or
exceeds the lesser of 40.0% of the number of outstanding registrable shares
or $2 million in value.
We are only required to complete one registration upon the request of each
initiating holder and we are not required to file a registration statement
within 180 days of the effective date of a prior registration statement. There
will be 16 initiating holders after this offering.
If we are eligible to register securities on Form F-3, then upon the request of
holders:
. who held preferred shares as of June 22, 1999, and
. who hold shares with a reasonably anticipated total offering price in
excess of $5 million,
we are required to use our best efforts to file under the Securities Act a
registration statement covering all registrable shares requested to be
registered. There is no limit on the number of registrations which we are
required to file on Form F-3. We are not required to file a registration
statement on Form F-3 within 180 days of the effective date of a prior
registration statement.
We agree to indemnify each selling shareholder against losses he incurs under
the Securities Act if the losses result from a misstatement or omission of
material fact in the registration statement.
With limited exceptions, if we propose to register any of our equity
securities, holders with registration rights may require us to include all or a
portion of their registrable shares, although the underwriter may limit the
number of shares included.
All expenses we incur filing the registrations described above will be borne by
us, including the fees and disbursements of one counsel retained by the holders
of the registrable shares, but excluding the underwriters' discounts, fees and
selling commissions.
WARRANTS
As of April 30, 2000, there were warrants outstanding to purchase 1,205,228
series B preferred shares at an exercise price of $2.24 per share. We expect
that the warrants will be exercised before completion of this offering because
by their terms the warrants would expire at that time. We have assumed that the
warrant holders will exercise their warrants by a so-called net exercise, which
means that the warrant holders can exercise their warrants without paying the
cash exercise price. The warrant holder then would receive less than the total
number of shares into which the warrant was exercisable.
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Assuming a net exercise, the warrant holder will receive a number of ordinary
shares equal to the product of:
. the number of shares represented by the warrant; and
. the result of dividing the difference between the initial public offering
price and the warrant exercise price by the initial public offering price.
If all holders of outstanding warrants to purchase preferred shares as of April
30, 2000 were to exercise by net exercise, the holders would receive
approximately 959,788 series B preferred shares, assuming an initial public
offering price of $11.00 per share.
We have received written indications from a number of warrantholders that they
intend to exercise their warrants by net exercise. One warrantholder has
indicated that he intends to pay cash for his exercise price. Warrantholders
are entitled to change their elections before the exercise. Even though we have
assumed net exercise, the warrantholders may elect to pay cash for their
exercise price.
If all holders of outstanding warrants to purchase preferred shares as of April
30, 2000 were to exercise for cash, the holders would receive approximately
1,205,228 series B preferred shares, and we would receive the aggregate
exercise price of $2,699,711. The series B preferred shares would convert upon
the closing of the offering to the same number of ordinary shares.
As of March 31, 2000, there was outstanding one warrant to purchase 137,061
ordinary shares. This warrant will not expire upon the completion of the
offering. As a result, we have not assumed that it will be exercised before the
offering.
MERGERS AND ACQUISITIONS UNDER ISRAELI LAWS
Under the Companies Law, a merger is generally required to be approved by the
shareholders and board of directors of each of the merging companies. 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,
unless determined otherwise by the court. Similarly, unless the court
determines differently, a merger will not be approved if it is objected to by a
majority of the shareholders present at the meeting, after excluding the shares
held by the other party to the merger, by any person who holds 25% or more of
the other party to the merger and by relatives of and corporations controlled
by these persons. Upon the request of a creditor of either party to the
proposed merger, the court may delay or prevent the merger if it concludes that
there exists a reasonable concern that as a result of the merger, the surviving
company will be unable to satisfy the obligations of any of the parties of the
merger. Also, a merger can be completed only after all approvals have been
submitted to the Israeli Registrar of Companies and seventy days have passed
from the time that a proposal for approval of the merger was filed with the
registrar.
The Companies Law also 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 holder of 25.0% or more of the voting
power at general meetings. This rule does not apply if there is already another
holder of 25.0% or more of the voting power at general meetings. Similarly, 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 holder of more than 45.0% of
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the voting power of the company. This rule does not apply if someone else
already holds a majority of the voting power of the company. These tender offer
requirements do not apply to companies whose shares are listed for trading
outside of Israel if under local law or the rules of the stock exchange on
which their shares are traded, there is a limitation on the percentage of
control which may be acquired or the purchaser is required to make a tender
offer to the public.
Under the Companies Law, a person may not acquire shares in a public company
if, after the acquisition, he will hold more than 90.0% of the shares or more
than 90% of any class of shares of that company, unless a tender offer is made
to purchase all of the shares or all of the shares of the particular class of
shares of the company. The Companies Law also provides that as long as a
shareholder in a public company holds more than 90% of the company's shares or
of a class of shares, that shareholder shall be precluded from purchasing any
additional shares. If a tender offer is accepted and less than 5.0% of the
shares of the company are not tendered, all of the shares will transfer to the
ownership of the purchaser. If 5.0% or more of the shares of the company are
not tendered, the purchaser may not purchase shares in a manner which will
grant him more than 90.0% of the shares of the company.
Israeli tax law treats some acquisitions, including stock-for-stock swaps
between an Israeli company and a foreign company, less favorably than U.S. tax
law. Israeli tax law may, for instance, subject a shareholder who exchanges our
shares for shares in a non-Israeli corporation to immediate taxation.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for our ordinary shares is the American Stock
Transfer and Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our ordinary shares.
Upon completion of this offering, based upon the number of ordinary shares
outstanding at April 30, 2000, there will be 19,882,474 ordinary shares
outstanding. This outstanding share number assumes that no warrants or options
are exercised, except warrants to purchase 959,788 series B preferred shares
that we expect will be net exercised before the completion of this offering and
converted into ordinary shares.
Of the 19,882,474 outstanding shares, the 5,000,000 ordinary shares sold in
this offering will be freely tradable without restriction under the Securities
Act. However, any ordinary shares purchased by our affiliates may generally
only be sold in compliance with the limitations of Rule 144 and will be subject
to a 180-day lock-up described under the section "Underwriting." The remaining
14,882,474 ordinary shares held by existing stockholders are restricted
securities under Rule 144 and are subject to the 180-day lockup. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption under Rule 144.
Rule 144
In general, under Rule 144, a person who has beneficially owned ordinary shares
for at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
. 1% of the number of ordinary shares then outstanding, which will equal
approximately 199,000 ordinary shares immediately after this offering; or
. the average weekly trading volume of the ordinary shares on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not our affiliate at any time during the 90
days preceding a sale and who has beneficially owned the shares proposed to be
sold for at least two years, is entitled to sell restricted shares of our
ordinary shares without complying with the manner of sale, public information,
volume limitation and notice provisions of Rule 144. Therefore, unless
otherwise restricted, 144(k) shares may be sold immediately upon the completion
of this offering.
Rule 701
Securities issued in reliance on Rule 701, such as ordinary shares acquired
upon the exercise of some of the options granted under our option plans, are
also restricted. Beginning 90 days after the effective date of this prospectus,
shares issued under Rule 701 may be sold by shareholders other than our
affiliates if they comply with the manner of sale provisions of Rule 144.
WARRANTS AND OPTIONS
As of April 30, 2000, we had warrants and options outstanding to purchase an
aggregate of 4,423,312 ordinary shares, including exercisable warrants and
options to purchase 1,488,701 ordinary
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shares. This excludes warrants to purchase 959,788 series B preferred shares
that we expect will be net exercised before completion of this offering and
converted into ordinary shares. All of these shares issuable upon the exercise
of options and warrants are subject to the 180-day lock-up described under the
section "Underwriting."
We intend to file one or more registration statements on Form S-8 under the
Securities Act to register all ordinary shares issuable under our option plans
promptly following the closing of this offering. Ordinary shares issued under
these plans will be, after the effective date of the applicable Form S-8
registration statement, eligible for resale in the public market without
restriction, subject to Rule 144 limitations applicable to affiliates and the
lock-up agreements noted above, if applicable.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
This summary discusses the material U.S. federal income tax consequences
arising from the purchase, ownership and sale of our ordinary shares. This
summary is based on the provisions of the Internal Revenue Code of 1986
referred to as the code, final, temporary and proposed U.S. Treasury
regulations issued under the code, and administrative and judicial
interpretations of the code and related regulations. The provisions of the
code, the regulations, and the interpretations are subject to change, possibly
with retroactive effect. We will not seek a ruling from the Internal Revenue
Service on the U.S. federal income tax treatment relating to an investment in
our ordinary shares. Therefore, no assurance exists that the Internal Revenue
Service will agree with the conclusions below.
The summary below does not address all federal income tax consequences that may
be relevant to particular investors. This summary does not address the
considerations that may be applicable to particular classes of taxpayers,
including:
. investors that hold ordinary shares as part of a hedge, straddle or
conversion transaction;
. insurance companies, banks or other financial institutions;
. broker-dealers;
. tax-exempt organizations; and
. investors who own directly, indirectly or through attribution, 10.0% or
more of our outstanding voting shares.
The summary also does not address the alternative minimum tax consequences of
an investment in our ordinary shares or the indirect consequences to U.S.
holders that hold equity interests in investors in our ordinary shares. This
summary is addressed only to holders that hold our ordinary shares as a capital
asset within the meaning of section 1221 of the code, are U.S. citizens,
individuals resident in the U.S. for purposes of U.S. federal income tax,
domestic corporations or partnerships and estates or trusts treated as United
States persons under section 7701 of the code, referred to as U.S. holders.
EACH INVESTOR SHOULD CONSULT WITH HIS OWN TAX ADVISOR ABOUT THE PARTICULAR U.S.
FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF OUR
ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL, FOREIGN OR
OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
TAX BASIS OF ORDINARY SHARES
A U.S. holder's tax basis in his ordinary shares will be the purchase price
paid for the shares by the U.S. holder. The holding period of each ordinary
share owned by a U.S. holder will begin on the day following the date of the
U.S. holder's purchase of the ordinary share and will include the day on which
the ordinary share is sold by the U.S. holder.
SALE OR EXCHANGE OF ORDINARY SHARES
A U.S. holder's sale or exchange of ordinary shares will result in the
recognition of gain or loss by the U.S. holder. The amount of the gain or loss
will equal the difference between the amount realized and the U.S. holder's
basis in the ordinary shares sold. Assuming that we are not treated as a
passive foreign investment company or a foreign investment company, the gain or
loss will be capital gain or loss if the ordinary shares are a capital asset in
the hands of the U.S. holder.
Gain or loss realized on the sale of ordinary shares will be long-term capital
gain or loss if the ordinary shares sold had been held for more than one year
at the time of their sale. Long-term capital
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gains recognized by some taxpayers generally are subject to a reduced rate of
federal tax, which has a maximum of 20.0%. If the U.S. holder's holding period
on the date of the sale or exchange was one year or less, the gain or loss will
be short-term capital gain or loss. Short-term capital gains generally are
subject to tax at the same rates as ordinary income. In general, any capital
gain recognized by a U.S. holder upon the sale or exchange of ordinary shares
will be treated as U.S.-source income for U.S. foreign tax credit purposes.
TREATMENT OF DIVIDEND DISTRIBUTIONS
For U.S. federal income tax purposes, gross dividends, including the amount of
any Israeli taxes withheld, paid to a U.S. holder based on his ordinary shares
will be included in his ordinary income to the extent made out of our current
or accumulated earnings and profits. These dividends will not be eligible for
the dividends received deduction allowed to U.S. corporations under section 243
of the code.
Dividend distributions in excess of our current and accumulated earnings and
profits will be treated first as a non-taxable return of the U.S. holder's tax
basis in his ordinary shares in the amount of that tax basis and then as a gain
from the sale of ordinary shares. Dividends paid in NIS will be includible in
income in a U.S. dollar amount based on the exchange rate at the time of their
receipt. Any gain or loss resulting from currency fluctuations during the
period from the date a dividend is paid to the date the payment is converted
into U.S. dollars generally will be treated as ordinary income or loss.
Any Israeli withholding tax imposed on dividends paid to a U.S. holder will be
a foreign income tax eligible for a foreign tax credit against the U.S.
holder's U.S. federal income tax liability, subject to specific limitations.
Generally, any U.S. foreign tax credit will be limited by the U.S. holder's
total foreign source income multiplied by the U.S. holder's tentative U.S. tax
rate. Alternatively, a U.S. holder may claim a deduction for the amount, but
only for a year in which a U.S. holder elects to do so for all foreign income
taxes. The U.S. holder may claim either a foreign tax credit or a deduction for
a tax year but may not claim both in the same year.
For foreign tax credit limitation purposes, dividends paid by us will be income
from sources outside of the United States. It is possible that, at some point
after the offering, we could be at least 50% owned by persons treated as United
States persons under the U.S. tax code. Under section 904(g) of the U.S. tax
code, dividends paid by a non-U.S. corporation that is at least 50% owned by
U.S. persons may be treated as U.S. source income rather than non-U.S. source
income for foreign tax credit purposes if the non-U.S. corporation has more
than an insignificant amount of U.S. source income. The effect of this rule may
be to treat a portion of the dividends paid by us as United States source
income. This treatment may adversely affect an eligible U.S. holder's ability
to use foreign tax credits.
The overall limitation on foreign taxes eligible for credit is calculated
separately for specific classes of income. Dividends we distribute on our
ordinary shares will generally constitute passive income. Foreign income taxes
exceeding the credit limitation for the year of payment or accrual may be
carried back for two taxable years and forward for five taxable years to reduce
U.S. federal income taxes, subject to the credit limitation applicable in each
of those years. Other restrictions on the foreign tax credit include a general
prohibition on the use of the credit to reduce liability for the U.S.
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individual and corporation alternative minimum taxes by more than 90.0% and an
allowance of foreign tax credits for alternative minimum tax purposes only to
the extent of foreign-source alternative minimum taxable income.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Any dividends paid on, or proceeds derived from a sale of, our ordinary shares
to, or by, U.S. holders may be subject to U.S. information reporting
requirements and the 31.0% U.S. backup withholding tax. The dividends or
proceeds will not be subject to the information reporting or withholding if the
holder:
. is a corporation or other exempt recipient or
. provides a U.S. taxpayer identification number, certifies that it has not
lost its exemption from backup withholding and otherwise complies with any
applicable withholding requirements. Any amounts withheld under the U.S.
backup withholding tax rules will be allowed as a refund or a credit
against the U.S. holder's U.S. federal income tax, provided the required
information is furnished to the U.S. Internal Revenue Service.
OUR TAX STATUS FOR U.S. FEDERAL INCOME TAX PURPOSES
Passive Foreign Investment Company. We may be found to be a passive foreign
investment company, or a PFIC, for U.S. federal income tax purposes. If so, any
gain recognized by a U.S. holder upon the sale of our ordinary shares or the
receipt of some types of distributions generally would be treated as ordinary
income. The income also would be allocated over the U.S. holder's holding
period for the ordinary shares. Absent any elections, an interest charge would
be imposed on the amount of deferred tax on the income allocated to prior
taxable years.
Generally, we will be treated as a PFIC for any tax year if, in that tax year
or any prior tax year, either
. 75.0% or more of our gross income is passive in nature, or
. on average, 50.0% or more of our assets produce or are held for the
production of passive income. The percentage of our assets that produce or
are held for the production of passive income is determined by the value of
the assets, or, if we elect or if we are treated as a controlled foreign
corporation under the code, by their adjusted basis for computing earnings
and profits.
We do not believe we satisfy either of the tests for PFIC status for any tax
year to date. Also, although we are acquiring substantial cash from this
offering, we expect that the majority of our assets will continue to generate
sufficient levels of income for us to avoid PFIC treatment. However, since the
determination of whether we are a PFIC will be made annually based on facts and
circumstances that, to some extent, may be beyond our control, there can be no
assurance that we will not become a PFIC at some time in the future.
If we were determined to be a PFIC, a U.S. holder could elect to treat his
ordinary shares as an interest in a qualified electing fund, or a QEF election.
If he makes a QEF election, the U.S. holder would be required to include in his
income his proportionate share of our earnings and profits in years in which we
are a PFIC. The U.S. holder would be required to include the income whether or
not distributions of our earnings and profits were actually made to the U.S.
holder. Any gain later recognized by the U.S. holder when he sold his ordinary
shares generally would be taxed as a capital gain. As an alternative to making
a QEF election, a U.S. holder may elect to mark the ordinary shares to market
annually, and recognize ordinary income or loss, subject to specific
limitations. The
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amount of income or loss will equal the difference between the fair market
value of the ordinary shares and the adjusted basis of the shares. U.S. holders
should consult with their own tax advisers about the eligibility, manner and
advisability of making a QEF election if we are treated as a PFIC.
Controlled Foreign Corporations. Sections 951 through 964 and section 1248 of
the code relate to controlled foreign corporations. The controlled foreign
corporation provisions may cause some portion of the controlled foreign
corporation's undistributed income to be considered as received by some U.S.
shareholders on a current basis. The controlled foreign corporations provision
could also cause a portion of any gain on a disposition of our ordinary shares
which would otherwise qualify for capital gains treatment to convert into
dividend income.
In general, the controlled foreign corporation provisions will apply to us only
if U.S. shareholders, who are U.S. holders and who own, directly or indirectly,
10.0% or more of the total combined voting power of all classes of our voting
shares, own in the aggregate, or are found to own after application of
attribution rules, more than 50.0%, of our outstanding shares measured by
voting power or value. We do not believe that we will be a controlled foreign
corporation after this offering. It is possible that we could become a
controlled foreign corporation in the future. Even if we were classified as a
controlled foreign corporation in a future year, however, the controlled
foreign corporation rules referred to above would apply only to U.S.
shareholders who own, directly or indirectly, 10.0% or more of the total
combined voting power of all classes of our voting shares.
Foreign Personal Holding Company. A corporation will be classified as a foreign
personal holding company, or an FPHC, if at any time during a tax year when:
. five or fewer individual U.S. citizens or residents directly or indirectly
or by attribution own more than 50.0% of the total combined voting power or
value of the corporation's shares and
. at least 60.0% of its gross income, or 50.0% for years following the first
year it becomes a FPHC, consists of FPHC income.
FPHC income is defined generally to include most dividends, interest,
royalties, rents and some other types of passive income. Each U.S. shareholder
in an FPHC is required to include in gross income, an allocable share of the
FPHC's undistributed foreign personal holding company income, generally the
taxable income of the FPHC, as specially adjusted.
We believe that we are not and will not be a PFIC, controlled foreign
corporation or FPHC after this offering. However, we may be found to be a PFIC,
controlled foreign corporation or FPHC in the future.
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ISRAELI TAXATION AND INVESTMENT PROGRAMS
Below is a summary of some of the current tax laws applicable to companies in
Israel and their effect on us. The summary also includes a discussion of some
of the Israeli tax consequences to persons purchasing our ordinary shares and
of some Israeli government programs benefiting us. These laws are subject to
change, possibly with retroactive effect. Portions of the summary discuss
legislation that has not been subject to judicial or administrative
interpretation. As a result, our views may be different from the views of the
tax authorities.
THIS DISCUSSION SHOULD NOT BE RELIED ON AS LEGAL OR PROFESSIONAL TAX ADVICE,
AND DOES NOT COVER ALL POSSIBLE TAX CONSIDERATIONS NOR DOES IT ADDRESS THE
CONSIDERATIONS THAT MAY BE APPLICABLE TO PARTICULAR CLASSES OF TAXPAYERS. YOU
SHOULD CONSULT YOUR OWN TAX ADVISOR TO LEARN ABOUT THE PARTICULAR TAX
CONSEQUENCES TO YOU OF AN INVESTMENT IN THE ORDINARY SHARES AND ABOUT POSSIBLE
CHANGES IN THE TAX LAWS.
TAX REFORM
On May 4, 2000, a committee chaired by the director general of the Israeli
ministry of finance issued a report recommending a widespread reform in
Israel's tax system. The proposed reform would reduce tax benefits available to
approved enterprises such as ours and may cause purchasers of our ordinary
shares to pay higher taxes in the future. The Israeli cabinet has approved the
recommendations in principle, but implementation of the reform requires
legislation by Israel's parliament. We cannot be certain whether the proposed
reform will be adopted or when it will be adopted. We also do not know what
form any reform will ultimately take or what effect it will have on us or on
persons who purchase our ordinary shares.
GENERAL CORPORATE TAX STRUCTURE
We are subject to corporate tax in Israel. The regular rate of corporate tax to
which Israeli companies are subject is 36.0%. However, the effective rate
payable by a company which derives income from an approved enterprise, as
further discussed below, may be considerably less.
Our tax loss carryforwards were approximately $8.0 million as of March 31,
2000, $4.5 million of which is for Accord Networks Ltd. The amount of our tax
loss carryforwards will be reduced by our future income.
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
The Law for the Encouragement of Industry (Taxes), 1969, referred to as the
Industry Encouragement Law, provides several tax benefits for industrial
companies. According to the Industry Encouragement Law, an industrial company
is a company resident in Israel, at least 90.0% of the income of which in any
tax year, determined in Israeli currency, exclusive of income from specified
sources, is derived from an industrial enterprise that it owns. An industrial
enterprise is defined by that law as an enterprise whose major activity in a
given tax year is industrial production activity.
Included among the tax benefits for an industrial company are:
. deductions of 12.5% per year of the purchase price of a patent or of know-
how that is utilized in the development or advancement of its enterprise;
and
. an election under some conditions to file a consolidated tax return with
additional related Israeli industrial companies.
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Under some tax laws and regulations, an industrial enterprise may be eligible
for special depreciation rates for machinery, equipment and buildings. These
rates differ based on various factors including the date operations begin and
the number of work shifts. An industrial company owning an approved enterprise
may choose between these special depreciation rates and the depreciation rates
available to approved enterprises.
Eligibility for the benefits under the Industry Encouragement Law is not
subject to receipt of prior approval from any governmental authority. We
believe that we qualify as an industrial company within the definition of the
Industry Encouragement Law. We cannot assure you that we will continue to
qualify as an industrial company or that the benefits described above will be
available in the future.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
The Law for the Encouragement of Capital Investments, 1959, referred to as the
Investment Law, provides that a capital investment in production facilities or
other eligible facilities may, upon application to the Israel Investment
Center, be designated as an approved enterprise. Each certificate of approval
for an approved enterprise relates to a specific capital investment program
delineated both by its financial scope, including its capital sources, and its
physical characteristics, for example the equipment to be purchased and
utilized under the program. The tax benefits derived from any certificate of
approval relate only to taxable income attributable to the specific approved
enterprise.
Taxable income derived from an approved enterprise is subject to a reduced
corporate tax rate of 25.0% until the earlier of:
. seven consecutive years, or 10 in the case of a foreign investors' company
as defined below, starting in the year in which the approved enterprise
first generates taxable income;
. 12 years from the start of production; or
. 14 years from the date of approval of the approved enterprise status.
This income is eligible for further reductions in tax rates if the company
qualifies as a foreign investors' company. Subject to various conditions, a
foreign investors' company is a company that has more than 25.0% of its share
capital, in terms of shares, rights to profits, voting and appointment of
directors, and more than 25.0% of its combined share and loan capital owned by
non-Israeli residents. The corporate tax rate is:
. 20.0% if the foreign investment is 49.0% or more but less than 74.0%;
. 15.0% if the foreign investment is 74.0% or more but less than 90.0%; and
. 10.0% if the foreign investment is 90.0% or more.
The determination of foreign ownership is made on the basis of the lowest level
of foreign ownership during the tax year. We anticipate that following this
offering, we will qualify as a foreign investors' company with foreign
investments of between 74.0% and 90.0%. If the tax reform recommendations are
adopted, a foreign investors' company would no longer be entitled to
preferential tax treatment.
If a company is operating under more than one approval, or that not all of its
capital investments are approved, its effective corporate tax rate is the
result of a weighted combination of the various applicable rates.
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A company owning an approved enterprise may elect to forego entitlement to the
grants otherwise available under the Investment Law and, in return, participate
in an alternative benefits program. Under the alternative benefits program the
undistributed income from the approved enterprise is fully exempt from
corporate tax for a period between two and ten years, depending upon the
location within Israel and the type of approved enterprise. Upon expiration of
the exemption period, the approved enterprise would be eligible for beneficial
tax rates for the remainder, if any, of the benefits period. Most of our
production facilities have been granted approved enterprise status under the
Investment Law. We participate in the alternative benefits program and income
we earn from our approved enterprises will be tax exempt for a period of two
years, beginning with the year in which we first earn taxable income. There can
be no assurance that this benefit program will continue to be available or that
we will continue to qualify for benefits under the current program. If the tax
reform recommendations are adopted, the tax exemption would be cancelled and a
corporate tax rate of 10% would apply during the exemption periods described
above.
Dividends paid from income derived from an approved enterprise during the
benefits period are generally taxed at a reduced rate of 15.0% if the dividends
are paid during the benefits period or at any time up to 12 years after the
benefits period. This tax must be withheld at source by the company paying the
dividend. In the case of a foreign investors' company, such as us, the 12 year
limitation on reduced withholding tax on dividends does not apply. A company
that has elected the alternative benefits program and subsequently pays a
dividend out of income derived from the approved enterprise during the tax
exemption period will be subject to tax on the amount distributed. The tax rate
will be the rate that would have been applicable had the company not elected
the alternative benefits program, generally 25.0%. Generally, any dividends
distributed are considered to be attributable to the entire enterprise, and the
effective tax rate is the result of a weighted combination of the various
applicable tax rates. However, a company may elect to attribute any dividend
distributed by it only to income not subject to the alternative benefits
program.
Since we participate in the alternative benefits program, if we distribute a
cash dividend from income which is tax exempt, as described above, we would
have to pay tax at the rate of 25.0%, or less depending on the percentage of
foreign investment, on an amount equal to the amount distributed and the
corporate tax on that amount.
The Investment Law also provides that a company with an approved enterprise
status is entitled to accelerated depreciation on its property and equipment
included in an approved investment program.
We finalized the implementation of the investments under our first investment
plan in June 1999 and received an approval for a second investment plan in
November 1999. Future applications to the Israel Investment Center will be
reviewed separately, and decisions on whether or not to approve applications
will be based on factors including the then prevailing criteria in the
Investment Law, the specific objectives of the applicant company stated in the
applications and other financial criteria of the applicant company. We cannot
assure you that any of these applications will be approved. Also, the benefits
available to an approved enterprise are conditional upon the fulfillment of
various conditions stipulated in the Investment Law and its regulations and the
criteria described in the specific certificate of approval. If these conditions
are not fulfilled, the benefits could be cancelled and we might be required to
refund the amount of benefits, with the addition of the Israeli consumer price
index linkage differences and interest.
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TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax Law (Inflationary Adjustments), 1985, generally referred to as
the Adjustment for Inflation Law, represents an attempt to overcome the
problems presented to a traditional tax system by an economy experiencing rapid
inflation, which was the case in Israel when this law was adopted. The
Adjustment for Inflation Law is highly complex. These are some of its important
features:
. There is a special tax adjustment for the preservation of equity that
classifies corporate assets into fixed assets and non-fixed assets. If a
company's equity exceeds the depreciated cost of fixed assets, the company
is allowed a deduction from taxable income that takes into account the
effect of the applicable annual rate of inflation on the excess. The
maximum deduction in any year is 70% of taxable income, with the unused
portion permitted to be carried forward on an inflation-linked basis. If
the depreciated cost of fixed assets exceeds a company's equity, then the
excess multiplied by the applicable annual rate of inflation is added to
taxable income.
. Subject to specified limitations, depreciation deductions on fixed assets
and losses carried forward are adjusted for inflation based on the changes
in the Israeli consumer price index.
. Gains on traded securities, which are normally exempt from tax, are taxable
in specified circumstances. However, dealers in securities are subject to
the regular tax rules applicable to business income in Israel.
CAPITAL GAIN AND INCOME TAXES APPLICABLE TO NON-ISRAELI RESIDENT SHAREHOLDERS
Under current law, any capital gain realized by an individual shareholder from
the sale of ordinary shares offered by this prospectus will be exempt from
Israeli capital gains tax if the ordinary shares are listed on an approved
foreign securities market, which includes Nasdaq in the U.S., provided that we
continue to qualify as an industrial company under the Industry Encouragement
Law. This exemption does not apply, however, to a shareholder whose taxable
income is determined under the Adjustment for Inflation Law, nor to a company
or individual whose gains from selling or disposing of the ordinary shares are
considered business income.
If we do not maintain the listing or our status as an industrial company, then,
subject to any applicable tax treaty, the Israeli capital gains tax rates would
be up to 50.0% for non-Israeli resident individuals and 36.0% for companies.
Under an amendment to the Adjustment for Inflation Law, effective January 1,
1999, non-Israeli corporations may, under some circumstances, be subject to
Israeli taxes on the sale of listed securities in an Israeli company subject to
the provisions of any applicable tax treaty.
If the tax reform recommendations are adopted, the exemption from Israeli
capital gains tax described above would no longer apply. Instead, subject to
any applicable tax treaty, individuals would be taxed at their marginal rate up
to a maximum rate of 25% and companies would be taxed at the company rate of
36%.
Under the tax treaty between the U.S. and Israel, the capital gain received by
a person who is entitled to claim the benefits U.S. residents receive under the
treaty from the disposition of shares in an Israeli corporation generally would
be exempt from Israeli capital gains tax if the shareholder did not own shares
possessing 10% or more of the voting power of the Israeli corporation within
the prior 12
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months. If Israeli capital gains tax is payable, it can be credited against
U.S. federal tax under the circumstances and subject to the limitations
specified in the treaty.
Non-residents of Israel are subject to income tax for income accrued or derived
from sources in Israel. These sources of income include passive income,
including dividends, royalties and interest as well as non-passive income from
services provided in Israel. Upon a distribution of dividends other than bonus
shares or stock dividends, income tax is generally withheld at the rate of
25.0%, or the lower rate payable for approved enterprises, unless a different
rate is provided in a treaty between Israel and the shareholder's country of
residence.
The tax treaty between the U.S. and Israel provides for a maximum tax of 25.0%
on dividends paid to a treaty U.S. resident. However, as mentioned above,
dividends distributed by an Israeli company and derived from the income of an
approved enterprise during the applicable benefits period are subject to a
reduced 15.0% dividend withholding tax. The treaty also provides that a 12.5%
Israeli dividend withholding tax applies to dividends paid to a U.S.
corporation owning 10.0% or more of an Israeli company's voting shares
throughout the current year to the date the dividend is paid and the preceding
taxable year, as applicable. The lower 12.5% rate applies only on dividends
from income not derived from an approved enterprise in the applicable period
and does not apply if the company has specified amounts of passive income.
A non-resident of Israel who has had dividend income derived or accrued in
Israel from which the applicable tax was withheld at source is generally exempt
from the duty to file an annual Israeli tax return for the income, if the
income was not derived from a business carried on in Israel by the non-resident
and the non-resident has no other sources of income in Israel.
Israel has no estate or gift tax. If the tax reform recommendations are
adopted, estate and gift taxes at the rate of 10% would be imposed on estates
and gifts in excess of specified amounts.
TAX BENEFITS FOR RESEARCH AND DEVELOPMENT
Israeli tax law allows, under specific conditions, a tax deduction in the year
incurred for expenditures, including capital expenditures, in scientific
research and development projects if the research projects are approved by the
relevant Israeli government ministry, determined by the field of research, and
the research and development is for the promotion of the enterprise and is
carried out by, or on behalf of, the company seeking the deduction.
Expenditures for research projects not so approved are deductible over a three-
year period. To date, all of our research and development programs have been
approved and funded, in part, by the Office of the Chief Scientist at the
Ministry of Industry and Trade, referred to as the OCS. Consequently we have
been eligible to deduct for tax purposes, all our research and development
expenses, net of the participations received.
LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND DEVELOPMENT, 1984
Under the Law for the Encouragement of Industrial Research and Development,
1984, referred to as the Research Law, research and development programs are
eligible for grants if they meet specified criteria and are approved by the
research committee of the OCS. These grants are issued in return for the
payment of royalties from revenues derived from the products developed under
the program. These royalties are:
. 3.0% of revenues derived from the products developed as a result of
research projects funded during the first three years;
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. 4.0% of revenues during the next three years; and
. 5.0% of revenues in the seventh year and going forward, with the total
royalties not to exceed 100.0% of the dollar value of the OCS grant.
However, in some cases described below, total royalties can equal up to 300.0%
of the OCS grant. Following the full payment of these royalties, there is no
further liability for payment. For participations received for approvals given
after December 31, 1998, interest at the 12-month LIBOR rate applicable to
dollar deposits as published on the first business day of each calendar year
will be added to the royalty payments.
The Research Law further requires that products developed with government
grants be manufactured in Israel unless special approval has been granted. If
approval is received from the OCS research committee for manufacturing outside
of Israel, we would be required to pay royalties that are adjusted in
proportion to manufacturing outside of Israel:
. when the manufacturing is performed outside of Israel by us or a company
affiliated with us, the royalties are to be paid as described above with
the addition of 1.0%; and
. when the manufacturing outside of Israel is not performed by us or a
company affiliated with us, the royalties paid will be equal to the ratio
of the amount of grant received from the OCS divided by the amount of grant
received from the OCS and the investment made by us in the project.
The payback will also be adjusted to:
. 120.0% of the grant if the portion of manufacturing that is performed
outside of Israel is up to 50.0%;
. 150.0% of the grant if the portion of manufacturing that is performed
outside Israel is between 50.0% and 90.0%; and
. 300.0% of the grant if the portion of manufacturing that is performed
outside Israel is more than 90.0%.
The Research Law also provides that know-how from the research and development
which is used to manufacture the products may not be transferred to third
parties without the prior approval of the research committee. This approval is
not required for the export of any products resulting from the research or
development. Approval of the transfer of know-how may be granted only if the
recipient abides by the Research Law, including the restrictions on the
transfer of know-how and the obligation to pay royalties in an amount that may
be increased.
We participate in programs sponsored by the OCS for the support of research and
development activities. Through March 31, 2000, we have recorded participations
from the OCS aggregating $6.2 million for some of our research and development
projects. We are obligated to pay royalties to the OCS of 3.0% to 5.0% of
revenues derived from the products developed from the funded projects, up to an
amount equal to 100.0% of the grants received. Through March 31, 2000, we have
accrued and paid royalties to the OCS in the aggregate amount of $1.4 million.
At March 31, 2000, the aggregate OCS contingent liability was $4.7 million,
plus interest on participations received for approvals given after December 31,
1998. The participations received are presented in our consolidated financial
statements as offsets to research and development expenses.
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FUND FOR THE ENCOURAGEMENT OF MARKETING ACTIVITIES
The Israeli government, through the Fund for the Encouragement of Marketing
Activities, awards to qualifying companies participations for marketing
expenses incurred to increase export sales from Israel. These participations,
which have been reflected as a reduction in selling expenses, are dollar-
linked, do not bear interest and are repaid through royalties on any increase
in export sales at the rate of 3.0% of the increased sales portion only up to
the amount of the participation. We received participations in the amounts of
approximately $57,000 in 1996, $148,000 in 1997, $107,000 in 1998 and $0 during
1999. As of December 31, 1999, the entire royalty commitment relating to these
participations was paid or accrued. We do not intend to apply for future
marketing participations under this program.
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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 are located in Israel. We are
directly affected by political, economic and military conditions in Israel. Our
business, financial condition and results of operations could be materially
adversely affected if major hostilities involving Israel should occur or if
trade between Israel and its present trading partners should be curtailed.
POLITICAL CONDITIONS
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors. A state of
hostility, varying in intensity and degree, has led to security and economic
problems for Israel. However, a peace agreement between Israel and Egypt was
signed in 1979 and a peace agreement between Israel and Jordan was signed in
1994. Since 1993, several agreements between Israel and Palestinian
representatives have been signed. Also, Israel and several Arab States have
announced their intention to establish trade and other relations. Israel has
not entered into any peace agreement with Syria or Lebanon, and there have been
difficulties in the negotiations with the Palestinians. We cannot be certain
how the peace process will develop or what effect it may have upon us.
Despite the progress towards peace between Israel and its Arab neighbors and
the Palestinians, some countries, companies and organizations continue to
participate in a boycott of Israeli firms. We do not believe that the boycott
has had a material adverse effect on us, but restrictive laws, policies or
practices directed towards Israel or Israeli businesses may 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 30 days, or longer
under some circumstances, of military reserve duty annually. Additionally, all
of these residents are subject to being called to active duty at any time under
emergency circumstances. Some of our employees are obligated to perform annual
reserve duty. While we have operated under these requirements since we began
operations, we cannot assess the full impact of these requirements on our
workforce or business if conditions should change. No prediction can be made of
the effect on us of any expansion or reduction of these obligations.
ECONOMIC CONDITIONS
Israel's economy has been subject to numerous destabilizing factors, including:
. a period of rampant inflation in the early to mid-1980s,
. low foreign exchange reserves,
. fluctuations in world commodity prices,
. military conflicts; and
. civil unrest.
The Israeli government has intervened in various sectors of the economy,
employing fiscal and monetary policies, import duties, foreign currency
restrictions and controls of wages, prices and foreign currency exchange rates
and other measures. The Israeli government has periodically changed its
policies in all these areas.
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Until May 1998, Israel imposed restrictions on transactions in foreign
currency. These restrictions affected our operations in various ways, and also
affected the right of non-residents of Israel to convert into foreign currency
amounts they received in Israeli currency, such as the proceeds of a judgment
enforced in Israel. Despite these restrictions, foreign investors who purchased
shares with foreign currency were able to repatriate in foreign currency both
dividends, after deduction of withholding tax, and the proceeds from the sale
of the shares. There are no Israeli currency control restrictions on
remittances of dividends on the ordinary shares or the proceeds from the sale
of the shares. However, legislation remains in effect under which currency
controls can be imposed by administrative action at any time.
TRADE AGREEMENTS
Israel is a member of the United Nations, the World Bank Group, including the
International Finance Corporation, the European Bank for Reconstruction and
Development, and the Inter-American Development Bank. Israel is also a
signatory to the General Agreement on Tariffs and Trade, which provides for
reciprocal lowering of trade barriers among its members. Also, Israel has been
granted preferences under the generalized system of preferences from Japan.
These preferences allow Israel to export the products covered by these programs
either duty-free or at reduced tariffs.
Israel has entered into preferential trade agreements with the European Union,
the U.S., Canada, the European Free Trade Association and a variety of other
countries. In recent years, Israel has established commercial and trade
relations with a number of the other nations, including Russia and China, with
which Israel had not previously had trade relations.
ASSISTANCE FROM THE UNITED STATES
Israel receives significant amounts of economic and military assistance from
the U.S., averaging approximately $3 billion annually over the last several
years. In 1992, the U.S. approved the issuance of up to $10 billion of loan
guarantees during U.S. fiscal years 1993 to 1998 to help Israel absorb a large
influx of new immigrants, primarily from the republics of the former Soviet
Union. There is no assurance that foreign aid from the U.S. will continue at or
near amounts received in the past. In 1998, the U.S. Congress adopted a
resolution to decrease the economic assistance granted to Israel until 2008,
when this aid will be discontinued. These resolutions included an increase in
annual military aid from $1.8 billion to $2.4 billion over the 10-year period.
If the grants for economic and military assistance are eliminated or reduced
significantly, the Israeli economy could suffer material adverse consequences.
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UNDERWRITING
GENERAL
We and Michal and Gil Rosenfeld have entered into an underwriting agreement
with the underwriters named below. CIBC World Markets Corp., Dain Rauscher
Incorporated, and U.S. Bancorp Piper Jaffray Inc. are acting as the
representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
ordinary shares by each of the underwriters. The underwriters' obligations are
several, which means that each underwriter is required to purchase a specified
number of ordinary shares, but is not responsible for the commitment of any
other underwriter to purchase ordinary shares. Subject to the terms and
conditions of the underwriting agreement, each underwriter has agreed to
purchase the number of ordinary shares opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER ORDINARY SHARES
----------- ---------------
<S> <C>
CIBC World Markets Corp. ....................................
Dain Rauscher Incorporated...................................
U.S. Bancorp Piper Jaffray Inc. .............................
----
Total.......................................................
====
</TABLE>
The underwriters have agreed to purchase all of the ordinary shares offered by
this prospectus, other than those covered by the over-allotment option
described below, if any are purchased. Under the underwriting agreement, if an
underwriter defaults in its commitment to purchase ordinary shares, the
commitments of non-defaulting underwriters may be increased or the underwriting
agreement may be terminated, depending on the circumstances.
The ordinary shares should be ready for delivery on or about
, 2000. The representatives have advised us that the
underwriters propose to offer the ordinary shares directly to the public at the
public offering price on the cover page of this prospectus. The representatives
may also offer some of the ordinary shares to securities dealers at this price
less a concession of $ per share. The underwriters may also allow,
and the dealers may re-allow, a concession not in excess of $ per
share to other dealers. After the ordinary shares are released for sale to the
public, the representatives may change the offering price and other selling
terms at various times.
OVER-ALLOTMENT OPTION
We and Michal and Gil Rosenfeld have granted the underwriters an over-allotment
option. This option, which is exercisable for up to 30 days after the date of
this prospectus, permits the underwriters to purchase a maximum of 48,500
additional ordinary shares from each of Michal and Gil Rosenfeld and a maximum
of 653,000 additional ordinary shares from us to cover over-allotments. If the
underwriters exercise all or part of this option, they will purchase the
ordinary shares covered by this option at the public offering price, less the
underwriting discount. If this option is exercised in full, the total price to
the public will be $ , the total proceeds to us
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will be $ , and the total proceeds to the selling shareholders will be
$ . The underwriters have agreed that, to the extent the over-
allotment option is exercised, they will each purchase a number of additional
ordinary shares proportionate to the underwriter's initial amount reflected in
the table shown above.
COMMISSIONS AND EXPENSES; INDEMNIFICATION
The table shown below provides information about the amount of the discount to
be paid to the underwriters by us and Michal and Gil Rosenfeld.
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH FULL
PER EXERCISE OF OVER- EXERCISE OF OVER-
SHARE ALLOTMENT OPTIONS ALLOTMENT OPTIONS
----- ----------------- -----------------
<S> <C> <C> <C>
Accord.......................... $ $ $
Gil Rosenfeld...................
Michal Rosenfeld................
----------- -----------
----------- -----------
Total.......................... $ $
=========== ===========
</TABLE>
We estimate that the total expenses of the offering, excluding the underwriting
discount will be approximately $2,575,000. This estimate includes filing fees,
printing, legal and accounting fees and expenses, Israeli stamp tax and
depositary fees.
We and Michal and Gil Rosenfeld have agreed to indemnify the underwriters
against some liabilities, including liabilities under the Securities Act of
1933.
LOCK-UP AGREEMENTS
We have agreed to a 180-day lock-up, and our officers and directors and the
holders of all of our outstanding ordinary shares, have agreed to a 180-day
lock-up for 14,882,474 ordinary shares and other securities that they
beneficially own, including securities that are convertible into ordinary
shares and securities that are exchangeable or exercisable for ordinary shares.
This means that, for a period of 180 days after the date of this prospectus we
and those persons may not offer, sell, pledge or dispose of these securities
without the prior written consent of CIBC World Markets Corp., except for:
. the issuance of shares under our existing employee share plans, non-
employee director plan and other outstanding options;
. transfers by gift or upon the death of the shareholder, by will or
intestacy; or
. if the shareholder is a corporation, partnership or limited liability
company, upon a distribution to its shareholders, partners or members,
provided that the person or entity that receives the shares also agrees to be
bound by the provisions of the lock-up agreement. The lock-up does not apply to
the issuance and sale of ordinary shares in this offering.
The representatives have informed us that they do not expect discretionary
sales by the underwriters to exceed five percent of the ordinary shares offered
by this prospectus.
OFFERING PRICE DETERMINATION
Before the offering, there has been no public market in the United States for
the ordinary shares. Consequently, the initial public offering price for the
ordinary shares will be determined by us and the representatives, based on
factors including:
. the history and prospects for the industry in which we compete;
. our management;
88
<PAGE>
. our past and present operations;
. our historical results of operations;
. our prospects for future business and earning potential;
. the general condition of the securities markets at the time of this
offering;
. the recent market prices of securities of generally comparable companies;
and
. the market capitalization and stages of development of other companies
which we and the representatives believe to be comparable to us.
SHORT POSITIONS, STABILIZATION AND PENALTY BIDS
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase ordinary shares before the distribution of
the ordinary shares is completed. However, under these rules the underwriters
may engage in:
. Stabilizing transactions--The representatives may make bids or purchases
for the purpose of fixing or maintaining the price of the ordinary shares,
so long as stabilizing bids do not exceed a specified maximum.
. Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the ordinary shares by selling more than the
number shown on the cover page of this prospectus. If a short position is
created in this offering, the representatives may engage in syndicate
covering transactions by purchasing ordinary shares in the open markert.
The representatives may also elect to reduce any short position by
exercising all or part of their over-allotment option.
. Penalty bids--If the representatives purchase ordinary shares in the open
market in a stabilizing transaction or a syndicate covering transaction,
they may reclaim a selling concession from the underwriters and selling
group members who sold those ordinary shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
ordinary shares to be higher than it would be in the absence of these
transactions. The imposition of a penalty bid might also have an effect on the
price of the ordinary shares if it discourages resales of the ordinary shares.
Neither we nor the underwriters makes any representation or prediction about
the effect that the transactions described above may have on the price of the
ordinary shares. These transactions may occur on the Nasdaq National Market. If
these transactions begin, they may be discontinued without notice at any time.
DIRECTED SHARE PROGRAM
The underwriters, at our request, have reserved for sale to our employees,
affiliates and strategic partners at the initial public offering price up to
5.0% of the ordinary shares being offered by this prospectus. We do not know if
our employees, affiliates and strategic partners will choose to purchase all or
any portion of these reserved shares, but any purchases they do make will
reduce the number of shares available to the general public. If all of these
reserved shares are not purchased, the underwriters will offer the remainder to
the general public on the same terms as the other shares offered by this
prospectus.
89
<PAGE>
OFFERS AND SALES IN ISRAEL
The underwriters have undertaken that:
. they will not offer ordinary shares to the public in Israel within the
meaning of section 15 of the Israeli Securities Law, 1968,
. they will not offer ordinary shares in Israel to more than 35 persons in
the aggregate,
. they will deliver to us and the Israel Securities Authority the names and
addresses of these persons within seven days of the closing of this
offering, and
. they will obtain warranties from each person that it is purchasing ordinary
shares for investment purposes only, and not for purposes of resale.
VALIDITY OF ORDINARY SHARES
The validity of the ordinary shares offered in this offering and other legal
matters relating to this offering under Israeli law will be passed upon for
Accord Networks Ltd. by Doron Cohen-David Cohen, Law Offices, Ramat-Gan, Israel
and for the underwriters by Yigal Arnon & Co., Jerusalem, Israel. Other legal
matters relating to this offering under U.S. law will be passed upon for Accord
Networks Ltd. by Alston & Bird LLP, Atlanta, Georgia and for the underwriters
by Ropes & Gray, Boston, Massachusetts. The spouse of a partner at Doron Cohen-
David Cohen, Law Offices beneficially owns 4,559 ordinary shares.
EXPERTS
The consolidated balance sheets of Accord Networks Ltd. at December 31, 1998
and 1999 and the consolidated statements of operations, stockholders' deficit
and cash flows for each of the three years in the period ended December 31,
1999 included in this prospectus have been included in reliance on the report
of Kesselman & Kesselman, a member firm of PricewaterhouseCoopers International
Limited, independent certified public accountants in Israel, given upon the
authority of the firm as experts in auditing and accounting.
ISA EXEMPTION
The Israel Securities Authority has granted us an exemption from the obligation
to publish a prospectus in the manner required under the prevailing laws of the
State of Israel and from the obligation to file reports with the Israel
Securities Authority. The exemption from filing reports is subject to our
maintaining for public review at our principal office in Israel a copy of each
report filed under U.S. law. This exemption will remain in force for as long as
we have an obligation to report to the U.S. authorities.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form F-1 under the Securities Act relating to this offering of our
ordinary shares. This prospectus does not
90
<PAGE>
contain all of the information contained in the registration statement or in
the exhibits and schedules that are a part of the registration statement.
You should refer to the registration statement and its exhibits for additional
information. Statements made in this prospectus concerning the contents of any
contract, agreement or other document are summaries of all material information
about the documents summarized, but are not complete descriptions of all terms
of these documents. When we complete this offering, we will also be required to
file annual, quarterly and special reports and other information with the SEC.
These periodic reports and other information will be available for inspection
and copying at the SEC's public reference rooms and the web site of the SEC.
You may read and copy any document we file at the SEC's public reference
facilities at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference facilities.
Our SEC filings are also available at the office of the Nasdaq National Market.
For further information on obtaining copies of our public filings at the Nasdaq
National Market, you should call (212) 656-5060.
After the offering, we will become subject to some of the informational
requirements of the Securities Exchange Act of 1934. As a foreign private
issuer, we are exempt from some rules under the Exchange Act including:
. we are not required to comply with the disclosure and procedural
requirements for proxy solicitations;
. our directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in section 16 of the
Exchange Act; and
. we are not required to file annual, quarterly and current reports and
financial statements with the Securities and Exchange Commission as
frequently or as promptly as U.S. companies whose securities are registered
under the Exchange Act.
We intend to file with the Securities and Exchange Commission, within 180 days
after the end of each fiscal year, an annual report on Form 20-F containing
financial statements that will be examined and reported on, with an opinion
expressed by an independent accounting firm, as well as quarterly reports on
Form 6-K containing unaudited financial information for the first three
quarters of each fiscal year, within 60 days after the end of each quarter.
These reports and other information filed by us will be filed with the SEC
electronically and may be read and copied at the SEC's public reference
facilities, on the SEC's web site, http://www.sec.gov, and at the offices of
the Nasdaq National Market as described above.
ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated in Israel, and some of our directors and executive officers
and Israeli experts named in this prospectus are not residents of the U.S. and
substantially all of their assets and some of our assets are located outside of
the U.S. Service of process upon our non-U.S. resident directors and executive
officers or the Israeli experts named in this prospectus and enforcement of
judgments obtained in the U.S. against us, and our directors and executive
officers, or the Israeli experts named in this prospectus, may be difficult to
obtain within the U.S. Accord Networks, Inc. is the U.S. agent authorized to
receive service of process in any action in any United States federal court
against us
91
<PAGE>
arising 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 any other
actions.
We have been informed by our legal counsel in Israel, Doron Cohen-David Cohen,
Law Offices, that there is doubt about the enforceability of civil liabilities
under the Securities Act or the Exchange Act in original actions instituted in
Israel. However, under Israeli law, subject to various time limitations, an
Israeli court may declare a foreign civil judgment enforceable if it finds
that:
. the judgment was given by a court which was, according to the laws of the
state of the court, competent to do so,
. the judgment is no longer appealable,
. the obligation imposed by the judgment is enforceable according to the
rules relating to the enforceability of judgments in Israel and the
judgment is not contrary to public policy, and
. the judgment may be executed in the state in which it was given.
Even if these conditions are satisfied, an Israeli court will not enforce a
foreign judgment if it was given in a jurisdiction that does not provide for
the enforcement of judgments of Israeli courts, subject to exceptional cases.
An Israeli court also will not enforce a foreign judgment if doing so is likely
to prejudice the sovereignty or security of the State of Israel. An Israeli
court also will not declare a foreign judgment enforceable if:
. the judgment was obtained by fraud;
. there was no due process;
. the judgment was given by a court not competent to do so according to the
rules of private international law in Israel;
. 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
. 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.
Judgments given or enforced by Israeli courts will generally be payable in
Israeli currency at the rate of exchange of the relevant foreign currency on
the day of the payment, but the judgment debtor may also make payment in
foreign currency if the Israeli exchange control regulations then in effect
permit payment in foreign currency. Judgment creditors bear the risk that they
will be unable to convert their awards into foreign currency that can be
transferred out of Israel, the risk of unfavorable exchange rates and the risk
of withholding taxes being imposed upon the transfer of proceeds outside of
Israel.
92
<PAGE>
ACCORD NETWORKS LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1999 ................ F-3
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999...................................................... F-5
Consolidated Statements of Changes in Mandatorily Redeemable Convertible
Preferred Shares and Stockholders' Equity (Deficit) for the Years Ended
December 31, 1997, 1998 and 1999......................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999...................................................... F-7
Notes to Consolidated Financial Statements................................ F-9
Unaudited Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1999 and March 31,
2000 (Unaudited)......................................................... F-32
Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 2000 (Unaudited)...................................... F-33
Condensed Consolidated Statements of Changes in Mandatorily Redeemable
Convertible Preferred Shares and Stockholders' Equity (Deficit) for the
Three Months Ended March 31, 2000 (Unaudited)............................ F-34
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 2000 (Unaudited)...................................... F-35
Notes to Condensed Consolidated Financial Statements (Unaudited).......... F-36
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Accord Networks Ltd.
We have audited the consolidated balance sheets of Accord Networks Ltd. (the
"parent") and its subsidiaries as of December 31, 1998 and 1999 and the related
consolidated statements of operations, changes in mandatorily redeemable
convertible preferred shares and stockholders' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the parent's board of directors
and 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, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973. 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 the parent's board of directors and management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a fair 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 the parent and its subsidiaries as of December 31, 1998 and 1999, and the
consolidated results of their operations and the cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
On June 16, 2000, the Company settled a patent infringement lawsuit for $6.5
million. See note 5a(1) and note 12f.
Kesselman & Kesselman
Certified Public Accountants
(Israel)
Tel-Aviv, Israel
February 6, 2000, except for notes 12e and 12f
the dates of which are May 25, 2000 and June 16, 2000, respectively.
F-2
<PAGE>
ACCORD NETWORKS LTD.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999 1999
------- ------- -----------
PRO FORMA
INFORMATION
(NOTE 13)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (note 5c)
Current assets:
Cash and cash equivalents......................... $ 1,436 $ 5,787 $ 5,787
Accounts and note receivable:
Trade accounts receivable, net of allowance for
doubtful accounts of $125 at December 31, 1999
(note 1l)....................................... 4,259 6,012 6,012
Trade note receivable, net of allowance for
doubtful account of $213 (note 1l).............. -- 80 80
Other (note 8a).................................. 99 1,882 1,882
Inventories (note 8b)............................. 2,141 2,786 2,786
Prepaid expenses and other current assets......... 128 263 263
------- ------- -------
Total current assets............................. 8,063 16,810 16,810
------- ------- -------
Fixed assets (note 2):
Cost.............................................. 2,666 3,204 3,204
Less--accumulated depreciation and amortization... 1,064 1,146 1,146
------- ------- -------
Total fixed assets............................... 1,602 2,058 2,058
------- ------- -------
Other assets (note 8c)............................. 448 1,630 1,630
------- ------- -------
Total assets..................................... $10,113 $20,498 $20,498
======= ======= =======
</TABLE>
F-3
<PAGE>
ACCORD NETWORKS LTD.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1999 1999
-------- -------- -----------
PRO FORMA
INFORMATION
(NOTE 13)
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accruals:
Trade........................................... $ 843 $ 2,220 $ 2,220
Loan from shareholder (note 4).................. 250 -- --
Other (note 8d)................................. 2,080 3,908 3,908
-------- -------- --------
Total current liabilities...................... 3,173 6,128 6,128
Long-term liabilities:
Accrued severance pay (note 3)................... 551 888 888
Deferred revenues................................ 47 26 26
Contingent liabilities and commitments (note 5)...
-------- -------- --------
Total liabilities.............................. 3,771 7,042 7,042
-------- -------- --------
Mandatorily redeemable convertible preferred
shares, NIS 0.01 par value,
series A, B and C (note 6)....................... 19,415 25,916 --
-------- -------- --------
Stockholders' equity (deficit) (notes 6 and 12e):
Ordinary shares of NIS 0.01 par value:
Authorized: December 31, 1998--4,250,000 shares,
December 31, 1999--41,324,561 shares; issued
and outstanding: December 31, 1998--1,277,067
shares, December 31, 1999--1,854,388 shares
(December 31, 1999 pro forma--13,381,258
shares)........................................ 4 6 40
Warrants and options (note 6c and d)............. 7 95 95
Additional paid-in capital....................... 159 26,041
Accumulated deficit.............................. (13,084) (12,720) (12,720)
-------- -------- --------
Total stockholders' equity (deficit)........... (13,073) (12,460) 13,456
-------- -------- --------
$ 10,113 $ 20,498 $ 20,498
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
ACCORD NETWORKS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Revenues (note 8e):
Product sales........................... $ 1,538 $ 12,172 $ 23,366
Support revenues........................ 40 425 1,469
---------- ---------- -----------
Total revenues......................... 1,578 12,597 24,835
---------- ---------- -----------
Cost of revenues:
Product sales........................... 442 2,954 5,329
Support revenues........................ 525 1,523 2,181
---------- ---------- -----------
Total cost of revenues................. 967 4,477 7,510
---------- ---------- -----------
Gross profit............................. 611 8,120 17,325
Operating expenses:
Research and development, net (note 8f). 2,515 2,439 4,109
Selling and marketing, net (note
5b(2)(c)).............................. 1,656 4,398 8,250
General and administrative.............. 1,349 2,233 4,460
---------- ---------- -----------
Total operating expenses............... 5,520 9,070 16,819
---------- ---------- -----------
Operating income (loss).................. (4,909) (950) 506
Interest and other expenses, net (note
8g)..................................... (93) (30) (142)
---------- ---------- -----------
Net income (loss) ....................... $ (5,002) $ (980) $ 364
========== ========== ===========
Earnings (loss) per share (note 8h):
Basic................................... $ (3.92) $ (0.77) $ 0.28
========== ========== ===========
Diluted................................. $ (3.92) $ (0.77) $ 0.02
========== ========== ===========
Weighted average number of shares
outstanding (note 8h):
Basic................................... 1,277,067 1,277,067 1,318,410
========== ========== ===========
Diluted................................. 1,277,067 1,277,067 16,092,564
========== ========== ===========
Pro forma earnings per share (note 1n):
Basic................................... $ 0.03
===========
Diluted................................. $ 0.02
===========
Pro forma weighted average number of
shares outstanding (note 1n):
Basic................................... 11,862,611
===========
Diluted................................. 16,092,564
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
ACCORD NETWORKS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED SHARES AND STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------------
MANDATORILY
REDEEMABLE
CONVERTIBLE WARRANTS
PREFERRED SHARES ORDINARY SHARES AND TOTAL
------------------ ----------------- ADDITIONAL OPTIONS STOCKHOLDERS'
NUMBER OF NUMBER OF PAID-IN (NOTE 6C ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL AND D) DEFICIT (DEFICIT)
---------- ------- ---------- ------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1997.................... 5,627,178 $10,315 1,277,067 $ 4 $ 2 $ (7,102) $(7,096)
Receipts on account of
shares to be allotted
(note 6a(3))........... 361
Amounts assigned to
options granted to non-
employees (note 6c).... * *
Net loss............... (5,002) (5,002)
---------- ------- ---------- --- ------- --- -------- --------
BALANCE AT DECEMBER 31,
1997.................... 5,627,178 10,676 1,277,067 4 2 (12,104) (12,098)
Issuance of series B
convertible preferred
shares, net of share
issue expenses in the
amount of $106 (note
6a(3))................. 4,017,428 8,739
Amounts assigned to
warrants and options
granted to non-
employees (note 6c and
d)..................... 5 5
Net loss............... (980) (980)
---------- ------- ---------- --- ------- --- -------- --------
BALANCE AT DECEMBER 31,
1998.................... 9,644,606 19,415 1,277,067 4 7 (13,084) (13,073)
Issuance of ordinary
shares for cash related
to exercise of stock
options................ 577,321 2 $ 159 161
Issuance of Series A
convertible preferred
shares (note 10b)...... 397,673 1
Issuance of Series B
convertible preferred
shares related to
exercise of warrants
(note 6d).............. 59,152 115
Issuance of series C
convertible preferred
shares, net of share
issue expenses in the
amount of $115
(note 6a (3)).......... 1,425,439 6,385
Amounts assigned to
warrants and options
granted to non-
employees (note 6c and
d)..................... 88 88
Net income............. 364 364
---------- ------- ---------- --- ------- --- -------- --------
BALANCE AT DECEMBER 31,
1999.................... 11,526,870 $25,916 1,854,388 $ 6 $ 159 $95 $(12,720) $(12,460)
========== ======= ========== === ======= === ======== ========
PRO FORMA BALANCE AT
DECEMBER 31, 1999
(unaudited) (note 13)... -- $ -- 13,381,258 $40 $26,041 $95 $(12,720) $ 13,456
========== ======= ========== === ======= === ======== ========
</TABLE>
-----------
* Representing an amount less than $ 1,000.
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
ACCORD NETWORKS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
1997 1998 1999
------- ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for the year....................... $(5,002) $ (980) $ 364
Adjustments required to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization....................... 369 622 834
Provision for doubtful accounts..................... -- -- 338
Increase in provision for vacation and recreation
pay................................................ -- 44 145
Accrued severance pay, net.......................... 60 40 109
Amounts assigned to options and warrants granted to
employees and non-employees (note 6c and d)........ -- 2 103
Interest on principal of convertible loans from
stockholders....................................... 123 84 --
Loss on sale of fixed assets........................ 6 10 14
Changes in operating asset and liability items:
Increase in accounts receivable.................... (924) (2,520) (4,089)
Increase in accounts payable and accruals.......... 540 1,016 2,184
Increase in inventories............................ (1,408) (380) (645)
Increase in deferred revenues...................... 167 197 664
------- ------ ------
(1,067) (885) (343)
------- ------ ------
Net cash provided by (used in) operating
activities........................................ (6,069) (1,865) 21
------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets............................. (393) (1,056) (1,376)
Proceeds from deposit (amounts deposited)............ (120) 25 (107)
Proceeds from sale of fixed assets................... -- 9 112
------- ------ ------
Net cash used in investing activities................ (513) (1,022) (1,371)
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issue of mandatorily redeemable convertible preferred
shares at a premium, net of share issue expenses.... -- 2,633 6,501
Issue of ordinary shares............................. -- -- 146
Convertible loans from stockholders.................. 5,899 -- --
Receipts on account of shares to be allotted......... 361 -- --
Offering costs (carried to deferred charges)......... -- -- (696)
Proceeds from issue of warrants (note 6d)............ -- 3 --
Repayment of long-term loan.......................... -- -- (250)
Proceeds (repayment) of short-term bank credit--net.. 412 (412) --
------- ------ ------
Net cash provided by financing activities............ 6,672 2,224 5,701
------- ------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 90 (663) 4,351
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR................................................. 2,009 2,099 1,436
------- ------ ------
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR... $ 2,099 $1,436 $5,787
======= ====== ======
</TABLE>
F-7
<PAGE>
ACCORD NETWORKS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION--CASH PAID
DURING THE YEAR FOR:
Interest...................................................... $20 $18 $33
=== === ===
Advances to income tax authorities............................ $13 $40 $51
=== === ===
</TABLE>
SUPPLEMENTARY INFORMATION ON FINANCING ACTIVITIES NOT INVOLVING CASH FLOWS:
1) As stated in note 6a(2), in March 1998, loans from stockholders and
accrued interest totaling $6,106,000 were converted into Series B
preferred shares.
2) Deferred charges amounting to $151,000 not paid as of December 31, 1999
will be included in the statements of cash flows upon payment.
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies, applied on a consistent basis, are as
follows:
a. General
1) Nature of operations
a) Accord Networks Ltd. (the "parent") and its wholly-owned
subsidiaries in the United States and the United Kingdom
(collectively, "Accord" or the "company"), are engaged in one
business segment--development, manufacturing and distributing of an
advanced networking and switching system that allows for real-time
interactive visual communications. The parent commenced selling its
system in 1997.
As to the company's principal markets, see note 8e.
b) In November 1999, the parent changed its name to Accord Networks
Ltd. The previous name was Accord Telecommunications Ltd.
c) Accord intends to raise capital through an initial public offering
("IPO") in the second quarter of 2000.
2) Accounting principles
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States
("U.S. GAAP").
3) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
b. Functional currency
The currency of the primary economic environment in which the operations of
Accord are conducted is the U.S. dollar ("$" or "dollar").
Most of Accord's sales are made outside Israel, mainly in the United States, in
dollars. Substantially all of Accord's production costs are comprised of cost
of materials, which are purchased in dollars. The balance of the production
costs is incurred in Israeli currency. Most of the marketing expenses are
incurred outside of Israel in dollars. Thus, the functional currency of the
parent and its subsidiaries is the dollar.
Transactions and balances originally denominated in dollars are presented at
their original amounts. Balances in non-dollar currencies are translated into
dollars using historical and current exchange rates for non-monetary and
monetary balances, respectively. For non-dollar transactions and other items
(stated below) reflected in the statements of operations, the following
exchange rates are used: (i) for transactions: exchange rates at transaction
dates or average rates and (ii) for other items (derived from non-monetary
balance sheet items such as depreciation and amortization, changes in
inventories, etc.)--historical exchange rates. The resulting currency
transaction gains or losses are included in the other income or expenses, as
appropriate.
F-9
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
c. Principles of consolidation
The consolidated financial statements include the accounts of the parent and
its wholly owned subsidiaries. Intercompany balances and transactions have been
eliminated. Profits from intercompany sales, not yet realized, have also been
eliminated.
d. Inventories
Inventories are recorded at the lower of cost or market. Cost is determined as
follows:
.Materials and supplies--on the "first-in, first-out" basis.
.Finished goods (including consignment inventory)--on basis of production
costs:
.Materials and supplies component--on "first-in, first-out" basis.
.Labor and overhead component--on average basis.
e. Fixed assets
Fixed assets are stated at cost and are depreciated by the straight-line method
over their estimated useful life.
f. Deferred charges
Deferred charges represent incremental external costs incurred in connection
with Accord's proposed IPO and will be charged against the proceeds of the
offering, or expensed if there will not be an IPO.
g. Impairment in value of fixed assets
Accord evaluates impairment of long lived assets under the provisions of
Statement of Financial Accounting Standards ("FAS") no. 121 of the Financial
Accounting Standards Board of the United States ("FASB"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
FAS 121 requires that long-lived assets, identifiable intangibles and goodwill
related to those assets to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. Under FAS 121, if the sum
of the expected future cash flows (undiscounted and without interest charges)
of the long-lived assets is less than the carrying amount of those assets, an
impairment loss will recognized. Accordingly, when indicators of an impairment
are present, Accord evaluates the carrying value of the foregoing assets in
relation to the operating performance and future discounted cash flows of the
underlying assets and reduces the carrying value of the long-lived assets to
the amount of discounted future cash flows from the asset. No impairment loss
has been incurred since inception.
h. Deferred income taxes
1) Deferred income taxes are created for temporary differences between the
assets and liabilities as measured in the financial statements and for
tax purposes. Deferred taxes are computed using the tax rates expected
to be in effect when these differences reverse. Valuation allowances in
respect of deferred tax assets are provided when it is more likely than
not that all or part of the deferred tax assets will not be realized.
F-10
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2) Taxes which would apply in the event of disposal of investments in
subsidiaries have not been taken into account in computing the deferred
income taxes, as it is the parent's policy to hold these investments
for the long-term.
i. Revenue recognition
1) Sales of products
Accord recognizes revenue from sale of products to end users and
resellers upon shipment, provided that appropriate signed
documentation of the arrangement, such as a signed contract, purchase
order or letter agreement, has been received, the fee is fixed and
determinable and collectibility is deemed probable. The Company does
not in the normal course of business provide a right of return to its
customers. If uncertainties exist, such as the granting to the
customer of a right of cancellation for up to thirty days, revenue is
recognized when the uncertainties are resolved.
In some cases, Accord grants its customers an evaluation period,
usually several months, to evaluate the system prior to purchase.
Accord does not recognize sales revenue from products shipped to
customers for evaluation until such products are actually purchased.
Until purchased, these products are recorded as consignment inventory
at the lower of cost or market.
2) Revenue from installation, training and support
Accord renders installation, training and support services, which are
priced separately, if the customer so wishes.
Revenue from installation and training services is recognized after
the service is rendered, while revenue from support services is
recognized ratably over the support contract period.
3) Warranty costs
Accord provides a warranty for a three month period on software and up
to one year on hardware. A provision is recorded at the time of the
sale of the related product for probable costs in connection with
warranties, based on Accord's experience and engineering estimates.
j. Research and development expenses
Research and development expenses are charged to the statements of operations
as incurred. Participations from the government of Israel and from research
foundations for development of approved projects are recognized as a reduction
of expenses as the related costs are incurred. No liability is recorded for
funds received from the government of Israel because Accord is not obligated to
repay any funds regardless of the outcome of the research and development.
k. Advertising costs
Advertising costs are expensed as incurred. Advertising expenses for the years
ended 1997, 1998 and 1999 were $410,000, $595,000 and $788,000, respectively.
F-11
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
l. Concentration of credit risks and allowance for doubtful accounts
Most of Accord's sales are made in the U.S. and Europe, to a large number of
customers. Accordingly, Accord's trade accounts receivable balances do not
represent a substantial concentration of credit risk.
The provision for doubtful accounts is principally determined for specific
debts doubtful of collection. The provision at December 31, 1999 was $338,000.
No provision for bad debts was necessary at December 31, 1997 and 1998.
m. Cash equivalents
Accord considers all highly liquid investments, with an original maturity of
three months or less when issued, that are not restricted as to withdrawal or
use, to be cash equivalents.
n. Earnings (loss) per share ("EPS")
1) Basic EPS are computed based on the weighted average number of ordinary
shares outstanding during each year.
2) Since the basic EPS for the years ended December 31, 1997 and 1998
represents a loss per share, the effect of including the incremental
shares from assumed exercise of warrants and options and from assumed
conversion of convertible loans in EPS computation is anti-dilutive,
and accordingly the basic and diluted EPS are the same.
3) Diluted EPS for the year ended December 31, 1999 were computed using
the weighted average number of shares outstanding during the year plus
the incremental shares from the assumed exercise of convertible
securities, warrants and options granted by the Parent.
4) The pro forma EPS for the year ended December 31, 1999 are computed
assuming that conversion of the participating preferred shares into
ordinary shares occurred on January 1, 1999 or at their issuance date,
if later.
o. Comprehensive income (loss)
Accord adopted FAS 130, "Reporting Comprehensive Income." FAS 130 requires
reporting and display of comprehensive income (loss) and its components, in a
full set of general-purpose financial statements. Accord has no comprehensive
income (loss) components other than profit (loss) for the reported years.
p. Recently issued accounting pronouncement
In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments
and Hedging Activities." FAS 133 established a new model for accounting for
derivatives and hedging activities. FAS 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. FAS 133 is effective for calendar
year companies beginning January 1, 2001. Accord does not currently use
derivative instruments.
F-12
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2 FIXED ASSETS
a. Grouped by major classifications, fixed assets are composed as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
IN YEARS DECEMBER 31,
--------- -------------
1998 1999
------ ------
(In
thousands)
<C> <S> <C> <C>
COST:
7 Machinery and equipment.......................... $ 83 $ 86
7 Office furniture................................. 191 292
3-5 Computers and peripheral equipment............... 2,128 2,751
7 Motor vehicles................................... 192 25
* Leasehold improvements........................... 72 50
------ ------
2,666 3,204
Less--accumulated depreciation and
amortization.................................... 1,064 1,146
------ ------
$1,602 $2,058
====== ======
</TABLE>
------------------
* Leasehold improvements are amortized by the straight-line method over the
lesser of the term of the lease or the estimated useful life of the
improvements.
b. Depreciation and amortization expenses related to fixed assets totaled
$69,000, $22,000 and $834,000 for the years ended December 31, 1997, 1998
and 1999, respectively.
c. Refer to Note 5c as to credit collateralized by the assets.
d. During the year 1999, fully depreciated assets were written off. The cost
of these assets totaled $679,000.
NOTE 3 ACCRUED SEVERANCE PAY
a. Israeli labor laws and agreements require payment of severance pay upon
dismissal of an employee or upon termination of employment in specified
circumstances. The parent's severance pay for its employees, based upon
length of service and the latest monthly salary (one month's salary for
each year worked), is mainly covered by purchased managerial insurance
policies. The value of these policies is recorded as an asset in the
balance sheets. Under labor agreements, these insurance policies are,
subject to specified limitations, the property of the employees.
b. The U.K. subsidiary has defined contribution plans for the benefit of its
employees. The subsidiary's contributions under these plans are based on
specified percentages of pay.
c. The changes in accrued severance pay for 1998 and 1999 represent an
increase in the liability of approximately $54,000 and $337,000, after
benefits paid of approximately $142,000 and $37,000, respectively.
d. The net amounts of severance pay charged to income in the years ended
December 31, 1997, 1998 and 1999 were approximately $171,000, $193,000
and $239,000, respectively.
F-13
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4 LOAN FROM SHAREHOLDER
The loan from a shareholder was linked to the dollar and was interest free. The
loan was repayable only after aggregate sales of Accord's products exceed $20
million and in case there was a positive cash flow. The loan was repaid in
November 1999.
NOTE 5 CONTINGENT LIABILITIES AND COMMITMENTS:
a. Contingent liabilities
1) In November 1998, a competitor (the "plaintiff") commenced an action
in the United States District Court, District of Massachusetts,
against the U.S. subsidiary of the parent, alleging that the
subsidiary infringes U.S. patents held by the plaintiff. In June 1999,
the plaintiff added the parent as a party to the lawsuit.
The plaintiff seeks preliminary and permanent injunctive relief that,
if awarded, could prohibit the parent and the subsidiary from using
certain technology in use in Accord's systems. The plaintiff also
seeks unspecified damages, including treble damages. In its answers
to the complaints, Accord denied the alleged infringement and
asserted that the patents held by the plaintiff were invalid, void
and/or unenforceable. Accord also filed counterclaims against the
plaintiff asserting that they were entitled to a declaratory judgment
that the patents were not infringed and were invalid, void and/or
unenforceable.
Accord intends to defend vigorously against these allegations.
However, due to the inherent uncertainties in the litigation process
and the judicial system and the early stage of this litigation,
management is unable to predict the outcome or estimate what, if any,
impact the outcome of this litigation may have on the future
operating results of the company. Accordingly, no provision in
respect of this matter has been made. Should the resolution be in
favor of the plaintiff, it may have a material adverse effect on the
company.
The above litigation was settled on June 16, 2000 for $6.5 million.
See note 12f.
2) In 1999, the U.S. subsidiary received a letter from a third party
alleging that Accord's system supports standards that may fall within
the scope of one of the third party's patents. The third party offered
the U.S. subsidiary a license, and the two parties are currently
holding negotiations. Due to the uncertainties involved in this
matter, management is unable to estimate the ultimate outcome thereof
at this time. Accordingly, no provision has been made in respect of
this matter.
b. Commitments
1) Leases
a) Accord's facilities and some vehicles are leased under operating
lease agreements for periods ending in 2000-2005.
F-14
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
b) Future minimum lease commitments under non-cancelable operating
lease agreements are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
Years ending December 31:
2000........................................ $ 965
2001........................................ 896
2002........................................ 694
2003........................................ 403
2004........................................ 403
Thereafter.................................. 101
------
$3,462
======
</TABLE>
c) Lease expenses totaled $203,000, $298,000 and $716,000 in the
years ended December 31, 1997, 1998 and 1999, respectively.
d) On January 10, 2000, the U.S. subsidiary entered into agreement to
lease a new office space. The lease will expire on December 31,
2003. The total annual lease payment for the years 2000, 2001,
2002 and 2003 will approximate $254,000, $311,000, $318,000 and
$325,000, respectively.
2) Royalties
a) Accord is committed to pay royalties to the chief scientist of the
Israeli ministry of industry and trade on proceeds from sales of
systems resulting from two research and development projects in
which the chief scientist participates by way of grant, at
progressive royalty rates: 3% for the first three years of system
sales by the company, 4% for the next three years, 5% thereafter,
up to 100% of the cumulative amount of participation received by
Accord. At the time the funding was received, successful
development of the related projects was not assured.
As of December 31, 1999, the balance of the amount received, which
is subject to repayment under these royalty agreements on future
sales, is $4,375,000.
b) Accord is committed to pay royalties to the Israel--U.S.
binational industrial research and development foundation ("BIRD")
on the proceeds from sale, leasing or other marketing or
commercial exploitation of the results of research and development
in which BIRD participated by way of a grant. Royalties up to the
amount of 150% of the grant will be paid at the rate of 5%, up to
the amount of the grant; once the amount of the grant is covered,
royalties will be payable at the rate of 2.5%, until additional
royalties in an amount of 16%-50% of the grant amount have been
paid to BIRD.
As of December 31, 1999, the balance of the amount subject to
repayment under this royalty agreement on future sales is
$718,000. This amount represents 150% of the balance of the grant
received.
c) Accord was committed to pay royalties to the government of Israel
related to marketing expenses in which the government participated
by way of grants amounting to approximately $312,000, which were
received in 1996 through 1998. The royalties were payable at the
rate
F-15
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of 3% of the increase in export sales after Accord began receiving
marketing grants, up to the amount of the dollar-linked grant
received.
As of December 31, 1999, the entire royalty commitment relating to
this agreement was recorded in the financial statements.
d) Royalty expenses related to these commitments for the years ended
December 31, 1997, 1998 and 1999 were approximately $137,000,
$709,000 and $931,000, respectively.
c. Line of credit facility
In March 1999, Accord entered into a line of credit agreement with a bank.
Under this agreement, Accord may borrow up to $4,000,000 for any purpose, for
a period of two years. The interest on the outstanding line of credit is
calculated daily at the LIBOR plus 1.5%. The line of credit is collateralized
by all the parent's assets.
In connection with the warrants granted to the bank, see note 6c(3).
NOTE 6 MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES AND COMMON
STOCKHOLDERS' EQUITY
a. Mandatorily redeemable convertible preferred shares
1) Mandatorily redeemable convertible preferred shares consist of the
following at December 31, 1998 and 1999 (in thousands, except share
amounts):
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES LIQUIDATION
AUTHORIZED OUTSTANDING CARRYING AMOUNT AMOUNT
------------------- -------------------- ---------------- ---------------
1998 1999 1998 1999 1998 1999 1998 1999
--------- --------- --------- ---------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Series A................ 3,750,000 3,750,000 3,292,357 3,690,030 $ 5,406 $ 5,407 $ 5,268 $ 5,904
Series B................ 8,500,000 8,500,000 6,352,249 6,411,401 14,438 14,553 14,229 14,362
Series C................ -- 1,425,439 -- 1,425,439 -- 6,500 -- 6,500
--------- ---------- ------- ------- ------- -------
9,644,606 11,526,870 19,844 26,460 $19,497 $26,766
========= ========== ======= =======
Net of issuance costs... (429) (544)
------- -------
$19,415 $25,916
======= =======
</TABLE>
2) The preferred shares (all series) confer on holders the right to
convert them into a like number of ordinary shares at any time, subject
to adjustments, and have the same rights as the rights of the ordinary
shares (except for 733,614 Series C preferred shares which have no
voting rights), with a preference in liquidation aggregating (1) their
purchase price (which, as of December 31, 1999, approximates $27
million) and (2) the pro rata share of those shares in the assets of
Accord then available for distribution on an as-converted basis. The
preferred shares will be automatically converted upon the occurrence of
an IPO of Accord into a like number of ordinary shares (provided that
the IPO price per share is not less than $6.72, adjusted for share
combination or subdivision or other recapitalization of Accord's
shares, and net proceeds to Accord are not less than $15 million).
The stockholders of the series C preferred shares have the right to
purchase additional series C preferred shares at nominal value per
share if Accord issues equity securities to the plaintiff as a
settlement of the patent infringement suit (see note 5a(1)). This right
will be terminated upon an IPO.
F-16
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the articles of association of Accord, specified events can
require repayment of the amounts paid by the preferred shareholders.
These events relate to a change in control of Accord and include: a
merger with another company whereby the shareholders of Accord lose
voting control subsequent to the merger; a corporate reorganization in
which Accord is not the continuing or surviving entity; the sale of all
or substantially all of Accord's assets; and a transaction or series of
related transactions in which more than 50% of the outstanding share
capital following the transaction is held by a shareholder or group of
shareholders that did not hold shares of Accord prior to the
transaction or series of transactions.
The occurrence of any of these events is deemed to be a winding up of
Accord. Upon any of these events, the preferred shareholders will be
paid in cash and/or securities the amounts that would be due to them
upon an actual liquidation of Accord and the preferred shareholders can
vote to require an immediate winding-up of Accord.
These rights expire upon the conversion of the preferred shares into
ordinary shares, which will automatically occur upon an IPO as stated
above. However, because the occurrence of these events is not solely
within the control of Accord, the preferred shares have been presented
outside of permanent equity in the historical balance sheets.
3) During the second half of 1997, Accord raised $6,260,000 from its
stockholders, of which approximately $361,000 was received on account
of series B preferred shares to be allotted and the remaining
$5,899,000 was received under loans convertible into series B preferred
shares. The loans were linked to the dollar and bore interest of six
month LIBOR plus 1%. The interest expense charged in respect of those
loans in the years ended December 31, 1997 and 1998 was $123,000 and
$84,000, respectively.
In March 1998, Accord issued 2,633,499 series B preferred shares in
respect of conversion of these loans, including accumulated interest
and issued 1,383,929 series B preferred shares for $3,100,000 in cash
(including the $361,000 received on account in 1997 and before
deduction of $106,000 for share issuance expenses), all at $2.24 per
share.
See note 10b for shares issued in 1999 under anti-dilutive rights of a
shareholder.
In August 1999, Accord issued 1,425,439 series C preferred shares to
two investors at a purchase price of $4.56 per share for a total of
$6,500,000 in cash (before deduction of $115,000 for share issuance
expenses).
b. Employee stock option plans
1) General
a) In 1995, Accord's board of directors approved an employee stock
option plan (the "plan"), pursuant to which 3,600,000 ordinary
shares were reserved for issuance upon the exercise of options to
be granted to Accord's employees (out of which 245,227 shares,
fully paid, were deposited with a trustee). Most of the options
will vest ratably over a period of four years from the date of
beginning of employment of each employee, or the grant date as
determined by the stock option committee, provided the employee is
still in Accord's employ. Each option can be exercised to purchase
one ordinary share of Accord. Any option not exercised by May 6,
2005 will expire, unless extended by the board of directors.
Through December 31, 1998 and 1999, 2,374,082 options and 3,556,119
options, respectively (including 1,075,918
F-17
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
options and 1,000,455 options, respectively, to senior employees),
were granted under the plan. The other options are to be granted
from time to time in the future, as determined by the board of
directors.
In addition, 497,734 options were granted to a former employee in
1996 which expire in May 2005.
b) On January 26, 2000, the parent's board of directors approved an
additional 1,500,000 ordinary shares to be reserved for issuance
upon the exercise of options to be granted to Accord's employees
under the Accord Networks Ltd. share ownership and option plan
(2000) and the Accord Networks Ltd. share option plan (2000).
In addition, in January 2000, Accord granted 848,500 options to
employees, at an exercise price of $8.50. Each option can be
exercised to purchase one ordinary share of NIS 0.01 par value of
Accord.
The grant of options under the employee stock option plans to the
parent's Israeli employees (1,748,250 options) is subject to the
terms stipulated by section 102 of the Israeli Income Tax Ordinance.
The Ordinance provides that the parent will be allowed to claim as
an expense for tax purposes the amounts credited to the employees as
a benefit, when the related tax is paid by the employee.
c) In November 1999, a former employee exercised 239,162 options to
purchase 239,162 ordinary shares granted in prior years for an
exercise price of $68,000.
2) Accounting treatment of the employee stock option plan
a) Accord accounts for its employee stock option plan using the
treatment prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") as permitted
by FAS 123. Under APB 25, compensation cost for employee stock
option plans is measured using the intrinsic value based method of
accounting.
The options were granted at exercise prices which represent the fair
value of the ordinary shares at the date of issuance. Since the
options granted to Accord's employees have no intrinsic value at
their grant dates, no compensation cost was recorded.
F-18
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
b) Had compensation cost for the plan been determined based on the fair value
at the grant dates, consistent with the method of FAS 123, the parent's net
income (loss) and earnings (loss) per share would have decreased (increased)
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1997 1998 1999
------- ------- -----
(In thousands, except
per share data)
<S> <C> <C> <C>
Net income (loss):
As reported.......................................... $(5,002) $ (980) $ 364
======= ======= =====
Pro forma............................................ $(5,042) $(1,059) $ (5)
======= ======= =====
Earnings (loss) per share--basic:
As reported--basic................................... $ (3.92) $ (0.77) $0.28
======= ======= =====
Pro forma--basic..................................... $ (3.95) $ (0.83) $0.00
======= ======= =====
Earnings (loss) per share--diluted:
As reported--diluted................................. $ (3.92) $ (0.77) $0.02
======= ======= =====
Pro forma--diluted................................... $ (3.95) $ (0.83) $0.00
======= ======= =====
</TABLE>
F-19
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3) A summary of the status of the plan as of December 31, 1997, 1998, 1999, and
changes during the years ended on those dates, is presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1998 1999
------------------------- ------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
--------------- -------- --------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year...... 158,545 * 2,144,152 $0.14 2,815,152 $0.24
Changes during the year:
Granted................ (/1/) 2,021,217 $0.15 745,500 $0.53 1,238,162 $4.02
Exercised (/3/)........ (18,361) $0.01 (38,303) $0.10 (/2/) (571,125) $0.26
Forfeited.............. (17,249) * (36,197) $0.08 (56,125) $1.20
--------------- --------- --------------
Options outstanding at
end of year............ 2,144,152 $0.14 2,815,152 $0.24 3,426,064 $1.58
=============== ========= ==============
Options exercisable at
end of year............ 226,656 683,642 1,308,601
=============== ========= ==============
Weighted average fair
value of options
granted during the
year (/4/)............. $0.10 $0.31 $2.33
------------------
*Less than $0.01
(/1/Including)options
granted to the CEO.. 650,918 $0.23 150,000 $1.25
=============== ==============
(/2/Including)exercise of 325,463 options by the CEO.
</TABLE>
(/3/Exercised)to purchase fully paid shares held by a trustee.
(/4/The)fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model, based on the following weighted
average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Dividend yield............................................. --% --% --%
=== === ===
Expected volatility........................................ 50% 50% 50%
=== === ===
Risk-free interest rate.................................... 5.9% 5.4% 5.4%
=== === ===
Expected average life--in years............................ 4 4 4
=== === ===
</TABLE>
F-20
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AT REMAINING AVERAGE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
GRANTING PERIODS PRICE 1999 LIFE PRICE 1999 PRICE
---------------- ----------- ------------ ----------- -------- ------------ --------
YEARS
-----------
<S> <C> <C> <C> <C> <C> <C>
Until May 1997.......... $0.00-$0.01 647,291 5.35 * 629,537 *
May 1997-March 1998..... $0.22-$0.23 1,165,273 5.35 $0.23 502,970 $0.22
May 1998................ $0.50 214,000 5.35 $0.50 97,563 $0.50
July 1998-February 1999. $1.00-$1.25 649,500 5.35 $1.18 78,531 $1.11
April 1999-June 1999.... $2.00-$2.50 327,000 5.35 $2.18 -- --
August 1999 and
thereafter............. $8.50 423,000 5.35 $8.50 -- --
--------- ---------
3,426,064 $1.58 1,308,601 $0.19
========= =========
</TABLE>
------------------
* Representing an amount lower than $ 0.01.
c. Options and warrants to non-employees
1) In January 1994, Accord issued 14,625 options to consultants for the
purchase of ordinary shares at an exercise price per share of NIS 0.01.
These options were exercisable and fully vested when issued and expire
December 31, 2004. In 1996, Accord issued 6,696 options to a consultant
to purchase ordinary shares at an exercise price per share of NIS 0.01.
The options were exercised in December 1999. In June 1997, Accord
issued 5,000 options to a consultant at an exercise price per option of
$2.24. These options expire in May 2005 and vest ratably over a four
year service period ending in April 2001.
2) Warrant granted to a bank
On April 28, 1999, Accord granted a warrant to a bank in connection
with a two-year credit line (see Note 5c). The warrant is exercisable
for a period of three years to purchase the number of Accord's ordinary
shares of NIS 0.01 par value, having an aggregate exercise price amount
equivalent to $500,000, at an exercise price per ordinary share
calculated as follows:
a) If during the year ending April 28, 2000, Accord undergoes a
"liquidity event", as defined in the warrant (issuance of equity
securities to new investors, sale of most of Accord's assets or a
merger), the exercise price will be equal to 80% of the price per
share paid by the purchasers of Accord's securities in the
liquidity event.
b) If during the twelve month period ending April 28, 2000, Accord
does not undergo a liquidity event, then the exercise price will be
the lower of (i) the price per share paid by purchasers of Accord's
securities in a liquidity event prior to the exercise of the
warrant; or (ii) a price per share reflecting an Accord valuation
of $80 million.
F-21
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In August 1999, Accord went through a liquidity event (see (a) above);
accordingly, the warrant entitles the bank to purchase 137,061 ordinary
shares at an exercise price of $3.65 per share.
3) Accounting treatment of options and warrants granted to non-employees
Accord accounts for the options and the warrant granted to non-
employees in exchange for services received using the fair value based
method of accounting, as prescribed by FAS 123, based on the fair value
of the equity instruments issued, which is more reliably measurable
than the value of the services received.
The fair value of equity instruments issued in exchange for services
received is charged against income as follows: exercisable and fully
vested equity instruments--at date of grant; non-vested equity
instruments--over the vesting period, based on the fair values of the
options at each interim financial reporting dates during the vesting
period. The fair value of the warrant granted to the bank (see (3)
above) is charged against interest expense over the credit period.
The following weighted average assumptions were used for estimating the
fair value of the options under the Black-Scholes option-pricing model:
weighted average dividend yield of 0% for all grants; expected
volatility of 50% for all grants; risk-free interest rate (in dollar
terms) of 4.5% for the 14,625 options granted in 1994 and in respect of
the 5,000 options granted in 1997: December 31, 1997--6.0%, December
31, 1998--5.0%, December 31, 1999--6.0%, April 8, 1998--5.5%, April 8,
1999--5.0%.
Service costs charged against income in respect of equity instruments
granted to non-employees were less than $ 1,000 in the years ended
December 31, 1997; in the years ended December 31, 1998 and 1999, these
costs totaled $2,000 and $88,000, respectively.
d. Warrants issued to stockholders
In March 1996 and 1998, Accord issued 583,705 warrants and 1,205,228 warrants,
respectively, for total consideration of $5,000, to several stockholders,
entitling their holders to purchase an aggregate of 1,788,933 series B
preferred shares of NIS 0.01 par value at an exercise price of $2.24 per share.
If not exercised, 583,705 warrants will be void after January 31, 2000, and the
remaining 1,205,228 warrants will be void after January 31, 2002, or the
occurrence of an IPO, if earlier. As of December 31, 1999, 59,152 warrants were
exercised to purchase series B preferred shares. In January 2000, 524,553
warrants were exercised to purchase series B preferred shares (see note 12a).
Holders of the 1,205,228 warrants are entitled to exercise the warrants in a
net exercise, which means that the warrant holders would receive less than the
total number of shares into which the warrant was exercisable. The number of
shares into which the warrants can be converted in a net exercise will vary
depending on the fair value of the shares at the date of exercise. Preferred
shares issued upon exercise of the warrants will be automatically converted
into ordinary shares upon the occurrence of an IPO.
e. Dividends
In the event cash dividends are declared by the parent, the dividends will be
paid in Israeli currency. Under current Israeli regulations, any cash dividend
in Israeli currency paid in respect of ordinary shares purchased by non-
residents of Israel with non-Israeli currency may be freely repatriated in that
non-Israeli currency, at the rate of exchange prevailing at the time of
conversion.
F-22
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
f. Non-employee director stock option plan
On January 26, 2000, the board of directors adopted the Accord non-
employee director stock option plan (2000), which provides for the grant
of options to our non-employee directors as follows:
. an option to purchase 25,000 shares on the later of the date of
approval of the plan by the shareholders, or the date the person first
becomes a non-employee director; and
. an option to purchase 2,500 shares each year the non-employee director
serves as a director.
The maximum number of ordinary shares currently subject to the plan is
200,000. The exercise price of options granted under the plan is the fair
value of the ordinary shares on the date of grant or is determined in the
discretion of the board of directors.
NOTE 7 TAXES ON INCOME
a. The parent
1)Tax benefits under the Law for the Encouragement of Capital Investments,
1959:
Under this law, by virtue of the "approved enterprise" status granted to
certain production facilities, the parent is entitled to various tax
benefits, as follows:
a) Reduced tax rates
During a seven or ten year period commencing in the first year in
which the parent earns taxable income from the "approved enterprise"
(provided the maximum period to which it is restricted by law has not
elapsed), the following tax rates apply:
(1) Corporate tax of 25%, instead of the regular tax rate (see (4)
below); and
(2) Tax exemption on income from approved enterprise in respect of
which the parent has elected the "alternative benefits" (involving
waiver of investment grants); the length of the exemption period
is two years, after which the income from this enterprise is
taxable at the rate of 25% for eight years.
In the event of distribution of cash dividends out of income which
was tax exempt as above, the parent would have to pay the 25% tax
in respect of the amount distributed, as stated in (a) above.
The period of benefits has not yet commenced.
Because of these reduced tax rates, the parent will not be subject
to tax until two years after all accumulated carryforward tax
losses have been offset by taxable income. There are no reconciling
items between the statutory rate of zero percent and the effective
rate of zero percent of the parent.
F-23
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
b) Accelerated depreciation
The parent is entitled to claim accelerated depreciation for five tax
years commencing in the first year of operation of each asset, in
respect of buildings, machinery and equipment used by the approved
enterprise.
c) Conditions for entitlement to the benefits
The entitlement to the above benefits is conditional upon the parent's
fulfilling the conditions stipulated by this law, regulations
published thereunder and the instruments of approval for the specific
investments in approved enterprise. In the event of failure to comply
with these conditions, the benefits may be cancelled and the parent
may be required to refund the amount of the benefits, in whole or in
part, with the addition of interest.
2) The Law for the Encouragement of Industry (Taxation), 1969
The parent is an "industrial company" as defined by this law and for
that reason is entitled to specified tax benefits, mainly accelerated
depreciation as prescribed by regulations published under the Income
(Inflationary Adjustments) Law, 1985 (see (3) below), the right to
claim public issuance expenses as a deduction for tax purposes and
amortization of patents and certain other intangible property rights.
3) Measurement of results for tax purposes under the Income Tax
(Inflationary Adjustments) Law, 1985 (the "Inflationary Adjustments
Law").
Under this law, results for tax purposes are measured in real terms, in
accordance with the changes in the Israeli consumer price index. As
explained in note 1b, the financial statements are measured in dollars.
The difference between the changes in the Israeli consumer price index
and the exchange rate of the dollar, both on annual and cumulative
basis, causes a difference between taxable income and income reflected
in these financial statements.
4) Tax rate applicable to income of the parent not derived for an
approved enterprise.
The parent's income not derived from an approved enterprise is taxed at
the regular rate of 36%.
b. The subsidiaries
The subsidiaries of the parent are taxed under the laws of their countries of
incorporation.
c. Carryforward tax losses
Accord has carryforward tax losses as of December 31, 1999 in the amount of
approximately $8.0 million (of which $4.5 million is associated with the
parent).
Under the inflationary adjustments law, carryforward tax losses of the parent
are linked to the Israeli consumer price index and can be utilized
indefinitely.
F-24
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
d. Deferred income taxes
1) As stated in a(1)(a)(2) above, in the event of distribution of cash
dividends out of tax-exempt income of approved enterprises, the parent
will be subject to tax at the rate of 25% in respect of the amount
distributed. The parent intends to permanently reinvest the amounts of
tax exempt income. Accordingly, no deferred taxes were included in
these financial statements in respect of tax exempt income.
Also, the parent expects that during the period its tax losses (see c.
above) are utilized, its income would be substantially tax exempt.
Accordingly, no deferred tax assets have been included in these
financial statements in respect of the parent's carryforward tax
losses.
2) The deferred tax asset in respect of the balances of temporary
differences (mostly in respect of carryforward losses of the
subsidiaries) and the related valuation allowance, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1998 1999
-------------
(In
thousands)
<S> <C> <C>
Deferred tax assets........................................ $ 821 $ 1,587
Less--valuation allowance.................................. 821 1,587
----- -------
-- --
===== =======
</TABLE>
e. Tax assessments
The parent and its subsidiaries have not been assessed for tax purposes since
incorporation.
F-25
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8 FINANCIAL STATEMENT INFORMATION
Balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1998 1999
------ ------
(In
thousands)
<S> <C> <C>
A.ACCOUNTS RECEIVABLE--OTHER:
Israeli government departments and agencies:
Participation in research and development expenses (note
5b(2)(a))*.................................................... $ -- $1,520
Income and value added taxes refundable........................ 99 179
Other.......................................................... -- 183
------ ------
$ 99 $1,882
====== ======
* This account receivable represents amounts approved by the government of
Israel and reflects a reimbursement of research and development
expenses. All amounts related to 1998 were received during 1998.
B.INVENTORIES:
Materials and supplies......................................... $1,296 $1,725
Finished goods ................................................ 568 577
Consignment/inventory.......................................... 277 484
------ ------
$2,141 $2,786
====== ======
C.OTHER ASSETS:
Severance pay funded (note 3).................................. $ 388 $ 616
Long-term deposit.............................................. 60 167
Deferred charges (note 1f)..................................... -- 847
------ ------
$ 448 $1,630
====== ======
D.ACCOUNTS PAYABLE--OTHER:
Payroll and payroll related.................................... $ 421 $ 670
Provision for vacation and recreation pay...................... 312 457
Accrued expenses............................................... 1,030 1,520
Advances from customers........................................ -- 259
Deferred revenues.............................................. 317 1,002
------ ------
$2,080 $3,908
====== ======
</TABLE>
F-26
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Statements of operations:
E. REVENUES--CLASSIFIED BY GEOGRAPHIC AREA (BASED ON THE LOCATION OF THE
CUSTOMERS):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------
1997 1998 1999
------ ------- -------
(In thousands)
<S> <C> <C> <C>
North America................................... $1,182 $ 9,788 $19,892
The rest of the world:
Europe........................................ 331 2,555 4,039
Far East...................................... 65 57 536
Israel........................................ -- 197 368
------ ------- -------
Total........................................... $1,578 $12,597 $24,835
====== ======= =======
F. RESEARCH AND DEVELOPMENT EXPENSES:
Gross expenses incurred......................... $3,711 $ 3,585 $ 5,732
Less--royalty-bearing participation (note
5b(2)a)........................................ 1,196 1,146 1,623
------ ------- -------
Research and development, expenses, net ........ $2,515 $ 2,439 $ 4,109
====== ======= =======
G. INTEREST AND OTHER INCOME (EXPENSES):
Interest income (expenses)--net:
Interest income--net.......................... $ 48 $ 61 $ (4)
Interest expense on convertible loans
from stockholders............................ (123) (84) --
------ ------- -------
(75) (23) (4)
Other expenses--net............................. (18) (7) (138)
------ ------- -------
Interest and other income (expenses), net....... $ (93) $ (30) $ (142)
====== ======= =======
H. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Allowance at the beginning of the year.......... $ --
Bad debt expense................................ 338
-------
Allowance at the end of the year................ $ 338
=======
</TABLE>
F-27
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
i. The following table sets forth the computation of historical basic and
diluted earnings (loss) per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
NUMERATOR--IN THOUSANDS:
Net income (loss) to stockholders........... $ (5,002) $ (980) $ 364
Interest on convertible loans from
stockholders............................... 123 84 --
--------- ---------- ----------
Numerator for diluted earnings per share.... $ (4,879) $ (896) $ 364
========= ========== ==========
DENOMINATOR:
Denominator for basic earnings per share--
weighted average
number of shares........................... 1,277,067 1,277,067 1,318,410
Effect of dilutive securities:
Convertible preferred shares............... 5,627,178 8,826,657 10,544,201
Warrants to stockholders................... -- -- 1,063,646
Warrants to consultants.................... 21,140 10,169 58,469
Employee stock option and invested shares.. 803,877 1,991,841 3,107,838
Convertible loans from stockholders........ 772,341 666,044 --
--------- ---------- ----------
Denominator for diluted earnings per share--
adjusted weighted
average number of shares................... 8,501,603 12,771,778 16,092,564
========= ========== ==========
</TABLE>
The effect of the inclusion of the dilutive securities in 1997 and 1998 is
anti-dilutive.
NOTE 9 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
a. Monetary balances in non-dollar currencies
1) As follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------
ISRAELI
POUNDS STERLING CURRENCY-UNLINKED
--------------- -----------------
(In thousands)
<S> <C> <C>
ASSETS--CURRENT:
Cash and cash
equivalents.... $ 181 $ 14
Trade
receivables.... -- 101
Other
receivables.... 36 1,690
----- ------
$ 217 $1,805
===== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------
ISRAELI
POUNDS STERLING CURRENCY-UNLINKED
--------------- -----------------
(In thousands)
<S> <C> <C>
LIABILITIES--
CURRENT:
Trade payables.. $ 202 $1,234
Other payables.. 135 439
----- ------
$ 337 $1,673
===== ======
</TABLE>
F-28
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2) The above balances do not include Israeli currency balances linked to
the dollar. Data regarding the rate of exchange and the Israeli CPI:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Rate of devaluation (revaluation) of
Israeli currency against the dollar... 8.8% 17.6% (0.2)%
Rate of increase in the Israeli CPI.... 7.0% 8.6% 1.3 %
Exchange rate of one dollar (at year
end).................................. NIS 3.536 NIS 4.160 NIS 4.153
</TABLE>
b. Fair value of financial instruments
The financial instruments of Accord consist of non-derivative assets
and liabilities (items included in working capital, long-term deposits
and long-term loan).
In view of their nature, the fair value of financial instruments
included in working capital of the group is usually identical or close
to their carrying value.
The fair value and the carrying value of long-term deposits at December
31, 1999 are approximately $117,000 and $143,000, respectively;
December 31, 1998--$51,000 and $60,000, respectively.
The fair value and the carrying value of long-term loan from
stockholder at December 31, 1998 are $222,000 and $250,000,
respectively.
The fair value of long-term deposits and the long-term loan above is
based on the present value of cash flows, based on the current
borrowing market rates for similar types of borrowing arrangements.
NOTE 10 BALANCES AND TRANSACTIONS WITH RELATED PARTIES
a. Balances with related parties:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Current liabilities........................................ $ 31 $ 66
Loan from stockholder (Note 4)............................. 250 --
------- ------
$ 281 $ 66
======= ======
</TABLE>
b. In October 1998, Accord terminated a joint research and development
agreement with a stockholder, which was originally entered into in
1995. Under the terms of the termination, the stockholder was granted a
royalty-free license to sell some of the technology that was jointly
developed by the two companies. Additionally, in March 1999 Accord
issued to the stockholder 397,673 series A preferred shares in full and
final satisfaction of the anti-dilution rights provided under a 1995
subscription agreement. The estimated value (approximately $1,656,000)
of the anti-dilution right, which related to the stockholder's original
preferred share purchase in 1995, and which occurred concurrently with
the research and development agreement, was recorded as mandatorily
redeemable convertible preferred shares and expense in 1995. Additional
share issuances under this anti-dilution right, including the final
397,673 shares, are recorded at the nominal amount paid by the
stockholder.
F-29
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
c. One of the members of the board of directors of Accord is also a member
of the board of directors of the main supplier of the digital signal
processors used in Accord's systems. Purchases from this supplier
totalled $16,427 and $30,845 in 1998 and 1999, respectively.
NOTE 11 SEGMENT INFORMATION
Accord adopted the provisions of FAS 131 which sets out disclosure and
reporting requirements in respect of segments.
Management identifies two reportable operating segments that are differentiated
by the locations of their customers: (1) the United States and (2) the rest of
the world, mainly Europe. The parent evaluates performance of these two
operating segments based on revenues only. As to revenue classified by
geographic area--see note 8e. Segment asset information is not provided since
Accord does not evaluate performance based on those assets.
COMPANY-WIDE DISCLOSURE REGARDING ITS ASSETS
Accord's total assets and long-lived assets, net of accumulated depreciation
and amortization, are located in the following geographical areas:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
-------------- --------------
LONG- LONG-
TOTAL LIVED TOTAL LIVED
ASSETS ASSETS ASSETS ASSETS
------- ------ ------- ------
<S> <C> <C> <C> <C>
Israel......................................... $ 5,299 $ 985 $10,425 $1,189
North America.................................. 4,620 500 9,659 725
United Kingdom................................. 194 117 361 144
------- ------ ------- ------
Total........................................ $10,113 $1,602 $20,445 $2,058
======= ====== ======= ======
</TABLE>
NOTE 12 SUBSEQUENT EVENTS
a. In March 1996, Accord issued 583,705 warrants to several stockholders,
entitling them to purchase an aggregate of 583,705 series B preferred
shares of NIS 0.01 par value at an exercise price of $2.24 per share.
Through January 31, 2000, all of the warrants were exercised (until
December 31, 1999--59,152 warrants were exercised).
b. As to new employee stock option plans approved on January 26, 2000, see
note 6b(1)(b).
c. As to a new non-employee directors option plan approved on January 26,
2000, see note 6f.
d. As to lease of new office space rented on January 10, 2000, see note
5b(1)(d).
e. On May 25, 2000 the General Meeting of the parent resolved to convert
5,000,000 unissued Ordinary shares into 5,000,000 preferred shares. The
board of directors of the parent will have the authority to issue up to
5,000,000 preferred shares upon completion of an IPO and the board of
directors will be able to set the terms, rights and preferences of these
shares.
F-30
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
f. On June 16, 2000, Accord and the plaintiff in a patent infringement
lawsuit entered into a written settlement agreement and the court
entered an order dismissing the case with prejudice. The settlement
agreement includes the following terms:
. Accord paid the plaintiff $500,000 when the settlement agreement was
signed, and will pay an additional $6 million within seven days of
its receipt of the net proceeds of this offering;
. If, by September 30, 2000, Accord has not paid the balance of the $6
million owed to the plaintiff under the settlement agreement, it will
make quarterly payments of $1 million beginning on October 30, 2000
until the unpaid balance of the $6 million has been paid.
NOTE 13 PRO FORMA INFORMATION (UNAUDITED)
Pro forma information is provided to give effect to the conversion of the
preferred shares. Upon the closing of the IPO (note 1a(1)(c)), all the
outstanding preferred shares of series A, B and C will automatically be
converted into 11,526,870 ordinary shares. The pro forma balance sheet as of
December 31, 1999 has been prepared assuming the conversion of the preferred
shares into ordinary shares as of that date.
F-31
<PAGE>
ACCORD NETWORKS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1999 MARCH 31, 2000
------------ ----------------------
(UNAUDITED)
<S> <C> <C> <C>
PRO FORMA
INFORMATION
ASSETS (NOTE 5)
Current assets:
Cash and cash equivalents................ $ 5,787 $ 3,832 $ 3,832
Accounts and note receivable:
Trade accounts receivable, net of
allowance for doubtful accounts of $166
at March 31, 2000 ($125 at December 31,
1999).................................. 6,012 6,180 6,180
Trade note receivable, net of allowance
for doubtful accounts of $213 at
March 31, 2000 and December 31, 1999... 80 301 301
Other................................... 1,882 2,870 2,870
Inventories.............................. 2,786 3,805 3,805
Prepaid expenses and other current
assets.................................. 263 485 485
-------- -------- ------------
Total current assets.................. 16,810 17,473 17,473
-------- -------- ------------
Fixed assets:
Cost..................................... 3,204 4,275 4,275
Less--accumulated depreciation and
amortization............................ 1,146 1,404 1,404
-------- -------- ------------
Total fixed assets.................... 2,058 2,871 2,871
-------- -------- ------------
Other assets.............................. 1,630 2,053 2,053
-------- -------- ------------
Total assets.......................... $ 20,498 $ 22,397 $ 22,397
======== ======== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable and accruals:
Trade................................... $ 2,220 $ 2,255 $ 2,255
Payables in connection with settlement
agreement (note 4b).................... 6,500
Other................................... 3,908 4,134 4,134
-------- -------- ------------
Total current liabilities............. 6,128 6,389 12,889
Long-term liabilities:
Accrued severance pay.................... 888 1,099 1,099
Deferred revenues........................ 26 21 21
Other.................................... -- 16 16
-------- -------- ------------
Total liabilities..................... 7,042 7,525 14,025
-------- -------- ------------
Mandatorily redeemable convertible
preferred shares, NIS 0.01 par value,
series A, B and C........................ 25,916 27,081 --
-------- -------- ------------
Stockholders' equity (deficit):
Ordinary shares of NIS 0.01 par value.... 6 6 36
Warrants and options..................... 95 122 122
Additional paid-in capital............... 159 163 27,214
Accumulated deficit...................... (12,720) (12,500) (19,000)
-------- -------- ------------
Total stockholders' equity (deficit).. (12,460) (12,209) 8,372
-------- -------- ------------
$ 20,498 $ 22,397 $ 22,397
======== ======== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-32
<PAGE>
ACCORD NETWORKS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 2000
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Product sales................................. $ 4,563 $ 7,774
Support revenues.............................. 267 485
------------- --------------
Total revenues............................... 4,830 8,259
------------- --------------
Cost of revenues:
Product sales................................. 977 1,807
Support revenues.............................. 431 634
------------- --------------
Total cost of revenues....................... 1,408 2,441
------------- --------------
Gross profit................................... 3,422 5,818
Operating expenses:
Research and development, net................. 1,081 1,517
Selling and marketing, net.................... 1,792 2,785
General and administrative.................... 757 1,279
------------- --------------
Total operating expenses..................... 3,630 5,581
------------- --------------
Operating income (loss)........................ (208) 237
Interest and other expenses, net............... (31) (17)
------------- --------------
Net income (loss) for the period .............. $ (239) $ 220
============= ==============
Earnings (loss) per share:
Basic......................................... $ (0.19) $ 0.12
============= ==============
Diluted....................................... $ (0.19) $ 0.01
============= ==============
Weighted average number of shares outstanding:
Basic......................................... 1,277,067 1,858,076
============= ==============
Diluted....................................... 1,277,067 17,604,242
============= ==============
Pro forma earnings (loss) per share:
Basic......................................... $ 0.02
==============
Diluted....................................... $ 0.01
==============
Pro forma weighted average number of shares
outstanding:
Basic......................................... 13,734,635
==============
Diluted....................................... 17,604,242
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-33
<PAGE>
ACCORD NETWORKS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED SHARES AND STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
MANDATORILY ---------------------------------------------------------------
REDEEMABLE
CONVERTIBLE
PREFERRED SHARES ORDINARY SHARES TOTAL
------------------ ----------------- ADDITIONAL WARRANTS STOCKHOLDERS'
NUMBER OF NUMBER OF PAID-IN AND ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL OPTIONS DEFICIT (DEFICIT)
---------- ------- ---------- ------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
2000.................... 11,526,870 $25,916 1,854,388 $ 6 $ 159 95 $(12,720) $(12,460)
CHANGES DURING THE
PERIOD ENDED MARCH 31,
2000 (unaudited):
Issuance of ordinary
shares for cash related
to exercise of stock
options................ 16,875 * 4 4
Issuance of series "B"
participating preferred
shares, net of share
issue expenses ........ 524,553 1,165 (1) (1)
Amounts assigned to
warrants and options
granted to non-
employees.............. 28 28
Net income............. 220 220
---------- ------- ---------- ----- ------- ---- -------- --------
BALANCE AT MARCH 31,
2000 (unaudited)........ 12,051,423 $27,081 1,871,263 $ 6 $ 163 122 $(12,500) $(12,209)
========== ======= ========== ===== ======= ==== ======== ========
PRO FORMA BALANCE AT
MARCH 31, 2000
(unaudited) (note 5).... -- $ -- 13,922,686 $ 36 $27,214 $122 $(19,000) $ 8,372
========== ======= ========== ===== ======= ==== ======== ========
</TABLE>
-----------
* Representing an amount less than $1,000
The accompanying notes are an integral part of the financial statements.
F-34
<PAGE>
ACCORD NETWORKS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 2000
--------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for the period........................ $ (239) $ 220
Adjustments required to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization.......................... 194 258
Provision for doubtful accounts........................ 24 41
Increase in provision for vacation and recreation pay.. 177 180
Accrued severance pay, net............................. 48 144
Amounts assigned to options and warrants granted to
non-employees......................................... 17 27
Changes in operating asset and liability items:
Increase in accounts receivable....................... (1,105) (1,625)
Decrease in accounts payable and accruals............. (20) (294)
Decrease (Increase) in inventories.................... 19 (1,019)
Increase in deferred revenues......................... 150 98
--------- ---------
(496) (2,190)
--------- ---------
Net cash used in operating activities................. (735) (1,970)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets................................ (177) (926)
Amounts placed in deposit............................... (35) (58)
--------- ---------
Net cash used in investing activities................... (212) (984)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issue of mandatorily redeemable convertible preferred
shares at a premium,
net of share issue expenses............................ 1 1,165
Issue of ordinary shares................................ -- 4
Offering costs (carried to deferred charges)............ -- (170)
--------- ---------
Net cash provided by financing activities............... 1 999
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS.................... (946) (1,955)
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD.................................................. 1,436 5,787
--------- ---------
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF PERIOD.... $ 490 $ 3,832
========= =========
SUPPLEMENTARY INFORMATION ON FINANCING ACTIVITIES NOT
INVOLVING CASH FLOWS:
Deferred charges amounting to $143,000 not paid as of
March 31, 2000 will be included in the statements of
cash flows upon payment.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-35
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 GENERAL
The accompanying unaudited consolidated financial statements have been prepared
based upon Securities and Exchange Commission (SEC) rules that permit reduced
disclosure for interim periods. In management's opinion, these statements
include all adjustments necessary for a fair presentation of the results of the
interim periods shown. All adjustments are of a normal recurring nature unless
otherwise disclosed. Revenues, expenses, assets and liabilities can vary during
each quarter of the year. Therefore, the results and trends in these interim
financial statements may not be the same as those for the full year. For a more
complete discussion of the Company's significant accounting policies and other
information, you should read this report in conjunction with the audited
consolidated financial statements included in this document.
NOTE 2 INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Materials and supplies.......................... $1,725 $2,157
Finished goods.................................. 577 1,040
Consignment/inventory........................... 484 608
------ ------
$2,786 $3,805
====== ======
</TABLE>
NOTE 3 EARNINGS PER SHARE
a. Basic earnings per share are computed based on the weighted average
number of shares outstanding during each period. In computing the
diluted earnings per share, account was taken of the dilutive effect of
the outstanding stock options, using the treasury stock method.
Following are data relating to the weighted average number of shares for
the purpose of computing the historical basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 2000
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Weighted average number of shares issued and
outstanding--used in computation of basic
earnings per share.............................. 1,277,067 1,858,076
Effect of dilutive securities:
Convertible preferred shares................... 9,644,607 11,876,559
Warrants to stockholders....................... 1,016,388
Warrants to consultants........................ 16,948 64,000
Employee stock options and invested shares..... 2,444,139 2,789,219
-------------- --------------
Weighted average number of shares issued and
outstanding--used in computation of diluted
earnings per share.............................. 13,382,761 17,604,242
============== ==============
</TABLE>
The effect of the inclusion of the dilutive securities in 1999 is anti-
dilutive.
b. The pro forma earnings per share for the period ended March 31, 2000 are
computed assuming that conversion of the preferred shares into ordinary
shares occurred on January 1, 2000 or at their issuance date, if later.
F-36
<PAGE>
ACCORD NETWORKS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4 SUBSEQUENT EVENT
a. On May 25, 2000 the General Meeting of the parent resolved to convert
5,000,000 unissued Ordinary shares into 5,000,000 preferred shares. The
board of directors of the parent will have the authority to issue up to
5,000,000 preferred shares upon completion of an IPO and the board of
directors will be able to set the terms, rights and preferences of these
shares.
b. On June 16, 2000, Accord and the plaintiff in a patent infringement lawsuit
entered into a written settlement agreement and the court entered an order
dismissing the case with prejudice. The settlement agreement includes the
following terms:
. Accord paid the plaintiff $500,000 when the settlement agreement was
signed, and will pay an additional $6 million within seven days of its
receipt of the net proceeds of this offering;
. If, by September 30, 2000, Accord has not paid the balance of the $6
million owed to the plaintiff under the settlement agreement, it will
make quarterly payments of $1 million beginning on October 30, 2000 until
the unpaid balance of the $6 million has been paid.
NOTE 5 PRO FORMA INFORMATION (UNAUDITED)
Pro forma information is provided to give effect to the conversion of the
preferred shares and the liability recorded in connection with a patent
infringement lawsuit (see note 4(b)). Upon the closing of the IPO, all the
outstanding preferred shares of series A, B and C will automatically be
converted to 12,051,423 ordinary shares. The pro forma balance sheet as of
March 31, 2000 has been prepared assuming the conversion of the preferred
shares into ordinary shares and the settlement of the patent infringement
lawsuit as of that date.
F-37
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
------------------------------------------------------------------
[Logo]
5,000,000 SHARES
ORDINARY SHARES
--------------
PROSPECTUS
--------------
, 2000
CIBC WORLD MARKETS
DAIN RAUSCHER WESSELS
U.S. BANCORP PIPER JAFFRAY
------------------------------------------------------------------
UNTIL , 2000, OR 25 DAYS AFTER THE DATE OF THIS PROSPECTUS, ALL
DEALERS THAT PARTICIPATE IN TRANSACTIONS WITH THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
DEALERS ARE ALSO OBLIGATED TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WHEN SELLING THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO
DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS
NOT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR
IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the offering
described in the registration statement. All amounts are estimates except the
SEC registration fee, the NASD fees and the Nasdaq listing fees:
<TABLE>
<S> <C>
SEC registration fee............................................ $ 18,216
NASD fees....................................................... 7,400
Nasdaq listing fees............................................. 95,000
Israeli stamp tax............................................... 690,000
Blue sky fees and expenses...................................... 5,000
Printing and engraving expenses................................. 250,000
Legal fees and expenses......................................... 800,000
Accounting fees and expenses.................................... 600,000
Transfer agent fees............................................. 3,500
Miscellaneous expenses.......................................... 105,884
----------
Total.......................................................... $2,575,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Companies Law, 1999, provides that a company may include in its articles of
association provisions which allow it to:
. enter into a contract to insure the liability of an office holder (as
defined below) of the company by reason of acts or omissions committed in
his capacity as an office holder of the company with respect to the
following:
(a) the breach of his duty of care to the company or any other person;
(b) the breach of his fiduciary duty to the company to the extent he acted
in good faith and had a reasonable basis to believe that the act would
not prejudice the interests of the company; and
(c) monetary liabilities or obligations which may be imposed upon him in
favor of other persons.
. indemnify an office holder of the company for:
(a) monetary liabilities or obligations imposed upon him in favor of other
persons pursuant to a court judgment, including a compromise judgment
or an arbitrator's decision approved by a court, by reason of acts or
omissions of such person in his capacity as an office holder of the
company; and
(b) reasonable litigation expenses, including attorney's fees, actually
incurred by the office holder or imposed upon him by a court, in an
action, suit or proceeding brought against him by or on behalf of the
Company or by other persons, or in connection with a criminal action
from which he was acquitted, or in connection with a criminal action
which does not require proof of criminal intent in which he was
convicted, in each case by reason of acts or omissions of the person in
his capacity as an office holder.
The Companies Law provides that a company's articles of association may provide
for indemnification of an office holder post-factum and may also provide that a
company may undertake to indemnify an office holder in advance, provided the
undertaking is limited to types of occurrences, which, in the opinion of the
company's board of directors, are, at the time of the undertaking, foreseeable
and to an amount the board of directors has determined is reasonable in the
circumstances.
II-1
<PAGE>
The Companies Law provides that a company may not indemnify, exempt or enter
into an insurance contract which would provide coverage for the liability of,
an office holder with respect to the following:
. a breach of his fiduciary duty, except to the extent described above;
. a breach of his duty of care, if the breach was done intentionally,
recklessly or with disregard of the circumstances of the breach or its
consequences;
. an act or omission done with the intent to unlawfully realize personal
gain; or
. a fine or monetary settlement imposed upon him.
The Companies Law defines "office holder" to include a director, managing
director, general manager, chief executive officer, executive vice president,
vice president, other managers directly subordinate to the managing director,
and any other person fulfilling or assuming any of these positions or
responsibilities without regard to the person's title.
Indemnification of, and procurement of insurance coverage for, an office holder
of a company requires, under the Companies Law, the approval of the company's
audit committee and board of directors, and, in certain circumstances,
including if the office holder is a director, the approval of the company's
shareholders.
We have agreed to indemnify each of our office holders subject to the above,
and intend to purchase from a commercial carrier a directors' and officers'
liability insurance policy insuring our office holders as permitted by the
Companies Law and our articles of association, including coverage with respect
to the offering of the ordinary shares described in this registration
statement. In October 1999 and April 2000, our board of directors authorized us
to enter into indemnification agreements with each of our office holders. Our
shareholders approved these agreements in December 1999 and May 2000. The form
of indemnification agreement provides among other things that subject to
certain conditions and limitations, we will indemnify our office holders in
respect of all amounts they may be obligated to pay, including reasonable legal
expenses, in the event of legal proceedings or a judgment in respect of or due
to any act or omission taken or made in their capacity as office holders,
including in connection with this offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since February 1997, we have issued and sold the securities listed below
without registering the securities under the Securities Act. None of these
transactions involved any underwriters, underwriting discounts or commissions,
or any public offering:
(a) In September 1997, our board of directors approved the grant of an option
to an executive search firm to acquire 6,696 of our ordinary shares for an
aggregate of approximately $15.00 as partial consideration for the search of
our chief executive officer. In December 1999, we issued 6,696 shares upon the
exercise of this option.
(b) In March, 1998, we issued an aggregate of 4,017,428 series B preferred
shares to a total of 16 investors upon their conversion of the outstanding
amounts of principal indebtedness under a loan agreement entered into in July
1997, an investment and loan agreement entered into in October 1997 and in
consideration for additional cash investments made by some of them upon their
exercise of pre-emptive rights or pursuant to a subscription agreement entered
into in March 1998. The conversion price of the debt and purchase price of the
other series B preferred shares was $2.24 per share and we received total
consideration of approximately $9.0 million, including the converted
II-2
<PAGE>
debt. In connection with this conversion and purchase of shares, we issued
warrants to purchase 1,205,228 shares of series B preferred shares at an
exercise price of $2.24 per share. These warrants may be exercised by cash
payment or net exercise.
(c) In September 1998, we granted an option to a consultant to purchase 5,000
ordinary shares at an exercise price of $2.24 per share as consideration for
services rendered to us.
(d) In March 1999, we issued 397,673 series A preferred shares to VTEL
Corporation in full and final satisfaction of the anti-dilution rights provided
under a Subscription Agreement dated June 14, 1995.
(e) In April 1999, we issued a warrant to a financial institution to purchase
137,061 ordinary shares at an exercise price of $3.648 per share in
consideration for a $4,000,000 revolving line of credit with an interest rate
of LIBOR, plus 1.5%. This warrant may be exercised by cash payment or net
exercise.
(f) In August 1999, we issued and sold for cash an aggregate of 1,425,439
series C preferred shares to a total of two investors at a purchase price of
$4.56 per share. Of these shares, 733,614 were non-voting series C preferred
shares and 691,825 were voting series C preferred shares.
(g) During December 1999 and January 2000 we issued 583,705 series B
preferred shares upon exercise of warrants issued in March 1996. The exercise
price of these warrants was $2.24 per share.
(h) We have granted options to certain of our employees, directors and
consultants to purchase approximately 5,113,978 ordinary shares, of which
631,164 ordinary shares have been issued upon the exercise of these options
since February 1997. The purchase price under the option grants ranges from
$0.01 to $9.50 based on the fair market value of our ordinary shares as of the
date of each grant as determined by our board of directors.
We believe that the issuances described in Items 15(a), 15(b), 15(d), 15(e),
15(f) and 15(g) above were deemed exempt from registration under the Securities
Act in reliance upon Section 4(2) thereof as transactions by an issuer not
involving any public offering. We also believe that the issuances described in
Item 15(c) and 15(h) were deemed exempt from registration under the Securities
Act in reliance upon Rule 701 promulgated thereunder in that they were offered
or sold under a written contract relating to compensation, as provided by Rule
701. In addition, we believe that these issuances were deemed to be exempt from
registration under Section 4(2) of the Securities Act as transactions by an
issuer not involving any public offering. The recipients of securities in the
above transactions have represented their intentions to acquire the securities
for investment only and not with a view to or for sale in connection with any
distribution thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
Form of Underwriting Agreement.
*1.1
*3.1 Form of Articles of Association of Registrant.
*3.2
Memorandum of Association of Registrant.
**4.1 Specimen Ordinary Share Certificate.
*4.2
Shareholders Rights Agreement dated as of June 22, 1999.
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
*4.3 Amendment to Shareholders Rights Agreement dated as of July 19,
1999.
*4.4 Second Amendment to Shareholders Rights Agreement dated as of May
25, 2000.
5.1 Opinion of Doron Cohen-David Cohen, Israeli counsel to the
Registrant, as to certain legal matters with respect to the
legality of the ordinary shares.
*10.1 Registrant's 1995 Employee Share Ownership and Option Plan.
*10.2 Registrant's Share Ownership and Option Plan (2000).
*10.3 Registrant's 2000 Share Option Plan.
*10.4 Registrant's 2000 Non-Employee Director Stock Option Plan.
10.5 Line of Credit Agreement with Bank Hapoalim B.M. dated April 28,
1999.
*10.6 Form of Indemnification Agreement.
10.7 Lease Agreement dated July 21, 1997 by and between Accord
Networks, Inc. and 500 Northridge Pointe, Inc.
10.8 Intentionally omitted.
10.9 Lease Agreement dated October 20, 1999 by and between Accord
Networks (U.K.) Limited and The Virtualists Limited.
10.10 Sublease Agreement dated January 10, 2000 by and between Accord
Networks, Inc. and Halis, Inc.
10.11 Lease Agreement dated January 10, 2000 by and between Accord
Networks, Inc. and Affiliated Equities Real Estate L.P.
10.12 Distribution Agreement dated January 21, 2000 by and between the
Registrant and PictureTel Corporation.+
*10.13 Warrant to Purchase Ordinary Shares dated effective as of April
28, 1999 granted to Hapoalim Nechasim (Menayot) Ltd.
10.14 Lease Agreement dated April 25, 1999 by and between Registrant and
Nichzay Azorim.
*10.15 Debenture with Bank Hapaolim B.M. dated April 28, 1999.
10.16 Letter Agreement dated January 26, 2000 amending Distribution
Agreement dated January 21, 2000 by and between the Registrant and
PictureTel Corporation.
**10.17 Settlement Agreement by and between Ezenia! Inc., f/k/a
VideoServer, Inc., Accord Networks, Inc., f/k/a Accord
Telecommunications, Inc., f/k/a/ Accord Video Telecommunications,
Inc., and Accord Networks Ltd., f/k/a Accord Telecommunications
Ltd. effective June 16, 2000.
*21.1 Subsidiaries of the Registrant.
23.1 Consent of Kesselman & Kesselman, a member of
PricewaterhouseCoopers International Limited, independent
certified public accountants in Israel.
23.2 Consent of Doron Cohen-David Cohen, counsel to the Registrant
(included in Exhibit 5.1).
*24.1 Power of Attorney.
**99.1 Consent of Credit Suisse First Boston.
99.2 Consent of University of Notre Dame.
99.3 Consent of Deutsche Telekom AG.
</TABLE>
II-4
<PAGE>
Consent of France Telecom.
**99.4
Letter of Kesselman & Kesselman, a member of
*99.5 PricewaterhouseCoopers International Limited, independent
certified public accountants in Israel, to the Securities and
Exchange Commission regarding Israeli generally accepted auditing
standards.
------------------
* Previously filed.
** To be filed by amendment.
+ Accord has requested confidential treatment of portions of this agreement. As
a result, portions of this agreement will be omitted when filed and will be
filed separately with the Securities and Exchange Commission.
(b) Financial Schedules
None.
ITEM 17. UNDERTAKINGS.
Accord 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 underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of Accord
pursuant to the foregoing provisions, or otherwise, Accord has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Accord of expenses incurred or paid
by a director, officer or controlling person of Accord 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, Accord 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 Act and will be governed by the final adjudication
of such issue.
Accord hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
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 Accord 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, 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-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM F-1 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF ATLANTA, STATE OF GEORGIA, ON JUNE 20, 2000.
Accord Networks Ltd.
/s/ Jules L. DeVigne
By: _________________________________
JULES L. DEVIGNE
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO.
1 HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES LISTED AND ON THE
DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jules L. DeVigne Chairman, Chief Executive Officer June 20, 2000
_________________________________ and Director (Principal
JULES L. DEVIGNE Executive Officer)
/s/ Jeffrey B. Bradley Chief Financial Officer June 20, 2000
_________________________________ (Principal Financial and
JEFFREY B. BRADLEY Accounting Officer)
/s/ Ori Shachar Controller June 20, 2000
_________________________________
ORI SHACHAR
/s/ Sigi Gavish Chief Technology Officer and June 20, 2000
_________________________________ Director
SIGI GAVISH
/s/ Matty Karp Director June 20, 2000
_________________________________
MATTY KARP
/s/ Jos C. Henkens Director June 20, 2000
_________________________________
JOS C. HENKENS
</TABLE>
Authorized Representative in the United States:
Accord Networks, Inc.
/s/ Jules L. DeVigne
By: __________________________
June 20, 2000
Name: Jules L. DeVigne
Title: Chairman and Chief Executive Officer
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
</TABLE>
Form of Underwriting Agreement.
*1.1
Form of Articles of Association of Registrant.
*3.1
Memorandum of Association of Registrant.
*3.2
Specimen Ordinary Share Certificate.
**4.1
Shareholders Rights Agreement dated as of June 22, 1999.
*4.2
Amendment to Shareholders Rights Agreement dated as of July 19,
*4.3 1999.
Second Amendment to Shareholders Rights Agreement dated as of May
*4.4 25, 2000.
Opinion of Doron Cohen-David Cohen, Israeli counsel to the
5.1 Registrant, as to certain legal matters with respect to the
legality of the ordinary shares.
Registrant's 1995 Employee Share Ownership and Option Plan.
*10.1
Registrant's Share Ownership and Option Plan (2000).
*10.2
Registrant's 2000 Share Option Plan.
*10.3
Registrant's 2000 Non-Employee Director Stock Option Plan.
*10.4
10.5 Line of Credit Agreement with Bank Hapoalim B.M. dated April 28,
1999.
Form of Indemnification Agreement.
*10.6
10.7 Lease Agreement dated July 21, 1997 by and between Accord
Networks, Inc. and 500 Northridge Pointe, Inc.
10.8 Intentionally omitted.
10.9 Lease Agreement dated October 20, 1999 by and between Accord
Networks (U.K.) Limited and The Virtualists Limited.
10.10 Sublease Agreement dated January 10, 2000 by and between Accord
Networks, Inc. and Halis, Inc.
Lease Agreement dated January 10, 2000 by and between Accord
10.11 Networks, Inc. and Affiliated Equities Real Estate L.P.
Distribution Agreement dated January 21, 2000 by and between the
10.12 Registrant and PictureTel Corporation.+
Warrant to Purchase Ordinary Shares dated effective as of April
*10.13 28, 1999 granted to Hapoalim Nechasim (Menayot) Ltd.
Lease Agreement dated April 25, 1999 by and between Registrant and
10.14 Nichzay Azorim.
*10.15
Debenture with Bank Hapaolim B.M. dated April 28, 1999.
10.16
Letter Agreement dated January 26, 2000 amending Distribution
Agreement dated January 21, 2000 by and between the Registrant and
PictureTel Corporation.
<PAGE>
<TABLE>
<S> <C>
**10.17 Settlement Agreement by and between Ezenia! Inc., f/k/a
VideoServer, Inc., Accord Networks, Inc., f/k/a Accord
Telecommunications, Inc., f/k/a Accord Video Telecommunications,
Inc., and Accord Networks Ltd., f/k/a Accord Telecommunications
Ltd. effective June 16, 2000.
*21.1 Subsidiaries of the Registrant.
23.1 Consent of Kesselman & Kesselman, a member of
PricewaterhouseCoopers International Limited, independent
certified public accountants in Israel.
23.2 Consent of Doron Cohen-David Cohen, counsel to the Registrant
(included in Exhibit 5.1).
*24.1 Power of Attorney.
**99.1 Consent of Credit Suisse First Boston.
99.2 Consent of University of Notre Dame.
99.3 Consent of Deutsche Telekom AG.
**99.4 Consent of France Telecom.
*99.5 Letter of Kesselman & Kesselman, a member of
PricewaterhouseCoopers International Limited, independent
certified public accountants in Israel, to the Securities and
Exchange Commission regarding Israeli generally accepted auditing
standards.
------------------
* Previously filed.
** To be filed by amendment.
+ Accord has requested confidential treatment of portions of this agreement.
As a result, portions of this agreement will be omitted when filed and will
be filed separately with the Securities and Exchange Commission.
</TABLE>
