<PAGE>
Registration No. 333-12266
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 2000.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1 to
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MIND C. T. I. LTD.
(Exact name of Registrant as specified in its charter)
Israel 7371 Not Applicable
(Primary Standard (I.R.S. Employer
(State or other Industrial Identification No.)
jurisdiction of Classification Code
incorporation or Number)
organization)
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Industrial Park, Building 7, P.O. Box 144
Yoqneam 20692, Israel
Tel: 972-4-993-6666
Fax: 972-4-993-7776
(Address and telephone number of Registrant's principal executive offices)
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MIND C.T.I. Inc.
777 Terrace Avenue
Hasbrouck Heights, NJ 07604
Tel: 201-288-3900
Fax: 201-288-4590
(Name, address, including zip code, and telephone number of agent for service)
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Copies to:
<TABLE>
<S> <C> <C> <C>
Yehuda M. Levy, Adv. Neil Gold Phyllis G. Korff Aaron M. Lampert, Adv.
Goldfarb, Levy, Eran & Co. Fulbright & Jaworski L.L.P. Skadden, Arps, Slate, Naschitz, Brandes & Co.
Eliahu House, 2 Ibn Gvirol Street 666 Fifth Avenue Meagher & Flom LLP 5 Tuval Street
Tel Aviv 64077, Israel New York, NY 10103 Four Times Square Tel Aviv 67897, Israel
Tel: 972-3-608-9999 Tel: 212-318-3000 New York, NY 10036-6522 Tel: 972-3-623-5000
Fax: 972-3-608-9909 Fax: 212-752-5958 Tel: 212-735-3000 Fax: 972-3-623-5005
Fax: 917-777-2694
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [X]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Proposed
Proposed maximum
Title of each Class of maximum offering aggregate Amount of
Securities to be Amount to be price per offering Registration
Registered registered(1) ordinary share(2) price(2) Fee
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<S> <C> <C> <C> <C>
Ordinary shares, NIS
0.01 per share ....... 4,830,000 $12.00 $57,960,000 $15,302
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</TABLE>
(1) Includes 630,000 ordinary shares issuable upon exercise of the
underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated August 2, 2000
PROSPECTUS
4,200,000 Shares
[LOGO OF MIND]
Ordinary Shares
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This is our initial public offering of ordinary shares. We are offering
4,200,000 ordinary shares. No public market currently exists for our ordinary
shares.
We propose to list the ordinary shares on the Nasdaq National Market under the
symbol "MNDO". We anticipate the public offering price to be between $10.00 and
$12.00 per ordinary share.
Investing in the ordinary shares involves risks. Risk Factors begin on page 5.
<TABLE>
<CAPTION>
Per Share Total
---------- -------
<S> <C> <C>
Public Offering Price........................................ $ $
Underwriting Discount........................................ $ $
Proceeds to MIND C.T.I. Ltd.................................. $ $
</TABLE>
We have granted the underwriters the right to purchase up to 630,000 additional
ordinary shares within 30 days to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the ordinary
shares to purchasers on or before , 2000.
--------------------------------------------------------------------------------
Lehman Brothers
U.S. Bancorp Piper Jaffray
CIBC World Markets
Fidelity Capital Markets
a division of National Financial Services
Corporation
, 2000
<PAGE>
Inside Front Cover Graphics Description
The MIND logo appears on the top right of the inside front cover. The words
"Provider of High Quality Real-Time Billing and Customer Care Software for
Internet Telephony Service Providers" appear at the center of the page, and
below these words appears the following bullet points:
. Operating in a rapidly growing industry
. Strategic relationships with major vendors
. Over 100 installations of MIND-iPhonEX Internet telephony billing systems
worldwide
A picture of a portion of our web-site appears within a large circle at the end
of the page, and to the right of the circle appears our slogan "Keep us in
Mind".
Inside Back Cover Graphics Description
The MIND logo appears on the top right of the inside back cover. The words
"Enabling Internet Protocol technologies by implementing software at Internet
speed" appears at the top of the page. In the center of the page appear the
words "emerging Internet Industry", followed by the following three bullet
points:
. Real-Time billing
. Modular Architecture
. Supports multiple services
On either side of the bullet points appear circles. The circle on the left
contains the words "Unified Messaging", "Data", "Content" and "Voice", and the
circle on the right contains a picture of a portion of our web-site. Our slogan
"Keep us in Mind" appears on the bottom left corner of the page.
<PAGE>
TABLE OF CONTENTS
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Page
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Prospectus Summary.................. 1
Risk Factors........................ 5
Forward-looking Statements.......... 16
Use of Proceeds..................... 17
Dividend Policy..................... 17
Capitalization...................... 18
Dilution............................ 19
Selected Consolidated Financial and
Operating Data..................... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
Business............................ 32
</TABLE>
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Page
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Management........................... 45
Related Party Transactions .......... 52
Principal Shareholders............... 54
Shares Eligible for Future Sale...... 56
Description of Ordinary Shares....... 58
Conditions in Israel................. 61
Taxation and Government Programs..... 63
Underwriting......................... 70
Legal Matters........................ 73
Experts.............................. 73
Enforceability of Civil Liabilities.. 73
Where You Can Find Additional
Information......................... 74
</TABLE>
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide any different or additional information.
This prospectus is not an offer to sell or a solicitation of an offer to buy
ordinary shares in any jurisdiction where it is unlawful. The information
contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any
sale of ordinary shares.
Until , 2000 (25 days after the date of this prospectus), all dealers
that buy, sell or trade our ordinary shares, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained in other parts of this
prospectus. You should read the entire prospectus carefully, including the
section entitled "Risk Factors" and our consolidated financial statements and
the notes to those financial statements, before deciding to buy our ordinary
shares.
We develop, manufacture and market real-time billing and customer care
software for Voice over IP service providers. Voice over IP, also known as
Internet telephony, is the real-time transmission of voice communications over
the public Internet and private networks based on Internet Protocol, commonly
known as IP. Internet Protocol is the process by which data is transmitted from
one computer to another over the Internet. Our billing and customer care
software, known as MIND-iPhonEX, enables providers of Voice over IP services to
meet complex, mission-critical billing and customer care needs, such as
authentication, authorization, accounting and reporting. Our software is also
used by service providers to collect the data needed to initiate service and
manage customer accounts.
Mind-iPhonEx is scalable, which means that it is easily adapted to changes
in the configuration and size of a service provider's network. It operates on
the IP telecommunications equipment of major manufacturers, such as Cisco
Systems Inc. and Lucent Technologies Inc. We also provide professional
services, primarily to our billing and customer care customers, consisting of
customization, installation, customer support, training and maintenance
services and project management, which is advice to our customers regarding
deployment of billing and customer care software over their IP networks. We
have installed MIND-iPhonEX for a large base of customers worldwide, including
Bell Atlantic Corp., Deutsche Telekom AG, China Ministry of Post and
Telecommunications (China Telecom), China United Telecommunications Corp.
(China Unicom), Singapore Telecommunications Ltd., iBasis Inc., and Southnet
TeleComm Services Inc.
In addition to our billing and customer care software products for Voice
over IP, we provide a call management system used by organizations for call
accounting, traffic analysis and fraud detection. This enterprise software,
which we call PhonEX, has been installed in many locations throughout the world
for customers including Credit Suisse First Boston and Deutsche Post AG.
Voice over IP service providers can offer their subscribers enhanced voice
and data communications services and lower rates for telephony services. These
advantages are contributing to the rapid growth in demand for IP telephony
services. Voice over IP providers include Internet service providers, and
Internet telephony service providers. In addition, traditional
telecommunications service providers are increasingly offering IP telephony to
remain competitive. International Data Corporation estimated that total Voice
over IP use is expected to increase from 2.7 billion minutes in 1999 to 135
billion minutes in 2004, representing a compound annual growth rate of 119%.
Revenues derived from providing Voice over IP services are expected to increase
from $480 million in 1999 to $19 billion in 2004, representing a compound
annual growth rate of 109%. According to Frost and Sullivan, the worldwide
market for gateway equipment that allows interconnections between IP-based and
traditional telephone networks was $279.2 million in 1998 and is estimated to
grow to approximately $9.2 billion in 2004. We believe that the expected growth
in the Voice over IP market indicated by this estimated increase in sales of
gateway equipment will lead to an increased demand for billing and customer
care software products that enable providers of Voice over IP services to bill
their subscribers for the services used.
Billing and customer care software is among the key components of any
telephony service provider's system because they enable the service provider to
track and bill for usage, manage revenues and customer relations, and devise
marketing programs and rate plans. As service providers broaden their service
offerings to include Voice over IP, the demand for more sophisticated billing
and customer care software suitable for these services is growing.
1
<PAGE>
Our objective is to be a leader in the market for billing and customer care
software for Voice over IP. In addition, we intend to offer billing and
customer care software for other IP-based services as the market for this type
of software grows. The key elements of our strategy include:
. Leverage our brand name recognition and technical expertise. We believe
that our early position in the market and our reputation for offering
high quality, reliable billing and customer care software has provided
us with significant brand name recognition among Voice over IP
providers. We intend to leverage our reputation, brand name recognition
and expertise to be a leader in the market for billing and customer care
software for Voice over IP.
. Enhance alliances with industry leaders. We have established cooperative
alliances with leading manufacturers of IP telecommunications equipment
such as Cisco, Lucent, Netspeak and VocalTec Ltd. Our alliances allow us
to broaden our marketing capabilities significantly, support new
features offered by equipment vendors as these features are introduced
to the market, and maintain our technology leadership over our
competitors. We intend to continue to leverage these alliances in order
to solidify and expand our market presence.
. Maintain and expand technological expertise. We believe that our
reputation in the market is due in large part to our technological
expertise, which we intend to maintain and expand in order to enhance
our existing products and develop new products for growing markets.
. Offer convergent IP billing products. As providers of IP-based services
continue to broaden their service offerings, we believe that they will
increasingly need billing and customer care products that allow them to
monitor and bill their customers based on the type and content of the
services provided. We intend to leverage our position in the market for
billing and customer care software for Voice over IP and our technical
expertise to be a leading provider of convergent billing software
products.
. Expand professional services opportunities. Our customers increasingly
require professional services, including customization, project
management, installation and training, technical support and
maintenance. This provides us with the opportunity to increase our
revenue base from existing customers.
We were incorporated under the laws of the State of Israel in 1995 as MIND
C.T.I. Ltd. Our principal executive offices are located at Industrial Park,
Building 7, Yoqneam 20692, Israel. Our telephone number is 1-888-270-4056.
Recent Operating Results
Our unaudited revenues were $3,630,000 for the three months ended June 30,
2000 compared to $1,821,000 for the three months ended June 30, 1999 and our
unaudited net income was $879,000 for the three months ended June 30, 2000
compared to $408,000 for the three months ended June 30, 1999. Our unaudited
net loss applicable to ordinary shares was $4,538,000 for the three months
ended June 30, 2000 compared to net income applicable to ordinary shares of
$408,000 for the three months ended June 30, 1999. The net loss applicable to
ordinary shares in the 2000 period resulted from amortization in the amount of
$5,417,000 relating to the beneficial conversion feature of our preferred
shares for the three months ended June 30, 2000.
2
<PAGE>
The Offering
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<S> <C>
Ordinary shares offered............. 4,200,000 shares
Ordinary shares to be outstanding
after this offering................ 21,283,298 shares
Over-allotment option granted to the
underwriters by us.................. 630,000 shares
Use of proceeds..................... We intend to use the net proceeds of this
offering to expand sales and marketing of
our products worldwide, to enhance our
product development programs, to purchase
property, plant and equipment, to provide
working capital and for other general
corporate purposes, including potential
acquisitions.
Proposed Nasdaq National Market
symbol............................. MNDO
</TABLE>
The above information excludes from the number of ordinary shares to be
outstanding after this offering 1,106,000 shares. As of May 31, 2000, 747,820
of the excluded shares are issuable upon the exercise of outstanding options
and 358,180 of the excluded shares are reserved for issuance under our share
option plan.
About this Prospectus
Unless otherwise indicated, all information contained in this prospectus:
. assumes no exercise of the underwriters' option to purchase up to
630,000 additional ordinary shares from us to cover over-allotments;
. assumes an initial offering price of $11.00 per ordinary share, the
midpoint of the estimated initial public offering price range;
. reflects a 19-for-1 share dividend that was effected in April 2000; and
. assumes the conversion of Series A and B preferred shares into ordinary
shares at a conversion rate of 19.7037 ordinary shares for every Series
A preferred share and 20 ordinary shares for every Series B preferred
share, which will take place immediately prior to this offering.
3
<PAGE>
Summary Consolidated Financial Data
The following tables present summary consolidated financial data derived
from our consolidated financial statements. You should read this along with the
sections of this prospectus entitled "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes.
<TABLE>
<CAPTION>
Years Ended Three Months Ended
December 31, March 31,
--------------------- ------------------
1997 1998 1999 1999 2000
------ ------ ------- ------------------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Revenues:
Sales of licenses.................. $1,500 $3,385 $ 6,791 $ 1,287 $ 2,642
Services........................... 491 685 1,405 298 529
------ ------ ------- -------- ---------
Total revenues....................... 1,991 4,070 8,196 1,585 3,171
Cost of revenues..................... 432 631 1,318 288 423
------ ------ ------- -------- ---------
Gross profit......................... 1,559 3,439 6,878 1,297 2,748
Research and development expenses,
net................................. 397 1,049 1,918 417 894
Selling, general and administrative
expenses:
Selling expenses................... 430 1,055 2,110 429 809
General and administrative
expenses.......................... 352 591 1,000 219 363
Non-cash compensation................ 1 1 26 -- 78
------ ------ ------- -------- ---------
Operating income..................... 379 743 1,824 232 604
Financial and other income, net...... 77 99 137 15 21
------ ------ ------- -------- ---------
Income before taxes on income........ 456 842 1,961 247 625
Taxes on income...................... 114 201 447 58 144
------ ------ ------- -------- ---------
Net income........................... 342 641 1,514 189 481
Accretion of mandatorily redeemable
convertible A preferred shares to
mandatory redemption value.......... -- -- -- -- (6,672)
------ ------ ------- -------- ---------
Net income (loss) applicable to
ordinary shares..................... $ 342 $ 641 $ 1,514 $ 189 $(6,191)
====== ====== ======= ======== =========
Earnings (loss) per ordinary share:
Basic.............................. $ 0.03 $ 0.05 $ 0.10 $ 0.01 $ (0.42)
====== ====== ======= ======== =========
Diluted............................ $ 0.03 $ 0.05 $ 0.10 $ 0.01 $ (0.42)
====== ====== ======= ======== =========
Weighted average number of ordinary
shares used in computation of
earnings (loss) per share:
Basic.............................. 11,163 12,246 14,667 13,928 14,892
====== ====== ======= ======== =========
Diluted............................ 11,200 12,283 14,984 14,115 14,892
====== ====== ======= ======== =========
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 2000
---------------------
Pro forma
Actual As Adjusted
-------- -----------
(In thousands)
(unaudited)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................ $16,473 $57,839
Working capital.......................................... 14,061 55,427
Total assets............................................. 20,663 62,029
Mandatorily redeemable convertible preferred shares...... 20,778 --
Total shareholders' equity (capital deficiency).......... $ (5,906) $56,238
</TABLE>
The pro forma as adjusted information included above gives effect to:
. the conversion of Series A and Series B preferred shares into ordinary
shares at a conversion rate of 19.7037 ordinary shares for every Series
A preferred share and 20 ordinary shares for every Series B preferred
share; and
. this offering of our ordinary shares.
4
<PAGE>
RISK FACTORS
Investing in our ordinary shares involves a high degree of risk. Before
purchasing our ordinary shares, you should carefully consider the risks
described below in addition to the other information in this prospectus. Our
business, results of operations and financial condition may be materially and
adversely affected by any of the following risks. The trading price of our
ordinary shares could decline due to any of these risks, and you could lose all
or part of your investment. You should also refer to the other information in
this prospectus, including our financial statements and the related notes.
Risks Relating to Our Business
We have a limited operating history as a provider of billing and customer care
software. As a result, it is difficult to evaluate our business and prospects.
We first introduced our billing and customer care software for IP telephony
in 1997. Until 1999, substantially all of our revenues were derived from sales
of our call management software for enterprises. Sales of our billing and
customer care software for Voice over IP accounted for 43% of our revenues in
1999 and 75% of our revenues in the three months ended March 31, 2000. This
product represents the strategic focus of our business. Because we have a
limited operating history as a provider of billing and customer care software
for Voice over IP, it is difficult to evaluate our business and prospects.
Our quarterly operating results may vary significantly in future periods. We
may fail to meet expectations of public market analysts and investors, and the
price of our ordinary shares may fall.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, including the following:
. the timing of orders for our software. Customers typically order our
billing and customer care software only after the infrastructure of an
IP telephony network has been provided by other vendors. There can be
delays in that process. It is therefore difficult for us to predict the
timing of orders for our products by customers;
. the ability of our customers to expand their Voice over IP operations
and increase their subscriber base, including their ability to obtain
financing;
. changes in our pricing policies or competitive pricing by our
competitors;
. the timing of releases of new products by manufacturers of IP
telecommunications equipment with which our billing and customer care
software operates; and
. the timing of product introductions by competitors.
In future quarters, our operating results may be below the expectations of
public market analysts and investors, and as a result, the price of our
ordinary shares may fall.
If the demand for Voice over IP does not continue to grow, the demand for our
billing and customer care software would diminish substantially.
Sales of our billing and customer care software for Voice over IP accounted
for 43% of our revenues in 1999 and 75% of our revenues in the three months
ended March 31, 2000. As a result, our business depends on the continued growth
in demand for Voice over IP services. Rapid growth in the demand for Voice over
IP services is a recent phenomenon that may not continue. If growth in the
demand for Voice over IP does not continue, we will face substantially
diminished demand for our billing and customer care software. The failure of
the Voice over IP market to continue to grow and develop will have a material
and adverse impact on our results of operations and financial condition.
5
<PAGE>
In addition, we plan to offer billing and customer care software to
providers of other IP-based services. The demand for these other IP-based
services is at a very early stage. We cannot be sure that the market for these
services will grow. In addition, there may never be significant demand for
specialized billing and customer care software for providers of these other IP-
based services. This would limit the potential growth of our revenues.
If our products fail to achieve widespread market acceptance, our results of
operations will be harmed.
Our future growth depends on the continued commercial acceptance and success
of our products. We first introduced our billing and customer care software for
Voice over IP in 1997. Accordingly, we cannot be sure that our products will
achieve widespread market acceptance. In addition, the market for billing and
customer care software products for Voice over IP is in the early stages of
development. As a result, our future performance will depend on the successful
development, introduction and consumer acceptance of new and enhanced versions
of our products. We are not certain that we will be able to develop new and
enhanced products to meet changing market needs. If our new and enhanced
products are not well received in the marketplace, our business and results of
operations will be harmed. We cannot assure you that we will be successful in
developing and marketing new products.
We depend on our marketing alliances and reseller arrangements with
manufacturers of IP telecommunications equipment to market our products. If we
are unable to maintain our existing marketing alliances, or enter into new
alliances, our revenues and income will decline.
We rely heavily on our marketing alliances and reseller arrangements with
major manufacturers of IP telecommunications equipment, including Cisco, Lucent
and VocalTec to market our products to the customers of these entities. Our
marketing alliances and reseller arrangements with these parties are non-
exclusive and do not contain minimum sales or marketing performance
requirements. In some instances, there is no formal contractual arrangement. As
a result, these entities may terminate these arrangements without notice, cause
or penalty. There is also no guarantee that any of these parties will continue
to market our products. Our arrangements with our resellers and marketing
allies do not prevent them from selling products of other companies, including
products that compete with ours. Our marketing allies and resellers also work
with some of our competitors, and have invested in these competing companies.
For example, Cisco Systems Inc. has invested in Portal Software Inc., one of
our competitors. Moreover, our marketing allies and resellers may develop their
own internal billing and customer care software products that compete with ours
and sell them as part of their equipment. We derive, and anticipate that we
will continue to derive, a significant portion of our revenues from customers
that have relationships with our marketing allies and resellers. If we are
unable to maintain our current marketing alliances and reseller relationships,
or if these marketing allies and resellers develop their own competing billing
and customer care software products, our revenues and income will decline.
If our software does not continue to integrate and operate successfully with
the IP telecommunications equipment of the leading manufacturers, we may be
unable to maintain our existing customer base and/or generate new sales.
The success of our software depends upon the continued successful
integration and operation of our software with the IP telecommunications
equipment of the leading manufacturers. We currently target a customer base
that uses a wide variety of network infrastructure equipment and software
platforms, which are constantly changing. In order to succeed, we must
continually modify our software as new IP telecommunications equipment is
introduced. If our product line fails to satisfy these demanding and rapidly
changing technological challenges, our existing customers will be dissatisfied.
As a result, we may be unable to generate future sales and our business will be
materially adversely affected.
6
<PAGE>
If we fail to attract and retain qualified personnel we will not be able to
implement our business strategy or operate our business effectively.
Our products require sophisticated research and development, sales and
marketing, software programming, and technical customer support. Our success
depends on our ability to attract, train, motivate and retain highly skilled
personnel within each of these areas of expertise. As part of our business
strategy, we intend to continue to increase substantially the number of our
employees who perform each of these functions. Qualified personnel in these
areas are in great demand and are likely to remain a limited resource for the
foreseeable future. We cannot assure you that we will be able to attract and
retain the skilled employees we require. In addition, the resources required to
attract and retain such personnel may adversely affect our operating margins.
The failure to attract and retain qualified personnel may have a material
adverse effect on our business, results of operations and financial condition.
We depend on a limited number of key personnel who would be difficult to
replace. If we lose the services of these individuals, our business will be
harmed.
Because our market is new and evolving, the success of our business depends
in large part upon the continuing contributions of our senior management.
Specifically, continued growth and success largely depend on the managerial and
technical skills of Monica Eisinger, our President and Chief Executive Officer
and one of our founders, and other members of senior management. Because the
demand for highly qualified senior personnel in Israel exceeds the supply of
this type of personnel, it will be difficult to replace members of our senior
management if one or more of them were to leave us. If either Ms. Eisinger or
other members of the senior management team are unable or unwilling to continue
their employment with our company, our business will be harmed.
Our success depends on our ability to continually develop and market new and
more technologically advanced products and enhancements.
The IP-based services market is characterized by:
. rapid technological advances like the development of new standards for
communications protocols;
. frequent new service offerings and enhancements by our customers, such
as value-added IP-based services and new rating plans; and
. changing customer needs.
We believe that our future success will largely depend upon our ability to
continue to enhance our existing products and successfully develop and market
new products on a cost-effective and timely basis. We cannot assure you that we
will be successful in developing and marketing new products that respond
adequately to technological change. Our failure to do so would have a material
adverse effect on our ability to market our own products.
The growth of our business is dependent on the continuation of a favorable
regulatory environment, and any change in this environment could harm our
business.
Federal, state and international regulatory bodies regulate the
telecommunications industry and the products that use telecommunications
networks. Over the past decade, a variety of new entrants have begun to provide
telecommunications services and, in particular, Voice over IP services,
intensifying competition in that industry. Future growth in the markets for our
products and services will depend in part on the continuation of a favorable
regulatory environment for Voice over IP services. However, the growth of Voice
over IP has also led to close examination of its regulatory treatment in many
jurisdictions. The provision of Voice over IP services is subject to change as
a result of future regulatory action, judicial decisions or legislation. The
cost of providing Voice over IP services could increase as a result of any
regulatory changes that would require providers to pay charges applicable to
traditional telephone networks. Any new regulations that increase the cost of
providing Voice over IP services could halt the growth of the Voice over IP
market. As a result, the market for our billing and customer care software
could decline.
7
<PAGE>
Any future regulation of the Internet may slow its growth and result in a
decreased demand for our products and services.
The demand for our products and services depends on the growth in Internet
usage since Voice over IP and other IP-based services are delivered mainly over
the Internet. The adoption of any laws or regulations that affect the growth of
the Internet, or the Voice over IP industry, could result in decreased demand
for our products.
From time to time, our software and the systems into which it is installed
contain undetected errors. This may cause us to experience a significant
decrease in market acceptance and use of our software products and we may be
subject to warranty and other liability.
From time to time, our software, as well as the systems into which they are
integrated, contain undetected errors. Because of this integration, it can be
difficult to determine the source of the errors. As a result, and regardless of
the source of the errors, we could experience one or more of the following
adverse results:
. diversion of our resources and the attention of our personnel from our
research and development efforts to address these errors;
. negative publicity and injury to our reputation that may result in loss
of existing or future customers; and/or
. loss of or delay in revenue.
In addition, we may be subject to claims based on errors in our software or
mistakes in performing our services. Our licenses generally contain provisions
such as disclaimers of warranties and limitations on liability for special,
consequential and incidental damages, designed to limit our exposure to
potential claims. However, not all of our contracts contain these provisions
and we cannot assure you that the provisions that exist will be enforceable.
For example, we have an agreement with Cisco relating to our provision of
billing and customer care software to China Unicom jointly with voice gateways
provided by Cisco. This agreement requires us to indemnify Cisco for claims by
China Unicom relating to our software. In addition, while we maintain product
liability insurance, we cannot assure you that this insurance will provide
sufficient, or any, coverage for these claims. A product liability claim,
whether or not successful, could adversely affect our business by damaging our
reputation, increasing our costs, and diverting the attention of our management
team.
If our billing and customer care software for Voice over IP fails to achieve
market acceptance among traditional telecommunications service providers, we
may suffer a decrease in market share, revenues and profitability.
We believe that as the demand for Voice over IP services grow, traditional
telecommunications service providers will increasingly offer Voice over IP to
remain competitive and these providers will constitute a growing portion of the
Voice over IP market. These companies already have relationships with
traditional billing and customer care software providers for their telephony
services, and may wish to work with their current providers of billing and
customer care software to enhance and modify that software for Voice over IP
services. If our billing and customer care software for Voice over IP fails to
achieve market acceptance among traditional telecommunications service
providers, we may suffer a decrease in market share, revenues and
profitability.
Because some of our customers require a lengthy approval process before they
order our products, our sales process is often subject to delays that may
decrease our revenues and seriously harm our business.
In 1999, we derived 43% of our revenues from the sale of software and
related services to providers of Voice over IP services. Before we can sell our
software to some of these customers, they must conduct a lengthy and complex
approval and purchase process. Prospective customers must make a significant
commitment of resources to test and evaluate our products and to integrate them
into larger systems. This evaluation process, which takes place before our
customers issue purchase orders, typically takes between three and six months.
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The following factors, among others, affect the length of the approval
process:
. the time involved for our customers to determine and announce their
specifications;
. the complexity of the networks being deployed;
. the timely delivery by IP telecommunications equipment manufacturers of
the hardware comprising the customer's network infrastructure;
. the build-up of the customer's network infrastructure; and
. the timely release of new versions of products comprising the customer's
network infrastructure by the vendors of those products.
Delays in product approval may decrease our revenues and could seriously
harm our business and results of operations.
We may need additional capital to finance our operations in the future and may
not be able to obtain additional capital.
We intend to continue to enhance our products, develop new product offerings
and expand our customer base in order to maintain our competitive position. If
our cash flow from operations is not sufficient to meet our capital expenditure
and working capital requirements, we will need to raise additional capital from
other sources, such as the issuance of additional equity. If we issue
additional equity, investors could experience dilution. If we are unable to
raise additional capital through the issuance of equity or otherwise, we cannot
assure you that any third party will be willing or able to provide additional
capital on favorable terms. If we are unable to obtain additional capital, we
may be required to reduce the scope of our business or our anticipated growth,
which would reduce our revenues.
If we are unable to compete effectively in the marketplace, we may suffer a
decrease in market share, revenues and profitability.
Competition in our industry is intense and we expect competition to
increase. We compete primarily with young, emerging billing companies such as
Portal Software Inc. and Belle Systems. We also compete with telecommunications
equipment companies such as Clarent Corporation, which offers an internally
developed billing and customer care software that is integrated into their
hardware. Finally, we believe that the more established traditional billing and
customer care companies, such as Amdocs Ltd. (which recently acquired Solect
Technology Group Inc.) and Saville Systems plc (acquired by ADC
Telecommunications Inc.), are beginning to offer billing and customer care
software for Voice over IP.
Some of our competitors have greater financial, technical, sales, marketing
and other resources, and greater name recognition than do we. Current and
potential competitors have established, and may establish in the future,
cooperative relationships among themselves or with third parties to increase
their ability to address the needs of prospective customers. Accordingly, new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. As a result, our competitors may be able to adapt
more quickly than us to new or emerging technologies and changes in customer
requirements, and may be able to devote greater resources to the promotion and
sale of their products. We cannot guarantee that we will be able to compete
effectively against current or future competitors or that competitive pressures
will not harm our financial results.
If we are unable to manage future expansion, if any, we may experience a
significant strain on our financial resources and personnel.
Since inception, we have rapidly and substantially increased the scope of
our operations and the number of employees domestically and internationally. On
March 31, 2000, we had 139 employees, compared to a total of 97 employees on
March 31, 1999. We expect to continue to hire new employees at a rapid pace.
This expansion has placed, and the anticipated growth of our future operations
will place, a significant strain on our internal training capabilities, our
management systems and our operational, administrative and financial resources.
We expect that we will need to continue to improve our financial and managerial
controls and reporting systems
9
<PAGE>
and procedures in order to continue to expand and manage our workforce. We
cannot assure you that we have made adequate provisions for the costs and risks
associated with our growth; that our systems, procedures or controls will be
adequate to support our operations as they continue to grow; or that we will be
able to market and sell our services successfully as our operations evolve. If
we are unable to successfully manage our future expansion, our business will
suffer.
We may seek to expand our business through acquisitions that could result in
diversion of resources and extra expenses, which could disrupt our business and
harm our financial condition.
Although we have not done so in the past, we may in the future pursue
acquisitions of business, products and technologies, or the establishment of
joint venture arrangements, that could expand our business. The negotiation of
potential acquisitions or joint ventures as well as the integration of an
acquired or jointly developed business, technology or product could cause
diversion of management's attention from the day-to-day operation of our
business. This could impair our relationships with our employees, customers,
distributors, re-sellers and marketing allies. Future acquisitions could result
in:
. potentially dilutive issuances of equity securities;
. the incurrence of debt and contingent liabilities;
. amortization of goodwill and other tangibles;
. research and development write-offs; and
. other acquisition-related expenses.
Acquired businesses or joint ventures may not be successfully integrated with
our operations or with our technology. If any acquisition or joint venture were
to occur, we may not receive the intended benefits of the acquisition or joint
venture. In addition, we have no experience with respect to negotiating an
acquisition and operating an acquired business. If future acquisitions disrupt
our operations, our business may suffer.
If we are unable to adequately protect our intellectual property or become
subject to a claim of infringement, our business may be materially adversely
affected.
Our success and ability to compete depend substantially upon our internally
developed technology. Any misappropriation of our technology could seriously
harm our business. In order to protect our technology and products, we rely on
a combination of trade secret and trademark law. Despite our efforts to protect
our intellectual property rights, unauthorized parties may attempt to copy or
otherwise obtain and use our software or technology or to develop software with
the same functionality. Policing unauthorized use of our products is difficult
and we cannot be certain that the steps we have taken will prevent
misappropriation, particularly in foreign countries where the laws may not
protect our intellectual property rights as fully as in the United States.
Although we have not received any notices from third parties alleging
infringement claims, third parties could claim that our current or future
products or technology infringe their proprietary rights. We expect that
software developers will increasingly be subject to infringement claims as the
number of products and competitors providing software and services to the Voice
over IP industry increase and overlaps occur. Any claim of infringement by a
third party could cause us to incur substantial costs defending against the
claim, even if the claim is invalid, and could distract our management from our
business. Furthermore, a party making such a claim could secure a judgment that
requires us to pay substantial damages. A judgment could also include an
injunction or court order that could prevent us from selling our software. Any
of these events could seriously harm our business.
If anyone asserts a claim against us relating to proprietary technology or
information, we might seek to license their intellectual property or to develop
non-infringing technology. We might not be able to obtain a license on
commercially reasonable terms or on any terms. Alternatively, our efforts to
develop non-infringing technology could be unsuccessful. Our failure to obtain
the necessary licenses or other right or to develop non-infringing technology
could prevent us from selling our software and could therefore seriously harm
our business.
10
<PAGE>
Some members of our board of directors may have conflicts of interest with us,
and some of these conflicts may be resolved in a manner adverse to us.
Mr. Mohan, a member of our board of directors, is a general partner of
Summit Partners and a director of Martin and Associates, a company partially
owned by Summit Partners. Martin and Associates is a provider of billing and
customer care software for local telephony providers, and might compete with us
in the future. In addition, Mr. Rosen, who is also a member of our board of
directors, is a corporate executive of ADC-Teledata, a subsidiary of ADC
Telecommunications Inc. that acquired Saville Systems plc, one of our
competitors. Mr. Mohan and Mr. Rosen, as directors of our company, will have
fiduciary duties, including duties of loyalty, to our company but may also have
conflicts of interest with respect to matters potentially involving or
affecting us, such as acquisitions or other corporate opportunities that may be
suitable for both us and Summit Partners or ADC-Teledata, as the case may be.
Although we believe that these directors will be able to fulfil their fiduciary
duties to our shareholders despite their involvement with Summit Partners and
ADC-Teledata, there could be potential conflicts of interest when these
directors are faced with decisions that could have different implications for
our company and either Summit Partners or ADC-Teledata. These conflicts could
be resolved in a manner adverse to us which could harm our business. For more
information relating to how we handle conflicts of interest, see "Management--
Approval of Specified Related Party Transactions under Israeli Law."
Because a substantial majority of our revenues are generated outside of Israel,
our results of operations could suffer if we are unable to manage international
operations effectively.
During 1999, 77.4% of our revenues were generated outside of Israel and
during the three months ended March 31, 2000, 87.6% of our revenues were
generated outside of Israel. Our sales outside of Israel are made in more than
20 countries. We currently have sales offices located in New Jersey, United
States and in Beijing, China, and plan to establish additional facilities in
other parts of the world. The expansion of our existing international
operations and entry into additional international markets will require
significant management attention and financial resources. Our ability to
penetrate some international markets may be limited due to different technical
standards, protocols and requirements for our products in different markets. We
cannot be certain that our investments in establishing facilities in other
countries will produce desired levels of revenue. In addition, conducting our
business internationally subjects us to a number of risks, including
. staffing and managing foreign operations;
. increased risk of collection;
. potentially adverse tax consequences;
. the burden of compliance with a wide variety of foreign laws and
regulations;
. burdens that may be imposed by tariffs and other trade barriers; and
. political and economic instability.
Our business may be negatively affected by exchange rate fluctuations.
Although most of our revenues are denominated in U.S. Dollars and Euros,
approximately 60% of our expenses are incurred in New Israeli Shekels, or NIS.
As a result, we may be negatively affected by fluctuations in the exchange rate
between the Euro or the NIS and the U.S. dollar. We cannot predict any future
trends in the rate of inflation in Israel or the rate of devaluation of the NIS
against the U.S. dollar. If the U.S. dollar cost of our operations in Israel
increases, our U.S. dollar-measured results of operations will be adversely
affected. In addition, devaluation in the Euro or local currencies of our
customers relative to the U.S. dollar could cause customers to decrease or
cancel orders or default on payment. We may choose to limit these exposures by
entering into hedging transactions. However, hedging transactions may not
enable us to avoid exchange-related losses, and our business may be harmed by
exchange rate fluctuations. The imposition of price or exchange controls or
other restrictions on the conversion of foreign currencies could affect our
ability to collect payments, which in turn, could have a material adverse
effect on our results of operations and financial condition.
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Breaches in the security of the data collected by our systems could adversely
affect our reputation and hurt our business.
Customers rely on third-party security features to protect due privacy and
integrity of customer data. Our products may be vulnerable to breaches in
security due to failures in the security mechanisms, the operating system, the
hardware platform or the networks linked to the platform. MIND-iPhonEX, which
provides web access to information, presents additional security issues for our
customers. Security vulnerabilities could jeopardize the security of
information stored in and transmitted through the computer systems of our
customers. A party that is able to circumvent our security mechanisms could
misappropriate proprietary information or cause interruptions in the operations
of our customers. Security breaches could damage our reputation and product
acceptance would be significantly harmed, which would cause our business to
suffer.
Risks Relating to the Offering
Our share price may be volatile, and you may be unable to sell your shares at
or above the offering price.
The initial public offering price will be determined through negotiations
between the underwriters and us and may not be indicative of market prices that
will prevail after the offering. Therefore, you may be unable to sell your
shares for more than you paid for them. A number of factors, many of which are
beyond our control, may cause the market price of our ordinary shares to
fluctuate significantly, such as:
. fluctuations in our quarterly revenues and earnings and those of our
publicly held competitors;
. shortfalls in our operating results from the levels forecast by
securities analysts;
. public announcements concerning us or our competitors;
. changes in pricing policies by us or our competitors;
. market conditions in our industry; and
. the general state of the securities market (particularly the technology
sector).
We have no control over any of these matters and any of them may adversely
affect our business internationally. In addition, trading in shares of
companies listed on the Nasdaq National Market in general and trading in shares
of technology companies in particular has been subjected to extreme price and
volume fluctuations that have been unrelated or disproportionate to operating
performance. These broad market and industry factors may depress our share
price, regardless of our actual operating results.
An active trading market for our ordinary shares may not develop or be
sustained after the offering, and it may be difficult for you to sell your
shares.
Before the offering, our ordinary shares did not trade in the public market.
We cannot be certain that an active and liquid trading market for our ordinary
shares will develop or be sustained after the offering. If a desirable trading
market does not develop, it may be difficult for you to sell your shares.
Substantial sales of our ordinary shares could adversely affect our share
price.
Sales of a substantial number of ordinary shares after the offering could
adversely affect the market price of our ordinary shares by introducing a large
number of sellers to the market. Given the likely volatility that will exist
for our ordinary shares, such sales could cause the market price of the
ordinary shares to decline.
After this offering, we will have outstanding 21,283,298 ordinary shares.
All of the ordinary shares to be sold in this offering will be freely tradable
without restriction or further registration under the federal securities laws
unless purchased by our "affiliates," as that term is defined in Rule 144 under
the Securities Act. The remaining outstanding ordinary shares, representing
approximately 80.3% of the outstanding ordinary shares upon completion of this
offering (78.0% if the underwriters' over-allotment option is exercised in
full) and all ordinary shares issued upon exercise of options, will be
"restricted securities" under the Securities Act subject to restrictions on the
timing, manner and volume of sales of such shares. Our directors, executive
officers, key
12
<PAGE>
employees and our current shareholders have agreed, for a period of 180 days
after the date of this prospectus and some of the participants in our directed
share program will be required to agree as a condition to participation in the
program, for a period of up to 90 days after the date of this prospectus, that
they will not, without the prior written consent of Lehman Brothers Inc.,
directly or indirectly, offer to sell, sell or otherwise dispose of any
ordinary shares or securities convertible into or exchangeable for ordinary
shares, except for:
. the exercise of stock options existing on the date of this offering;
. transfers to their associates (as defined in the Exchange Act) who agree
to the lock-up; and
. pledges if the pledgees agree to the lock-up.
We have also agreed to an equivalent lock-up, except that we may issue
shares, warrants or options in consideration of acquisitions if the recipient
agrees to comply with the lock-up.
Holders of 16,491,298 ordinary shares have the right to require us to
register their shares on two occasions, and have incidental registration rights
with respect to those ordinary shares. In addition, as of May 31, 2000 there
were outstanding options to purchase a total of 747,820 ordinary shares and we
were authorized to grant options to purchase 358,180 additional ordinary
shares. We intend to file a registration statement on Form S-8 covering all of
the ordinary shares issuable upon the exercise of options under our stock
option plans, at which time these shares will be immediately available for sale
in the public market, subject to the terms of the related options and any
applicable lock-up agreements.
After this offering, our current shareholders will continue to be able to
control the outcome of matters requiring shareholder approval.
After this offering, our current shareholders will beneficially own an
aggregate of 17,083,298 ordinary shares representing approximately 80.3% of the
ordinary shares then outstanding. Therefore, they will be able to control the
outcome of various actions that require shareholder approval. For example,
these shareholders could elect all of our directors, delay or prevent a
transaction in which shareholders might receive a premium over the prevailing
market price for their shares and prevent changes in control or management.
This concentration of ownership may adversely affect our share price.
Our management will have broad discretion with respect to the use of the
proceeds of this offering, and may not apply the proceeds to uses that will
benefit shareholders.
There is a significant amount of unallocated proceeds and our management
will have broad discretion in determining how to allocate the proceeds from
this offering. We intend to use a significant portion of the net proceeds from
the offering to expand sales and marketing of our products worldwide, to
enhance our product development, for potential acquisitions and for working
capital and general corporate purposes. There is no specific allocation for a
substantial portion of these net proceeds and our management retains the right
to utilize the proceeds as it determines. There can be no assurance that
management will be able to use the proceeds effectively to continue the growth
of our business.
Risks Relating to Our Location in Israel
Potential political, economic and military instability in Israel may harm our
results of operations.
We were organized under the laws of the State of Israel and a substantial
portion of our assets, and our principal operations, are located in Israel.
Consequently, our operations, financial condition and results of operations are
directly influenced by economic, political and military conditions in and
affecting Israel. We could be adversely affected if major hostilities break out
in the Middle East or if trade between Israel and its present trading partners
is curtailed. Since the establishment of the State of Israel in 1948, a state
of hostility has existed between Israel and the Arab countries in the region.
Any future armed conflicts or political instability in the region could
negatively affect our business or harm our results of operations. We cannot
predict whether a full resolution of these problems will be achieved, the
nature of any such resolution or any consequences that any of these factors may
have on us. Israeli companies and companies doing business with them have been
subject to an economic boycott initiated by the Arab countries. This boycott
and policies may seriously harm our operating results or the expansion of our
business.
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We currently participate in or receive tax benefits from government programs.
These programs require us to meet certain conditions and these programs and
benefits may be terminated or reduced in the future.
We receive tax benefits under Israeli law for capital investments that are
designated as "Approved Enterprises." To maintain our eligibility for these tax
benefits, we must continue to meet several conditions including making required
investments in fixed assets. If we fail to comply with these conditions in the
future, the tax benefits received could be cancelled. The Israeli government
has reduced the benefits available under this program in recent years and has
indicated that it may reduce or eliminate these benefits in the future. These
tax benefits may not continue in the future at their current levels or at any
level. From time to time, we submit requests for expansion of our Approved
Enterprise programs or for new programs. These requests might not be approved.
The termination or reduction of these tax benefits could seriously harm our
business, financial condition and results of operations. For more information
about Approved Enterprises, see "Taxation and Government Programs--Law for
Encouragement of Capital Investments, 1959," and Note 7 to our financial
statements.
Because we have received grants from the Office of the Chief Scientist, we are
subject to on-going restrictions.
We have received grants in the past from the Office of the Chief Scientist
of the Israeli Ministry of Industry and Trade. According to Israeli law, any
products developed with grants from the Office of the Chief Scientist are
required to be manufactured in Israel, unless we obtain prior approval of a
governmental committee. As a condition to obtaining this approval, we may be
required to pay the Office of the Chief Scientist up to 300% of the grants we
received. In addition, we are prohibited from transferring to third parties the
technology developed with these grants without the prior approval of a
governmental committee. Approval is not required for the export of any products
resulting from the funded technology.
Our results of operations may be negatively affected by the obligation of some
of our key personnel to perform military service.
Some of our executive officers and employees in Israel, including the Chief
Financial Officer, are obligated to perform up to 36 days of military reserve
duty annually. 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 would harm our
business.
It may be difficult to enforce a U.S. judgment against us, our officers and
directors and the Israeli experts in this prospectus or to assert U.S.
securities laws claims in Israel or serve process on substantially all of our
officers and directors and these experts.
We are incorporated in the State of Israel. Substantially all of our
executive officers and directors and the Israeli experts in this prospectus are
nonresidents of the United States, and a substantial portion of our assets and
the assets of these persons are located outside the United States. Therefore,
it may be difficult for an investor, or any other person or entity, to collect
a judgment obtained in the United States against us or any of these persons, or
to effect service of process upon these persons in the United States. For more
information regarding enforceability of civil liabilities against us, our
executive officers and directors and the Israeli experts named in this
prospectus, see "Enforceability of Civil Liabilities."
Provisions of Israeli law and our articles of association may delay, prevent or
make difficult a change of control and therefore depress the price of our
stock.
Some of the provisions of our articles of association and Israeli law could,
together or separately:
. discourage potential acquisition proposals;
. delay or prevent a change in control; and
. limit the price that investors might be willing to pay in the future for
our ordinary shares.
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In particular, our articles of association provide that our board of
directors will be divided into three classes which serve staggered three year
terms. In addition, Israeli corporate law regulates mergers and acquisitions of
shares through tender offers, requires approvals for transactions involving
significant shareholders and regulates other matters that may be relevant to
these types of transactions. See "Description of Ordinary Shares--Mergers and
Acquisitions under Israeli Law." Furthermore, Israel tax law treats stock-for-
stock acquisitions between an Israeli company and a foreign company less
favorably than does U.S. tax law. For example, Israeli tax law may subject a
shareholder who exchanges his ordinary shares for shares in a foreign
corporation to immediate taxation. Finally, the terms of the grants we received
in the past from the Office of the Chief Scientist require prior approval of
the acquisition of any shares by a non-Israeli acquirer or the acquisition of
25% of our shares by an Israeli acquirer, excluding the shares listed on
Nasdaq.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address, among
other things, our strategy; the anticipated development of our products; our
development of additional revenue sources; the market acceptance of our
services; and our technological advancement. These statements may be found in
the sections of this prospectus entitled "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and in this prospectus generally, including the
section of this prospectus entitled "Business--Our Marketing Opportunity" which
contains information obtained from independent industry sources. Actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including all the risks discussed in
"Risk Factors" and elsewhere in this prospectus.
In addition, statements that use the terms "believe," "do not believe,"
"expect," "plan," "intend," "estimate," "anticipate" and similar expressions
are intended to identify forward-looking statements. All forward-looking
statements in this prospectus reflect our current views with respect to future
events and are based on assumptions and are subject to risks and uncertainties.
Except as required by applicable law, including the securities laws of the
United States, we do not intend to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
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USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of our
ordinary shares will be approximately $41.4 million, after deducting the
underwriting discount and the estimated offering expenses. We intend to use
approximately $9.0 million of the net proceeds of this offering to continue to
increase our sales and marketing capabilities, including to open and acquire
sales and marketing centers in additional markets worldwide, and approximately
$7.0 million for research and development relating to new products. We expect
to invest $6.4 million over a period of two to three years in connection with
increasing the size of our facilities pursuant to an Approved Enterprise
program under Israeli law. We expect to use approximately $1.5 million of the
net proceeds of this offering to purchase property, plant and equipment
pursuant to the Approved Enterprise program over the next 12 months. We expect
that the balance of the required investment in the Approved Enterprise program
will be financed by any proceeds of the offering remaining after this twelve-
month period, cash on our balance sheet and our cash flow from operations. We
will use the rest of the proceeds for working capital to support the growth of
our business and for other general corporate purposes, including potential
acquisitions. We currently have no agreements or understandings with respect to
any potential acquisition and no specific plan for the use of the rest of these
proceeds.
Pending our use of the net proceeds as described above, we intend to invest
the net proceeds in interest-bearing instruments or bank deposits in Israel or
outside of Israel.
DIVIDEND POLICY
In 1998, we paid a dividend of approximately $266,000, and in 1999 we paid a
dividend in the amount of approximately $393,000. In the first quarter of 2000,
we declared a dividend of $2,013,000 to shareholders of record on March 30,
2000, which was paid in the second quarter of 2000. We do not expect to make
dividend payments on our ordinary shares in the foreseeable future and
currently intend to retain all future earnings to finance our operations and to
expand our business. In addition, we received certain benefits as an Approved
Enterprise under the Law for the Encouragement of Capital Investments, 1959.
Payment of cash dividends may subject that portion of our income derived from
the Approved Enterprise to Israeli taxes to which such income would not
otherwise be subject.
Under current Israeli regulations, any dividends or other distributions paid
in respect of ordinary shares that were purchased by non-residents of Israel
with certain non-Israeli currencies, including U.S. dollars, may be freely
repatriated in such non-Israeli currencies at the rate of exchange prevailing
at the time of the conversion provided that Israeli income tax has been paid
on, or withheld from, such payments.
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CAPITALIZATION
The following table sets forth our capitalization at March 31, 2000:
. on an actual basis;
. on a pro forma basis to give effect to the conversion of all our Series
A and Series B preferred shares at a conversion rate of 19.7037 ordinary
shares for each Series A preferred share and 20 ordinary shares for each
Series B preferred share, which will take place immediately prior to
this offering;
. on a pro forma as adjusted basis to give additional effect to the sale
by us of 4,200,000 ordinary shares in this offering at an initial public
offering price of $11.00 per share and the receipt by us of the
estimated net proceeds of the offering, after deducting the underwriting
discount and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
As of March 31, 2000
-----------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents........................ $16,473 $16,473 $57,839
======= ======= =======
Mandatorily redeemable convertible preferred
shares:
Series A preferred shares: authorized:
2,222,220 issued and outstanding: actual -
111,111 shares; pro forma and pro forma as
adjusted - none............................... $17,778 $ -- $ --
Series B preferred shares: authorized: 555,560,
issued and outstanding: actual - 27,778
shares; pro forma and pro forma as adjusted -
none......................................... 3,000 -- --
-------
20,778 -- --
-------
Shareholders' equity (capital deficiency):
Ordinary shares, NIS 0.01 par value per share:
authorized - 85,222,220 shares; issued and
outstanding: actual -
14,336,440 shares; pro forma - 17,081,298
shares; pro forma as
adjusted - 21,281,298 shares................... 36 43 53
Additional paid-in capital...................... 1,364 22,135 63,491
Deferred compensation........................... (880) (880) (880)
Accumulated deficit............................. (6,426) (6,426) (6,426)
------- ------- -------
Total shareholders' equity (capital
deficiency)................................... (5,906) 14,872 56,238
------- ------- -------
Total capitalization........................... $14,872 $14,872 $56,238
======= ======= =======
</TABLE>
The preceding table excludes from the number of ordinary shares to be
outstanding after this offering 1,108,000 shares. 680,820 of the excluded
shares are issuable upon the exercise of options outstanding at March 31, 2000,
and 427,180 of the excluded shares reserved for issuance at March 31, 2000
under our option plans. Subsequent to March 31, 2000, 2000 shares were issued
upon exercise of existing options.
18
<PAGE>
DILUTION
Our pro forma consolidated net tangible book value as of March 31, 2000 was
approximately $14.9 million, or $0.87 per ordinary share. Pro forma
consolidated net tangible book value per share represents the total amount of
our consolidated tangible assets reduced by the amount of our consolidated
liabilities and divided by the number of ordinary shares outstanding on a pro
forma basis after giving effect to the conversion of all outstanding preferred
shares into ordinary shares. After giving effect to this offering of our
ordinary shares and receipt by us of the estimated net proceeds of this
offering, after deducting the underwriting discount and estimated offering
expenses payable by us, our pro forma consolidated net tangible book value at
March 31, 2000 would have been approximately $56.2 million, or $2.64 per
ordinary share. This represents an immediate increase in pro forma consolidated
net tangible book value of $1.77 per ordinary share to existing shareholders
and an immediate dilution of $8.36 per ordinary share to new investors
purchasing ordinary shares in this offering.
Dilution per share represents the difference between the price per share to
be paid by new investors and the pro forma consolidated net tangible book value
per share immediately after this offering. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $11.00
Pro forma consolidated net tangible book value per share
before this offering....................................... $0.87
Increase in pro forma consolidated net tangible value per
share attributable to new investors........................ 1.77
-----
Pro forma consolidated net tangible book value per share after
this offering................................................ 2.64
------
Dilution per share to new investors........................... $ 8.36
======
</TABLE>
The following table sets forth the differences between the total
consideration paid and the average price per share paid by existing
shareholders and by new investors purchasing ordinary shares in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.. 17,083,298 80.3% $15,442,000 25.1% $0.90
New investors.......... 4,200,000 19.7 46,200,000 74.9 11.00
---------- ----- ----------- -----
Total................ 21,283,298 100.0% $61,642,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing table does not reflect 680,820 ordinary shares issuable upon
exercise of options outstanding at March 31, 2000 under our share option plans
and 427,180 additional ordinary shares reserved for issuance under these plans
at March 31, 2000. To the extent outstanding options are exercised, there will
be further dilution to new investors.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
We have derived the selected consolidated statement of operations data
presented below for the years ended December 31, 1997, 1998 and 1999 and the
consolidated balance sheet data as of December 31, 1998 and 1999 from our
audited consolidated financial statements and notes included in this
prospectus. We have derived the selected consolidated statement of operations
data presented below for the years ended December 31, 1995 and 1996 and the
consolidated balance sheet data as of December 31, 1995, 1996 and 1997 from our
audited consolidated financial statements that are not included in this
prospectus. The selected financial data for the three month period ended March
31, 1999 and 2000 have not been audited and in the opinion of management
reflect and include all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of such results. Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. You should read
the selected financial data together with the section of this prospectus
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Period From
April 6, Three Months
(Inception) Ended
through Years Ended December 31, March 31,
December 31, ---------------------------- --------------
1995 1996 1997 1998 1999 1999 2000
------------ ------ ------ ------ ------ ------ -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
Sales of licenses...... $ 315 $ 584 $1,500 $3,385 $6,791 $1,287 $ 2,642
Services............... 55 316 491 685 1,405 298 529
------ ------ ------ ------ ------ ------ -------
Total revenues.......... 370 900 1,991 4,070 8,196 1,585 3,171
Cost of revenues........ 207 253 432 631 1,318 288 423
------ ------ ------ ------ ------ ------ -------
Gross profit............ 163 647 1,559 3,439 6,878 1,297 2,748
Research and
development, expenses,
net.................... 25 111 397 1,049 1,918 417 894
Selling, general and
administrative
expenses:
Selling expenses....... 37 225 430 1,055 2,110 429 809
General and
administrative
expenses.............. 77 247 352 591 1,000 219 363
Non-cash compensation... 7 2 1 1 26 -- 78
------ ------ ------ ------ ------ ------ -------
Operating income........ 17 62 379 743 1,824 232 604
Financial and other
income (expenses),
net.................... (2) (20) 77 99 137 15 21
------ ------ ------ ------ ------ ------ -------
Income before taxes on
income................. 15 42 456 842 1,961 247 625
Taxes on income......... 4 12 114 201 447 58 144
------ ------ ------ ------ ------ ------ -------
Net income.............. 11 30 342 641 1,514 189 481
Accretion of mandatorily
redeemable A preferred
shares to mandatory
redemption value....... -- -- -- -- -- -- (6,672)
------ ------ ------ ------ ------ ------ -------
Net income (loss)
applicable to ordinary
shares................. $ 11 $ 30 $ 342 $ 641 $1,514 $ 189 $(6,191)
====== ====== ====== ====== ====== ====== =======
Earnings (loss) for
ordinary share:
Basic.................. $ 0.00 $ 0.00 $ 0.03 $ 0.05 $ 0.10 $ 0.01 $ (0.42)
====== ====== ====== ====== ====== ====== =======
Diluted................ $ 0.00 $ 0.00 $ 0.03 $ 0.05 $ 0.10 $ 0.01 $ (0.42)
====== ====== ====== ====== ====== ====== =======
Pro forma loss per
ordinary share:
Basic.................. $ (0.42)
=======
Diluted................ $ (0.42)
=======
Weighted average number
of ordinary shares used
in computation of
earnings (loss) per
ordinary share:
Basic.................. 10,390 10,390 11,163 12,246 14,667 13,928 14,892
====== ====== ====== ====== ====== ====== =======
Diluted................ 10,390 10,426 11,200 12,283 14,984 14,115 14,892
====== ====== ====== ====== ====== ====== =======
Dividends per ordinary
share.................. $ -- $ -- $ 0.02 $ 0.01 $ 0.03 $ -- $ 0.14
====== ====== ====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
As of
As of December 31, March 31,
-------------------------------- ---------
1995 1996 1997 1998 1999 2000
---- ---- ------ ------ ------ ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.......... $ 4 $ 1 $ 39 $ 803 $2,646 $16,473
Working capital.................... (61) (67) 974 1,181 4,415 14,061
Total assets....................... 217 690 2,087 3,217 7,493 20,663
Mandatorily redeemable convertible
preferred shares.................. -- -- -- -- -- 20,778
Total shareholders' equity (capital
deficiency)....................... 68 98 1,257 1,760 5,220 (5,906)
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is based on and should be read in
conjunction with our financial statements, including the related notes, and
other financial information included in this prospectus.
Overview
We develop, manufacture and market real-time billing and customer care
software for Voice over IP service providers. Our billing and customer care
software product, known as MIND-iPhonEX, enables providers of Voice over IP to
meet complex, mission-critical needs, such as authentication, authorization,
accounting and reporting. Our software is also used by service providers to
collect the data needed to initiate service and manage customer accounts. We
also provide professional services, primarily to our billing and customer care
customers, consisting of customization, installation, customer support,
training and maintenance services and project management, which is advice to
our customers regarding the deployment of billing and customer care software
over their IP networks. In addition, we provide a software product to
enterprises, known as PhonEX, which is a call management system used by
organizations for call accounting, traffic analysis and fraud detection.
We were incorporated in Israel in 1995 and started providing our enterprise
software product to large organizations in that year. In 1997, we introduced
our billing and customer care software for Voice over IP. We generate revenues
from the sales of licenses for our billing and customer care and enterprise
software, and from fees for professional services. In 1999, 82.9% of our
revenues were derived from license fees and 17.1% were derived from
professional services. Of the total license fees in 1999, 43.1% were derived
from providing our billing and customer care software and 56.9% were derived
from providing our enterprise software. For the three months ended March 31,
2000, 83.3% of our revenues were derived from license fees and 16.7% were
derived from professional services. Of the total license fees for the three
months ended March 31, 2000, 75.5% were derived from providing our billing and
customer care software and 24.5% were derived from providing our enterprise
software. In the future, we expect sales of licenses for our billing and
customer care software to remain the primary source of our revenues. We also
expect sales of professional services to increase as a percentage of total
revenues. We do not experience any significant seasonality in our revenues.
Sales to a single distributor of our enterprise software represented 32.3%
of our revenues in 1998 and 19.2% of our revenues in 1999. Recently, we have
changed our strategy to focus our business on our billing and customer care
software. In 1999, 33.8% of our revenues were derived from our 10 largest
customers, excluding the single distributor. We expect to continue to derive
substantial revenues from a small number of changing customers. None of these
customers, however, is expected to represent more than 10% of our annual
revenues.
The currency of the primary economic environment in which we operate is the
U.S. dollar. Most of our revenues are derived from sales outside Israel which
are denominated primarily in U.S. dollars. To the extent that our revenues are
derived in NIS, contract amounts are stated in dollars and paid in NIS linked
to changes in the exchange rate of the U.S. dollar to the NIS. In addition,
most of our marketing costs are incurred outside Israel, primarily in U.S.
dollars. Transactions and balances originally denominated in U.S. dollars are
presented at their original amounts. Balances in non-dollar currencies are
translated into U.S. dollars using historical and current exchange rates for
non-monetary and monetary balances, respectively. For non-dollar transactions
and other items reflected in our income statements, the following exchange
rates are used:
. for transactions, exchange rates at the transaction dates or average
rates; and
. for other items (derived from non-monetary balance sheet items such as
depreciation and amortization, changes in inventories or similar items),
historical exchange rates.
The resulting currency transaction gains or losses are reported as financial
income or expenses as appropriate.
Our financial statements are prepared in accordance with generally accepted
accounting principles in the United States.
21
<PAGE>
Revenues. Our revenues from licenses are recognized on the basis set forth
in Statement of Position 97-2 (SOP 97-2) of the American Institute of Certified
Public Accountants. Our revenues from licenses are recognized when delivery has
occurred, persuasive evidence of an agreement exists, the sales price is fixed
or determinable and collectibility is probable. Customization of our products,
if any, is performed before delivery occurs. In cases where we install our
software products, the revenue recognition is deferred until the installation
is completed. We do not grant a right of return of products sold to customers,
distributors and resellers. Revenues from providing professional services are
priced on a fixed price basis and recognized ratably over the period of the
agreement, or as services are performed.
We are paid a one-time license fee by our customers for the right to use our
billing and customer care or our enterprise call management software products,
and additional fees to expand the scale of the network supported by our
software. We price our licenses for our billing and customer care software
based on (1) traffic volume, which is measured by factors such as minutes per
month, number of lines used and number of subscribers, and (2) the
functionality of the system based on application modules that are added to the
software. Licenses for our enterprise software are priced based on the number
of extensions in the customer's switchboard, as well as the functionality of
the system based on application modules that are added to the software. In
relation to our professional services, other than maintenance services, we
quote a fixed price based on the type of service offered, estimated direct
labor costs and the expenses that we will incur to provide these services. Fees
for maintenance services are based on a fixed percentage of the license fee and
are paid annually.
We provide a revenue breakdown for our customer care and billing Voice over
IP software and our enterprise call management software. These products are
sold to different customers and serve different markets. We believe that this
information provides a better understanding of our performance and allows
investors to make a more informed judgment about our business.
Cost of Revenues. The cost of revenues relating to providing our billing and
customer care and enterprise software consists primarily of direct labor costs
and overhead expenses related to software installation. Cost of revenues also
include software license fees to Oracle, materials, documentation, packaging
and shipping costs. Our cost of professional services revenues consists
primarily of direct labor costs and travel expenses. Our revenues from the sale
of our licenses have a higher gross margin than that from providing our
professional services. We incur variable direct labor costs when we provide
professional services. There are no comparable variable labor costs incurred
when we license our software.
Research and Development Expenses, net. Our research and development
expenses consist primarily of compensation and overhead costs for research and
development personnel and depreciation of testing and other equipment. Research
and development costs related to software products are expensed as incurred
until the "technological feasibility" of the product has been established.
Because of the relatively short time period between "technological feasibility"
and product release, and the insignificant amount of costs incurred during that
period, no software development costs have been capitalized.
Grants from the Office of the Chief Scientist of the Israeli Ministry of
Industry and Trade for development of approved projects are recognized as a
reduction of expense as the related cost is incurred. We have in the past used
these grants and repaid them. However, we currently do not use nor do we intend
to use a material amount of grants from the Office of the Chief Scientist in
the future. We expect to continue to make substantial investments in research
and development.
Selling Expenses. Our selling expenses consist primarily of compensation,
overhead and related costs for sales and marketing personnel, the operation of
international sales offices, sales commissions, marketing programs, public
relations, promotional materials, travel expenses and trade show expenses and
exhibition expenses.
General and Administrative Expenses. Our general and administrative expenses
consist primarily of compensation, overhead and related expenses for
executives, accounting and human resources personnel, professional fees,
provisions for doubtful accounts and other general corporate expenses.
22
<PAGE>
Non-Cash Compensation. Amortization of stock-based compensation results from
the granting of options to employees with exercise prices per share determined
to be below the fair market value per share of our ordinary shares on the dates
of grant. The stock-based compensation is being amortized over the vesting
period of the individual options.
Financial and Other Income, net. Our financial and other income, net
consists primarily of interest earned on bank deposits, gains on trading
securities, gains and losses from the conversion of monetary balance sheet
items denominated in non-dollar currencies into dollars, net of financing costs
and bank charges in real terms as well as the devaluation of monetary assets
and monetary liabilities.
Conversion and Redemption Feature of Preferred Shares. An amount of
$5,778,000 in connection with the issuance of the Series A preferred shares and
$1,445,000 in connection with the issuance of the Series B preferred shares, in
each case representing a beneficial conversion feature, will be amortized
against retained earnings (accumulated deficit) over a period that commenced
upon issuance of the preferred shares on March 30, 2000, and ending upon the
earlier of 12 months from the date of issuance or the date of an initial public
offering. The amount of amortization in the three month period ended March 31,
2000 was nominal and was not recorded. These amounts were calculated as the
difference between the per share conversion price and the deemed fair value of
an ordinary share, which was estimated by us at $8.00 per ordinary share at the
issuance date, multiplied by the applicable number of equivalent ordinary
shares.
We, our existing shareholders and the investors in the Series A and Series B
preferred shares entered into a redemption agreement on March 30, 2000,
concurrently with the purchase of the preferred shares. The redemption
agreement provides that, if a liquidity event has not occurred by March 30,
2005, the holders of the preferred shares will be entitled to cause a sale of
our company or redemption of the preferred shares at an amount equal to the
higher of (a) fair market value of the preferred shares or (b) the amount as
determined in the case of a liquidity event. However, any amount paid in
redemption of the Series B preferred shares is payable only to the extent of
profit of the Company. As of March 31, 2000, we have an accumulated deficit.
Liquidity events include a number of transactions including those resulting in
a change of control of our company or a sale by us of most of our assets and an
initial public offering.
As a result of the redemption provisions, the Series A preferred shares are
classified outside of permanent shareholders' equity at March 31, 2000 at their
estimated fair value of $17,778,000. In addition, we recognized a charge to
accumulated deficit, which was accreted for the three months ended March 31,
2000 in an amount of $6,672,000. This amount reflects the difference between
the redemption value of the Series A preferred shares and the net proceeds we
have received for the issuance of those shares. The Series B preferred shares
are also classified outside of permanent shareholders' equity at March 31, 2000
at their estimated fair value of $3,000,000 at March 31, 2000. An identical
amount was recorded as reduction of additional paid-in capital representing the
deemed purchase and cancellation of the ordinary shares which were exchanged
for the Series B preferred shares. The Series B preferred shares will be
increased by a charge to retained earnings (accumulated deficit) in the future
to the extent that our company has net income, up to the redemption amounts as
determined in the preceding paragraph.
Taxes on Income. Israeli companies are generally subject to income tax at
the corporate tax rate of 36%. Our facilities, however, have been granted
"approved enterprise" status under the Law for the Encouragement of Capital
Investments, 1959. Income derived from the approved enterprise is tax exempt
for a period of ten years commencing in the first year in which we earn taxable
income from the approved enterprise, since we have elected the "alternative
benefits scheme" (involving a waiver of investment grants). In the event of
distribution of cash dividends from income that was tax exempt, we would have
to pay 25% tax in respect of the amount distributed. As a result of dividends
paid by us with respect to 1997, 1998, 1999 and the first quarter of 2000, we
were subject to this tax with respect to the amount distributed. We do not
expect to make dividend payments in the future. Our effective tax rate after
2005 will continue to be reduced depending upon future capital investments and
approved enterprise certifications. These tax benefits may not be applied to
reduce the tax rate for any income derived by our foreign subsidiaries. There
is a proposal in Israel to replace the ten-year tax exemption available to
"approved enterprises" with a 10% tax. For more information on the proposed
Israeli tax reform, see the discussion in this prospectus under the heading
"Taxation and Government Programs--Proposed Tax Reform."
23
<PAGE>
Results of Operations
The following discussion of our results of operations for the years ended
December 31, 1997, 1998 and 1999 and the three months ended March 31, 1999 and
2000, including the percentage data in the following table, is based upon our
statements of operations contained in our financial statements for those
periods, and the related notes, included in this prospectus:
<TABLE>
<CAPTION>
Three
Months
Years Ended Ended March
December 31, 31,
------------------- ------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................... 21.7 15.5 16.1 18.2 13.3
----- ----- ----- ----- -----
Gross profit............................... 78.3 84.5 83.9 81.8 86.7
Research and development expenses, net..... 19.9 25.8 23.4 26.3 28.2
Selling, general and administrative
expenses:
Selling expenses......................... 21.7 25.9 25.7 27.1 25.5
General and administrative expenses...... 17.7 14.5 12.2 13.8 11.5
Non-cash compensation...................... 0.0 0.0 0.3 -- 2.5
----- ----- ----- ----- -----
Operating Income........................... 19.0 18.3 22.3 14.6 19.0
Financial and other income, net............ 3.9 2.4 1.6 0.9 0.7
----- ----- ----- ----- -----
Income before Taxes on income.............. 22.9 20.7 23.9 15.5 19.7
Taxes on income............................ 5.7 4.9 5.4 3.6 4.5
----- ----- ----- ----- -----
Net Income................................. 17.2% 15.8% 18.5% 11.9% 15.2%
===== ===== ===== ===== =====
</TABLE>
The following table presents the geographic distribution of our sales.
<TABLE>
<CAPTION>
Three
Months
Years Ended Ended March
December 31, 31,
------------------- ------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
United States and Canada................ 4.2% 17.4% 25.2% 17.7% 36.6%
Asia Pacific and other.................. 0.8 2.9 10.9 3.8 29.2
Europe.................................. 42.8 57.4 41.3 57.2 21.8
Israel.................................. 52.2 22.3 22.6 21.3 12.4
----- ----- ----- ----- -----
Total................................. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
As shown in the above table, our sales in the United States and Asia Pacific
increased over prior periods as a percentage of sales during the years ended
December 31, 1998, and 1999 and the three months ended March 31, 2000, while
sales of our products in Europe and in Israel decreased as a percentage of
sales during those periods.
Our revenues from sales in the United States and Asia Pacific, both in
absolute dollars and as a percentage of revenues, increased because of the
growth of the market for Voice over IP services in these areas. The percentage
of our revenues from sales in Europe decreased because Voice over IP services
are not universally offered in Europe. The percentage of our revenues from
sales in Israel decreased because Voice over IP services are not yet offered in
Israel.
24
<PAGE>
Comparison of Three Months ended March 31, 1999 and 2000
Revenues. Revenues increased from $1.6 million for the three months ended
March 31, 1999 to $3.2 million for the three months ended March 31, 2000, an
increase of $1.6 million, or 100.1%.
This increase was primarily attributable to an increase of $1.4 million, or
105.3%, in license fees, comprised of an increase of $1.9 million, or 1,227.5%,
relating to our billing and customer care software, partially offset by a
decrease of $505,000, or 44.5%, relating to our enterprise software.
Approximately 51% of the increase in revenues relating to our billing and
customer care software was primarily attributable to an increase in the average
product price with the balance attributable to an increase in the number of
products sold. Our average product price increased primarily as a result of our
sale of products that support larger networks. Revenues relating to our
enterprise software decreased relative to the prior year as a result of a one-
time large purchase by a distributor in 1999.
The remainder of the increase in revenues of $231,000, or 77.5%, was related
to an increase in revenues from professional services, primarily attributable
to the increase in the sales of licenses for our billing and customer care
software.
Cost of Revenues. Cost of revenues increased from $288,000 for the three
months ended March 31, 1999 to $423,000 for the three months ended March 31,
2000, an increase of $135,000, or 46.9%. This increase was due to higher costs
associated with our increased revenues, as well as increased compensation to
our employees. Gross profit as a percentage of revenues increased from 81.8%
for the three months ended March 31, 1999 to 86.7% for the same period in 2000.
This increase was due to the increase in our sales of licenses for our billing
and customer care software as a percentage of our total revenues.
Research and Development, net. Research and development expenses, net
increased from $417,000 for the three months ended March 31, 1999 to $894,000
for the three months ended March 31, 2000, an increase of $477,000, or 114.4%.
This increase was primarily attributable to an increase in personnel-related
expenses resulting from increasing the number of our research and development
employees during 1999 and the first quarter of 2000 associated with the
development of our billing and customer care software, as well as increased
compensation to our employees. Research and development expenses, net increased
as a percentage of revenues from 26.3% for the three months ended March 31,
1999 to 28.2% for the same period ended March 31, 2000.
Selling Expenses. Selling expenses increased from $429,000 for the three
months ended March 31, 1999 to $809,000 for the same period ended March 31,
2000, an increase of $380,000, or 88.6%. This increase was primarily
attributable to an increase of $188,000 in personnel and related expenses, an
increase of $138,000 in public relations, advertising and other promotional
expenses and an increase of $53,000 in expenses related to the expansion of our
sales office in the United States and the opening of our marketing office in
China. Selling expenses decreased as a percentage of revenues from 27.1% for
the three months ended March 31, 1999 to 25.5% for the same period ended March
31, 2000. We expect that these expenses will increase in the future because of
our marketing office that was opened in China during the first quarter of 2000,
additional offices we expect to open internationally and an increase in
personnel to support our sales growth.
General and Administrative Expenses. General and administrative expenses
increased from $219,000 for the three months ended March 31, 1999 to $363,000
for the same period ended March 31, 2000, an increase of $144,000, or 65.8%.
This increase was primarily attributable to an increase of $73,000 in the
provision for doubtful accounts and an increase of $61,000 in personnel
expenses. General and administrative expenses as a percentage of revenues
decreased from 13.8% for the three months ended March 31, 1999 to 11.5% for the
same period ended March 31, 2000. We expect that these expenses will increase
in the future as we expand our infrastructure as our sales increase.
Taxes on Income. Taxes on income increased from $58,000 in the three months
ended March 31, 1999 to $144,000 for the same period ended March 31, 2000. This
represented an effective tax rate of 23.5% in the three months ended March 31,
1999 and 23.0% in the three months ended March 31, 2000. Through March 31,
2000, we distributed as a dividend to our shareholders all of our earnings from
tax exempt income. Under
25
<PAGE>
Israeli law, we are required to pay a 25% tax on the amounts distributed.
Effective April 1, 2000, we have adopted a policy to retain our earnings to
support our growth and do not expect to pay dividends for the foreseeable
future. As a result, we expect our effective income tax rate to be
significantly reduced as the substantial majority of our income is expected to
be exempt from tax.
Net Income. Net income increased from $189,000 for the three months ended
March 31, 1999 to $481,000 for the same period ended March 31, 2000, an
increase of $292,000, or 154.5%. Net income increased as a percentage of
revenues from 11.9% for the three months ended March 31, 1999 to 15.2% for the
same period ended March 31, 2000.
Comparison of Years Ended December 31, 1998 and 1999
Revenues. Revenues increased from $4.1 million for the year ended December
31, 1998 to $8.2 million for the year ended December 31, 1999, an increase of
$4.1 million, or 101.4%. This increase was primarily attributable to an
increase of $3.4 million, or 100.6%, in license fees, comprised of an increase
of $2.0 million, or 279.2%, relating to our billing and customer care software
and an increase of $1.4 million, or 51.4%, relating to our enterprise software.
Approximately 60% of the increase in revenues relating to our billing and
customer care software was attributable to an increase in our average product
price, with the balance attributable to an increase in the number of systems
sold. Revenues relating to our enterprise software increased primarily due to
sales to new customers in Israel.
The remainder of the increase in revenues of $720,000, or 105.1%, was
related to an increase in revenues from professional services, primarily
attributable to the increase in the sales of billing and customer care
software.
Cost of Revenues. Cost of revenues increased from $631,000 for the year
ended December 31, 1998 to $1.3 million for the year ended December 31, 1999,
an increase of $687,000, or 108.9%. This increase was attributable to higher
costs associated with our increased revenues. Gross profit as a percentage of
revenues decreased moderately from 84.5% for the year ended December 31, 1998
to 83.9% for the year ended December 31, 1999.
Research and Development, net. Research and development expenses, net
increased from $1.0 million for the year ended December 31, 1998 to $1.9
million for the year ended December 31, 1999, an increase of $869,000, or
82.8%. This increase was primarily attributable to an increase in the number of
research and development personnel whom we employed. Research and development
expenses, net as a percentage of revenues decreased from 25.8% for the year
ended December 31, 1998 to 23.4% for the year ended December 31, 1999.
Selling Expenses. Selling expenses increased from $1.1 million for the year
ended December 31, 1998 to $2.1 million for the year ended December 31, 1999,
an increase of $1.0 million, or 100.0%. This increase was primarily
attributable to an increase of $420,000 in personnel-related expenses resulting
from increasing the number of our sales and marketing employees in 1999, an
increase of $427,000 in promotional expenses and an increase of $209,000
because 1999 was the first full year of operation of our marketing office in
the United States. This increase of our selling expenses was in response to
current and expected growth in the market for our products. Selling expenses,
as a percentage of revenues decreased from 25.9% for the year ended December
31, 1998 to 25.7% for the year ended December 31, 1999.
General and Administrative Expenses. General and administrative expenses
increased from $591,000 for the year ended December 31, 1998 to $1.0 million
for the year ended December 31, 1999, an increase of $409,000 or 69.2%. This
increase was primarily attributable to an increase of $261,000 in the provision
for doubtful accounts, of $87,000 in occupancy costs and $61,000 in personnel
expenses. General and administrative expenses as a percentage of revenues
decreased from 14.5% for the year ended December 31, 1998 to 12.2% for the year
ended December 31, 1999.
26
<PAGE>
Taxes on Income. Taxes on income increased from $201,000 for the year ended
December 31, 1998 to $447,000 for the year ended December 31, 1999. This
represented an effective tax rate of 23.9% for 1998 and 22.8% for 1999. The
taxes paid resulted primarily from a 25% tax we are required to pay under
Israeli law on dividends paid by us from tax exempt income.
Net Income. Net income increased from $641,000 for the year ended December
31, 1998 to $1.5 million for the year ended December 31, 1999, an increase of
$873,000, or 136.2%. Net income increased as a percentage of revenues from
15.8% for the year ended December 31, 1998 to 18.5% for the year ended December
31, 1999.
Comparison between Years Ended December 31, 1997 and 1998
Revenues. Revenues increased from $2.0 million for the year ended December
31, 1997 to $4.1 million for the year ended December 31, 1998, an increase of
$2.1 million, or 104.4%. This increase was primarily attributable to our
increases of $1.9 million, or 125.7%, in license fees, comprised of an increase
of $1.3 million, or 96.0%, relating to our enterprise software and an increase
of $585,000, or 400.7% relating to our billing and customer care software.
Revenues relating to our billing and customer care software increased primarily
as a result of the market roll-out of our billing and customer care software.
Revenues relating to our enterprise software increased primarily as a result of
increased marketing efforts in Europe, which resulted in increased sales.
The remainder of the increase of $194,000, or 39.5%, was related to an
increase in our revenues from professional services.
Cost of Revenues. Cost of revenues increased from $432,000 for the year
ended December 31, 1997 to $631,000 for the year ended December 31, 1998, an
increase of $199,000, or 46.1%. This increase was due to higher costs
associated with our increased revenues. Gross profit as a percentage of
revenues increased from 78.3% for 1997 to 84.5% for 1998. This increase was due
to the increase in our sales of licenses for our enterprise software outside
Israel, which generated higher margins.
Research and Development, net. Research and development expenses, net
increased from $397,000 for the year ended December 31, 1997 to $1.0 million
for the year ended December 31, 1998, an increase of $652,000, or 164.2%. This
increase was primarily attributable to an increase in personnel-related
expenses resulting from increasing the number of our research and development
employees in 1998 associated with the development of our billing and customer
care software and the new releases of our enterprise software. Research and
development expenses, net increased as a percentage of revenues from 19.9% for
the year ended December 31, 1997 to 25.8% for the year ended December 31, 1998.
Selling Expenses. Selling expenses increased from $430,000 for the year
ended December 31, 1997 to $1.1 million for the year ended December 31, 1998,
an increase of $625,000, or 145.3%. This increase was primarily attributable to
an increase of $347,000 in personnel and related expenses, $146,000 of expenses
related to the opening of a sales and support office in the United States and
an increase of $132,000 in public relations, advertising and other promotional
expenses. Selling expenses increased as a percentage of revenues from 21.7% for
the year ended December 31, 1997 to 25.9% for the year ended December 31, 1998.
General and Administrative Expenses. General and administrative expenses
increased from $352,000 the year ended December 31, 1997 to $591,000 for the
year ended December 31, 1998, an increase of $239,000, or 67.9%. This increase
was primarily attributable to an increase of $128,000 in personnel expenses and
of $111,000 in travel expenses. General and administrative expenses as a
percentage of revenues decreased from 17.7% for the year ended December 31,
1997 to 14.5% for the year ended December 31, 1998.
Taxes on Income. Taxes on income increased from $114,000 for the year ended
December 31, 1997 to $201,000 for the year ended December 1998. This
represented an effective tax rate of 25.0% for 1997 and
27
<PAGE>
23.9% for 1998. The taxes paid resulted primarily from a 25% tax we were
required to pay under Israeli law on dividends paid by us from tax exempt
income.
Net Income. Net income increased from $342,000 for the year ended December
31, 1997 to $641,000 for the year ended December 31, 1998, an increase of
$299,000, or 87.4%. Net profit decreased as a percentage of revenues from 17.2%
for the year ended December 31, 1997 to 15.8% for the year ended December 31,
1998.
Quarterly Results of Operations
The following table presents consolidated statements of operations data for
each of the nine fiscal quarters ended March 31, 2000. In management's opinion,
this unaudited information has been prepared on the same basis as our audited
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments, necessary for fair presentation of the
unaudited information for the quarters presented. The results of operations for
any quarter are not necessarily indicative of results that we might achieve for
any subsequent periods.
<TABLE>
<CAPTION>
Three Months 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
------- -------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $580 $1,356 $968 $1,166 $1,585 $1,821 $2,035 $2,755 $ 3,171
Cost of revenues........ 116 187 139 189 288 338 265 427 423
---- ------ ---- ------ ------ ------ ------ ------ -------
Gross profit............ 464 1,169 829 977 1,297 1,483 1,770 2,328 2,748
Research and development
expenses, net.......... 156 316 304 273 417 370 574 557 894
Selling, general and
administrative
expenses:
Selling expenses....... 236 223 282 314 429 404 567 711 809
General and
administrative
expenses.............. 113 116 157 205 219 211 230 339 363
Non-cash compensation... 1 -- -- -- -- -- 10 16 78
---- ------ ---- ------ ------ ------ ------ ------ -------
Operating income
(loss)................. (42) 514 86 185 232 498 389 705 604
Financial and other
income (expenses),
net.................... 14 23 24 38 15 20 36 66 21
---- ------ ---- ------ ------ ------ ------ ------ -------
Income (loss) before
taxes on income........ (28) 537 110 223 247 518 425 771 625
Taxes on income......... -- 134 28 39 58 110 109 170 144
---- ------ ---- ------ ------ ------ ------ ------ -------
Net income (loss)....... (28) 403 82 184 189 408 316 601 481
Accretion of mandatorily
redeemable convertible
A preferred shares to
mandatory redemption
value.................. -- -- -- -- -- -- -- -- (6,672)
---- ------ ---- ------ ------ ------ ------ ------ -------
Net income (loss)
applicable to ordinary
shares................. $(28) $ 403 $ 82 $ 184 $ 189 $ 408 $ 316 $ 601 $(6,191)
==== ====== ==== ====== ====== ====== ====== ====== =======
</TABLE>
We expect our operating results to fluctuate significantly in the future as
a result of various factors, many of which are outside our control.
Consequently, we believe that period-to-period comparisons of our operating
results may not necessarily be meaningful and, as a result, you should not rely
on them as an indication of future performance.
Our quarterly results have in the past varied for different reasons. Sales
increased significantly in the quarter ended June 30, 1998 because of the
receipt of a large order for enterprise software from one of our distributors
in Europe. General and administrative expenses in the quarter ended December
31, 1999 were higher because of an increase in our provision for doubtful
accounts as a result of the growth of our business.
Liquidity and Capital Resources
Since our inception, we have financed our operations mainly through cash
generated by operations. We have supplemented this source by two rounds of
financing in the form of the sale of equity securities. Our first round
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<PAGE>
of financing in an amount of $1.0 million, closed in August 1997. A follow-on
exercise of a warrant during the course of January 1999 yielded an additional
$2.3 million. Our second round of financing, in an amount of $12.0 million, was
completed in the first quarter of 2000. As of March 31, 2000 we had
approximately $16.5 million in cash and cash equivalents. As of March 31, 2000,
our working capital was $14.1 million.
Our operating activities used cash in the amount of $579,000 in 1997 and
provided cash in the amount of $1.5 million in 1998 and $1.0 million in 1999.
Cash used in operating activities in 1997 was primarily attributable to an
increase in trading securities in the amount of $752,000 as a result of
investing the excess funds from operations and an increase in trade receivables
in the amount of $519,000 as a result of the increase in our revenues,
partially offset by our net income of $342,000 and an increase in trade and
other payables. Cash provided by operating activities in 1998 was primarily
attributable to our net income of $641,000 and non-cash expenses related to
depreciation and amortization in the amount of $128,000 and a decrease in
trading securities in the amount of $581,000 as a result of the sale of a
portion of these securities. Cash provided by operating activities in 1999 was
primarily attributable to our net income of $1.5 million and non-cash expenses
related to depreciation and amortization in the amount of $196,000, partially
offset by an increase in trade receivables. Our operating activities provided
cash in the amount of $1.4 million in the three months ended March 31, 2000
compared to $224,000 in the three months ended March 31, 1999. Cash provided by
operating activities for the three months ended March 31, 2000 was primarily
attributable to our net income of $481,000 and an increase in payables, as a
result of the dividend declared in the quarter.
We used cash for investing activities of $200,000 in 1997, $422,000 in 1998
and $1.1 million in 1999. Our principal investment activities were the purchase
of property and equipment and the investment of cash in short term bank
deposits. In the three months ended March 31, 2000, cash provided by investing
activities was $473,000.
For the year ended December 31, 1997, our financing activities provided
$816,000 primarily attributable to proceeds in the amount of $1.0 million from
the issuance of ordinary shares, partially offset by a dividend paid in the
amount of $101,000. For the year ended December 31, 1998, our financing
activities used approximately $338,000, primarily attributable to the payment
of a dividend. Our financing activities provided $1.9 million in the year ended
December 31, 1999 primarily attributable to the proceeds from the issuance of
ordinary shares in the amount of $2.3 million, partially offset by a dividend
paid in the amount of $393,000. Our financing activities provided $12.0 million
in the three months ended March 31, 2000 from the issuance of preferred shares.
During the years ended December 31, 1997, 1998 and 1999, the aggregate
amount of our capital expenditures was $1.2 million, and our capital
expenditures in the three months ended March 31, 2000 was $159,000. These
expenditures were principally for the purchase of testing and other equipment.
Although we have no material commitments for capital expenditures, we
anticipate an increase in capital expenditures and lease commitments consistent
with our anticipated growth in operations, infrastructure and personnel.
As of March 31, 2000, we do not have any outstanding loans or lines of
credit.
In 1998, a dividend in the amount of approximately $266,000 was paid. In
1999, a dividend in the amount of approximately $393,000 was declared and paid.
In the first quarter of 2000, we declared a $2,013,000 dividend that was paid
in the second quarter of 2000. We do not intend to make dividend payments in
the future.
We believe that the net proceeds of the offering, together with our existing
cash and cash equivalents, will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least the next 18
months.
Disclosure Regarding Market Risk
The dollar cost of our operations is influenced by the extent to which any
inflation in Israel is offset, on a lagging basis, or is not offset by the
devaluation of the NIS in relation to the dollar. When the rate of inflation
29
<PAGE>
in Israel exceeds the rate of devaluation of the NIS against the dollar,
companies experience increases in the dollar cost of their operations in
Israel. Unless offset by a devaluation of the NIS, inflation in Israel will
have a negative effect on our profitability as we receive payment in dollars or
dollar-linked NIS for all of our sales while we incur a portion of our
expenses, principally salaries and related personnel expenses, in NIS.
In addition, a portion of our revenues is denominated in Euro derived from
sales to customers in Europe. Devaluation in the local currencies of our
customers relative to the U.S. dollar could cause our customers to cancel or
decrease orders or default on payment. Further, a strengthening of these
currencies versus other currencies could make our products less competitive in
foreign markets and collection of receivables more difficult.
The following table presents information about the rate of inflation in
Israel, the rate of devaluation of the NIS against the U.S. dollar, and the
rate of inflation of Israel adjusted for the devaluation:
<TABLE>
<CAPTION>
Israeli Inflation
Years Ended Israeli Inflation Israeli Devaluation Adjusted for
December 31, Rate Rate Devaluation
------------ ----------------- ------------------- -----------------
<S> <C> <C> <C>
1995................ 8.1% 3.9% 4.1%
1996................ 10.6 3.7 6.6
1997................ 7.0 8.8 (1.7)
1998................ 8.6 17.6 (7.7)
1999................ 1.3 (0.1) 1.4
</TABLE>
We cannot assure you that we will not be materially and 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 inflation in
Israel.
A devaluation of the NIS in relation to the U.S. dollar has the effect of
reducing the U.S. dollar amount of any of our expenses or liabilities which are
payable in NIS, unless these expenses or payables are linked to the U.S.
dollar. This devaluation also has the effect of decreasing the U.S. dollar
value of any asset which consists of NIS or receivables payable in NIS, unless
the receivables are linked to the U.S. dollar. Conversely, any increase in the
value of the NIS in relation to the U.S. dollar has the effect of increasing
the U.S. dollar value of any unlinked NIS assets and the U.S. dollar amounts of
any unlinked NIS liabilities and expenses.
Because exchange rates between the NIS and the U.S. dollar fluctuate
continuously, with a historically declining trend in the value of the NIS,
exchange rate fluctuations and especially larger periodic devaluations will
have an impact on our profitability and period-to-period comparisons of our
results. The effects of foreign currency re-measurements are reported in our
consolidated financial statements in current operations.
We endeavor to limit our balance sheet exposure by attempting to maintain a
similar level of assets and liabilities in any given currency, to the extent
possible. However, this method of matching levels of assets and liabilities of
the same currency is not always possible to achieve.
The following table sets forth our consolidated balance sheet exposure as of
March 31, 2000.
<TABLE>
<CAPTION>
Current
Monetary
Asset
(Liability)--
Currency net
-------- -------------
(In
thousands)
<S> <C>
NIS............................................................ $(70)
Other non-dollar currencies.................................... 421
----
$351
====
</TABLE>
30
<PAGE>
The balance sheet exposure as of March 31, 2000 is $351,000 in net assets.
Our annual expenses in NIS are approximately $4.5 million. An increase of the
NIS against the U.S. dollar by 1% may result in an increase in our operating
expenses by approximately $45,000.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. FAS No. 133
established accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet at its fair value. FAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the statement of operations. FAS No. 133 is
effective for fiscal years beginning after June 15, 2000. We believe that the
adoption of FAS No. 133 will not have a material effect on our financial
statements.
31
<PAGE>
BUSINESS
Overview
We develop, manufacture and market real-time billing and customer care
software for Voice over IP service providers. Voice over IP, also known as
Internet telephony, is the real-time transmission of voice communications over
the public Internet and private networks based on Internet Protocol commonly
known as IP. Internet Protocol is the process by which data is transmitted from
one computer to another on the Internet. Our billing and customer care
software, known as MIND-iPhonEX, enables providers of Voice over IP services to
meet complex, mission-critical billing and customer care needs such as
authentication, authorization, accounting and reporting. Our software is also
used by service providers to collect the data needed to initiate service and
manage customer accounts.
MIND-iPhonEx is scalable, which means that it is easily adapted to changes
in the size and configuration of a service provider's network. It operates on
the IP telecommunications equipment of major manufacturers, such as Cisco
Systems Inc. and Lucent Technologies Inc. We also provide professional
services, primarily to our billing and customer care customers, consisting of
customization, installation, customer support, training and maintenance
services and project management which is advice to our customers regarding the
deployment of billing and customer care software over their IP networks,
consisting of consulting services relating to our customers' Voice over IP
networks in order to deploy billing and customer care software. We have
installed MIND-iPhonEX for a large base of customers worldwide, including:
. Traditional telecommunications service providers that also offer Voice
over IP telephony, such as Bell Atlantic Corp., Deutsche Telekom AG,
China Ministry of Post and Telecommunication (China Telecom), China
United Telecommunications Corp. (China Unicom), Singapore
Telecommunications Ltd.;
. Internet telephony service providers that primarily offer Voice over IP
services and do not offer traditional telephone services, including,
among others, iBasis/VIP Calling; and
. Internet service providers that also provide Voice over IP services,
such as SouthNet TeleComm Services, Inc.
In addition to our billing and customer care software, we offer a call
management system used by organizations for call accounting, traffic analysis
and fraud detection. This enterprise software which we call PhonEX, has been
installed in many locations throughout the world for customers including Credit
Suisse First Boston, Deutsche Post and ST Microelectronics.
We believe that as providers of Voice over IP and other IP-based services
expand their offerings, they will increasingly need billing and customer care
software that allows them to monitor and bill their customers based on type and
content of the services provided. We have developed and have begun providing
billing and customer care software to meet this need to track and account for a
variety of IP-based services, including, cable television, Internet dial-up
services, IP messaging and other similar services.
Our Market Opportunity
Voice Over IP Industry Background
Traditional telephone communications are transmitted through networks based
on circuit switching technology that requires an open connection to be
established and maintained between calling parties for the entire path and
duration of a call. Voice over IP is transmitted through the public Internet
and private networks based on Internet Protocol that were initially developed
for transmitting data, such as e-mail. These networks do not require an open
circuit for the entire path or duration of the transmission. In a network using
IP technology, the data is divided into compressed packets that are sent to a
final destination where they are reassembled back to their original order. In
this type of network, multiple streams of information can travel through
different paths in the network, allowing a more efficient use of the network.
In recent years, the improvements in the
32
<PAGE>
technologies used in IP networks have led to an increase in the use of this
type of network to transmit both voice and data over what are known as
convergent networks. The Voice over IP market has emerged from these
technological advances.
Voice over IP offers a number of advantages to subscribers over traditional
telephony. Providers of Voice over IP services can offer their subscribers
enhanced voice and data communications services and applications, such as:
. unified messaging services permitting single source retrieval of voice
mail, e-mail and faxes through the Internet or by phone or any other
Internet-capable devices;
. personal computer-to-phone services allowing subscribers to place calls
through a personal computer and speak to a party who uses a standard
telephone; and
. web-based services that allow a live voice connection from any web site
to any regular telephone over the Internet while continuing to view the
web-site.
In addition, Voice over IP service providers typically enjoy lower capital
costs because the infrastructure for networks based on Internet Protocol is
less expensive than that for traditional telecommunications networks. To date,
typically Voice over IP providers bypass the international settlement process,
which represents a significant portion of international long distance tariffs.
As a result, Voice over IP service providers are able to offer their customers
lower rates for telephony services.
The enhanced services and cost advantages offered by Voice over IP service
providers are contributing to the rapid growth in demand for IP telephony
services. This demand is being met by Internet service providers, who often
have the necessary IP-based infrastructure in place, as well as Internet
telephony service providers that primarily offer Voice over IP and do not offer
traditional telephony services. In addition, traditional telecommunications
service providers are increasingly offering Voice over IP services to remain
competitive. International Data Corporation (IDC) estimated that as of mid-
1999, there were 300 IP telephony service providers worldwide, and that more
are entering the market every month. IDC estimated that total Voice over IP use
is expected to increase from 2.7 billion minutes in 1999 to 135 billion minutes
in 2004, representing a compound annual growth rate of 119%. Revenues derived
from providing Voice over IP services are expected to increase from $480
million in 1999 to $19 billion in 2004, representing a compound annual growth
rate of 109%. IDC estimates that in 2004, half of the total Voice over IP
revenues will be generated from enhanced services such as unified messaging,
personal computer-to-phone services and web-based services that allow a live
connection to a regular telephone while viewing a website. According to Frost
and Sullivan, the worldwide market for gateway equipment that allows
interconnection between IP-based and traditional telephone networks was $279.2
million in 1998 and is estimated to grow to approximately $9.2 billion in 2004.
We believe that the expected growth in the Voice over IP market indicated by
this estimated increase in sales of gateway equipment will lead to an increased
demand for billing and customer care software that enables providers of Voice
over IP services to bill their subscribers for the services used.
Billing and Customer Care Industry
Billing and customer care software is among the key components of any
telephony service provider's systems because they enable the service provider
to track and bill for usage, manage revenues and customer relations and devise
marketing programs and rate plans. In today's intensely competitive
telecommunications market, sophisticated billing and customer care software can
provide a competitive advantage as service providers attempt to differentiate
themselves by providing superior features, like cross-discounting and a single
bill for multiple services. As service providers broaden their service
offerings to include Voice over IP, the demand for more sophisticated billing
and customer care software suitable for these services is growing. We believe
that as providers of IP-based services continue to expand their service
offerings, they will increasingly need products that allow them to monitor and
bill their subscribers based on the type and content of services provided. As a
result, we believe that this trend will increase the demand for sophisticated
billing and customer care products for what is known as convergent billing.
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<PAGE>
Many existing billing and customer care software products do not meet the
demands of the increasingly competitive and dynamic environment of Voice over
IP and other IP-based services. Traditional billing systems are typically
designed to support a particular type of service provider--for instance, either
wireline or wireless--and a specific size of network. As a result, these
billing systems require time and expense to accommodate a growing subscriber
base or new products and features. Traditional billing systems are also
generally unable to efficiently support multiple services or convergent
networks. In addition, traditional billing systems are typically limited to
periodic or "batch-oriented" processing, and cannot provide the real-time
processing typically required by providers of IP-based services.
Providers of Voice over IP and other IP-based services typically require
billing and customer care products that can handle authentication,
authorization and accounting needs in real-time in order to determine the types
of services to which the subscriber is entitled, as well as any applicable
limits to the availability of the services. This real-time functionality is
particularly important for pre-paid billing plans, which currently constitute a
substantial portion of the Voice over IP billing plans. In addition, billing
and customer care software products are required to be interoperable with the
IP telecommunications equipment of major manufacturers in order to accommodate
IP network infrastructures that are composed of equipment of multiple vendors.
Finally, billing and customer care software products need to be capable of
being easily adaptable to changes in the size and configuration of a Voice over
IP provider's system, or scalable, to enable rapid growth in subscriber base,
and to permit easy adaptation to emerging products and services.
Our Solution
We develop, market and support real-time, scalable billing and customer care
software for providers of Voice over IP that are designed to meet their
complex, mission-critical provisioning, authentication, authorization,
accounting and reporting needs. We have installed MIND-iPhonEX for a large base
of customers, with over 100 installations worldwide. Our billing and customer
care software provides our customers with the following benefits:
. Real-Time Solution. Voice over IP providers require a call handling
system that enables caller authentication, authorization and accounting
and, if needed, cut-off, all in real-time. We believe that MIND-iPhonEX
is one of the few billing and customer care products designed for Voice
over IP that offers real-time functionality for both prepaid and
postpaid billing plans, and that has a real-time rating engine able to
support multiple time zones and multi-currency billing.
. Scalability. MIND-iPhonEX is designed to be easily adapted to changes in
the size and configuration of a service provider's network. Our products
can permit the network of a service provider to grow from accommodating
a small number of subscribers to a large number of subscribers,
primarily through the addition of hardware. This feature allows a
service provider to expand its infrastructure and its subscriber base
without the need to redesign or replace its billing and customer care
software. This scalability of our software is important since many Voice
over IP providers begin with a relatively small subscriber base and
experience rapid growth. For example, we designed and provided a billing
and customer care solution for China Unicom, which started offering
Voice over IP services in 1999. When China Unicom first deployed our
software in May 1999, it was capable of supporting one million users.
Our software was upgraded to five million in November 1999, and 20
million users in June 2000. Increases in the potential number of users
have been, and future increases will be, accomplished without the need
to modify or replace our installed software.
. Interoperability. Currently, there are no industry-accepted standards
for the interface between IP telecommunications equipment and Voice over
IP billing products. Our Voice over IP billing systems are fully
interoperable with the IP telecommunications equipment of most of the
leading manufacturers including Cisco, Lucent, Netspeak and VocalTec.
This interoperability provides us with a competitive advantage, as it
enables our customers to use networks composed of equipment manufactured
by multiple vendors. It also allows providers to upgrade an existing
network with new and different equipment without changing their billing
and customer care products.
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<PAGE>
. Improved Time to Market. MIND-iPhonEX is a modular, extensible software
product based on software architecture designed for easy adaptability
and implementation. These features allow each of our customers to tailor
our products to meet their individual needs in terms of the number of
subscribers serviced and the variety of services provided. In addition,
due to its adaptable design, MIND-iPhonEX can be customized relatively
quickly, enabling our customers to improve their time to market as they
initially implement their networks and, later, as they add and modify
the services they provide.
Our Strategy
Our objective is to be a leader in the market for billing and customer care
software for Voice over IP. In addition, we intend to offer billing and
customer care software for other IP-based services as the market for these
products grows. The key elements of our strategy include:
. Leverage our brand name recognition and technical expertise. We were one
of the first to provide billing and customer care software for IP
telephony, introducing MIND-iPhonEX in 1997. We have installed
MIND-iPhonEX for a large customer base, including Bell Atlantic Corp.,
Deutsche Telekom AG, China Ministry of Post and Telecommunications
(China Telecom), China United Telecommunications Corp. (China Unicom),
Singapore Telecommunications Ltd., iBasis Inc., and Southnet TeleComm
Services Inc. We believe that our early position in the market and our
reputation for offering high quality, reliable billing and customer care
software has provided us with significant brand name recognition among
Voice over IP providers. We intend to leverage our reputation, brand
name recognition and expertise to be a leader in the market for billing
and customer care software for Voice over IP and other IP-based
services.
. Enhance alliances with industry leaders. We have established cooperative
relationships with leading manufacturers of IP telecommunications
equipment such as Cisco, Lucent, Netspeak and VocalTec. We team with
these industry leaders in marketing activities, as well as in the
research and development and implementation stages of product
development and enhancement. Our alliances allow us to broaden our
marketing capabilities significantly, support new features offered by
equipment vendors as these features are introduced to the market, and
maintain our technology leadership over our competitors. We intend to
continue to leverage these alliances in order to solidify and expand our
market presence.
. Maintain and expand our technological expertise. We believe that our
reputation in the market is due in large part to our technological
expertise. We make significant investments in our research and
development to continually enhance our products to meet the changing
needs in the Voice over IP industry. We intend to continue our
commitment to technology, both to enhance our existing products and to
develop new products for growing markets.
. Offer convergent IP billing products. As providers of IP-based services
continue to broaden their service offerings, we believe that they will
increasingly need billing and customer care products to monitor and bill
their customers based on the type and content of the services provided.
For example, instead of the flat fee for access pricing model, Internet
service providers may want to bill subscribers based on the type and
content of the services used. We intend to leverage our position in the
market for billing and customer care software for Voice over IP and our
technological expertise to be a leading provider of convergent billing
products.
. Expand professional services opportunities. As IP-based service
offerings become more complex, our customers increasingly require
consulting services, especially for customization, as well as for
project management, installation and training, technical support and
maintenance. This provides us with the opportunity to increase our
revenue base from existing customers. We have begun to capitalize on
this opportunity and, as a result, fees from providing professional
services are expected to increase as a percentage of our revenues.
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Our Products and Services
Billing and Customer Care Products for Voice over IP
MIND-iPhonEX is a real-time, fully scalable billing and customer care
product for Voice over IP service providers that meets their mission-critical
needs and is interoperable with the IP telecommunications equipment of major
manufacturers. MIND-iPhonEX was among the recipients of several industry
awards, including Computer Telephony 1998 Product of the Year, Communications
Solutions 1999 Product of the Year, Internet Telephony 1998 and 1999 Product of
the Year, and the Best of the CTI Expo in 1999. Our highly functional and
adaptable product enables our customers to quickly deploy Voice over IP
networks and to rapidly grow and add new services. MIND-iPhonEX supports both
prepaid billing plans, in which customers pre-pay for the services, or postpaid
billing plans, in which customers pay for the services after using them, on the
basis of either limited or unlimited credit lines. The key functionalities of
MIND-iPhonEX are as follows:
. Provisioning. Provisioning involves setting up the ability of a
subscriber to use IP services. MIND-iPhonEX enables subscribers to
register for service quickly and efficiently. The registration process
collects the data needed to connect and bill the subscriber for service.
Once the data is collected and verified, MIND-iPhonEX creates customer
accounts and activates the services in real-time. MIND-iPhonEX features
web-enabled registration and payment applications so that customers may
register online for the service and start using it immediately. It also
allows subscribers to charge their credit cards online and to recharge
pre-paid calling cards that have reached their limit.
. Authentication. MIND-iPhonEX authenticates subscribers who dial into the
network to use the service. Authentication is based on a number of
methods, including user codes, passwords and caller line identification.
The identification information is passed to the MIND-iPhonEX system,
where the subscriber is authenticated and then permitted to use the
service.
. Authorization. The MIND-iPhonEX system authorizes a particular call by:
. reviewing the destination of the call to determine whether a call to
this destination is permitted;
. reviewing the amount of money remaining on the subscriber's prepaid
card and prerating the call that the subscriber desires to make,
using the rating engine described below; or
. reviewing the balance of a credit limit of a pre-paid plan and
calculating the resulting cut off time, if any, of the call.
Based on this data, MIND-iPhonEX authorizes the desired call, either
for an unlimited or a limited time, and will automatically inform the
gateway or gatekeeper to cut-off the call if the limit is reached.
. Accounting. When each call is completed, MIND-iPhonEX uses the rating
engine described below to determine the amount to be charged to the
subscriber and updates the balance of the account in real-time. In
addition, the call detail records are stored on the MIND-iPhonEX system
for invoicing and reporting.
. Interconnect Billing. The networks operated by our customers are
typically interconnected with the networks of other telecommunications
service providers. Interconnecting providers need to charge other
providers for carrying each other's services over their networks. MIND-
iPhonEX generates reports that enable providers to bill for traffic and
services that are being transported across their networks by other
providers.
. Rating Engine. MIND-iPhonEX offers a real-time and flexible rating
engine that allows service providers to offer subscribers a wide variety
of billing plans. This flexibility also allows service providers to set
different tariff parameters. For example, our billing and customer care
software can support different rates for individual customers and for
different customer groups, different rates for different types of data
transferred, rates based on the day of the week and time of the day and
rates
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based on the origin and destination of the call. MIND-iPhonEX also
allows international service providers to define rates in different
currencies using the product's multi-currency and multi-time zone
functionality.
. Support for Customer Relationship Management. The Customer Relationship
Journal is a feature of the MIND-iPhonEX that enables service providers
to keep track of all subscriber-related events, including subscriber
inquiries, payments and customer information updates. The Journal also
stores a history of all interactions between the service provider and
the subscriber. This tool helps the service provider identify valued
customers and build positive customer relationships.
[GRAPHIC OF WEB INTERFACE FOR CUSTOMERS]
. Subscriber web interface. MIND-iPhonEX has a user friendly subscriber
web interface (shown above) which allows subscribers to resolve billing
inquiries themselves. Individual customers can obtain real time
information about their account, including details of calls made that
have not yet been invoiced, like the time, destination, length and cost
of each call. The subscriber can also browse invoices, call details and
payment history records. This feature is convenient for subscribers and
efficient for service providers as it reduces service costs.
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[GRAPHIC OFC WEB INTERFACE FOR CSR]
. Customer Support Representative web interface. MIND-iPhonEX has a user
friendly customer support representative web interface (shown above)
which allows operators of the system to perform customer care from any
location. The Customer Support Representative web interface is an
extension of the management capabilities of the service provider's
system. This feature is of particular significance to service providers
who have remote operations centers and are required to provide local
support of their system in more than one location.
. Call Management and Traffic Analysis Reports. MIND-iPhonEX's Call
Management and Traffic Analysis features allow service providers to
generate reports and graphic analyses of call activity. These reports
contain information regarding peak hours, call loads to different
destinations, the number of calls per minute for a specific gateway or
group of gateways, the duration of calls and other parameters. These
features enable service providers to analyze subscriber behavior and use
the information to improve their marketing and business development
strategies. In addition, the traffic analyses reports assist service
providers in planning the growth and development of their networks. This
is of particular significance in the Voice over IP market in which many
providers begin with a relatively small subscriber base and experience
rapid growth.
. Fraud Detection. MIND-iPhonEX contains a fraud detection tool that
enables detection of "stolen' calls and telephone misuse. MIND-iPhonEX
Guard detects, locates and warns of any suspicious activity by
activating alarms in real-time. It is easily customized to suit the
needs of each service provider and allows a provider to build fraud
inquiries based on a defined set of parameters. When these specific
parameters are violated, MIND-iPhonEX Guard activates an alarm at four
different alarm levels. Different actions may be implemented at each
level. For instance, the operator may be alerted to possible fraud via
e-mail, fax, pager, audio or visual alarms.
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Professional Services
We provide professional services to our customers, consisting primarily of
project management, customization, installations, customer support, training
and maintenance services. As IP-based service offerings become more complex,
more customers require customization services to add specialized features to
their systems. We typically incorporate additional or specialized features
developed for a particular customer into future versions of our products. In
order to meet the needs of our customers, we created a new professional
services division that has grown from 8 to 18 employees since January 1, 2000.
Enterprise Software
Our enterprise product, known as PhonEX, is used by corporations for call
accounting, traffic analysis and fraud detection. PhonEX is a call management
system that collects, records and stores all call information in a customized
database. The system:
. allows customers to generate near real-time reports on the enterprise's
telephone use;
. produces sophisticated reports and graphics for easy and effective
analysis of call activity; and
. allows customers to allocate telephone expenses to specific departments,
individual clients or projects.
These functions allow organizations to more effectively manage their
telecommunications resources. PhonEX is easy to install and configure, user-
friendly and compatible with any switchboard system. PhonEX also performs call
management and traffic analysis as well as fraud management in the same manner
as MIND-iPhonEX. In addition, PhonEX is a multi-lingual and multi-currency
system, which means that reports can be generated in any currency defined in
the system, or in two currencies simultaneously.
Products under Development
Manufacturers of IP telecommunications equipment have begun to develop and
market Voice over IP systems for enterprises. We are developing an enterprise
software product that can be used to provide call accounting, traffic analysis
and fraud detection for enterprises that use IP telephony, and which provides
substantially the same features as PhonEX. We intend to further develop and
market this product as the emerging market for Voice over IP systems for
enterprises grows.
Technology
MIND-iPhonEX has an open architecture, which was developed using industry
standards-based application programming interfaces that enables it to readily
integrate with other software applications. These application program
interfaces create an object-oriented, multi-layered architecture that supports
a distributed environment. Our object-oriented technology enables the design
and implementation of software on the basis of reusable business objects rather
than complex procedural code. Our multi-layered architecture organizes these
applications in layers of related information that support the top tier
interface between the user and the application. We implement our application in
a distributed configuration. This allows various modules to be installed on
different servers. We believe that our technology allows us to offer products
with the following benefits:
. fast integration and interoperability with the IP telecommunications
equipment of major manufacturers;
. modular architecture which allows MIND-iPhonEX to be easily scalable and
enables us to customize our software relatively quickly;
. reliable products that ensure 24x7 service for mission-critical
applications and are designed to support network operating centers of IP
telephony service providers to ensure no single point of failure in
their networks. In the case of a failure of the network, MIND-iPhonEX
has an automatic fail-over mechanism to ensure minimum loss of service;
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. secured at all levels of the architecture. Each user of the system may
be assigned to different security groups. Service providers are
therefore able to determine and audit who has access to the system. In
addition, firewalls can be installed to prevent unauthorized access to
the system;
. rapid development of new applications, features and services; and
. easy interface with legacy systems and external software.
MIND-iPhonEX has a four-tier architecture, consisting of the following
tiers:
. Client Application Tier: This is the top tier graphic user interface
between the user and the application. It includes client
applications for customer registration, customer care and billing
administration;
. Business Object Tier: This tier includes the business logic and
rules of the billing system. This tier manages accounts, services,
events and tariffs. It includes an object request broker, that
facilities the transfer of information requested by the client
application tier from the database object tier;
. Database Object Tier: This tier brings together data objects that
define the accounts, services and tariffs; and
. Database Tier: This tier includes the Oracle database server and
management software where the actual billing and customer care
information is stored.
Research and Development
We believe that significant investment in research and development is
essential to maintaining and expanding our technological expertise in the
market for Voice over IP billing and customer care software and to our strategy
of being a leading provider of new and innovative convergent Internet billing
products. We have invested significant time and resources to create a
structured process for undertaking research and product development. We believe
that the method that we use for our product development and testing is well
suited for identifying market needs, addressing the activities required to
release new products, and bringing development projects to market successfully.
Our product development activities also include the release of new versions of
our products. Our research and development personnel include engineers and
software developers with experience in the development and design of billing
and customer care software. As of March 31, 2000, our research and development
department consisted of 64 employees.
Sales and Marketing
Sales
Billing and Customer Care Software for Voice over IP
We conduct our sales and marketing activities primarily through our
marketing and co-operative alliances with hardware platform developers and
software application developers such as Cisco, Lucent and Vocal Tec, under
which we market and sell our software to the customers of those entities. These
marketing allies and re-sellers provide us with a global extension of our
direct sales force and are a significant source of leads and referrals. We
perform co-development with our marketing allies to support new software and
product releases to maintain interoperability of our software with their
gateways and other equipment. We also engage in joint marketing activities with
them including joint responses to requests for proposals, sharing booths in
trade shows, distributing each others' marketing information and cross links
and references to web sites. We believe these relationships also help validate
our technology and facilitate broad market acceptance of our software.
Our contracts with our marketing allies, distributors and resellers are non-
exclusive and may be terminated at any time with notice. For example, we
entered into a non-exclusive agreement with Cisco Systems, Inc. on
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January 1, 2000 under which we agreed to participate in Cisco's New World
Ecosystem Program. The Ecosystem Program was established by Cisco to facilitate
the establishment of a network of vendors of complementary products and
services that are interoperable with Cisco's equipment and each other. Under
the terms of the agreement, we cooperate with Cisco in marketing and
distributing products and services that Cisco desires to include in the
Ecosystem Program from time to time. The agreement is terminable on 60 days'
written notice by either party.
As of March 31, 2000, our sales and marketing force consisted of 20
employees who are responsible for sales both directly and through resellers.
Our sales organization is managed from our corporate headquarters in Yoqneam,
Israel. We currently have sales offices in Yoqneam, Israel, Hasbrouk Heights,
New Jersey and in Beijing, China.
Enterprise Software
In Europe, our enterprise software is sold by our appointed distributors and
directly through our sales force. Under an agreement entered into in February
1998, we appointed Telesens AG as an exclusive distributor of our enterprise
software in Germany. In addition, we have non-exclusive agreements with Nice
Systems, Bosch Telecom (through our distributor, Telesens AG) and Telrad for
the sale of our enterprise software. We also sell our enterprise software
through resellers in Europe, the United States and Israel.
Marketing
Our marketing programs are focused on creating awareness, interest and
preference for our products and services. We engage in a variety of marketing
activities, including:
. participating in industry trade shows and special events, including as
panelists and presenters at industry conferences;
. advertising in industry media;
. contributing articles to billing and Voice over IP industry magazines;
. conducting ongoing public and press relations programs; and
. conducting training seminars for vendors and system integrators.
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Customers
Billing and Customer Care Software for Voice over IP
We currently provide over 100 traditional telecommunications service
providers, Internet telephony service providers and Internet service providers
with our billing and customer care software for Voice over IP. Some key
customers are as follows:
[3 COLUMN SERVICE PROVIDERS LIST]
Case Study -- China Unicom. China Unicom is China's second largest national
telecommunications service provider. Traditionally, China Unicom only provided
GSM cellular services. China Unicom recently obtained a license from the
Chinese government to provide IP telephony services. We believe this case study
illustrates our method of doing business with the initial sale of a billing and
customer care software license and additional fees from the expansion of the
scale of the system as the customer's network grows. However, the large
subscriber base of China Unicom is not typical of the current subscriber base
of our customers.
CHALLENGE: China Unicom needed billing and customer care software for Voice
over IP service capable of supporting a large and rapidly growing subscriber
base.
SOLUTION: We responded to a Request for Proposal from China Unicom in March
1999. China Unicom decided on the combined solution of Cisco voice gateways and
the MIND-iPhonEX billing and customer care software to create an integrated
Voice over IP solution. We were appointed to design and provide a solution for
China Unicom that is interoperable with the Cisco gateways, supports the
Chinese language and is scalable to millions of users.
China Unicom rolled out the first phase of its IP telephony project in May
1999 in 12 cities. The software we installed for them at that time was capable
of supporting one million users. In November 1999, China Unicom advised us that
it was expanding its network to support five million users. As the number of
users that our software can support can be increased through the addition of
hardware without the need to modify or
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replace our installed software, we were easily able to accommodate this growth.
That number was increased again in June 2000 to 20 million users in over 100
cities, again without the need to modify or replace our installed software.
China Unicom has announced that it intends to expand its Internet protocol
telephony network to cover 200 cities by the end of 2000.
Enterprise Software
Our enterprise software has been installed in locations throughout the
world, for customers including ABN Amro, Bosch Telecom, CellCom, the largest
cellular telecommunications provider in Israel, Credit Suisse First Boston,
Deutsche Post, the Israeli Defense Forces, the Israel Electric Corp. Limited
and STMicroElectronics.
Competition
Billing and Customer Care Software for Voice over IP
Competition in the market for billing and customer care software for Voice
over IP is intense and we expect competition to increase. We compete primarily
with young, emerging billing companies such as Portal Software Inc. and Belle
Systems. We also compete with telecommunications equipment manufacturers such
as Clarent Corporation, which offers an internally developed billing and
customer care software product integrated into their hardware. Finally, we
believe that the more established traditional billing and customer care
companies, such as Amdocs Ltd. (which recently acquired Solect Technology Inc.)
and Saville Systems plc (acquired by ADC Telecommunications, Inc.) will begin
to offer billing and customer care software products for Voice over IP.
We believe that our competitive advantage is based on:
. our ability to provide a real-time, scalable, interoperable and reliable
billing and customer care software;
. our ability to rapidly deploy our software; and
. our reputation of providing proven, high-quality billing and customer
care software.
However, we depend on our marketing alliances with manufacturers of IP
telecommunications equipment and reseller arrangements to market our billing
and customer care software. Some of our marketing allies and resellers also
work with some of our competitors. For example, Cisco has invested in Portal
Software Inc. Our marketing alliances and reseller arrangements are for the
most part non-exclusive and do not contain minimum sales or marketing
performance requirements. We may not be able to compete effectively with our
competitors under these circumstances. Many of our competitors have greater
financial, personnel and other resources, have longer and more established
relationships with service providers and may be able to offer more aggressive
pricing or devote greater resources to the promotion of their products. In
addition, one or more of our competitors could develop superior products and
these products could achieve greater market acceptance than our product.
Enterprise Software
Our main competitors in the market for enterprise software products include
Veramark Technologies, Inc., Mer Telemanagement Solutions Inc. and Telco
Research Corp. To compete effectively, companies must be able to offer adequate
technical support and ongoing product development and customization services.
In addition, multinational companies prefer call accounting systems that can be
installed at their various offices throughout the world, and therefore require
call accounting products that are multilingual and support the local
telecommunication requirements. The principal factors upon which we compete are
customer support, ease of use, compatibility with any switchboard system and
the multi-lingual and multi-currency nature of our system.
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Facilities
Our headquarters are located in Yoqneam, Israel, approximately 50 miles
north of Tel Aviv. We lease approximately 22,000 square feet at our Yoqneam
headquarters. We recently received approval under the Approved Enterprise
program in Israel to expand our facilities in Yoqneam. We expect that
construction of a new facility will take from two to three years. We also lease
2,000 square feet of office space in New Jersey, and 1,000 square feet in
Beijing, China. The offices in New Jersey and Beijing are used primarily for
sales and customer support.
Employees
As of March 31, 2000 we employed 139 employees, 13 of whom are part-time
employees. Of these employees, 125 were employed in Israel, 4 in China and 10
by our U.S. subsidiary. We employed 64 employees in research and development,
36 in professional services and customer support, 20 in sales and marketing,
and 19 in general and administration.
We are subject to Israeli labor laws and regulations with respect to our
Israeli employees. These laws principally concern matters such as paid annual
vacation, paid sick days, length of the work day and work week, minimum wages,
pay for overtime, insurance for work-related accidents, severance pay and other
conditions of employment.
Furthermore, by order of the Israeli Ministry of Labor and Welfare, all
employers and employees are subject to provisions of collective bargaining
agreements between the Histadrut, Federation of Labor, and the Coordination
Bureau of Economic Organizations in Israel. These provisions principally
concern cost of living increases, recreation pay, commuting expenses and other
conditions of employment. We provide our employees with benefits and working
conditions above the required minimums. Our employees are not represented by a
labor union. To date, we have not experienced any work stoppages and our
relationships with our employees are good.
Legal Proceedings
We are not a party to any material legal proceedings.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding our directors
and executive officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Monica Eisinger............ 42 President, Chairman of the Board of Directors
and Chief Executive Officer
Yaron Amir................. 34 Chief Financial Officer
Sagee Aran................. 37 Vice President--Professional Services
Zeev Braude................ 35 Vice President--Marketing and Business
Development
Ilan Melamed............... 36 Vice President--U.S. Operations, MIND C.T.I.
Inc.
Kevin P. Mohan............. 36 Director
Ilan Rosen................. 42 Director
Lior Salansky.............. 35 Director
</TABLE>
The background of each of our directors and executive officers is as
follows:
Monica Eisinger. Ms. Eisinger is a founder of our company and has been
President, Chairman and Chief Executive Officer of our company since inception.
Prior to founding MIND, Ms. Eisinger served as an information systems
consultant to Raphael, the Israeli Armaments Industry and directed over 40
projects. Ms. Eisinger holds a B.Sc. in Computer Sciences and a Masters Degree
in Telecommunications (with expertise in Voice and Data Integration over the
Ethernet) from the Technion, Israel Institute of Technology.
Yaron Amir. Mr. Amir joined our company as Chief Financial Officer in April
2000. Prior to that and since 1996, Mr. Amir was the Chief Financial Officer of
On Track Innovations, a company engaged in the field of contactless smart
cards. From 1993 to 1996, Mr. Amir worked as a controller at Kitan
Consolidated, a textile company. Mr. Amir is a Certified Public Accountant and
a Certified Information System Auditor. He holds a Bachelor's Degree in
Accounting and Economics and a Masters in Business Administration, both from
the Hebrew University of Jerusalem.
Sagee Aran. Mr. Aran joined our company in March 2000 as Vice President of
Professional Services. Prior to joining our company, he worked for seven years
at HISH Ltd., a company specializing in process engineering and management, at
which he held a number of positions including Operations Manager and
International Sales and Marketing Manager. Mr. Aran holds a B.Sc. in
Engineering from the Technion, Israel Institute of Technology.
Zeev Braude. Mr. Braude has worked at our company since our inception
serving in a number of positions, the most recent of which was Vice President
of Product Line Management. Mr. Braude has been Vice President of Marketing and
Business Development of our company since February 2000. Mr. Braude holds a
B.Sc. in Computer Engineering from the Technion, Israel Institute of
Technology.
Ilan Melamed. Mr. Melamed has served as General Manager of our U.S. office
since September 1998 and as Vice President--U.S. Operations of MIND C.T.I. Inc.
since May 2000. Prior to joining our company, Mr. Melamed was employed by
Israel Aircraft Industries for five years, at which he held a number of
positions including the Director of the Israel Aircraft Industries office in
Colombia. He holds a Bachelor of Arts degree in Business Administration from
Hebrew University.
Kevin P. Mohan. Mr. Mohan has served as a director of our company since
March 2000. Mr. Mohan is a general partner of Summit Partners, a venture
capital firm, where he has been employed since 1994. He received an A.B. in
Economics from Harvard College, a J.D. from Harvard Law School, and a Masters
in Business Administration from Harvard Business School. Mr. Mohan also serves
as a director on the boards of several privately held companies.
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Ilan Rosen. Mr. Rosen has served as a director of our company since August
1997. Mr. Rosen is Corporate Vice President of ADC Teledata Communications,
Ltd., where he has been employed since November 1996. Prior thereto and since
1993, Mr. Rosen was the President of ADASHA, Development & Investments Ltd.
which listed on the Tel Aviv Stock Exchange under his direction. He holds a
Bachelor of Science in Mechanical Engineering and a Masters in Business
Administration, both from Tel Aviv University.
Lior Salansky. Mr. Salansky is a founder of our company and has served as a
director since our inception. He has served in a number of positions within our
company from inception until February 2000, including Vice President of
Business Development, R&D Manager and software developer. He holds a Bachelor's
Degree in Computer Science from the Technion, Israel Institute of Technology.
Board of Directors
Our board is divided into three classes of directors, denominated Class I,
Class II and Class III. The initial term of each class will expire as follows:
Class I in 2001, Class II in 2002 and Class III in 2003. Monica Eisinger is a
member of Class I, Lior Salansky is a member of Class II, and Kevin P. Mohan
and Ilan Rosen are members of Class III. At each annual general meeting of
shareholders beginning in 2001, directors will be elected for a three-year term
to succeed the directors whose terms then expire. Our external directors, who
will be appointed for three year terms pursuant to Israeli law, will not be
members of any class.
Stock Option Plans
We have established stock option plans to provide for the issuance of
options to our directors, officers and employees. Under the plan, options to
purchase our ordinary shares may be issued from time to time to our directors,
officers and employees at exercise prices and on other terms and conditions as
determined by our Board of Directors. Our Board of Directors determines the
exercise price and the vesting period of options granted. The option plans
permit the issuance of options to acquire up to 1,108,000 ordinary shares. As
of May 31, 2000, options to purchase 747,820 ordinary shares have been issued
and options for 2,000 ordinary shares have been exercised. The options vest
over three to five years (mainly three years), commencing on the date of grant.
The weighted average exercise price of these options was $2.75 per share. Any
option not exercised by January 1, 2006 will expire, except for 50,000 options
which will expire on December 31, 2001.
Israeli Companies Law
We are subject to the provisions of the new Israeli Companies Law, 5759-
1999, which became effective on February 1, 2000 and regulations adopted
thereunder.
External Directors
Qualifications of External Directors
Under the Israeli Companies Law, companies incorporated under the laws of
Israel whose shares have been offered to the public in or outside of Israel are
required to appoint two external directors. The Companies Law provides that a
person may not be appointed as an external director if he or his relative,
partner, employer or any entity under his control has or had during the two
years preceding the date of appointment any affiliation with:
. the company;
. any entity controlling the company; or
. any entity controlled by the company or by its controlling entity.
The term affiliation includes:
. an employment relationship;
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. a business or professional relationship maintained on a regular basis;
. control; and
. service as an office holder.
The Companies Law defines the term "office holder" of a company to include a
director, the chief executive officer, the chief financial officer and any
officer of the company that reports directly to the chief executive officer.
No person can serve as an external director if the person's position or
other business creates, or may create, conflict of interests with the person's
responsibilities as an external director or may otherwise interfere with the
person's ability to serve as an external director.
Until the lapse of two years from termination of office, a company may not
engage an external director to serve as an office holder and cannot employ or
receive services from that person, either directly or indirectly, including
through a corporation controlled by that person.
Election of External Directors
External directors are to be elected by a majority vote at a shareholders'
meeting, provided that either:
. at least one third of the shares of non-controlling shareholders voted
at the meeting vote in favor of this election; or
. the total number of shares of non-controlling shareholders voted against
the election of the external director does not exceed one percent of the
aggregate voting rights in the company.
The initial term of an external director is three years and may be extended
for an additional three years. External directors may be removed only by the
same percentage of shareholders as is required for their election, or by a
court, and then only if the external directors cease to meet the statutory
qualifications for their appointment or if they violate their duty of loyalty
to the company. Each committee of a company's board of directors is required to
include at least one external director. Under the provisions of the Companies
Law, we are required to designate the initial external directors at a
shareholders' meeting to be convened within three months following the
offering. We intend to elect two additional directors as external directors
within that time period.
Audit Committee
Nasdaq Requirements
Under Nasdaq rules, we are required to have at least two independent
directors as defined by Nasdaq rules applicable to non-U.S. companies. Our two
external directors required under Israeli law will also be our independent
directors as required under Nasdaq rules. A majority of the members of the
audit committee must be independent. The responsibilities of the audit
committee under Nasdaq rules include, among other things, evaluating the
independence of a company's outside auditors. We intend to form an audit
committee within 90 days following this offering which will be comprised of
directors who meet the qualifications under the Israeli Companies Law. We have
applied for a waiver from Nasdaq's new audit committee requirements. See "--
Israeli Companies Law Requirements" below for more information.
Israeli Companies Law Requirements
Under the Israeli Companies Law, the board of directors of any company that
is required to nominate external directors must also appoint an audit
committee, comprised of at least three directors including all of the external
directors, but excluding:
<PAGE>
. the chairman of the board of directors; and
. a controlling shareholder or a relative of a controlling shareholder and
any director employed by the company or who provides services to the
company on a regular basis.
The role of the audit committee is to examine flaws in the business
management of the company, in consultation with the internal auditor and the
company's independent accountants, and suggest appropriate course of action.
Approval of Related Party Transactions
The approval of the audit committee is required to effect actions and
transactions with office holders, controlling shareholders and entities in
which they have a personal interest. An audit committee may not approve an
action or a transaction with an office holder, controlling shareholders or an
entity in which they have a personal interest unless at the time of approval
the two external directors are serving as members of the audit committee and at
least one of whom was present at the meeting in which any approval was granted.
Internal Auditor
Under the Companies Law, the board of directors must appoint an internal
auditor proposed by the audit committee. The role of the internal auditor is to
examine whether the company's actions comply with the law, integrity and
orderly business procedure. Under the Companies Law, the internal auditor may
not be an interested party, an office holder, or an affiliate, or a relative of
an interested party, an office holder or affiliate, nor may the internal
auditor be the company's independent accountant or its representative. We
intend to appoint an internal auditor that complies with the requirements of
the Companies Law after this offering.
Approval of Specified Related Party Transactions Under Israeli Law
Fiduciary Duties of Office Holders
The Israeli Companies Law imposes a duty of care and a duty of loyalty on
all office holders of a company. The duty of care requires an office holder to
act with the level of care with which a reasonable office holder in the same
position would have acted under the same circumstances. The duty of care
includes a duty to use reasonable means to obtain:
. information on the advisability of a given action brought for his
approval or performed by him by virtue of his position; and
. all other important information pertaining to these actions.
The duty of loyalty of an office holder includes a duty to:
. refrain from any conflict of interest between the performance of his
duties in the company and his personal affairs;
. refrain from any activity that is competitive with the company;
. refrain from exploiting any business opportunity of the company to
receive a personal gain for himself or others; and
. disclose to the company any information or documents relating to a
company's affairs which the office holder has received due to his
position as an office holder.
Each person listed in the table under "--Directors and Executive Officers"
above is an office holder except Ilan Melamed.
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<PAGE>
Disclosure of Personal Interest of an Office Holder
The Israeli Companies Law requires that an office holder of a company
disclose to the company any personal interest that he may have and all related
material information known to him, in connection with any existing or proposed
transaction by the company. The disclosure is required to be made promptly and
in any event no later than the board of directors meeting in which the
transaction is first discussed. If the transaction is an extraordinary
transaction, the office holder must also disclose any personal interest held
by:
. the office holder's spouse, siblings, parents, grandparents,
descendants, spouse's descendants and the spouses of any of these
people; or
. any corporation in which the office holder is a 5% or greater
shareholder, director or general manager or in which he has the right to
appoint at least one director or the general manager.
Under Israeli law, an extraordinary transaction is a transaction:
. other than in the ordinary course of business;
. otherwise than on market terms; or
. that is likely to have a material impact of the company's profitability,
assets or liabilities.
Once an office holder complies with the above disclosure requirement, the
board of directors may approve a transaction between the company and an office
holder, or a third party in which an office holder has a personal interest. A
transaction that is adverse to the company's interest may not be approved.
If the transaction is an extraordinary transaction, both the audit committee
and the board of directors must approve the transaction. A director who has a
personal interest in a matter which is considered at a meeting of the board of
directors or the audit committee may not be present at this meeting or vote on
this matter. If a majority of the directors has a personal interest in an
extraordinary transaction, these directors are permitted to be present and
vote, but shareholder approval is also required. Shareholder approval is also
required to approve compensation of a director.
Disclosure of Personal Interests of a Controlling Shareholder
Under the Israeli Companies Law, the disclosure requirements which apply to
an office holder also apply to a controlling shareholder of a public company. A
controlling shareholder is a shareholder who has the ability to direct the
activities of a company, including a shareholder that owns 25% or more of the
voting rights if no other shareholder owns more than 50% of the voting rights,
but excluding a shareholder whose power derives solely from his or her position
on the board of directors or any other position with the company. Extraordinary
transactions with a controlling shareholder or in which a controlling
shareholder has a personal interest, and the engagement of a controlling
shareholder as an office holder, require the approval of the audit committee,
the board of directors and the shareholders of the company. The shareholder
approval must be by a majority of the shares voted on the matter, provided that
either:
. at least one-third of the shares of shareholders who have no personal
interest in the transaction and who vote on the matter vote to approve
it; or
. the shareholders who have no personal interest in the transaction who
vote against the transaction do not represent more than one percent of
the voting rights in the company.
Shareholders generally have the right to examine any document in the
company's possession pertaining to any matter that requires shareholder
approval. If this information is made public in Israel or elsewhere, we will
file the information with the Securities and Exchange Commission in the United
States.
For information concerning the direct and indirect personal interests of an
office holder and principal shareholders in specified transactions with us, see
the section of this prospectus entitled "Related Party Transactions."
49
<PAGE>
Exculpation, Insurance and Indemnification
Exculpation of Office Holders
Under the Companies Law, an Israeli company may not exempt an office holder
from liability for a breach of his duty of loyalty, but may exempt in advance
an office holder from his liability to the company, in whole or in part, for a
breach of his duty of care.
Officers and Directors Insurance
Our articles of association provide that, subject to the provisions of the
Companies Law, we may enter into a contract for the insurance of the liability
of any of our officers and directors, with respect to an act performed in the
capacity of an officer or director for:
. a breach of his duty of care to us or to another person;
. a breach of his duty of loyalty to us, provided that the officer or
director acted in good faith and had reasonable cause to assume that his
act would not prejudice our interests; or
. a financial liability imposed upon him in favor of another person.
Indemnification of Officers and Directors
Our articles of association provide that we may indemnify an officer or
director against the following obligations and expenses imposed on the officer
or director with respect to an act performed in the capacity of an officer or
director:
. a financial liability imposed on him in favor of another person by any
judgment concerning an act performed in his capacity as an officer or
director; and
. reasonable litigation expenses, including attorneys' fees, expended by
the officer or director or charged to him by a court in connection with:
. proceedings we institute against him or instituted on our behalf or
by another person;
. a criminal charge from which he was acquitted; or
. a criminal charge in which he was convicted for a criminal offense
that does not require proof of criminal intent.
Our articles of association also include provisions:
. authorizing us to grant in advance an undertaking to indemnify an
officer or director, provided that the undertaking is limited to types
of events which our board of directors deems to be anticipated and
limited to an amount determined by our board of directors to be
reasonable under the circumstances; and
. authorizing us to retroactively indemnify an officer or director.
Limitations on Insurance and Indemnification
The Israeli Companies Law provides that a company may not indemnify an
office holder nor enter into an insurance contract which would provide coverage
for any monetary liability incurred as a result of any of the following:
. a breach by the office holder of his duty of loyalty unless the office
holder acted in good faith and had a reasonable basis to believe that
the act would not prejudice the company;
. a breach by the office holder of his duty of care if the breach was done
intentionally or recklessly;
. any act or omission done with the intent to derive an illegal personal
benefit; or
. any fine levied against the office holder.
50
<PAGE>
In addition, under the Companies Law, indemnification of, and procurement of
insurance coverage for, our office holders must be approved by our audit
committee and our board of directors and, if the beneficiary is a director, by
our shareholders.
We have agreed to indemnify our officers and directors to the fullest extent
permitted under the Companies Law. We have obtained directors and officers
liability insurance for the benefit of our office holders.
Compensation of Directors and Officers
The aggregate direct remuneration paid to all 5 persons who serviced in the
capacity of director or executive officer during 1999 was approximately
$459,000, including approximately $86,000 which was set aside for pension and
retirement benefits. This does not include amounts expended by us 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. Directors have not received cash fees for their services as directors,
but were granted options from time to time.
As of May 31, 2000, options to purchase 288,220 ordinary shares were granted
to our directors and executive officers under our options plans were
outstanding. The weighted average exercise price of these options is $3.20 per
share.
Executive Officers
Our executive officers are elected by our board of directors and serve at
the discretion of our board of directors. We maintain written employment
agreements with our executive officers. Each agreement terminates on between 30
and 60 days' written notice and provides for standard terms and conditions of
employment. All of our executive officers have agreed not to compete with us
for 12 months (or 24 months in the case of Monica Eisinger) following the
termination of their employment with us. Monica Eisinger is entitled to six
months' severance pay upon termination of her employment by either her or us,
other than for cause. Mr. Salansky is a former executive officer who resigned
in March 2000. His employment agreement contained a non-compete agreement
prohibiting him from competing with MIND for a period of 24 months.
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<PAGE>
RELATED PARTY TRANSACTIONS
Investment by Summit
Share Purchase Agreement. In March 2000, we raised approximately $12 million
in a private placement of our securities to a group of funds led by Summit
Ventures V, L.P. We issued to these investors 111,111 Series A preferred
shares. In connection with the same transaction, the investors also purchased
27,778 Series B preferred shares from Lior Salansky, for an aggregate price of
$3 million. The Series B preferred shares were issued to Mr. Salansky on March
30, 2000 in exchange for 555,560 existing ordinary shares owned by
Mr. Salansky. Mr. Salansky has no relationship to the entities affiliated with
Summit Ventures V, L.P. The Series B investors have agreed to transfer Series B
preferred shares to Mr. Salansky under specified circumstances because when
those shares were purchased from him there was an agreement that if MIND
reached certain valuation targets, a portion of the shares purchased from
Mr. Salansky would be returned, thereby increasing the effective per share
price of the shares initially purchased from him.
The Series A and Series B preferred shares may be converted into ordinary
shares upon the request of the investors at any point following the first
anniversary of the date of their issuance. The Series A and Series B preferred
shares will automatically convert upon a liquidity event, which includes the
closing of this offering. The number of ordinary shares into which the Series A
preferred shares may be converted depends on the initial public offering price
of our shares. At the initial public offering price of $11.00 per share, each
Series A preferred share will convert into 19.7037 ordinary shares, or an
aggregate of 2,189,298 ordinary shares. The maximum number of shares into which
each Series A preferred shares is convertible is 20 ordinary shares based on
initial public offering price of $10.80 per share and the minimum number of
shares into which each Series A preferred share is convertible is 16 ordinary
shares based on an initial public offering price of $13.50 per share.
Each Series B preferred share converts into 20 ordinary shares, or on
aggregate of 555,560 ordinary shares. However, the investors have agreed to
transfer to Mr. Salansky for no consideration an amount of ordinary shares
equal to the difference between the number of ordinary shares into which their
Series B preferred shares were converted and the number of ordinary shares into
which an equal amount of Series A preferred shares would have been converted.
At the assumed initial offering price of $11.00 per share, 8,231 ordinary
shares will be transferred to Mr. Salansky.
Simultaneously with the sale of the Series B preferred shares by Mr.
Salansky described above, Mr. Salansky also sold an aggregate of 468,240
ordinary shares owned by him for a total purchase price of $2,499,481. The
share purchase agreement relating to the sale of those shares provides that if
we consummate an initial public offering within a period of 12 months from the
date of the agreement at a specified valuation, Mr. Salansky will be deemed to
have sold up to an aggregate of 585,300 ordinary shares to the purchasers. At
the assumed initial offering price of $11.00 per share, Mr. Salansky will be
required to transfer an additional 108,389 ordinary shares to those purchasers.
In the event that upon conversion to ordinary shares, the holder of
preferred shares would own in excess of 10% of the then outstanding shares, the
amount in excess of 10% will be converted into non-voting ordinary shares.
These non-voting ordinary shares will be automatically converted into ordinary
shares on a one-for-one basis upon transfer to a third party unless that third
party would then own in excess of 10% of the then outstanding ordinary shares.
Summit Ventures V, L.P. and its related funds have no relationship with us
other than their investment in the Series A and Series B preferred shares.
Kevin P. Mohan, a member of Summit Partners, LLC, the sole general partner of
the sole general partner of Summit Partners V, L.P., is one of our directors.
Eleven individuals, including Mr. Mohan, are members of Summit Partners, LLC.
Registration Rights Agreement. In connection with the investment, we granted
to our principal shareholders, and transferees of their shares, two demand
registration rights and unlimited incidental
52
<PAGE>
registration rights. These shareholders agreed not to exercise their demand
rights for at least six months following the closing of this offering.
Shareholders' Agreement. In connection with the investment, we and our
principal shareholders entered into a shareholders' agreement. The shareholders
granted each other certain co-sale and first refusal rights, accepted certain
restrictions on the transfer of their shares and agreed upon the appointment of
directors and the formation of committees of the Board of Directors. In
addition, we granted the shareholders certain pre-emptive rights relating to
the issuance of new securities. The shareholders' agreement between us and our
principal shareholders also provides that if Monica Eisinger or Lior Salansky
desire to sell all or any part of the shares owned by them, other than in the
public market, Summit and ADC and Ms. Eisinger or Mr. Salansky are entitled to
sell a pro rata portion of the shares proposed to be sold. Except for these
limited co-sale rights, the shareholders agreement will terminate immediately
prior to the closing of this offering.
Repurchase of Management Shares. In connection with the investment, we
repurchased an aggregate of 30 management shares, 10 each from Monica Eisinger,
Lior Salansky and ADC Teledata Communications Ltd. The repurchase was at
nominal value.
Sub-contractor Agreement with MIND Israel Ltd.
MIND Israel Ltd. is a company founded in 1992 by Monica Eisinger and Lior
Salansky, two of our principal shareholders. MIND Israel Ltd. was involved in
the business of providing information technology consulting services. One of
MIND Israel Ltd.'s major customers was the Israeli Ministry of Defense. MIND
Israel Ltd. wished to assign this contract to us upon our formation. Because
Israeli governmental procedures require a long waiting period prior to the
assignment of this type of contract, MIND Israel Ltd. entered into an agreement
with us under which we performed those services as a sub-contractor of MIND
Israel Ltd. As compensation for these services, MIND Israel Ltd. paid to us
$58,000 in 1997 and $80,000 in 1998. These amounts represented the total amount
that it received from the Israeli Ministry of Defense under this contract.
53
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our ordinary shares as of the date of this prospectus, as adjusted
to reflect the sale of the ordinary shares in this offering, by:
. each person who is known to own beneficially more than 10% of the
outstanding ordinary shares; and
. all directors and executive officers as a group.
Unless otherwise noted below, each shareholder's address is c/o MIND C.T.I.
Ltd., Industrial Park, Building 7, Yoqneam 20692, Israel.
<TABLE>
<CAPTION>
Percentage of Ordinary Shares
Total Shares -----------------------------------
Name and Address of Beneficially Before After
Beneficial Owner Owned(/1/) Offering(/2/) Offering(/3/)
------------------- ------------ -------------- --------------
<S> <C> <C> <C>
Monica Eisinger......... 5,040,000(/4/) 29.5% 23.7%
Lior Salansky........... 4,016,200(/4/)(/5/) 23.5% 18.9%
Snir Street
Yoqneam Illit, Israel
ADC Teledata 4,502,000 26.4% 21.2%
Communications
Ltd.(/6/)..............
10 HaSadnaot Street
Herzlia 46120, Israel
Summit Partners 2,561,873(/9/) 15.0% 12.0%
(/7/)(/8/).............
Kevin Mohan(/10/)....... 2,561,873(/9/) 15.0% 12.0%
All directors and 9,243,600 53.8% 43.2%
executive officers as a
group (8
persons)(/11/).........
</TABLE>
--------
(1) Shares beneficially owned include shares that may be acquired pursuant to
options that are exercisable within 60 days of the date of this prospectus.
(2) Based on 17,083,298 ordinary shares outstanding prior to this offering.
Ordinary shares deemed beneficially owned by virtue of the right of any
person or group to acquire such shares within 60 days of the date of this
prospectus are treated as outstanding only for purposes of determining the
percent owned by such person or group.
(3) Based on 21,283,298 ordinary shares outstanding immediately following this
offering.
(4) The shares owned by Ms. Eisinger and Mr. Salansky include 140,000 shares
owned by MIND Israel Ltd. Each of Ms. Eisinger and Mr. Salansky is
considered a beneficial owner of these shares.
(5) Summit Partners and other shareholders may be required to transfer ordinary
shares in our company to Lior Salansky. Based on an estimated initial
public offering price of $11.00 per share, the Summit Partners and other
shareholders would transfer an aggregate 8,231 ordinary shares to Mr.
Salansky. In addition, pursuant to Mr. Salansky's obligation to persons who
previously purchased shares from him, Mr. Salansky would transfer an
aggregate of 108,389 ordinary shares, including an aggregate of 17,686
ordinary shares to three of our officers. Accordingly, at the assumed
initial public offering price, Mr. Salansky's beneficial ownership would
decrease by 100,158 ordinary shares. Please see "Related Party
Transactions--Investment by Summit Partners" for a description of this
arrangement.
(6) ADC Teledata Communications Ltd. is a wholly-owned subsidiary of ADC
Telecommunications, Inc., a Minnesota company whose shares are publicly
traded on the Nasdaq Stock Market. The address of ADC Telecommunications is
12501 Whitewater Drive, Minnetonka, MN 55343.
(7) The address of Summit Partners is 600 Atlantic Avenue, Suite 2800, Boston,
MA 02210.
(8) Summit Partners is the name used to refer to a group of investment
partnerships. Shares reflected include 1,710,583 shares held by Summit
Ventures, V, L.P., 636,545 shares held by Summit Ventures V Companion Fund,
L.P., 134,507 shares held by Summit V Advisors Fund (QP) L.P., 41,107
shares held by Summit V Advisors Fund, L.P. and 39,131 shares held by
Summit Investors III, L.P. The general partner for each of Summit Ventures
V, L.P., Summit Ventures V Companion Fund, L.P., Summit V Advisors Fund
(QP) L.P. and Summit V Advisors Fund, L.P. is Summit Partners V, L.P., the
general partner of which is Summit Partners, LLC. Mr. Mohan is a member of
Summit Partners, LLC. Based on an estimated initial offering price of
$11,00 per share, Summit Partners would transfer 7,682 ordinary shares to
Mr. Salansky. Please see "Related Party Transactions--Investment by Summit
Partners."
(9) After the offering, 500,000 of the shares held by Summit Partners and its
affiliates will be non-voting shares. These non-voting shares will be
automatically converted into voting shares upon transfer to a third party.
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<PAGE>
(10) Represents shares described in note (8) above, beneficially owned by
Summit Partners. Mr Mohan, one of our directors, is a member of Summit
Partners LLC, the sole general partner of Summit Partners V, L.P. which is
the sole general partner of Summit Ventures V, L.P., Summit Ventures V
Companion Fund, L.P., Summit V Advisors Fund (QP), L.P., and Summit V
Advisors Fund, L.P. Summit Partners, LLC, through an investment committee,
has voting and dispositive authority over the shares held by these
entities and Summit Investors III, L.P. Mr. Mohan does not have voting and
dispositive authority over these shares and disclaims beneficial ownership
except to the extent of his pecuniary interest in these shares.
(11) Includes 101,000 shares which may be acquired upon the exercise of options
within 60 days.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of ordinary shares after the offering could
adversely affect the market price of our ordinary shares by introducing a large
number of sellers to the market. Given the likely volatility that will exist
for our ordinary shares, such sales could cause the market price of the
ordinary shares to decline.
After this offering, we will have outstanding 21,283,298 ordinary shares.
All of the ordinary shares to be sold in this offering, other than shares sold
pursuant to our directed share program, will be freely tradable without
restriction or further registration under the federal securities laws unless
purchased by our "affiliates," as that term is defined in Rule 144 under the
Securities Act. The remaining outstanding ordinary shares, representing
approximately 80.3% of the outstanding ordinary shares upon completion of this
offering (78.0% if the underwriters' over-allotment option is exercised in
full) and all ordinary shares issued upon exercise of options, will be
"restricted securities" under the Securities Act subject to restrictions on the
timing, manner and volume of sales of such shares. Our directors, executive
officers, key employees and our current shareholders have agreed for a period
of 180 days after the date of this prospectus, and some of the participants in
our directed share program will be required to agree as a condition to their
participation in the program, for a period of up to 90 days after the date of
this prospectus, that they will not, without the prior written consent of
Lehman Brothers Inc., directly or indirectly, offer to sell, sell or otherwise
dispose of any ordinary shares or securities convertible into or exchangeable
for ordinary shares, except for:
. the exercise of stock options or warrants existing on the date of this
offering;
. transfers to their associates (as defined in the Exchange Act) who agree
to the lock-up; and
. pledges if the pledgees agree to the lock-up.
We have also agreed to an equivalent lock-up, except that we may issue shares,
warrants or options in consideration of acquisitions if the recipient agrees to
comply with the lock-up.
Holders of 16,491,298 ordinary shares have the right to require us to
register their shares on two occasions, and have incidental registration rights
with respect to those ordinary shares. In addition, as of May 31, 2000, there
were outstanding options to purchase a total of 747,820 ordinary shares and we
were authorized to grant options to purchase 358,180 additional ordinary
shares. We intend to file a registration statement on Form S-8 covering all of
the ordinary shares issuable upon the exercise of options under our share
option plan, at which time these shares will be immediately available for sale
in the public market, subject to the terms of the related options and any
applicable lock-up agreements.
Rule 144
In general, under Rule 144 as currently in effect, 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 212,833 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 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates 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,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
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<PAGE>
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.
The Securities and Exchange Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject
to the reporting requirements of the Securities Exchange Act of 1934, along
with the shares acquired upon exercise of these options, including exercises
after the date of this prospectus. Securities issued in reliance on Rule 701
are restricted securities and, subject to the contractual restrictions
described above, beginning 90 days after the date of this prospectus, may be
sold by persons other than affiliates subject only to the manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
its one year minimum holding period requirement.
Stock Options
Following the completion of this offering we intend to file a registration
statement on Form S-8 under the Securities Act covering 1,108,000 shares
reserved for issuance under our stock option plans. The registration statement
on Form S-8 will become effective automatically upon filing. As of May 31,
2000, options to purchase 747,820 shares were issued and outstanding.
Accordingly, ordinary shares registered under the registration statement will,
subject to vesting provisions and Rule 144 volume limitations applicable to our
affiliates, be available for sale in the open market immediately after the 180-
day lock-up agreements expire.
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<PAGE>
DESCRIPTION OF ORDINARY SHARES
Upon completion of this offering, we will be authorized to issue 80,000,000
ordinary shares, par value NIS 0.01 per share and 8,000,000 non-voting ordinary
shares, par value NIS 0.01 per share. In April 2000, our board of directors
declared, and our shareholders approved, a share dividend of 19 ordinary shares
for each ordinary share. Prior to this offering, there were 17,083,298 shares
issued and outstanding, assuming the conversion of all our outstanding
preferred shares.
Upon completion of this offering, all outstanding ordinary shares, including
the ordinary shares issued in this offering, will be validly issued and fully
paid and will not have preemptive rights, rights of first refusal or co-sale
rights. The ownership or voting of ordinary shares by non-residents of Israel
is not restricted in any way by our memorandum of association, our articles of
association or the laws of the State of Israel, except for citizens of
countries which are in a state of war with Israel who may not be recognized as
owners of ordinary shares.
As of May 31, 2000, all of the Series A and Series B preferred shares are
held by a shareholder in the United States and another shareholder in the
United States owned approximately 1.4% of our ordinary shares.
Transfer of Shares and Notices
Fully paid ordinary shares are issued in registered form and may be freely
transferred pursuant to our articles of association unless such transfer is
restricted or prohibited by another instrument. Unless otherwise prescribed by
law, each shareholder of record will be provided at least 21 calendar days'
prior notice of any general shareholders meeting.
Election of Directors
The ordinary shares do not have cumulative voting rights in the election of
directors. Thus, the holders of ordinary shares conferring more than 50% of the
voting power have the power to elect all the directors, to the exclusion of the
remaining shareholders. Our board is divided into three classes of directors
serving staggered three year terms.
Dividend and Liquidation Rights
Dividends on our ordinary shares may be paid only out of profits and other
surplus, as defined in the Companies Law, as of the end of the most recent
fiscal year or as accrued over a period of two years, whichever is higher. Our
board of directors is authorized to declare dividends, provided that there is
no reasonable concern that the dividend will prevent us from satisfying our
existing and foreseeable obligations as they become due. In the event of our
liquidation, after satisfaction of liabilities to creditors, our assets will be
distributed to the holders of ordinary shares in proportion to their respective
holdings. This liquidation right may be affected by the grant of preferential
dividends or distribution rights to the holders of a class of shares with
preferential rights that may be authorized in the future.
Voting, Shareholders' Meetings and Resolutions
Holders of ordinary shares have one vote for each ordinary share held on all
matters submitted to a vote of shareholders. Non-voting ordinary shares are
identical in all respects to the ordinary shares except that they do not carry
voting rights. Non-voting ordinary shares would be issued to holders of
preferred shares under the circumstances described in this prospectus under the
section "Related Party Transactions--Investment by Summit."
These voting rights may be affected by the grant of any special voting
rights to the holders of a class of shares with preferential rights that may be
authorized in the future. The quorum required for an ordinary meeting of
shareholders consists of at least two shareholders present in person or by
proxy who hold or represent between them at least 25% of the outstanding voting
shares unless otherwise required by applicable rules. A meeting adjourned for
lack of a quorum generally is adjourned to the same day in the following week
at the same time and place or any time and place as the Chairman may designate
with the consent of the
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<PAGE>
shareholders voting on the matter adjourned. At such reconvened meeting the
required quorum consists of any two members present in person or by proxy.
Under the new Israeli Companies Law, unless otherwise provided in the
articles of association or applicable law, all resolutions of the shareholders
require a simple majority of the shares present, in person or by proxy, and
voting on the matter. However, our articles of association require approval of
75% of the shares present and voting to remove directors or change the
structure of our staggered board of directors. All shareholders meetings
require prior notice of at least 21 days.
Under the Companies Law, each and every shareholder has a duty to act in
good faith towards the company and other shareholders and refrain from abusing
his power in the company including, among other things, in voting in the
general meeting of shareholders on the following matters:
. 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.
In addition, each and every shareholder has the general duty to refrain from
depriving rights of other shareholders. Furthermore, any controlling
shareholder, any shareholder who knows that it possesses the power to determine
the outcome of a shareholder vote and any shareholder that, pursuant to the
provisions of the articles of association, has the power to appoint an office
holder in the company, is under a duty to act in fairness towards the company.
The Companies Law does not describe the substance of this duty of fairness.
These various shareholder duties, which typically do not apply to shareholders
of U.S. companies, may restrict the ability of a shareholder to act in what the
shareholder perceives to be its own best interests.
Mergers and Acquisitions under Israeli Law
The Companies Law includes provisions that allow a merger transaction and
requires that each company that is party to a merger approve the transaction by
its board of directors and a vote of the majority of its shares, voting on the
proposed merger at a shareholders' meeting called on at least 21 days' prior
notice. For purposes of the shareholder vote, unless a court rules otherwise,
the merger will not be deemed approved if a majority of the shares held by
parties other than the other party to the merger, or by any person who holds
25% or more of the shares or the right to appoint 25% or more of the directors
of the other party, vote against the merger. 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 to the merger. In addition, a merger may not be completed unless
at least 70 days have passed from the time that a proposal of the merger has
been filed with the Israeli Registrar of Companies.
The Companies Law also provides that an acquisition of shares of a public
company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% shareholder of the company and
there is no 25% or more shareholder in the company. If there already is another
25%, but less than 50%, shareholder in the company, the Companies Law provides
that an acquisition of shares of a public company must be made by means of a
tender offer if as a result of the acquisition the purchaser would become a 45%
shareholder of the company. This rule does not apply if someone else is already
a majority shareholder in the company. If following any acquisition of shares,
the acquirer will hold 90% or more of the company's shares, the acquisition may
not be made other than through a tender offer to acquire all of the shares of
such class. If more than 95% of the outstanding shares are tendered in the
tender offer, all the shares that the
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acquirer offered to purchase will be transferred to it. However, the remaining
minority shareholders may seek to alter the consideration by court order.
Finally, Israeli tax law treats stock-for-stock acquisitions between an
Israeli company and a foreign company less favorably than does U.S. tax law.
For example, Israeli tax law may subject a shareholder who exchanges his
ordinary shares for shares in a foreign corporation to immediate taxation.
Modification of Class Rights
Our articles of association provide that the rights attached to any class
(unless otherwise provided by the terms of such class), such as voting, rights
to dividends and the like, may be varied by written consent of holders of a
majority of the issued shares of that class, or by adoption by the holders of a
majority of the shares of that class at a separate class meeting.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our ordinary shares is American Stock
Transfer & Trust Company, New York, New York.
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CONDITIONS IN ISRAEL
We are incorporated under the laws of, and our principal offices and
manufacturing and research and development facilities are located in, the State
of Israel. Accordingly, we are directly affected by political, economic and
military conditions in Israel.
Political Conditions
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Israel signed a peace treaty with
Egypt in 1979 and a peace treaty with Jordan in 1994. Since 1993, a joint
Israeli-Palestinian Declaration of Principles and several other agreements have
been signed between Israel and the Palestinians. The implementation of these
agreements with the Palestinians has been subject to difficulties and delays,
and a resolution of all the differences between the parties remains uncertain.
As of the date hereof, Israel has not entered into any peace agreement with
Syria and Lebanon.
Despite the progress towards peace between Israel and its Arab neighbors and
the Palestinians, certain countries, companies and organizations continue to
participate in a boycott of Israeli firms and others doing business with Israel
or with Israeli companies. Although we are precluded from marketing our
products to such countries, we believe that in the past, the boycott has not
had a material adverse effect on us. However, restrictive laws, policies or
practices directed towards Israel or Israeli businesses could have an adverse
impact on the expansion of our business.
All male adult citizens and permanent residents of Israel under the age of
48 are, unless exempt, obligated to perform up to 36 days of military reserve
duty annually. Additionally, all such residents are subject to being called to
active duty at any time under emergency circumstances. Many of our officers and
employees are currently obligated to perform annual reserve duty. While we have
operated effectively under these requirements since we began operations, we
cannot assess the full impact of such requirements on our workforce or business
if conditions should change, and we cannot predict the effect on us of any
expansion or reduction of such obligations.
Trade Relations
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is a member of the World Trade Organization and is
signatory to the Global Agreement on Trade and Services. In addition, Israel
has been granted preferences under the Generalized System of Preferences from
the United States, Australia, Canada and Japan. These preferences allow Israel
to export the products covered by such programs either duty-free or at reduced
tariffs.
Israel and the EEC, known now as the "European Union," concluded a Free
Trade Agreement in July 1975 which confers certain advantages with respect to
Israeli exports to most European countries and obligates Israel to lower its
tariffs with respect to imports from these countries over a number of years. In
1985, Israel and the United States entered into an agreement to establish a
Free Trade Area. The Free Trade Area has eliminated all tariff and certain non-
tariff barriers on most trade between the two countries. On January 1, 1993, an
agreement between Israel and the European Free Trade Association, known as the
"EFTA," established a free-trade zone between Israel and the EFTA nations. In
recent years, Israel has established commercial and trade relations with a
number of other nations, including Russia, China, India, Turkey and other
nations in Eastern Europe and Asia.
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Assistance from the United States
Israel receives significant amounts of economic and military assistance from
the United States, averaging approximately $3 billion annually over the last
several years. In addition, in 1992, the United States 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. Under the loan guarantee program, Israel
issued up to $2 billion in principal amount of guaranteed loans each year. We
cannot assure you that foreign aide from the United States will continue at or
near amounts received in the past. The Clinton Administration has recently
announced that it is considering phasing out economic assistance while
increasing military assistance to Israel. If the grants of economic and
military assistance are eliminated or reduced significantly, the Israeli
economy could suffer material adverse consequences.
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TAXATION AND GOVERNMENT PROGRAMS
Israeli Tax Considerations
The following is a summary of the current tax structure applicable to
companies in Israel, with special reference to its effect on us. The following
also contains a discussion of the material Israeli and United States tax
consequences to persons purchasing our ordinary shares offered hereby. To the
extent that the discussion is based on tax legislation which has not been
subject to judicial or administrative interpretation, we cannot assure you that
the tax authorities will accept the views expressed in the discussion in
question.
Prospective purchasers of our ordinary shares should consult their own tax
advisors as to the United States, Israeli or other tax consequences of the
purchase, ownership and disposition of ordinary shares, including, in
particular, the effect of any foreign, state or local taxes.
General Corporate Tax Structure
The regular rate of corporate tax in Israel to which Israeli companies are
subject is 36%. As described below, the tax rate payable by a company which
derives income from an "Approved Enterprise" may be considerably less.
Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes), 1969, or the
Industry Encouragement Law, a company qualifies as an "Industrial Company" if
it is resident in Israel and at least 90% of its income in a given tax year,
determined in NIS, exclusive of income from capital gains, interest and
dividends, is derived from Industrial Enterprises owned by that company. An
"Industrial Enterprise" is defined as an enterprise whose major activity in a
particular tax year is industrial activity.
Industrial Companies qualify for accelerated depreciation rates for
machinery, equipment and buildings used by an Industrial Enterprise. An
Industrial Company owning an Approved Enterprise, as described below, may
choose between the above depreciation rates and the depreciation rates
available to Approved Enterprises.
Pursuant to the Industry Encouragement Law, an Industrial Company is also
entitled to amortize the purchase price of know-how and patents over a period
of eight years beginning with the year in which such rights were first used.
Eligibility for the benefits under the law is not subject to receipt of
prior approval from any governmental authority. We believe that we currently
qualify as an Industrial Company within the definition of the Industry
Encouragement Law. However, the definition may be amended from time to time and
the Israeli tax authorities, which reassess our qualifications annually may
determine that we no longer qualify as an Industrial Company. As a result of
either of the foregoing, the benefits described above might not be available in
the future.
Law for the Encouragement of Capital Investments, 1959
The Law for Encouragement of Capital Investments, 1959, provides that upon
application to the Investment Center of the Ministry of Industry and Trade of
the Sate of Israel, a proposed capital investment in eligible facilities may be
designated as an "Approved Enterprise." Each certificate of approval for an
Approved Enterprise relates to a specific investment program delineated both by
its financial scope, including its capital sources, and by its physical
characteristics, such as the equipment to be purchased and utilized pursuant to
the program. The tax benefits derived from any such certificate of approval
relate only to taxable income derived from growth in manufacturing revenues
attributable to the specific Approved Enterprise. If a company has more than
one approval or only a portion of its capital investments are approved, its
effective tax rate is the result of a weighted combination of the applicable
rates. The benefits under the law are usually not available with respect to
income derived from products manufactured outside of Israel.
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Taxable income of a company derived from an Approved Enterprise is subject
to tax at the maximum rate of 25%, rather than the regular rate of 36%, for the
benefit period. That income is eligible for further reductions in tax rates
depending on the percentage of the foreign investment in the company's share
capital (conferring rights to profits, voting and appointment of directors) and
the percentage of its combined share and loan capital owned by non-Israeli
residents ("foreign investment level"). The tax rate is:
. 20% if the foreign investment level is 49% or more but less than 74%;
. 15% if the foreign investment level is 74% or more but less than 90%;
and
. 10% if the foreign investment level is 90% or more.
The lowest level of foreign investment during the year will be used to
determine the relevant tax rate for that year. These tax benefits are granted
for a limited period not exceeding seven years, or ten years for a company
whose foreign investment level exceeds 25% from the first year in which the
Approved Enterprise has taxable income.
The period of benefits may in no event, however, exceed the lesser of 12
years from the year in which production commenced and 14 years from the year of
receipt of Approved Enterprise status.
A company owning an Approved Enterprise may elect to receive, in lieu of the
foregoing, an alternative package of benefits. Under the alternative package,
the company's undistributed income derived from an Approval Enterprise will be
exempt from tax for a period of between two and ten years from the first year
of taxable income, depending on the geographic location of the Approved
Enterprise within Israel, and the company will be eligible for the tax benefits
under the law for the remainder of the benefit period.
The Investment Center bases its decision of whether to approve or reject a
company's application for designation as an Approved Enterprise on criteria set
forth in the law and related regulations, the then prevailing policy of the
Investment Center and the specific objectives and financial criteria of the
applicant. Accordingly, a company cannot be certain in advance whether its
application will be approved. In addition, the benefits available to an
Approved Enterprise are conditional upon compliance with the conditions
stipulated in the law and related regulations and the criteria set forth in the
specific certificate of approval. In the event that a company violates these
conditions, in whole or in part, it may be required to refund all or a portion
of its tax benefits, linked to the Israeli consumer price index and interest.
These conditions include:
. adhering to the business plan contained in the application to the
Investment Center;
. financing at least 30% of the investment in property, plant and
equipment with the proceeds of the sale of ordinary shares;
. filing regular reports with the Investment Center with respect to the
Approved Enterprise; and
. obtaining the approval of the Investment Center for changes in the
ownership of a company.
Most of our manufacturing facilities in Yoqneam have been granted the status
of Approved Enterprise. Since our manufacturing facilities are located in "Area
A" and since we elected to receive the alternative package of benefits
(involving waiver of investment grants), our income derived from each Approved
Enterprise is tax exempt for a period of ten years commencing in the first year
in which we earn taxable income from each Approved Enterprise. To date, we have
two Approved Enterprises, as follows:
. the first Approved Enterprise commenced operations in 1995 and income
derived from this Approved Enterprise is exempt from tax for a period of
ten years through 2004;
. the second Approved Enterprise requires that we invest approximately
$6.4 million in property, plant and equipment pursuant to an approved
investment plan; and
. after we have invested 80% of this amount, income from this Approved
Enterprise will be exempt from tax for a period of ten years.
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Dividends paid out of income derived from an Approved Enterprise during the
tax exemption period will be subject to corporate tax in respect of the amount
distributed, including withholding tax thereon, at the rate that would have
been applicable had the company not elected the alternative package of
benefits. The dividend recipient is taxed at a reduced rate of 15%, applicable
to dividends from an Approved Enterprise, if the dividend is paid during the
same benefit period and at any time up to 12 years thereafter. The withholding
tax rate will be up to 25% after such period. If the foreign investment level
in the company exceeds 25%, the 12-year limitation period does not apply. This
tax should be withheld by the company at source, regardless of whether the
dividend is converted into foreign currency.
When dividends are distributed from the Approved Enterprise, they are
generally considered to be attributable to the entire enterprise and their
effective tax rate is a result of a weighted combination of the applicable tax
rates. In the event that we pay a cash dividend from income that is derived
from our Approved Enterprises pursuant to the alternative package of benefits,
which income would otherwise be tax-exempt, we would be required to pay tax on
the amount of income distributed as dividends at the rate which would have been
applicable if we had not elected the alternative package of benefits, that rate
is ordinarily up to 25% and to withhold at source on behalf on the recipient of
the dividend an additional 15% of the amount distributed. Through May 31, 2000
we distributed most of our income and paid corporate tax at the rate of 25%. We
currently intend to reinvest the amount of our income and not to distribute
such income as a dividend.
The law also provides that an Approved Enterprise is entitled to accelerated
depreciation on its property and equipment that are included in an approved
investment program.
Taxation Under Inflationary Conditions
The Income Tax (Inflationary Adjustment) Law, 1985, commonly referred to as
the Inflationary Adjustments Law, attempts to overcome some of the problems
presented to a traditional tax system by rapid inflation. The Inflationary
Adjustments Law provides tax deductions and adjustments to depreciation
deduction and tax loss carry forwards to mitigate the effects resulting from an
inflationary economy. Our taxable income is determined under this law.
The Israeli Income Tax Ordinance and regulations promulgated thereunder
allow "Foreign-Invested Companies," which maintain their accounts in U.S.
dollars in compliance with the regulations to adjust their tax returns based on
exchange rate fluctuations of the NIS against the U.S. Dollar rather than
changes in the Israeli consumer price index, or CPI, in lieu of the principles
set forth by the Inflationary Adjustments Law. For these purposes, a Foreign-
Invested Company is a company more than 25% of the share capital of which in
terms of rights to profits, voting and appointment of directors, and of the
combined share capital of which including shareholder loans and capital notes,
is held by persons who are not residents of Israel. A company that elects to
measure its results for tax purposes based on the dollar exchange rate cannot
change the election for a period of three years following the election. We
adjust our tax returns based on the changes in the Israeli CPI. Because we
qualify as a "Foreign-Invested Company," we are entitled to measure our results
for tax purposes on the basis of changes in the exchange rate of the U.S.
dollar in future tax years.
Withholding and Capital Gains Taxes Applicable to Non-Israeli Shareholders
The State of Israel imposes income tax on nonresidents of Israel on income
accrued or derived from sources in Israel or received in Israel. These sources
of income include passive income such as dividends, royalties and interest, as
well as non-passive income from services rendered in Israel. These sources of
income include passive income such as dividends, royalties and interest, as
well as non-passive income from the services rendered in Israel. We are
required to withhold income tax at the rate of 25%, or 15% for dividends of
income generated by an Approved Enterprise, on all distributions of dividends
other than bonus shares (stock dividends), unless a different tax rate is
provided in a treaty between Israel and the shareholder's country of residence.
Under the income tax treaty between the United States and Israel, the maximum
tax on dividends paid to a holder of ordinary shares who is a U.S. resident (as
defined in the treaty) is 25%.
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Israeli law imposes a capital gains tax on the sale of securities and other
capital assets. Under current law, however, sales of the ordinary shares
offered by this prospectus are exempt from Israeli capital gains tax, for so
long as the shares are quoted on Nasdaq or listed on a stock exchange
recognized by the Israeli Ministry of Finance, provided that we continue to
qualify as an Industrial Company or Industrial Holding Company. See "--Law for
Encouragement of Industry (Taxes), 1969." Under a possible interpretation of
the Income Tax (Inflationary Adjustment) Law, 1985, non-Israeli companies may
be subject to Israeli taxation on the sale of our shares regardless of whether
our shares are traded on a recognized stock exchange. Furthermore, under the
income tax treaty between the U.S. and Israel, a holder of ordinary shares who
is a U.S. resident will be exempted from Israeli capital gains tax on the sale
of ordinary shares unless the holder owned, directly or indirectly, 10% or more
of our voting power at any time during the 12-month period before the sale.
A non-resident of Israel who receives interest, dividend or royalty income
derived from or accrued in Israel, from which tax was withheld at the source,
is generally exempted from the duty to file tax returns in Israel with respect
to such income, provided such income was not derived from a business conducted
in Israel by the taxpayer and the taxpayer has no other taxable sources of
income in Israel.
Proposed Tax Reform
On May 7, 2000, the Israeli government approved the recommendations of the
Public Committee on the Reform of Taxes on Income to broaden the categories of
taxable income and to reduce the tax rates imposed on employment income.
The committee recommended, among other things, to impose a tax upon capital
gains at a rate of up to 25% for individuals, including capital gains derived
from the sale of shares in publicly traded companies, which are currently
exempt from capital gains tax; to impose a tax upon all income of Israeli
residents, including individuals and corporations, regardless of the
territorial source of income; to increase the tax rate from zero to 10% on the
exempt period under the alternative package of benefits for Approved
Enterprises under the Law for the Encouragement of Capital Investments, 1959;
and to equalize the corporate tax rate applicable to companies that are owned
49% or more by non-Israeli residents (10% to 20%, depending on the foreign
investment level) to the corporate tax rate applicable to companies that are
owned 49% or more by Israeli residents (25%).
In order to be enacted as legislation, the report must be approved by the
Israeli Parliament, the Knesset, and published, and the substance of the
recommendations could undergo significant revision during that process. If
implemented, the recommendation might result in the imposition of Israeli
capital gains taxes on non-Israeli residents who are not eligible for an
exemption under a relevant tax treaty. For a summary of the treatment of
capital gains under the U.S. - Israel tax treaty, see the discussion above
under "--Withholding and Capital Gains Taxes Applicable to Non-Israeli
Shareholders."
United States Federal Income Tax Considerations
Subject to the limitations described in the next paragraph, the following
discussion describes the material United States federal income tax consequences
of the purchase, ownership and disposition of the ordinary shares to a U.S.
Holder.
A U.S. Holder is:
. an individual citizen or resident of the United States;
. a corporation or another entity taxable as a corporation created or
organized under the laws of the United States or any political
subdivision thereof;
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. an estate, the income of which is includable in gross income for United
States federal income tax purposes regardless of its source; or
. a trust, if a United States court is able to exercise primary
supervision over its administration and one or more United States
persons who have the authority to control all substantial decisions of
the trust.
Unless otherwise specifically indicated, this summary does not consider
United States tax consequences to a person that is not a U.S. Holder and
considers only U.S. holders that will own the ordinary shares as capital
assets.
This discussion is based on current provisions of the Internal Revenue Code
of 1986, as amended, referred to as the Code, current and proposed Treasury
regulations promulgated under the Code, and administrative and judicial
interpretations of the Code, all as in effect today and all of which are
subject to change, possibly with a retroactive effect. This discussion does not
address all aspects of U.S. federal income taxation that may be relevant to any
particular U.S. holder based on the U.S. holder's particular circumstances,
like the tax treatment of U.S. holders who are broker-dealers or who own,
directly, indirectly or constructively, 10% or more of our outstanding voting
shares, U.S. holders holding the ordinary shares as part of a hedging, straddle
or conversion transaction, U.S. holders whose functional currency is not the
U.S. dollar, insurance companies, tax-exempt organizations, financial
institutions and persons subject to the alternative minimum tax, who may be
subject to special rules not discussed below. Additionally, the tax treatment
of persons who hold the ordinary shares through a partnership or other pass-
through entity is not considered, nor are the possible application of U.S.
federal estate or gift taxes or any aspect of state, local or non-U.S. tax
laws.
You are advised to consult your own tax advisor with respect to the specific
tax consequences to you of purchasing, holding or disposing of the ordinary
shares.
Distributions on the Ordinary Shares
A distribution paid by us with respect to the ordinary shares to a U.S.
holder will be treated as ordinary income to the extent that the distribution
does not exceed our current and accumulated earnings and profits, as determined
for U.S. federal income tax purposes. The amount of any distribution which
exceeds these earnings and profits will be treated first as a non-taxable
return of capital reducing the U.S. holder's tax basis in its ordinary shares
to the extent thereof, and then as capital gain from the deemed disposition of
the ordinary shares.
Dividends paid by us in NIS will be included in the income of U.S. holders
at the dollar amount of the dividend, based upon the spot rate of exchange in
effect on the date of the distributions. U.S. holders will have a tax basis in
the NIS for U.S. federal income tax purposes equal to that dollar value. Any
subsequent gain or loss in respect of the NIS arising from exchange rate
fluctuations will be taxable as ordinary income or loss and will be U.S. source
income or loss.
Subject to the limitations set forth in the Code, U.S. holders may elect to
claim as a foreign tax credit against their U.S. federal income tax liability
the Israeli income tax withheld from dividends received in respect of the
ordinary shares. The limitations on claiming a foreign tax credit include among
others, computation rules under which foreign tax credits allowable with
respect to specific classes of income cannot exceed the U.S. federal income
payable with respect each such class. In this regard, dividends paid by us will
generally be foreign source "passive income" for U.S. foreign tax credit
purposes or, in the case of a financial services entity, "financial services
income." U.S. holders that do not elect to claim a foreign tax credit may
instead claim a deduction for the Israeli income tax withheld. The rules
relating to foreign tax credits are complex, and you should consult your own
tax advisor to determine whether and to what extent you would be entitled to
this credit.
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Disposition of Ordinary Shares
Upon the sale or exchange of the ordinary shares, a U.S. holder generally
will recognize capital gain or loss in an amount equal to the difference
between the amount realized on the sale or exchange and the U.S. holder's tax
basis in the ordinary shares. The gain or loss recognized on the sale or
exchange of the ordinary shares generally will be long-term capital gain or
loss if the U.S. holder held the ordinary shares for more than one year at the
time of the sale or exchange.
Gain or loss recognized by a U.S. holder on a sale, exchange or other
disposition of ordinary shares generally will be treated as U.S. source income
or loss for U.S. foreign tax credit purposes.
Passive Foreign Investment Companies
We will be a passive foreign investment company if either (1) 75% or more of
our gross income in a taxable year is passive income; or (2) 50% or more of the
value, determined on the basis of a quarterly average of our assets in a
taxable year are held for the production of, or produces, passive income. If we
own (directly or indirectly) at least 25% by value of the stock of another
corporation, we will be treated for purposes of the foregoing test as owning
our proportionate share of the other corporation's assets and directly earning
our proportionate share of the other corporation's income. If we are a passive
foreign investment company:
. a U.S. holder who has held our shares during more than one taxable year
during which we were a passive foreign investment company will be
required to report any gain on the disposition of the shares as ordinary
income rather than capital gain. That U.S. holder will also be required
to compute the tax liability on that gain, as well as the dividends and
others distributions, as if the income had been earned ratably over each
day in the holding period of the shareholder;
. a U.S. holder must pay tax on amounts so allocated to prior taxable
years at the highest income tax rate for each taxable year during which
we were a passive foreign investment company and for which the items are
treated as having been earned regardless of the rate otherwise
applicable to that U.S. holder during those taxable years;
. the taxes attributable to the prior years will be subject to an interest
charge at the rate applicable to deficiencies for income tax; and
. a U.S. holder who acquires our shares in that corporation from a
decedent that will be denied the normally available step-up in tax bases
in fair market value for the shares at the date of death and instead
will have a tax basis equal to the decedent's tax basis.
Our Status as a Passive Foreign Investment Company
We currently do not expect that we will be a passive foreign investment
company in 2000. However, passive foreign investment company status is
determined as of the end of the taxable year and is dependant on a number of
factors, including the value of a corporation's assets and the amount and type
of its gross income. Therefore, there can be no assurance that we will not
become a passive foreign investment company in 2000 or in a future year.
We will notify U.S. holders in the event we conclude that we will be treated
as a passive foreign investment company for any taxable year to enable U.S.
holders to consider whether or not to elect to treat us as a "qualified
electing fund" for U.S. federal income tax purposes or to elect to "mark to
market" the ordinary shares. If a U.S. holder makes one of these two elections,
distributions and gain will not be recognized ratably as ordinary income over
the U.S. holder's holding period or be subject to an interest charge as
described above. Further, gain on the sale of the ordinary shares will be
characterized as capital gain and the denial of basis step-up at death
described above will not apply. However, U.S. holders making one of the two
elections may be subject to current income recognition, even if we do not
distribute any cash.
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Both of these elections are subject to a number of specific rules and
requirements, and you are urged to consult your tax advisor concerning these
elections if we become a passive foreign investment company.
Backup Withholding
A U.S. holder may be subject to backup withholding at rate of 31% with
respect to dividend payments and receipt of the proceeds from the disposition
of the ordinary shares. Backup withholding will not apply with respect to
payments made to certain exempt recipients, such as corporations and tax-exempt
organizations, or if a U.S. holder provides a tax payer identification number
(or certifies that he has applied for a taxpayer identification number),
certifies that such holder is not subject to backup withholding or otherwise
establishes an exemption. Backup withholding is not an additional tax and may
be claimed as a credit against the U.S. federal income tax liability of a U.S.
holder, or alternatively, the U.S. holder may be eligible for a refund of any
excess amounts withheld under the backup withholding rules, in either case,
provided that the required information is furnished to the Internal Revenue
Service.
Non-U.S. Holders of Ordinary Shares
Except as provided below, a non-U.S. holder of ordinary shares except
certain former U.S. citizens and long-term residents of the United States
generally will not be subject to U.S. federal income or withholding tax on the
receipt of dividends on, and the proceeds from the disposition of, an ordinary
share, unless such item is effectively connected with the conduct by the non-
U.S. holder of a trade or business in the United States or, in the case of a
resident of a country which has an income tax treaty with the United States,
such item is attributable to a permanent establishment in the United States or,
in the case of an individual, a fixed place of business in the United States.
In addition, gain recognized by an individual non-U.S. holder will be subject
to tax in the United States if the non-U.S. holder is present in the United
States for 183 days or more in the taxable year of the sale and certain other
conditions are met.
Non-U.S. holders will not be subject to information reporting or backup
withholding with respect to the payment of dividends on ordinary shares unless
the payment is made through a paying agent, or an office of a paying agent, in
the United States. Non-U.S. holders generally will be subject to information
reporting and, under regulations generally effective January 1, 2001, to backup
withholding at a rate of 31% with respect to the payment within the United
States of dividends on the ordinary shares unless the holder provides its
taxpayer identification number, certifies to its foreign status, or otherwise
establishes an exemption.
Non-U.S. holders generally will be subject to information reporting and
backup withholding at a rate of 31% on the receipt of the proceeds from the
disposition of the ordinary shares to, or through, the United States office of
a broker, whether domestic or foreign, unless the holder provides a taxpayer
identification number, certifies to its foreign status or otherwise establishes
an exemption. Non-U.S. holders will not be subject to information reporting or
backup withholding with respect to the receipt of proceeds from the disposition
of the ordinary shares by a foreign office of a broker; provided, however, that
if the broker is a U.S. person or a "U.S. related person," information
reporting (but not backup withholding) will apply unless the broker has
documentary evidence in its records of the non-U.S. holder's foreign status or
the non-U.S. holder certifies to its foreign status under penalties of perjury
or otherwise establishes an exemption. For this purpose, a "U.S. related
person" is a broker or other intermediary that maintains one or more enumerated
U.S. relationships. Backup withholding is not an additional tax and may be
claimed as a credit against the U.S. federal income tax liability of a U.S.
holder, or alternatively, the U.S. holder may be eligible for a refund of any
excess amounts withheld under the backup withholding rules, in either case,
provided that the required information is furnished to the Internal Revenue
Service.
69
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
named below, for whom Lehman Brothers Inc., U.S. Bancorp Piper Jaffray Inc.,
CIBC World Markets Corp., and Fidelity Capital Markets, a division of National
Financial Services Corporation, are acting as representatives, has agreed to
purchase from us the respective number of ordinary shares shown opposite its
name below:
<TABLE>
<CAPTION>
Number of
Ordinary
Underwriters Shares
------------ ---------
<S> <C>
Lehman Brothers Inc. .........................................
U.S. Bancorp Piper Jaffray Inc. ..............................
CIBC World Markets Corp. .....................................
Fidelity Capital Markets, a division of National Financial
Services Corporation.........................................
---------
Total..................................................... 4,200,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase ordinary shares depend on the satisfaction of the conditions contained
in the underwriting agreement, and that if any of the ordinary shares are
purchased by the underwriters under the underwriting agreement, then all of the
ordinary shares which the underwriters have agreed to purchase under the
underwriting agreement must be purchased. The conditions contained in the
underwriting agreement include that:
. the representations and warranties made by us to the underwriters are
true;
. there is no material change in the financial markets; and
. we deliver customary closing documents to the underwriters.
The representatives had advised us that the underwriters propose to offer
the ordinary shares directly to the public at the public offering price set
forth on the cover page of this prospectus, and to selected dealers, who may
include the underwriters, at such public offering price less a selling
concession not in excess of $ per share. The underwriters may allow, and the
selected dealers may reallow, a concession not in excess of $ per share to
brokers and dealers. After the offering, the underwriters may change the
offering price and other selling terms.
The underwriters have agreed that:
. they will not offer the ordinary shares to the public in Israel within
the meaning of Section 15 of the Israel Securities Law, 5728-1968;
. they will not offer the ordinary shares in Israel to an aggregate of
more than 35 investors who are not persons of the type enumerated in
Section 15A(b) of the Securities Law, including any such investor who
acquired our securities during the past 12 months; and
. they will deliver to us the names and addresses of such investors within
seven days of the consummation of the offering.
The following table summarizes the underwriting discounts and commissions we
will pay. The underwriting discounts and commissions are equal to the public
offer price per share less the amount paid to us per share. The underwriting
discounts and commissions are equal to % of the public offering price
<TABLE>
<CAPTION>
No
Paid by us Exercise Full Exercise
---------- -------- -------------
<S> <C> <C>
Per share.......................................... $ $
----- ----
Total............................................ $ $
===== ====
</TABLE>
70
<PAGE>
We estimate that the total expenses of the offering, including registration,
filing and listing fees, printing fees and legal and accounting expenses but
excluding underwriting discounts and commissions, will be approximately $1.6
million.
We have granted to the underwriters an option to purchase up to an aggregate
of 630,000 additional ordinary shares, exercisable solely to cover over-
allotments, if any, at the public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option at any time, and from time to time, until
30 days after the date of the underwriting agreement. To the extent the
underwriters exercise this option, each underwriter will be committed, so long
as the conditions of the underwriting agreement are satisfied, to purchase a
number of additional ordinary shares proportionate to that underwriter's
initial commitment as indicated in the preceding table, and we will be
obligated, under the over-allotment option, to sell the ordinary shares to the
underwriters.
We have agreed that, without the prior written consent of Lehman Brothers
Inc., we will not, directly or indirectly, offer, sell or otherwise dispose of
any shares of capital stock or any securities which may be converted into or
exchanged for any shares of capital stock for a period of 180 days from the
date of this prospectus. Our principal shareholders and all of our officers and
directors have agreed under lock-up agreements that, without the prior written
consent of Lehman Brothers Inc., they will not, directly or indirectly, offer,
sell or otherwise dispose of any shares of capital stock or any securities
which may be converted into or exchanged for any shares of capital stock for a
period of 180 days from the date of this prospectus. Without the prior written
consent of Lehman Brothers Inc., some of the individuals participating in the
directed share program will be prohibited from disposing of shares of common
stock for a period of up to 90 days after the date of this prospectus.
Prior to the offering, there has been no public market for ordinary shares.
The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
ordinary shares, the representatives will consider prevailing market
conditions, our historical performance and capital structure, estimates of our
business potential and earning prospects, an overall assessment of our
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter of this offering and will be
facilitating electronic distribution through the Internet.
We have agreed to indemnify the underwriters against liabilities relating to
the offering, including liabilities under the Securities Act, liabilities
arising from breaches of the representations and warranties contained in the
underwriting agreement, and liabilities incurred in connection with the
directed share program referred to below, and to contribute to payments that
the underwriters may be required to make for these liabilities.
Until the distribution of the ordinary shares is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase ordinary shares. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the ordinary shares. These
transactions may consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the ordinary shares.
The underwriters may purchase and sell ordinary shares in the open market.
These transactions may include short sales, stabilizing transactions and
purchases to cover short positions created by short sales. Short sales involve
the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. "Covered" short sales are sales made in
an amount not greater than the underwriters' option to purchase additional
shares from the issuer in the offering. The underwriters may close out any
covered short position by either exercising their option to purchase shares or
purchasing shares in the open market. In
71
<PAGE>
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. "Naked" short sales are any
sales in excess of such option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that there may be
downward pressure on the price of our ordinary shares in the open market after
pricing that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or purchases of ordinary
shares made by the underwriters in the open market prior to the completion of
the offering.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of ordinary shares
offered by them.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase ordinary
shares in the open market to reduce the underwriters' short position or to
stabilize the price of the ordinary shares, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid could have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province in Canada in which
the sale is made.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the ordinary shares. In addition, neither we nor
any of the underwriters make any representation that the representatives will
engage in such transactions or that any such transaction, once commenced, will
not be discontinued without notice.
Purchasers of the ordinary shares offered in this prospectus may be required
to pay stamp taxes and other charges under the laws and practices of the
country of purchase, in addition to the offering price listed on the cover of
this prospectus.
At our request, Lehman Brothers Inc. has reserved up to 210,000 ordinary
shares, or 5% of the ordinary shares offered by this prospectus, for sale
pursuant to a directed share program to our officers, directors, employees (and
their family members), customers, suppliers, and personal friends of our
directors and executive officers. All of the persons purchasing the reserved
shares must commit to purchase no later than the close of business on the day
following the date of this prospectus. Commitments may be withdrawn at any time
before they are accepted, which must be after effectiveness of the registration
statement. The number of shares available for sale to the general public will
be reduced to the extent these persons purchase the reserved shares.
Lehman Brothers Inc. acted as the placement agent for the investment in our
preferred shares in March 2000 and received customary fees in connection
therewith.
72
<PAGE>
LEGAL MATTERS
The validity of the ordinary shares being offered hereby and certain other
legal matters in connection with this offering with respect to Israeli law will
be passed upon for us by Goldfarb, Levy, Eran & Co., our Israeli counsel.
Partners of Goldfarb, Levy, Eran & Co. beneficially own approximately 13,000
ordinary shares. Certain legal matters in connection with this offering with
respect to United States law will be passed upon for us by Fulbright & Jaworski
L.L.P., our U.S. counsel. Certain legal matters in connection with this
offering with respect to Israeli law will be passed upon for the underwriters
by Naschitz, Brandes & Co., Israeli counsel to the underwriters, and by
Skadden, Arps, Slate, Meagher & Flom LLP, U.S. counsel to the underwriters with
respect to United States law.
EXPERTS
Our financial statements at December 31, 1998 and 1999 and for the years
ended December 31, 1997, 1998 and 1999 appearing in this prospectus have been
audited by Kesselman & Kesselman, independent certified public accountants in
Israel, and a member of PricewaterhouseCoopers International Limited, whose
report thereon appears in this prospectus in reliance on the report of such
accountants given on the authority of such firm as experts in auditing and
accounting.
ENFORCEABILITY OF CIVIL LIABILITIES
Service of process upon us and upon our directors and officers and the
Israeli experts named in this prospectus, substantially all of whom reside
outside the United States, may be difficult to obtain within the United States.
Furthermore, because substantially all of our assets and substantially all of
our directors and officers are located outside the United States, any judgment
obtained in the United States against us or any of our directors and officers
may not be collectible within the United States.
We have been informed by our legal counsel in Israel, Goldfarb, Levy, Eran &
Co., that original actions may not be instituted in Israel to enforce civil
liabilities under the Securities Act and the Exchange Act. However, Israeli
courts are authorized to enforce a United States final executory judgment in a
civil matter, including a monetary or compensatory judgment in a non-civil
matter provided that:
. the application for enforcement was filed within five years after the
judgment;
. adequate service of process has been effected and the defendant has had
a reasonable opportunity to present his arguments and evidence;
. the judgment and the enforcement thereof are not contrary to the law,
public policy, security or sovereignty of the State of Israel;
. the judgment was obtained after due process before a court of competent
jurisdiction according to the rules of private international law
prevailing in Israel;
. the judgment was not obtained by fraud and does not conflict with any
other valid judgment in the same matter between the same parties;
. an action between the same parties in the same matter is not pending in
any Israeli court at the time the lawsuit is instituted in the United
States court; and
. the U.S. court is not prohibited by law from enforcing judgments of
Israel courts.
Pursuant to the underwriting agreement, we have irrevocably appointed MIND
C.T.I. Inc. as our agent to receive service of process in any action against us
in any federal court or court of the State of New York arising out of this
offering or any purchase or sale of securities in connection therewith. This
does not limit the appointment of MIND C.T.I. Inc. in this registration
statement as our agent to receive service of process in any action against us
in any other federal or state court in the United States.
73
<PAGE>
If a foreign judgment is enforced by an Israeli court, it generally will be
payable in Israeli currency, which can then be converted into non-Israeli
currency and transferred out of Israel. The usual practice in an action before
an Israeli court to recover an amount in a non-Israeli currency is for the
Israeli court to render judgment for the equivalent amount in Israeli currency
at the rate of exchange in force on the date thereof, but the judgment debtor
may make payment in foreign currency. Pending collection, the amount of the
judgment of an Israeli court stated in Israeli currency ordinarily will be
linked to the Israeli consumer price index plus interest at the annual
statutory rate set by Israeli regulations prevailing at such time. Judgment
creditors must bear the risk of unfavorable exchange rates.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form F-1 under the Securities Act with respect to this offering of
our ordinary shares. This prospectus does not contain all of the information
contained in the registration statement. Statements made in this prospectus as
to the contents of any contract, agreement or other document are necessarily
summaries of these documents and are qualified in their entirety by reference
to each such contract, agreement or other document which is filed as an exhibit
to the registration statement. You may read and copy the registration
statement, including the exhibits and schedules thereto, and any document we
file with the Securities and Exchange Commission without charge at the
Securities and Exchange Commission's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of such material may be obtained by mail
from the Public Reference Branch of the Securities and Exchange Commission at
such address, at prescribed rates. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the public reference
room.
As a result of this offering, we will become subject to the informational
requirements of the Exchange Act applicable to foreign private issuers and will
fulfill the obligations with respect to such requirements by filing reports
with the Securities and Exchange Commission. As a foreign private issuer, we
will be exempt from the rules under the Exchange Act prescribing the furnishing
and content of proxy statements, and our officers, directors and principal
shareholders will be exempt from the reporting and "short-swing" profit
recovery provisions contained in Section 16 of the Exchange Act. In addition,
we will not be required under the Exchange Act to file periodic reports and
financial statements with the Securities and Exchange Commission as frequently
or as promptly as United States companies whose securities are registered under
the Exchange Act. A copy of each report submitted in accordance with applicable
United States Law will be available for public review at our principal
executive offices.
74
<PAGE>
MIND C.T.I. LTD.
(An Israeli Corporation)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 and
(Unaudited) March 31, 2000............................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1997,
1998 and 1999 and the (Unaudited) Three Months Ended March 31, 1999 and
2000..................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity (Capital
Deficiency) for the Years Ended December 31, 1997, 1998 and 1999 and the
(Unaudited) Three Months Ended March 31, 2000............................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999 and the (Unaudited) Three Months Ended March 31, 1999
and 2000................................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
[PricewaterhouseCoopers Letterhead]
REPORT OF INDEPENDENT AUDITORS
To the shareholders of MIND C.T.I. Ltd.
We have audited the consolidated balance sheets of MIND C.T.I. Ltd. (the
"Company") and its subsidiary as of December 31, 1998 and 1999 and the related
consolidated statements of income, changes in shareholders' equity (capital
deficiency) and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company'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 in Israel, including those prescribed by the Israeli Auditors (Mode
of Performance) Regulations, 1973. Those auditing standards are substantially
similar to auditing standards generally accepted in the United States. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Company'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 aforementioned financial statements present fairly, in
all material respects, the consolidated financial position of the Company and
its subsidiary as of December 31, 1998 and 1999 and the results of their
operations, changes in shareholders' equity (capital deficiency) and their 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.
Kesselman & Kesselman
Certified Public Accountants (Isr.)
Tel-Aviv, Israel
March 30, 2000,
except for Notes 5 and 6a(2), for which the date is May 1, 2000
F-2
<PAGE>
MIND C.T.I. LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Information
(Note 10)
-----------
December 31,
------------- March 31, March 31,
1998 1999 2000 2000
------ ------ --------- -----------
(Unaudited)
(In thousands of U.S. dollars)
<S> <C> <C> <C> <C>
Assets
CURRENT ASSETS (Note 8):
Cash and cash equivalents............... $ 803 $2,646 $16,473 $16,473
Short-term investments (Note 9a)........ 203 754 134 134
Accounts receivable (Note 9b):
Trade................................. 1,200 2,577 2,550 2,550
Other................................. 123 250 127 127
Inventories............................. 88 37 35 35
------ ------ ------- -------
Total current assets................ 2,417 6,264 19,319 19,319
------ ------ ------- -------
PROPERTY AND EQUIPMENT (Note 2):
Cost.................................... 953 1,392 1,536 1,536
Less--accumulated depreciation and
amortization........................... 284 421 482 482
------ ------ ------- -------
669 971 1,054 1,054
------ ------ ------- -------
OTHER ASSETS (Note 9c).................... 131 258 290 290
------ ------ ------- -------
Total assets........................ $3,217 $7,493 $20,663 $20,663
====== ====== ======= =======
Liabilities and shareholders' equity (net
of capital deficiency)
CURRENT LIABILITIES (Note 8):
Accounts payable and accruals:
Trade................................. $ 171 $ 201 $ 427 $ 427
Other (Note 9d)....................... 1,065 1,648 2,818 2,818
Declared dividend....................... -- -- 2,013 2,013
------ ------ ------- -------
Total current liabilities........... 1,236 1,849 5,258 5,258
ACCRUED SEVERANCE PAY (Note 3)............ 221 424 533 533
------ ------ ------- -------
Total liabilities................... 1,457 2,273 5,791 5,791
------ ------ ------- -------
COMMITMENTS (Note 4)
MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED SHARES OF NIS 0.01 PAR VALUE (A
preferred shares--111,111 shares; B
preferred shares--27,778 shares;
liquidation value of $15,000,000)(Note
5)....................................... 20,778
-------
SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(Note 6):
Share capital--ordinary shares of NIS
0.01 par value (authorized 85,222,220
shares; issued and outstanding:
December 31, 1998--12,246,000 shares;
December 31, 1999--14,892,000 shares;
March 31, 2000: actual--14,336,440
shares; pro forma--17,081,298 shares--
unaudited)............................. 36 36 36 43
Additional paid-in capital.............. 1,067 3,680 1,364 22,135
Deferred stock compensation............. -- (274) (880) (880)
Retained earnings (accumulated
deficit)............................... 657 1,778 (6,426) (6,426)
------ ------ ------- -------
Total shareholders' equity (capital
deficiency)........................ 1,760 5,220 (5,906) 14,872
------ ------ ------- -------
Total liabilities and shareholders'
equity (net of capital
deficiency)........................ $3,217 $7,493 $20,663 $20,663
====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
MIND C.T.I. LTD.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months
Years Ended December Ended March
31, 31,
-------------------- --------------
1997 1998 1999 1999 2000
------ ------ ------ ------ -------
(Unaudited)
(In thousands of U.S. dollars,
except per share data)
<S> <C> <C> <C> <C> <C>
REVENUES (Note 10a):
Sales of licenses...................... $1,500 $3,385 $6,791 $1,287 $ 2,642
Services............................... 491 685 1,405 298 529
------ ------ ------ ------ -------
Total Revenues .......................... 1,991 4,070 8,196 1,585 3,171
COST OF REVENUES......................... 432 631 1,318 288 423
------ ------ ------ ------ -------
GROSS PROFIT............................. 1,559 3,439 6,878 1,297 2,748
RESEARCH AND DEVELOPMENT EXPENSES--net
(excluding $9,000 and $31,000 of non-
cash compensation in 1999 and in the
three months ended March 31, 2000
(unaudited), respectively) (Note 10b)... 397 1,049 1,918 417 894
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (excluding $1,000, $1,000,
$17,000, and $47,000 of non-cash
compensation in 1997, 1998, 1999 and in
the three months ended March 31, 2000
(unaudited), respectively) (Note 10c):
Selling expenses....................... 430 1,055 2,110 429 809
General and administrative expenses.... 352 591 1,000 219 363
NON-CASH COMPENSATION.................... 1 1 26 -- 78
------ ------ ------ ------ -------
OPERATING INCOME......................... 379 743 1,824 232 604
FINANCIAL AND OTHER INCOME--net (Note
10d).................................... 77 99 137 15 21
------ ------ ------ ------ -------
INCOME BEFORE TAXES ON INCOME............ 456 842 1,961 247 625
TAXES ON INCOME (Note 7)................. 114 201 447 58 144
------ ------ ------ ------ -------
NET INCOME............................... 342 641 1,514 189 481
ACCRETION OF MANDATORILY REDEEMABLE
CONVERTIBLE A PREFERRED SHARES TO
MANDATORY REDEMPTION VALUE (Note 5)..... -- -- -- -- (6,672)
------ ------ ------ ------ -------
NET INCOME (LOSS) APPLICABLE TO ORDINARY
SHARES.................................. $ 342 $ 641 $1,514 $ 189 $(6,191)
====== ====== ====== ====== =======
EARNINGS (LOSS) PER ORDINARY SHARE (Note
10e):
Basic.................................. $ 0.03 $ 0.05 $ 0.10 $ 0.01 $ (0.42)
====== ====== ====== ====== =======
Diluted................................ $ 0.03 $ 0.05 $ 0.10 $ 0.01 $ (0.42)
====== ====== ====== ====== =======
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES USED IN COMPUTATION OF EARNING
(LOSS) PER ORDINARY SHARE--IN THOUSANDS
(Note 10e):
Basic.................................. 11,163 12,246 14,667 13,928 14,892
====== ====== ====== ====== =======
Diluted................................ 11,200 12,283 14,984 14,115 14,892
====== ====== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
MIND C.T.I. LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
Share Capital Retained
--------------------- Additional Earnings
Number of Paid-In Deferred Stock (Accumulated
Shares Amount Capital Compensation Deficit) Total
-------------- ------ ---------- -------------- ------------ -------
(In thousands) (In thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1997................... 10,390 $36 $ 23 $ (2) $ 41 $ 98
CHANGES DURING 1997:
Net income............. -- -- -- -- 342 342
Issuance of ordinary
shares in August 1997,
net of share issuance
costs of $14,000 (Note
6a(4))................ 1,856 * 1,044 -- -- 1,044
Amortization of
deferred compensation
related to employee
stock option grants... -- -- -- 1 -- 1
Dividend declared...... -- -- -- -- (228) (228)
------ --- ------- ----- ------- -------
BALANCE AT DECEMBER 31,
1997................... 12,246 36 1,067 (1) 155 1,257
CHANGES DURING 1998:
Net income............. -- -- -- -- 641 641
Amortization of
deferred compensation
related to employee
stock option grants... -- -- -- 1 1
Dividend declared...... -- -- -- -- (139) (139)
------ --- ------- ----- ------- -------
BALANCE AT DECEMBER 31,
1998................... 12,246 36 1,067 -- 657 1,760
CHANGES DURING 1999:
Net income............. -- -- -- -- 1,514 1,514
Exercise of warrants to
purchase ordinary
shares in January
1999, net of issuance
costs of $23,000 (Note
6a(4))................ 2,646 * 2,313 -- -- 2,313
Deferred compensation
related to employee
stock option grants... -- -- 300 (300) --
Amortization of
deferred compensation
related to employee
stock option grants... -- -- -- 26 -- 26
Dividend declared...... -- -- -- -- (393) (393)
------ --- ------- ----- ------- -------
BALANCE AT DECEMBER 31,
1999................... 14,892 36 3,680 (274) 1,778 5,220
CHANGES DURING THE THREE
MONTHS PERIOD ENDED
MARCH 31, 2000
(unaudited):
Net income............. -- -- -- -- 481 481
Dividend declared...... -- -- -- -- (2,013) (2,013)
Deemed purchase and
cancellation of
ordinary shares on
March 30, 2000, which
were exchanged for
mandatorily redeemable
convertible B
preferred shares (Note
5) ................... (556) * (3,000) -- -- (3,000)
Accretion of
mandatorily redeemable
convertible A
preferred shares to
mandatory redemption
value (Note 5)........ -- -- -- -- (6,672) (6,672)
Deferred compensation
related to employee
stock option grants... -- -- 684 (684) -- --
Amortization of
deferred compensation
related to employee
stock option grants... -- -- -- 78 -- 78
------ --- ------- ----- ------- -------
BALANCE AT MARCH 31,
2000 (unaudited)....... 14,336 36 1,364 (880) (6,426) (5,906)
Conversion of
mandatorily redeemable
convertible A and B
preferred shares into
ordinary shares
(unaudited)........... 2,745 7 20,771 -- -- 20,778
------ --- ------- ----- ------- -------
PRO FORMA BALANCE AT
MARCH 31, 2000
(unaudited)............ 17,081 $43 $22,135 $(880) $(6,426) $14,872
====== === ======= ===== ======= =======
</TABLE>
--------
* Represents an amount less than $1,000.
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
MIND C.T.I. LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Years Ended Ended
December 31, March 31,
----------------------- ----------------
1997 1998 1999 1999 2000
------ ------ ------- ------- -------
(Unaudited)
(In thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income......................... $ 342 $ 641 $ 1,514 $ 189 $ 481
Adjustments to reconcile net income
to net cash provided by or used in
operating activities:
Depreciation and amortization...... 81 128 196 40 70
Deferred income taxes--net......... 35 131 294 53 (529)
Compensation expense resulting
from options granted to
employees......................... 1 1 26 -- 78
Accrued severance pay--net......... 25 28 89 44 86
Capital loss on sale of property
and equipment--net................ -- 3 9 -- 4
Erosion of principal of long-term
loans from shareholders
denominated in Israeli currency
and linked to the Israeli
consumer price index.............. (9) (3) -- -- --
Unrealized loss (gain) from
trading securities................ (32) 5 (19) (6) (8)
Interest accrued on short-term
bank deposits..................... -- -- (29) (7) (2)
Changes in operating asset and
liability items:
Purchase of trading securities.... (854) -- -- -- --
Proceeds from sale of trading
securities....................... 102 576 96 -- --
Decrease (increase) in accounts
receivable:
Trade............................ (519) (397) (1,377) (60) 27
Other............................ (9) (65) (127) (3) 152
Increase (decrease) in accounts
payable and accruals:
Trade............................ 60 61 30 (20) 226
Other............................ 213 478 276 (55) 767
Decrease (increase) in
inventories...................... (15) (62) 51 49 2
------ ------ ------- ------- -------
Net cash provided by (used in)
operating activities.............. (579) 1,525 1,029 224 1,354
------ ------ ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment......................... (210) (425) (526) (49) (159)
Investment in short-term bank
deposits.......................... -- -- (1,410) (1,410) 630
Withdrawal of short-term bank
deposits.......................... -- -- 811 -- --
Proceeds from sale of property and
equipment......................... 10 3 19 -- 2
------ ------ ------- ------- -------
Net cash provided by (used in)
investing activities.............. (200) (422) (1,106) (1,459) 473
------ ------ ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of ordinary shares (net of
share issuance costs)............. 1,044 -- 2,313 2,313 --
Issuance of mandatorily redeemable
convertible A preferred shares.... -- -- -- -- 12,000
Short-term bank credit--net........ (26) -- -- 5 --
Repayment of long-term bank loans.. (48) (45) -- -- --
Repayment of loans from
shareholders...................... (53) (27) -- -- --
Dividends paid..................... (101) (266) (393) -- --
------ ------ ------- ------- -------
Net cash provided by (used in)
financing activities.............. 816 (338) 1,920 2,318 12,000
------ ------ ------- ------- -------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 37 765 1,843 1,083 13,827
BALANCE OF CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD............. 1 38 803 803 2,646
------ ------ ------- ------- -------
BALANCE OF CASH AND CASH EQUIVALENTS
AT END OF PERIOD................... $ 38 $ 803 $ 2,646 $ 1,886 $16,473
====== ====== ======= ======= =======
SUPPLEMENTARY DISCLOSURE OF CASH
FLOW INFORMATION--
cash paid during the period for:
Interest........................... $ 15 $ 12 $ 5 $ -- $ --
====== ====== ======= ======= =======
Income tax......................... $ 69 $ 133 $ 210 $ 11 $ 76
====== ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
MIND C.T.I. 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
MIND C.T.I. Ltd. (the "Company"), an Israeli corporation develops,
manufactures and markets real-time billing and customer care software for Voice
over Internet Protocol service providers. The Company also provides a call
management system used by organizations for call accounting, traffic analysis
and fraud detection.
2) Functional currency
The currency of the primary economic environment in which the operations of
the Company and its wholly-owned subsidiary are conducted is the U.S. dollar
("dollar" or "$"). Most of the Company's revenues are derived from sales
outside of Israel which are denominated primarily in dollars. To the extent
that the Company's revenues are derived in Israeli currency linked to the
dollar, contract amounts are stated in dollars and paid in Israeli currency
linked to the changes in the exchange rate of the dollar and Israeli currency.
In addition, most marketing costs are incurred outside Israel, primarily in
dollars. Thus, the functional currency of the Company and its subsidiary 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
(detailed below) reflected in the statements of income, 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 carried to financial income or expenses, as appropriate.
3) Accounting principles
The financial statements are prepared in accordance with generally accepted
accounting principles ("GAAP") in the United States.
4) Use of estimates in preparation of financial statements
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and 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. Principles of consolidation:
1) The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary.
2) Intercompany balances and transactions were eliminated in consolidation.
F-7
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--(Continued)
c. Cash equivalents and short term bank deposits
The Company and its subsidiary consider all highly liquid investments, which
include short-term bank deposits (up to three months from date of deposit) that
are not restricted as to withdrawal or use, to be cash equivalents.
Bank deposits with an original maturity of more than three months but less
than one year from date of deposit are presented as "short-term bank deposits"
among "short-term investments."
d. Marketable securities
These securities--participation certificates in mutual funds--classified as
"trading securities", are stated at redemption value, which is the fair value.
The changes in redemption value of the securities are carried to financial
income or expenses.
e. Inventories
Inventories are valued at the lower of cost or market value. Cost is
determined by the "first-in, first-out" method.
f. Property and equipment
1) These assets are stated at cost.
2) The assets are depreciated by the straight-line method, on basis of their
estimated useful life.
Annual rates of depreciation are as follows:
<TABLE>
<CAPTION>
<S> <C>
Computers and electronic equipment.............................. 15-33%
(mainly 33%)
Office furniture and equipment.................................. 6-7%
Vehicles........................................................ 15%
</TABLE>
3) Leasehold improvements are amortized by the straight line method over the
term of the lease, which is shorter than the estimated useful life of the
improvements.
g. Impairment of long-lived assets
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"
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 indicators of
impairment are present, the existence of impairment is identified by comparing
the carrying amount of the potentially impaired asset to the undiscounted cash
flows from use and eventual disposition of that asset. If the carrying amount
of the asset being evaluated is greater than the undiscounted cash flows from
use and eventual disposition of that asset, then impairment is measured based
on the excess, if any, of the carrying amount over the fair value of the asset.
In the reported periods, no impairment loss has been recognized.
F-8
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--(Continued)
h. Income taxes:
1) Deferred income taxes are computed for temporary differences between the
assets and liabilities as measured in the financial statements and for tax
purposes, at the tax rates expected to be in effect when these differences
reverse.
2) Taxes which would apply in the event of disposal of investment in
subsidiary have not been taken into account in computing the deferred taxes, as
it is the Company's policy to hold this investment, not to realize it.
i. Revenue recognition:
1) Sales of licenses
On October 27, 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition".
SOP 97-2 supersedes SOP 91-1 and provides guidance on when and in what amounts
revenues should be recognized for the licensing, selling, leasing or otherwise
marketing of computer software.
SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997. The Company adopted SOP 97-2 as revised in
SOP 98-4, "Deferral of the Effective Date of Certain Provisions of SOP 97-2"
and SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition with
Respect to Certain Transactions."
Revenue from sale of products is recognized when delivery has occurred,
persuasive evidence of an agreement exists, the sales price is fixed or
determinable and collectability is probable. Customization of the product, if
any, is performed before delivery occurs.
In cases where the Company installs the product, the revenue recognition is
deferred until the installation is completed.
The Company does not grant a right of return of products sold to customers,
distributors and resellers.
The Company renders maintenance and support services to its customers mainly
for a period of one year from delivery. When revenue on sale of products is
recognized, the Company defers a portion of the sales price (which is presented
in the balance sheet as "deferred revenues" among "accounts payable and
accruals--other,") and recognizes it as maintenance and support service revenue
ratably over the above period. The portion of the sales price that is deferred
is determined based on the fair value of the service as priced in transactions
in which the Company renders solely maintenance and support services
2) Maintenance, support and project management
Such revenues are priced on a fixed price basis and are recognized ratably
over the service period or as services are performed. See also (1) above.
Project management consists of advice to the Company's customers regarding
the deployment of billing and customer care software over their IP networks.
j. Research and development:
Pursuant to FAS No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," research and development costs related to
software products are expensed as incurred until the "technological
feasibility" of the product has been established. Because of the relatively
short time
F-9
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--(Continued)
period between "technological feasibility" and product release, and the
insignificant amount of costs incurred during such period, no software
development costs have been capitalized.
Royalty-bearing grants received from government departments for development
of approved projects is recognized as a reduction of expenses as the related
cost is incurred, since at the time the grants were received, successful
development of the related projects was not assured.
k. Allowance for doubtful accounts
The allowance is determined for specific debts doubtful of collection.
l. Advertising expenses
These expenses are charged to income as incurred. Advertising expenses
totaled $28,000, $106,000 and $215,000 in the years ended December 31, 1997,
1998 and 1999, respectively, and (unaudited) $47,000 and $77,000 in the three
months ended March 31, 1999 and 2000, respectively.
m. Comprehensive income
The Company has no comprehensive income components other than net income.
n. Interim financial information
The unaudited consolidated financial statements at March 31, 2000 and for
the three month periods ended March 31, 1999 and 2000 have been prepared in
accordance with GAAP for interim financial information and with Article 10 of
Regulation S-X of the United States Securities and Exchange Commission. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
o. Unaudited pro forma balance sheet
Upon the closing of the Company's anticipated initial public offering
("IPO"), each outstanding share of mandatorily redeemable convertible A and B
preferred shares will automatically convert into 19.7037 and 20 ordinary
shares, respectively, assuming an estimated IPO price of $11.00 per ordinary
share. These transactions have been reflected in the unaudited pro forma
balance sheet as if they occurred on March 31, 2000. The final conversion ratio
will depend on the IPO price per share (see Note 5).
F-10
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--PROPERTY AND EQUIPMENT
a. Composition of assets, grouped by major classification, is as follows:
<TABLE>
<CAPTION>
Accumulated
depreciation and
Cost amortization
----------------------- ---------------------
December December
31, 31,
----------- March 31, --------- March 31,
1998 1999 2000 1998 1999 2000
---- ------ ----------- ---- ---- -----------
(In thousands of U.S. (In thousands of U.S.
dollars) dollars)
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Computers and electronic
equipment.................. $290 $ 534 $ 651 $108 $206 $247
Office furniture and
equipment.................. 174 266 297 37 53 59
Vehicles.................... 437 592 588 87 162 176
Leasehold improvements...... 52 -- -- 52 -- --
---- ------ ------ ---- ---- ----
$953 $1,392 $1,536 $284 $421 $482
==== ====== ====== ==== ==== ====
</TABLE>
b. Depreciation and amortization expenses totaled $81,000, $128,000 and
$196,000 in the years ended December 31, 1997, 1998 and 1999, respectively, and
(unaudited) $40,000 and $70,000 in the three months ended March 31, 1999 and
2000, respectively.
NOTE 3--SEVERANCE PAY
a. Israeli law generally requires payment of severance pay upon dismissal of
an employee or upon termination of employment in certain other circumstances.
The severance pay liability of the Company to its Israeli employees, based upon
the number of years of service and the latest monthly salary, is partly covered
by regular deposits with severance pay funds and pension funds, and by purchase
of insurance policies; under labor agreements, the deposits with recognized
pension funds and the insurance policies, as above, are in the employees' names
and are, subject to certain limitations, the property of the employees.
The severance pay liabilities covered by the pension funds are not reflected
in the financial statements as the severance pay risks have been irrevocably
transferred to the pension funds.
The amounts accrued and the portion funded with severance pay funds and by
the insurance policies are reflected in the financial statements as follows:
<TABLE>
<CAPTION>
December
31,
------------ March 31,
1998 1999 2000
----- ----- -----------
(In thousands of U.S.
dollars)
(Unaudited)
<S> <C> <C> <C>
Accrued severance pay............................ $ 221 $ 424 $ 533
Less--amounts funded (presented in "other
assets")........................................ (126) (240) (263)
----- ----- -----
Unfunded balance................................. $ 95 $ 184 $ 270
===== ===== =====
</TABLE>
The amounts of accrued severance pay as above cover the Company's severance
pay liability in accordance with labor agreements in force and based on salary
components which, in management's opinion, create entitlement to severance pay.
The Company may only make withdrawals from the amounts funded with severance
pay and pension funds and by insurance policies for the purpose of paying
severance pay.
F-11
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--SEVERANCE PAY--(Continued)
b. The severance pay expenses were $78,000, $83,000 and $201,000 in the
years ended December 31, 1997, 1998 and 1999, respectively, and (unaudited)
$68,000 and $128,000 in the three months ended March 31, 1999 and 2000,
respectively.
c. The earnings on the amounts funded were $1,000, $6,000 and $16,000 in the
years ended December 31, 1997, 1998 and 1999, respectively, and (unaudited)
$4,000 and $11,000 in the three months ended March 31, 1999, and 2000,
respectively.
NOTE 4--LEASE COMMITMENTS
a. Leasing of premises
The premises occupied by the Company and its subsidiary are rented under
various operating lease agreements. The lease agreements for the premises
expire on various dates between 2002 and 2004.
Future minimum lease commitments of the Company and its subsidiary under the
above leases, at exchange rates in effect on March 31, 2000, are as follows:
<TABLE>
<CAPTION>
(In thousands
of U.S. dollars)
----------------
<S> <C>
Nine months ending December 31, 2000........................ $ 234
Years Ending December 31:
2001...................................................... 312
2002...................................................... 317
2003...................................................... 260
2004...................................................... 266
------
$1,389
======
</TABLE>
The rental payments for the premises in Israel, which constitute most of the
above amounts, are payable in Israeli currency linked to the Israeli consumer
price index (the "Israeli CPI").
Rental expense totaled $51,000, $77,000 and $201,000 in the years ended
December 31, 1997,1998 and 1999, respectively, and (unaudited) $50,000 and
$76,000 in the three months ended March 31, 1999 and 2000, respectively.
b. Leasing of motor vehicles
In 2000, the Company has entered into operating lease agreements for use of
motor vehicles. The lease agreements expire on various dates between 2002 and
2003.
Future minimum lease commitments of the Company under the above leases, at
exchange rates in effect on March 31, 2000, are as follows:
<TABLE>
<CAPTION>
(In thousands
of U.S. dollars)
----------------
<S> <C>
Nine Months Ending December 31, 2000........................ $ 80
Years Ending December 31:
2001...................................................... 107
2002...................................................... 107
2003...................................................... 11
----
$305
====
</TABLE>
F-12
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--LEASE COMMITMENTS--(Continued)
The rental payments are payable in Israeli currency linked to the Israeli
CPI.
Rental expense totaled (unaudited) $8,000 in the three months ended March
31, 2000.
NOTE 5--MANDATORILY REDEEMABLE CONVERTIBLE A AND B PREFERRED SHARES
a. As of March 31, 2000, the mandatorily redeemable convertible preferred
shares are composed as follow:
<TABLE>
<CAPTION>
Original Mandatory
Issued and Gross Redemption
Outstanding Proceeds Value
----------- -------- ----------
(Number of (In thousands of
Shares) U.S. dollars)
<S> <C> <C> <C>
A preferred shares of NIS 0.01 par value... 111,111 $12,000 $17,778
B preferred shares of NIS 0.01 par value... 27,778 3,000 3,000
------- ------- -------
138,889 $15,000 $20,778
======= ======= =======
</TABLE>
The A preferred shares were issued under an investment agreement among new
investors, the Company and principal shareholders, dated March 30, 2000, for
consideration of $12,000,000.
Issuance costs of $894,000, which are included in accounts payable and
accruals at March 31, 2000 (see Note 9d), are charged against the recorded
amount of the A preferred shares before any accretion.
The B preferred shares were issued on March 30, 2000 in exchange for
ordinary shares held by one of the Company's principal shareholders. Concurrent
with the exchange, this principal shareholder sold the B preferred shares to an
investor group which was the same as the investors in the A preferred shares.
The Company received no cash as a result of this sale.
b. The A and B preferred shares confer upon their holders the same rights as
the ordinary shares (see Note 6a(3)), have conversion rights, redemption rights
and a preference in liquidation as stipulated in the articles of association of
the Company and a mechanism of anti-dilution in the event of issuance of shares
at a price per share lower than the price the holders of the preferred shares
paid.
The A and B preferred shares are convertible into ordinary shares, at the
holder's option, at any time after 12 months from the date of issuance. The A
and B preferred shares will automatically be converted into ordinary shares
upon the occurrence of a liquidity event, including an IPO (see also below). In
this case the conversion ratio of the B preferred shares will be one to twenty
and the number of ordinary shares into which the B preferred shares will be
converted is 555,560 ordinary shares. The conversion ratio of the A preferred
shares will be between one to sixteen and one to twenty, depending on the IPO
price per ordinary share. If such IPO price per ordinary share is at least
$13.50, the number of ordinary shares into which the A preferred shares will be
converted will be 1,777,776 shares. If such IPO price per ordinary share is
$10.80 or less, the number of ordinary shares into which the A preferred shares
will be converted will be 2,222,220 shares. If such IPO price per ordinary
share ranges between $10.80 and $13.50, the conversion value shall be adjusted
on a straight line basis interpolation.
Under the Articles of Association of the Company, in the event of a
liquidity event as described below, the holders of the A and B preferred shares
will receive an amount in cash before the holders of the ordinary shares
receive any distribution, equal to the greater of (a) the sum of $108 per
preferred share plus an amount
F-13
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--MANDATORILY REDEEMABLE CONVERTIBLE A AND B PREFERRED SHARES--
(Continued)
equivalent to a dividend of 4.5% compounded annually since March 30, 2000, or
(b) an amount such preferred holder would have received had the preferred
shares been converted into ordinary shares immediately prior to the liquidity
event. These liquidity events include: (i) a liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary; (ii) a sale of
shares by the Company or by one or more of its shareholders, merger or similar
transaction involving the Company, as the result of which those persons who
held 100% of the voting stock of the Company immediately prior to such
transaction do not hold more than 50% of the voting stock of the Company (or
the surviving or resulting entity) after giving effect to such transaction or
(iii) the sale or licensing of all or substantially all of the assets of the
Company.
The occurrence of such an event is deemed to be liquidation of the Company,
as stated above. However, because the redemption in the event of a deemed
liquidation is not solely within the control of the Company, the mandatorily
redeemable convertible preferred shares have been presented outside of
permanent shareholders' equity in the balance sheet. These rights expire upon
the conversion of the A and B preferred shares into ordinary shares, which will
automatically occur upon an IPO.
c. In connection with the issuance of the A and B preferred shares, the
amounts of $5,778,000 and $1,445,000, representing the beneficial conversion
features will be amortized against retained earnings (accumulated deficit) over
a period that commenced upon issuance (March 30, 2000), and ending upon the
earlier of 12 months from the date of issuance or the date of an IPO. The
amount of amortization in the three months period ended March 31, 2000 was
nominal and was not recorded. The amounts of $5,778,000 and $1,445,000 are
calculated as the difference between the per share conversion price and the
deemed fair value of an ordinary share at the issuance date, multiplied by the
applicable number of equivalent ordinary shares.
d. The Company, its existing shareholders and the investors in the A and B
preferred shares entered into a redemption agreement on March 30, 2000,
concurrently with the purchase of the A and B preferred shares. The redemption
agreement provides that, if a liquidity event as described in b. above has not
occurred by March 30, 2005, the holders of the A and B preferred shares will be
entitled to cause a sale of the Company or redemption of the A and B preferred
shares at an amount equal to the higher of (a) fair market value of the
preferred shares (as determined by appraisal, if requested), or (b) the amount
as determined in the case of a liquidity event as described above. However, any
amount paid in redemption of the B preferred shares is payable only to the
extent of profits of the Company earned since the date of issuance (March 30,
2000), since as of March 31, 2000, the Company has an accumulated deficit.
Accordingly, the A preferred shares are classified outside of permanent
shareholders' equity at March 31, 2000, at their expected mandatory redemption
value of $17,778,000. In addition, as a result of the forgoing, the Company
recognized a charge to accumulated deficit, which was accreted for the three
months ended March 31, 2000 in the amount of $6,672,000. This amount reflects
the difference between the redemption value of the A preferred shares and the
net proceeds received by the Company for the issuance of those shares. The B
preferred shares are also classified outside of permanent shareholders' equity
at their estimated fair value of $3,000,000 at March 31, 2000, with a like
amount recorded as a reduction of additional paid-in capital representing the
deemed purchase and cancellation of the ordinary shares which were exchanged
for the B preferred shares. The B preferred shares will be increased by a
charge to retained earnings (accumulated deficit) in the future to the extent
that the Company has net income, up to the redemption amounts as determined in
the preceding paragraph.
F-14
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--SHAREHOLDERS' EQUITY
a. Share capital:
1) In January 1998, the shareholders of the Company resolved to split every
ordinary share of NIS 1 par value into 100 ordinary shares of NIS 0.01 par
value. All per share amounts and shares outstanding in these financial
statements have been adjusted to give retroactive effect to the stock split.
2) On April 30, 2000, the shareholders of the Company resolved to increase
the authorized share capital to 88,000,000 shares of NIS 0.01 par value
(85,222,220 ordinary shares, 2,222,220 mandatorily redeemable convertible A
preferred shares and 555,560 mandatorily redeemable convertible B preferred
shares).
On April 30, 2000 the Board of Directors of the Company resolved to allot a
stock dividend (bonus shares) at the rate of 19 ordinary shares for each
ordinary share. All per ordinary share amounts and ordinary shares outstanding
in these financial statements have been adjusted to give retroactive effect to
the stock dividend.
3) Each ordinary share of NIS 0.01 par value confers upon its holder the
right to receive cash dividends and stock dividends, the right to a share in
the Company's assets upon liquidation, based on paid up par value, not taking
into account any premium and the right to vote at shareholders' meetings.
4) Under an agreement entered into in August 1997, the Company issued
1,856,000 ordinary shares of NIS 0.01 par value to an investor, in
consideration of $1,044,000 ($0.56 per share), net of issuance costs of
$14,000. In addition, the Company granted the investor a warrant to increase
its holdings up to 30% of the Company's shares at a price of $0.88 per share.
In January 1999, the investor exercised the warrant and the Company issued
thereto 2,646,000 additional ordinary shares of NIS 0.01 par value, in
consideration of $2,313,000, net of issuance costs of $23,000.
b. Option plans:
1) In December 1995, an employee was granted an option to purchase 50,000
ordinary shares of NIS 0.01 par value for $7,500 ($0.15 per share). The options
are exercisable through December 31, 2001. As of December 31, 1999 and March
31, 2000, all such options are fully vested.
The compensation expense that was charged against income in each of the
years ended December 31, 1997 and 1998 in respect of such option is $1,000.
2) In December 1998, the Board of Directors approved an employee stock
option plan, which was amended in 2000 (the "1998 Plan"). Under the 1998 Plan,
options for up to 1,058,000 ordinary shares of NIS 0.01 par value are to be
granted to senior employees. Immediately upon issuance, the shares issuable
upon the exercise of the options will confer on holders the same rights as the
other ordinary shares.
The 2000 amendment changed the number of options that can be granted under
the 1998 Plan and enabled the Company to grant options to employees of the U.S.
subsidiary.
The Board of Directors determines the exercise price and the vesting period
of the options granted.
The options vest over three to five years (mainly three years), commencing
on the date of grant (usually 33% each year).
Any option not exercised by January 1, 2006 will expire.
F-15
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The 1998 Plan, in respect of Israeli employees, is subject to the terms
stipulated by Section 102 of the Israeli Income Tax Ordinance. Inter alia, the
Ordinance provides that the Company will be allowed to claim as an expense for
tax purposes the amounts credited to the employees as a benefit upon sale of
shares allotted under the plan at a price exceeding the exercise price, when
the related capital gains tax is payable by the employee. The Company has not
recorded a tax benefit because it anticipates that the tax benefit will be
nominal, as most of its income during the period the options may be exercised
will be tax exempt (see Note 7a).
NOTE 6--SHAREHOLDERS' EQUITY (Continued)
The 1998 Plan supersedes any previous commitments to grant options or shares
to employees who were granted options under that plan.
The following is a summary of the status of the 1998 Plan as of December 31,
1998 and 1999 and as of March 31, 2000 and changes during the periods then
ended:
<TABLE>
<CAPTION>
Years Ended December 31, Three Months
---------------------------------- Ended March 31,
1998 1999 2000
---------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
------- -------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period.... -- $ -- 221,220 $ 0.57 413,220 $1.16
Changes during period:
Granted............... 221,220 0.57 207,000 1.77 312,600 4.93
Forfeited............. -- -- (15,000) 0.98 (45,000) 2.33
------- ----- ------- ------ ------- -----
Options outstanding at
end of period.......... 221,220 $0.57 413,220 $ 1.16 680,820 $2.81
======= ===== ======= ====== ======= =====
Options exercisable at
end of period.......... -- $ -- 53,000 $ 0.57 110,000 $0.69
======= ===== ======= ====== ======= =====
Weighted average fair
value of options
granted during the
period*................ $ 0.19 $ 1.99 $ 3.78
======= ======= =======
</TABLE>
--------
* The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions.
<TABLE>
<CAPTION>
Years Ended Three Months
December 31, Ended
--------------- March 31,
1998 1999 2000
------ ------ ------------
(Unaudited)
<S> <C> <C> <C>
Dividend yield................................... 0% 0% 0%
Expected volatility.............................. 50% 53% 53%
Risk-free interest rate.......................... 5% 5% 5%
Expected lives--in years......................... 2 2 2
</TABLE>
F-16
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--SHAREHOLDERS' EQUITY--(Continued)
3) The following table summarizes information about options outstanding and
exercisable at December 31, 1999 and March 31, 2000 (unaudited):
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------- ---------------------------------
Number Weighted Number Weighted
Outstanding Average Weighted Exercisable Average Weighted
Range of at Remaining Average at Remaining Average
Exercise December 31, Contractual Exercise December 31, Contractual Exercise
prices 1999 Life Price 1999 Life Price
-------- ------------ ----------- -------- ------------ ----------- --------
Years Years
<S> <C> <C> <C> <C> <C> <C>
$0.57 227,220 6 $0.57 53,000 6 $0.57
$0.60-2.50 168,000 6 $1.54 -- -- --
$2.55-5.00 18,000 6 $5.00 -- -- --
------- -------
413,220 6 $1.16 53,000 6 $0.57
======= =======
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------- ---------------------------------
Weighted Weighted
Number Average Weighted Number Average Weighted
Range of Outstanding Remaining Average Exercisable Remaining Average
Exercise at March 31, Contractual Exercise at March 31, Contractual Exercise
prices 2000 Life Price 2000 Life Price
-------- ------------ ----------- -------- ------------ ----------- --------
Years Years
<S> <C> <C> <C> <C> <C> <C>
$0.57 227,220 5 $0.57 89,000 5 $0.57
$0.60-2.50 129,000 5 $1.25 21,000 5 $1.18
$2.55-5.00 324,600 5 $5.00 -- -- --
------- -------
680,820 5 $2.81 110,000 5 $0.69
======= =======
</TABLE>
4) Accounting treatment of the 1998 Plan
As permitted by FAS No. 123, "Accounting for Stock-Based Compensation," the
Company accounts, for the 1998 Plan using the treatment prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Under APB 25, compensation cost for employee stock
option plans is measured using the intrinsic value based method of accounting.
Accordingly, the difference, if any, between the fair value of the shares on
the date of the grant of the options, and the exercise price of such options,
is recorded as a compensation expense over the vesting period.
In the year ended December 31, 1999 and in the three months ended March 31,
2000, the Company recorded $300,000 and (unaudited) $684,000, respectively, of
deferred stock compensation for the excess of the deemed fair value of the
ordinary shares over the exercise price at the date of grant of options to
employees. The compensation expense is being amortized by the straight line
method over the vesting period of the options. The compensation expense that
has been charged against income in the year ended December 31, 1999 and in the
three months ended March 31, 2000 is $26,000 and (unaudited) $78,000,
respectively.
F-17
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--SHAREHOLDERS' EQUITY--(Continued)
Had compensation cost for the 1998 Plan been determined based on the fair
value at the grant dates for awards granted under the 1998 Plan, consistent
with the method of FAS 123, the Company's net income (loss) applicable to
ordinary shares and earnings (loss) per ordinary share would have been reduced
to the pro-forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31
------------------------------ --------------------------------
1998 1999 1999 2000
-------------- --------------- -------------- -----------------
(unaudited)
As Pro As Pro As Pro As Pro
reported forma reported forma reported forma reported forma
-------- ----- -------- ------ -------- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)
applicable to ordinary
shares--in thousands of
U.S. dollars........... $ 641 $ 626 $1,514 $1,424 $ 189 $ 158 $(6,191) $(6,222)
===== ===== ====== ====== ===== ===== ======= =======
Earnings per ordinary
share--in U.S. dollars:
Basic................... $0.05 $0.05 $ 0.10 $ 0.10 $0.01 $0.01 $ (0.42) $ (0.42)
===== ===== ====== ====== ===== ===== ======= =======
Diluted................. $0.05 $0.05 $ 0.10 $ 0.10 $0.01 $0.01 $ (0.42) $ (0.42)
===== ===== ====== ====== ===== ===== ======= =======
</TABLE>
c. Dividends
In the event cash dividends are declared by the Company, such 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
such non-Israeli currency, at the rate of exchange prevailing at the time of
conversion.
NOTE 7--TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of Capital Investments,
1959
The Company's production facilities have been granted "approved enterprise"
status under the above law. Income derived from the approved enterprises is tax
exempt for a period of ten years commencing in the first year in which the
Company earns taxable income from the approved enterprise, since the Company
has elected the "alternative benefits" scheme (involving waiver of investment
grants).
The period of tax benefits of the first approved enterprise, which commenced
operation in 1995, will expire in 2004. The period of benefits of the second
approved enterprise has not yet commenced.
In the event of distribution of cash dividends from income which was tax
exempt as above, the Company would have to pay 25% tax in respect of the amount
distributed.
Through March 31, 2000, the Company distributed as a dividend most of the
retained earnings derived from tax exempt income. Therefore, the Company
recorded deferred and current taxes at the rate of 25% in respect of the
amounts distributed. Most of such dividends was declared in March 2000. As from
April 1, 2000, the Company intends to reinvest all of its income and not to
distribute such income as dividends.
The entitlement to the above benefits is conditional upon the Company's
fulfilling the conditions stipulated by the above law, regulations published
thereunder and the certificate of approval for the specific investments in
approved enterprises. In the event of failure to comply with these conditions,
the benefits may be canceled and the Company may be required to refund the
amount of the benefits, in whole or in part, with the addition of linkage
differences to the Israeli CPI and interest.
F-18
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--TAXES ON INCOME--(Continued)
b. Measurement of results for tax purposes under the Income Tax (Inflationary
Adjustments) Law, 1985 (the "Inflationary Adjustments Law")
Under the Inflationary Adjustments Law, results for tax purposes are
measured in real terms, in accordance with the changes in the Israeli CPI. The
Company is taxed under this law. As explained in Note 1a(2), the financial
statements are measured in dollars. The difference between the changes in the
Israeli CPI and in the exchange rate of the dollar relative to Israeli
currency--both on annual and cumulative bases--causes a difference between
taxable income and income reflected in these financial statements.
c. Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969
The Company is an "industrial company" as defined by this law and as such is
entitled to certain tax benefits, consisting mainly of accelerated depreciation
as prescribed by regulations published under the Inflationary Adjustments Law,
and amortization of patents and certain other intangible property rights.
d. Other applicable tax rates:
1) Income from other sources in Israel
Income not eligible for Approved Enterprise benefits is taxes at the
regular rate of 36%.
2) Income of the U.S. subsidiary
The U.S. subsidiary is taxed according to tax laws in the United
States.
e. Deferred income taxes:
<TABLE>
<CAPTION>
December
31,
------------ March 31,
1998 1999 2000
----- ----- -----------
(Unaudited)
(In thousands of U.S.
dollars)
<S> <C> <C> <C>
1) Provided in respect of the following:
Accrued vacation pay........................... $ 2 $ 2 $ 2
Accrued severance pay.......................... 5 4 6
Research and development expenses.............. 36 48
Dividend distributable from tax exempt income,
see a. above................................. (186) (515)
----- ----- ---
$(179) $(473) $56
===== ===== ===
2) The deferred taxes are presented in the balance
sheets as follows:
Among current assets (liabilities)............. $(184) $(491) $29
As non-current assets.......................... 5 18 27
----- ----- ---
$(179) $(473) $56
===== ===== ===
</TABLE>
3) Paragraph 9(f) of FAS 109 creates an exception which prohibits the
recognition of deferred tax liabilities or assets that arise from
differences between the financial reporting and tax bases of assets and
liabilities that are remeasured from the local currency into dollars
using historical exchange rates, and that result from (i) changes in
exchange rates, and (ii) indexing for tax purposes.
F-19
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--TAXES ON INCOME--(Continued)
f. Taxes on income included in the income statements:
1) As follows:
<TABLE>
<CAPTION>
Three
Months
Years Ended Ended
December 31, March 31,
-------------- -------------
1997 1998 1999 1999 2000
---- ---- ---- ----- ------
(Unaudited)
(In thousands of U.S.
dollars)
<S> <C> <C> <C> <C> <C>
Current:
Israeli....................................... $ 79 $ 70 $153 $ 5 $ 645
United States................................. -- -- -- -- 28
---- ---- ---- ----- ------
79 70 153 5 673
Deferred, see e. above.......................... 35 131 294 53 (529)
---- ---- ---- ----- ------
$114 $201 $447 $ 58 $ 144
==== ==== ==== ===== ======
</TABLE>
2) Following is a reconciliation of the theoretical tax expense, assuming
all income is taxed at the regular tax rates applicable to companies in Israel
(see d. above), and the actual tax expense:
<TABLE>
<CAPTION>
Three Months
Ended
Years Ended December 31, March 31,
--------------------------------- --------------------
1997 1998 1999 1999 2000
--------- --------- ----------- --------- ---------
(Unaudited)
(In thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before
taxes on income, as
reported in the
statements of income*.. $456 100% $842 100% $1,961 100% $247 100% $625 100%
==== === ==== === ====== === ==== === ==== ===
Theoretical tax expense
(benefit).............. $164 36% $303 36% $ 706 36% $ 89 36% $225 36%
Less--tax benefits
arising from approved
enterprise status, see
a. above............... (50) (11) (93) (11) (216) (11) (27) (11) (69) (11)
---- --- ---- --- ------ --- ---- --- ---- ---
114 25 210 25 490 25 62 25 156 25
Increase (decrease) in
taxes resulting from
permanent differences:
Disallowable
deductions............ 21 5 30 4 33 2 9 3 15 2
Differences between the
basis of measurement
of income reported for
tax purposes and the
basis of measurement
of income for income
for financial
reporting purposes--
net, see b. and e(3)
above................. (17) (4) (30) (4) (57) (3) (10) (4) (17) (3)
Other.................. (4) (1) (9) (1) (19) (1) (3) (1) (10) (1)
---- --- ---- --- ------ --- ---- --- ---- ---
Taxes on income......... $114 25% $201 24% $ 447 23% $ 58 23% $144 23%
==== === ==== === ====== === ==== === ==== ===
* As follows:
Taxable in Israel..... $519 $837 $1,951 $244 $624
Taxable in the United
States............... (63) 5 10 3 1
---- ---- ------ ---- ----
$456 $842 $1,961 $247 $625
==== ==== ====== ==== ====
</TABLE>
F-20
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--TAXES ON INCOME--(Continued)
g. Tax assessments
The Company has received final assessments from the tax authorities,
following their audit through the year ended December 31, 1998. The U.S.
subsidiary has not been assessed since incorporation in 1997. Any resulting
taxes are recorded in the period the assessments are received.
NOTE 8--MONETARY BALANCES IN NON-DOLLAR CURRENCIES
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------
Israeli Currency Other
----------------------- Non-Dollar
Linked* Unlinked Currencies
----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
(In thousands of U.S. dollars)
<S> <C> <C> <C>
Assets--current:
Cash and cash equivalents.............. $-- $ 328 $341
Short-term investments................. -- 134 --
Accounts receivable:
Trade................................ -- 999 120
Other................................ 22 -- --
---- ------ ----
$ 22 1,461 $461
==== ====== ====
Liabilities--current:
Accounts payable and accruals:
Trade................................ $-- $ 327 $ 40
Other................................ -- 1,226 --
---- ------ ----
$-- $1,553 $ 40
==== ====== ====
</TABLE>
--------
* To the Israeli CPI.
F-21
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--SUPPLEMENTARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
December 31,
-------------- March 31,
1998 1999 2000
------ ------ -----------
(Unaudited)
(In thousands of U.S.
dollars)
<S> <C> <C> <C>
a. Short-term investments:
Marketable securities*......................... $ 203 $ 126 $ 134
Bank deposits**................................ -- 628 --
------ ------ ------
$ 203 $ 754 $ 134
====== ====== ======
* Including unrealized gain................... $ 27 $ 25 $ 33
====== ====== ======
** The deposits were denominated in dollars and
bore annual interest of 5.125%.
b. Accounts receivable:
1) Trade:
Open accounts................................ $1,248 $2,807 $2,880
Less--allowance for doubtful accounts........ (48) (230) (330)
------ ------ ------
$1,200 $2,577 $2,550
====== ====== ======
2) Other:
Government of Israel......................... $ 45 $ 141 $ --
Employees.................................... 12 21 19
Deferred income taxes, see Note 7e........... -- -- 29
Related parties.............................. 27 14 16
Sundry....................................... 39 74 63
------ ------ ------
$ 123 $ 250 $ 127
====== ====== ======
c. Other assets:
Amounts funded with severance pay funds and by
insurance policies in respect of employee
severance pay, see Note 3..................... $ 126 $ 240 $ 263
Deferred income taxes, see Note 7e............. 5 18 27
------ ------ ------
$ 131 $ 258 $ 290
====== ====== ======
d. Accounts payable and accruals--other:
Payroll and related expenses................... $ 227 $ 287 $ 456
Accrued vacation pay........................... 46 100 103
Deferred revenues, see Note 1i................. 473 617 748
Government of Israel (March 31, 2000, mainly in
respect of tax and dividend distributed from
tax exempt income, see Note 7a)............... -- 35 478
Deferred income taxes, see Note 7e............. 184 491 --
Shareholders................................... 5 -- 3
Accrued costs in respect of preferred shares
issuance, see Note 5.......................... -- -- 894
Accrued expenses and sundry.................... 130 118 136
------ ------ ------
$1,065 $1,648 $2,818
====== ====== ======
</TABLE>
e. Concentration of credit risks
Most of the Company's cash, cash equivalents, short-term bank deposits and
marketable securities at December 31, 1998 and 1999 and March 31, 2000 were
deposited with Israeli and U.S. banks. The Company is of the opinion that the
credit risk in respect of those balances is remote.
F-22
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--SUPPLEMENTARY BALANCE SHEET INFORMATION--(Continued)
Most of the Company's revenue has historically been from a large number of
customers. Consequently, the exposure to credit risks relating to trade
receivables is limited. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. An appropriate allowance
for doubtful accounts is included in the accounts.
f. Fair value of financial instruments
The financial instruments of the Company and its subsidiary consist mainly
of non-derivative assets and liabilities (items included in working capital).
In view of their nature, the fair value of the financial instruments included
in the working capital of the Company and its subsidiary is identical or close
to their carrying value.
NOTE 10--SELECTED INCOME STATEMENT DATA
a. Revenues:
1) The Company has two product lines: (i) product line "A"--real-time
billing and customer care software for Voice over IP service providers and (ii)
product line "B"--software product to enterprises which is a call management
system used by organizations for call accountancy, traffic analysis and fraud
detection.
Following are data regarding revenues classified by product lines:
<TABLE>
<CAPTION>
Three Months
Years Ended December Ended
31, March 31,
-------------------- -------------
1997 1998 1999 1999 2000
------ ------ ------ ------ ------
(Unaudited)
(In thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C>
Product line "A".......................... $ 183 $ 914 $3,529 $ 208 $2,393
Product line "B".......................... 1,808 3,156 4,667 1,377 778
------ ------ ------ ------ ------
$1,991 $4,070 $8,196 $1,585 $3,171
====== ====== ====== ====== ======
</TABLE>
2) Following are data regarding geographical revenues classified by
geographical location of the customers:
<TABLE>
<CAPTION>
Three Months
Years Ended December Ended
31, March 31,
-------------------- -------------
1997 1998 1999 1999 2000
------ ------ ------ ------ ------
(Unaudited)
(In thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C>
United States and Canada................. $ 83 $ 707 $2,068 $ 281 $1,162
Asia Pacific and other................... 15 117 894 60 927
Europe (mainly--Germany)................. 853 2,336 3,385 906 690
Israel................................... 1,040 910 1,849 338 392
------ ------ ------ ------ ------
$1,991 $4,070 $8,196 $1,585 $3,171
====== ====== ====== ====== ======
</TABLE>
Most of the Company's assets are located in Israel.
F-23
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--SELECTED INCOME STATEMENT DATA--(Continued)
3) The Company has one customer the revenue from which exceeds 10% of total
revenues. The amount of revenues from that customer was $381,000, $1,316,000
and $1,574,000 in 1997, 1998 and 1999, respectively.
4) In 1997 and 1998 the Company had revenues from a related party in the
amount of $158,000 and $80,000, respectively.
b. Research and development expenses--net:
<TABLE>
<CAPTION>
Three
Months
Years Ended Ended
December 31, March 31,
-------------------- -----------
1997 1998 1999 1999 2000
----- ------ ------ ----- -----
(Unaudited)
(In thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C>
Expenses incurred:
Payroll and related expenses........... $ 513 $ 993 $1,702 $ 354 $ 757
Depreciation and amortization.......... 22 38 96 12 32
Other.................................. 8 18 148 51 105
----- ------ ------ ----- -----
543 1,049 1,946 417 894
Less--royalty bearing participations from
the Government of Israel*............... (146) -- (28) -- --
----- ------ ------ ----- -----
$ 397 $1,049 $1,918 $ 417 $ 894
===== ====== ====== ===== =====
</TABLE>
--------
* The Company was committed to pay royalties to the Israeli Government on
proceeds from sales of products in the research and development of which the
Government participated by way of grants. Under the terms of the Company's
funding from the Israeli Government, royalties of 4% were payable on sales
of products developed from a project so funded, up to 100% of the amount of
the grant received by the Company. Through March 31, 2000, the Company paid
the entire amount of royalties in respect of such participations.
F-24
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--SELECTED INCOME STATEMENT DATA--(Continued)
<TABLE>
<CAPTION>
Three
Months
Years Ended Ended
December 31, March 31,
--------------- -------------
1997 1998 1999 1999 2000
---- ---- ----- ----- ------
(Unaudited)
(In thousands of U.S.
dollars)
<S> <C> <C> <C> <C> <C>
c. Selling, general and administrative expenses:
1) Selling expenses
Including royalties in respect of
participation in research and development,
see b. above................................ $ 83 $192 $ 161 $34 $ --
==== ==== ===== ===== ======
2) General and administrative expenses
The changes in allowance for doubtful
accounts is composed as follows:
Balance at beginning of period............. $-- $ 24 $ 48 $48 $230
Increase during the period................. 24 24 285 27 100
Bad debt written off....................... -- -- (103) -- --
---- ---- ----- ----- ------
Balance at end of period................... $ 24 $ 48 $ 230 $75 $330
==== ==== ===== ===== ======
d. Financial and other income (expenses)--net:
Income:
Gain on sale of, and unrealized gain on,
trading securities.......................... $ 32 $-- $ 20 $37 $ 4
Interest on bank deposits.................... 4 10 139 6 30
Non-dollar currency gains--net............... 60 104 -- -- --
---- ---- ----- ----- ------
96 114 159 43 34
---- ---- ----- ----- ------
Expenses:
Financial expenses in respect of long-term
loan........................................ 15 5 -- -- --
Financial expenses in respect of short-term
credit...................................... 4 7 14 13 --
Non-dollar currency losses--net.............. -- -- 1 15 9
Capital loss on sale of property and
equipment................................... -- 3 9 -- 4
---- ---- ----- ----- ------
19 15 24 28 13
---- ---- ----- ----- ------
$ 77 $ 99 $ 135 $15 $ 21
==== ==== ===== ===== ======
</TABLE>
e. Earnings (loss) per ordinary share ("EPS")
Basic EPS are computed based on the net income less the accretion relating
to the mandatorily redeemable A preferred shares divided by the weighted
average number of shares outstanding during each period. In computing diluted
EPS, account was taken of the dilutive effect of the outstanding stock options
using the treasury stock method.
Basic and diluted EPS for the three month period ended March 31, 2000
include the ordinary shares which were repurchased by the Company in exchange
for the issuance of B preferred shares (see Note 5), since the ordinary shares
were outstanding during the entirety of the period.
Diluted EPS for the three month period ended March 31, 2000 does not include
680,280 options, because of their anti-dilutive effect, since the Company had
net loss applicable to ordinary shares.
F-25
<PAGE>
MIND C.T.I. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--SELECTED INCOME STATEMENT DATA--(Continued)
Following are data relating to the weighted average number of shares for
the purpose of computing EPS:
<TABLE>
<CAPTION>
Years Ended December Three Months Ended
31, March 31,
-------------------- ------------------
1997 1998 1999 1999 2000
------ ------ ------ ------ -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Weighted average number of shares
issued and outstanding--used in
computation of basic EPS.......... 11,163 12,246 14,667 13,928 14,892
Add--incremental shares from
assumed exercise of options....... 37 37 317 187 --
------ ------ ------ ------ ------
Weighted average number of shares
used in computation of diluted
EPS............................... 11,200 12,283 14,984 14,115 14,892
====== ====== ====== ====== ======
</TABLE>
The pro forma basic and diluted loss per ordinary share for the three
months ended March 31, 2000 is $0.42 and is similar to the actual loss per
ordinary share for such period since the mandatorily redeemable preferred
convertible A shares were issued on March 30, 2000.
F-26
<PAGE>
4,200,000 Shares
[MIND LOGO]
Ordinary Shares
-------------
PROSPECTUS
, 2000
-------------
Lehman Brothers
U.S. Bancorp Piper Jaffray
CIBC World Markets
Fidelity Capital Markets
a division of National Financial Services Corporation
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this registration statement (other
than the underwriting discount) will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................. $ 15,302
NASD Filing Fee..................................................... 6,296
Nasdaq Listing Fee.................................................. 95,000
Israel Stamp Duty................................................... 430,000
Fees of Transfer Agent and Registrar................................ 10,000
Accounting Fees..................................................... 250,000
Legal Fees.......................................................... 425,000
Printing and Engraving Fees......................................... 200,000
Miscellaneous....................................................... 168,402
----------
Total............................................................. $1,600,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Sections 260 and 261 of the Companies Law, 5759-1999 (the "Companies Law")
permit a company's articles of association to provide that: (i) the company may
prospectively exculpate an office holder from liability for damage resulting
from such office holder's breach of duty of care to the company (ii) the
company may insure an office holder for the breach of his duty of care or, to
the extent he acted in good faith and had a reasonable basis to believe that
the act would not prejudice the company, for the breach of his duty of loyalty,
as well as for monetary liabilities charged against him as a result of an act
or omission he committed in connection with his service as an office holder of
the company and (iii) the company may indemnify an office holder in connection
with his service as an office holder, for monetary liability incurred pursuant
to a judgment, including a settlement or arbitration decision approved by a
court, in an action brought against him by a third party as well as for
reasonable legal expenses incurred in an action brought against him by or on
behalf of the company or others, or as a result of a criminal charge of which
he was acquitted, or as a result of a conviction for a crime which does not
require proof of criminal intent. These provisions are specifically limited in
their scope by Section 263 of the Companies Law, which provides that a company
may not indemnify an office holder nor enter into an insurance contract which
would provide coverage for any monetary liability incurred as a result of the
following: (a) a breach by the office holder of his duty of loyalty unless he
acted in good faith and had a reasonable basis to believe that the act would
not prejudice the company; (b) a breach by the office holder of his duty of
care if such breach was done intentionally or recklessly; (c) any act or
omission done with the intent to derive an illegal personal benefit; or (d) any
fine levied against the office holder as a result of a criminal offense.
The Registrant has agreed to indemnify its officers and directors to the
fullest extent permitted under the Companies Law and has obtained liability
insurance for the benefit of its officers and directors.
The Amended and Restated Articles of Association of the Registrant provides
as follows:
"Exculpation, Indemnity and Insurance
(a) For purposes of these Articles, the term "Office Holder" shall mean
every Director and every officer of the Company, including, without
limitation, each of the persons defined as "Nosei Misra" in the
Companies Law.
II-1
<PAGE>
(b) Subject to the provisions of the Companies Law, the Company may
prospectively exculpate an Office Holder from all or some of the Office
Holder's responsibility for damage resulting from the Office Holder's
breach of the Office Holder's duty of care to the Company.
(c) Subject to the provisions of the Companies Law, the Company may
indemnify an Office Holder in respect of an obligation or expense
specified below imposed on the Office Holder in respect of an act
performed in his capacity as an Officer Holder, as follows:
(i) a financial obligation imposed on him in favor of another person by
a court judgment, including a compromise judgment or an
arbitrator's award approved by court;
(ii) reasonable litigation expenses, including attorneys' fees,
expended by an Officer Holder or charged to the Office Holder by a
court, in a proceeding instituted against the Office Holder by the
Company or on its behalf or by another person, or in a criminal
charge from which the Office Holder was acquitted, or in a
criminal proceeding in which the Office Holder was convicted of an
offense that does not require proof of criminal intent.
The Company may undertake to indemnify an Officer Holder as aforesaid,
(aa) prospectively, provided that the undertaking is limited to
categories of events which in the opinion of the Board of Directors can
be foreseen when the undertaking to indemnify is given, and to an amount
set by the Board of Directors as reasonable under the circumstances and
(bb) retroactively.
(b) Subject to the provisions of the Companies Law, the Company may enter
into a contract for the insurance of all or part of the liability of
any Office Holder imposed on the Office Holder in respect of an act
performed in his capacity as an Office Holder, in respect of each of
the following:
(i) a breach of his duty of care to the Company or to another person;
(ii) a breach of his duty of loyalty to the Company, provided that the
Office Holder acted in good faith and had reasonable cause to
assume that such act would not prejudice the interests of the
Company;
(iii) a financial obligation imposed on him in favor of another person.
(e) The provisions above are not intended, and shall not be interpreted, to
restrict the Company in any manner in respect of the procurement of
insurance and/or in respect of indemnification (i) in connection with
any person who is not an Office Holder, including, without limitation,
any employee, agent, consultant or contractor of the Company who is not
an Office Holder, and/or (ii) in connection with any Office Holder to
the extent that such insurance and/or indemnification is not
specifically prohibited under law; provided that the procurement of any
such insurance and/or the provision of any such indemnification shall
be approved by the Audit Committee of the Company."
Item 15. Recent Sales of Unregistered Securities.
In August of 1997, we raised $1.0 million from ADC Teledata Communications
Ltd. in a private placement of 1,856,000 ordinary shares. We also granted ADC
Teledata Communications a warrant to purchase an additional 2,640,000 ordinary
shares which was exercised in January 1999 yielding us with additional proceeds
of $2.3 million.
In March 2000, we raised $12.0 million from Summit Ventures V L.P., Summit V
Companion Fund, L.P., Summit V Advisors, L.P., Summit V Advisors (QP), L.P.,
Summit Investors III, L.P. and Oscar Gruss & Son Incorporated, in a private
placement of 111,111 Series A Preferred Shares.
In March 2000, we issued 27,778 Series B preferred shares to Lior Salansky
in exchange for 555,560 ordinary shares owned by Mr. Salansky.
The foregoing transactions were exempt from registration requirements under
Section 4(2) of the Securities Act of 1933, as amended.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description Page
------- ----------- ----
<C> <S> <C>
1 Form of Underwriting Agreement
3.1 Memorandum of Association of Registrant(1)
3.2 Form of Articles of Association of Registrant
4.1 Specimen of Certificate for Ordinary Shares
5 Opinion of Goldfarb, Levy, Eran & Co.
10.1 1998 Option Plan
10.2 Share Purchase Agreement by and among MIND C.T.I. Ltd., Lior
Salansky, Monica Eisinger, ADC Teledata Communications Ltd. and
the Purchasers listed therein, dated March 30, 2000
10.3 Registration Rights Agreement by and among MIND C.T.I. Ltd.,
Lior Salansky, Monica Eisinger, ADC Teledata Communications
Ltd. and the Investors listed therein, dated as of March 30,
2000 among Mind Software and the investors
10.4 Shareholders Agreement by and among MIND C.T.I. Ltd., Lior
Salansky, Monica Eisinger, ADC Teledata Communications Ltd. and
the Purchasers listed therein, dated March 30, 2000
10.5 Escrow Agreement by and among Lior Salansky, Oscar Gruss & Son
Inc., Yaron Amir, Ilan Melamed, the Purchasers listed herein
and Ravillan, Volovelsky, Dinstein, Sneh & Co. as Trustees,
dated April 6, 2000
10.6 Share Purchase Agreement by and among Lior Salansky, Oscar
Gruss & Son Inc., Yaron Amir, Ilan Melamed and the Purchasers
listed therein, dated April 6, 2000
10.7 2000 Share Option Plan
10.8 Waiver between Summit, ADC Teledata Communications Ltd., Monica
Eisinger and Lior Salansky dated August 1, 2000
10.9 Amendment Agreement to Shareholders' Agreement by and among
MIND C.T.I. Ltd., Lior Salansky, Monica Eisinger, ADC Teledata
Communications Ltd. and the Purchasers listed therein, dated
July 10, 2000
21 Subsidiaries of the Registrant
23.1 Consent of Kesselman & Kesselman
23.2 Consent of Goldfarb, Levy, Eran & Co. (to be included in
Exhibit 5 hereto)
24 Power of Attorney (included in the signature pages to the
Registration Statement)
</TABLE>
--------
(1) English translation from Hebrew original
(b) Financial Statement Schedules
Not applicable.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
II-3
<PAGE>
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<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 Tel Aviv, Israel, on the 31 day of July, 2000.
/s/ Monica Eisinger
By: _________________________________
Name: Monica Eisinger
Title: President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Monica Eisinger and Yaron Amir, and each of
them, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to (i) act on, sign and file with the Securities and
Exchange Commission any and all amendment (including post-effective amendments)
to this registration statement together with all schedules and exhibits thereto
and any subsequent registration statement field pursuant to Rule 462(b) under
the Securities Act of 1933, as amended, together with all schedules and
exhibits thereto, (ii) act on, sign and file such certificates, instruments,
agreements and other documents as may be necessary or appropriate in connection
therewith, (iii) act on and file any supplement to any prospectus included in
this registration statement or any such amendment or any subsequent
registration statement filed pursuant to Rule 462(b) under the Securities Act
of 1933, as amended, and (iv) take any and all actions which may be necessary
or appropriate to be done, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Monica Eisinger President and Chief July 31, 2000
______________________________________ Executive Officer
Monica Eisinger
/s/ Yaron Amir Chief Financial Officer July 31, 2000
______________________________________ (principal financial and
Yaron Amir accounting officer)
/s/ Lior Salansky Director July 31, 2000
______________________________________
Lior Salansky
/s/ Ilan Rosen Director July 31, 2000
______________________________________
Ilan Rosen
/s/ Kevin Mohan Director July 31, 2000
______________________________________
Kevin Mohan
</TABLE>
Authorized Representative in the
United States:
Mind C.T.I. Inc.
By: /s/ Ilan Melamed Vice President, U.S. Operations
------------------------------- July 31,
Ilan Melamed 2000
II-5
