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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 20-F
(MARK ONE)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 33-73720
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COMET SOFTWARE INTERNATIONAL LTD.
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(Exact Name of Registrant as specified in its charter)
ISRAEL
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(Jurisdiction of incorporation or organization)
13 NOAH MOSES STREET. TEL AVIV 67442. ISRAEL
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(Address of principal executive offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
NONE
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Securities registered or to be registered pursuant to Section
12(g) of the Act:
ORDINARY SHARES. NIS 0.01 PAR VALUE PER SHARE
---------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
ORDINARY SHARES. NIS 0.01 PAR VALUE PER SHARE
---------------------------------------------
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report: 5,375,000 Ordinary Shares, NIS 0.01 par value per share and 660,000
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DEFERRED SHARES, NIS 0.01 PAR VALUE PER SHARE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [] No
Indicate by check mark which financial statement item the registrant has
elected to follow.
[ ] Item 17 [X] Item 18
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PART I
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ITEM 1 - DESCRIPTION OF BUSINESS GENERAL
Comet Software International Ltd. (the "Company") designs, develops and
markets integrated information management systems, and provides associated
support services, primarily for the health care industry. The Company's
principal product, currently marketed under the name COMET (Computerized
Medical Technologies), consists of a variety of interactive software modules,
which collectively integrate clinical, management and financial applications
to provide data ranging from the medical record of a single patient to a
comprehensive report on the entire organization. The company markets the
COMET system as a combination of modules, each of which can operate
efficiently on a stand-alone basis with functionality and performance that
the Company believes are among the highest in the industry. COMET's "building
block" approach allows a customer to purchase a single module, or a series of
modules, which can be interfaced with its or other existing systems. The
Company believes that, due to COMET's modularity, as a customer's
requirements grow, COMET systems can be expanded at a relatively low cost and
without sacrificing the benefits of a fully functional and integrated system.
Furthermore, COMET's open-systems architecture enables it to be installed,
without material modification, on most mainframes, minicomputers,
workstations and personal computers operating in the UNIX environment, and
primarily utilizing the MUMPS language, that are manufactured by IBM, Digital
Equipment Corp., Hewlett-Packard Co. and other suppliers of computer
equipment. While the Company continues its MUMPS product, it is
simultaneously investing numerous resources in future technologies, in order
to assure that COMET is continuously on the cutting edge of high technology.
The Company supports its information management systems by providing a full
range of professional software support services, including system
installation and training, customization, ongoing customer support and
contract maintenance services. In addition, the Company offers its customers
the ability to outsource their data processing and information services
requirements.
The Company currently markets COMET systems in the United States, Israel and
Europe. In Europe, the Company initially focused on marketing COMET in the
Italian market through the indirect distribution arrangement with Finsiel, a
leading Italian software company which is part of the IRI Group, one of the
largest Italian conglomerates. The Company believes that Finsiel, through its
and IRI's prominent business standing in the health care community in Italy,
will be able to successfully market COMET in connection with the potential
automation of health care facilities in Italy. The Company's relationship with
Finsiel has already resulted in COMET's installation of three Italian hospitals.
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Penetration into the Czech Republic has already resulted in an installation of
the COMET system at a major hospital in that country, with other indentified
prospects in the pipeline. These activities are performed via the subsidiary
established there last year (see Marketing, Sales & Distribution). An initial
penetration process has already begun in Germany as well.
The Company believes that COMET provides health care facilities with a
relatively low cost and easy to use means of managing information flow in an
accurate and timely manner in order to increase productivity, contain costs,
improve the quality of patient care, as well as comply with various governmental
regulations and third party pay or reimbursement requirements. COMET's
modularity and its attractive pricing make the Company a significant competitor
in its industry.
INDUSTRY BACKGROUND
Health care expenditures represent a large and growing percentage of the gross
national product of most developed countries. Seeking to contain health care
expenditures while maintaining and improving the quality of care, many
government agencies and third party insurers are issuing regulations and
revising their health care expenditure payment practices. As new reimbursement
systems limit payments for various illnesses, hospitals and long-term care
facilities must find ways to deliver services more efficiently by controlling
costs and monitoring care practices and treatment outcomes. In order to do so,
the facilities' managers must have access to accurate, up-to-date clinical and
financial information and decision support tools to assist in the analysis of
this information.
As a result of the foregoing, the demand for information management technology
among health care facilities is growing. Health care facilities increasingly
require information systems that (i) allow various departments within a facility
to share information, (ii) improve operating efficiencies through greater
automation, (iii) provide more complete information on the actual costs of
providing services, enabling facilities to manage the pricing and delivery of
those services more effectively, (iv) assure adherence to government regulations
and third party payor billing and reimbursement procedures, (v) improve access
to clinical information, supporting better decision-making by medical personnel
and (vi) measure, trace and report patient outcomes, allowing facilities to
demonstrate cost-effectiveness and quality to payors and potential patients.
As populations age and new payment systems encourage hospitals to discharge
recovering patients to less costly nursing homes, the number of patients in the
long-term health care industry is increasing. The Company believes that these
circumstances will result in a substantial increase in the number of nursing
home beds within the next fifteen years. As this long-term health care market
grows, the Company believes that demand for information systems to service this
market will also increase. Additionally, as major corporations enter the health
care industry and owners of single health care facilities are acquiring
additional sites, the ownership of nursing homes and other long-term care
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facilities is being consolidated. The Company believes that many multi-site
owners recognize that effective and efficient information management can assist
them to control and standardize their operations, as well as comply with
government regulations.
In the past, computer systems servicing health care facilities were primarily
used for billing, general ledger and other financial/administrative functions.
Many institutions relied on outside system vendors for their processing
requirements; therefore, it was difficult to tailor systems to such facilities'
specific needs. Other institutions purchased mainframe computers which were
expensive to install and maintain. As computer technology developed, various
departments within health care institutions (such as pharmacies and
laboratories) began to purchase stand-alone systems to support their respective
functions. This created "islands of automation" within health care facilities.
Currently, most health care facilities operate multiple stand-alone systems with
minimal integration between these systems. As a result of this lack of
integration, the same information is entered repeatedly, data is often
inconsistent, information does not flow freely between departments and
management cannot obtain up-to-date information on the facilities' activities.
Attempting to build interfaces between these disparate systems is expensive,
inefficient, and in some cases, impossible to achieve. Furthermore, information
systems that are not designed to work together prevent users from realizing the
full benefits of computerization.
The Company believes that integrated computerization is increasingly being seen
as a way to both reduce costs and facilitate the delivery of high quality
patient care. By instituting computerized information systems, health care
facilities can increase productivity, gain rapid access to accurate clinical
data, track patient progress and comply with the increasing demands for
information from government and private insurers.
COMPANY STRATEGY
The Company's principal strategy is to design, develop, market and support
integrated information management computer software systems for health care
facilities worldwide, either as complete or partial solutions depending on a
facility's particular needs, and includes the following elements:
Further Market Penetration. The Company will continue to develop and offer a
wide range of software modules for patient care, patient management,
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financial/administrative and clinical applications, and to market such modules
either as a complete solution or as a partial solution for the specific needs of
a facility. The Company's COMET systems will continue to address the
interdisciplinary nature of health care by allowing information entered through
one application to be accessed in a convenient and appropriate manner by other
applications. The Company, to the extent its finances are sufficient, intends to
seek to increase its share of the health care information systems market by
expanding its sales and marketing personnel in an effort to penetrate further
the acute care market in Israel, Italy, and the Czech Republic and the long-term
care market in the United States, and expand into the acute care market in the
United States, Hungary, Germany and elsewhere in Europe. The Company also
intends to expand its marketing efforts by opening regional customer support
offices in Rome and elsewhere in Europe and the United States and/or relying on
direct sales to and strategic alliances with strong local partners (e.g.,
Finsiel) that are active in target markets. These alliances may include
distribution, joint marketing or licensing arrangements.
Expansion of Information Management Services. A portion of the Company's
revenues have been derived from providing out sourcing and facility management
services. The Company believes that health care facilities will utilize these
services as efficient and effective ways to administer their operations and thus
provide the company with a consistent and stable income stream. The Company
plans to continue to expand its maintenance, customer support and outsourcing
activities.
Continuing Research and Development. The Company will continue to work closely
with is customers to meet the evolving needs of health care providers. In an
effort to increase its research and product development, the Company intends to
take advantage of the large number of highly qualified computer programmers in
Israel to develop new modules and new versions and enhancements of existing
modules. Specifically, the Company plans to (i) continue developing versions of
COMET in several different languages to service those countries for which it
does not currently have a local language version, as well as to adapt each
version to the regulatory requirements and reimbursement policies of such
countries, (ii) finalize the development of COMET systems for acute care
facilities in the United States and (iii) complete the development of certain
clinical modules and subsystems. The Company also intends to invest in future
technology, with the intent to introduce "Comet 2000". Following are a list of
the Company's long and short term objectives:
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Short Term Objectives
0 Expand penetration into Italy and the Czech acute care markets
0 Initiate penetration into the German and Hungarian acute care markets
0 Define new, next generation technologies
0 Expand penetration into the US long term market
0 Increase outsourcing activities
Long Term Objectives
0 Penetrate the German and Hungarian acute care markets
0 Initiate penetration into other geographies
0 Introduce new, next generation products (Comet 2000)
0 Penetrate the US acute care market
THE COMET SYSTEM
Integrated Health Care Software. As presently marketed, COMET is a comprehensive
integrated information management computer software system for acute care
facilities (such as hospitals), long-term care facilities (such as geriatric
institutions) and other institutions. Currently, COMET systems are, or are in
the process of being, installed in acute care facilities in Israel, Italy and
Czech Republic and are installed in long-term care facilities in the United
States and Israel. COMET systems are comprised of a variety of integrated and
interactive modules which are marketed by the Company in any combination as
either comprehensive or partial solutions for health care facilities according
to their specific needs and requirements. A COMET system, particularly its
operating language and administrative and billing modules, is customized
according to the requirements of the geographical region where a particular
facility is located.
COMET fully integrates clinical, management and financial applications to
provide data ranging from the medical record of a single patient to a
comprehensive report on an entire facility or group of facilities. COMET allows
facilities to manage information flow in an accurate and timely manner, project
and monitor reimbursements, contain costs, monitor patient care documentation
and maintain quality control. COMET systems consist of a combination of
sophisticated modules enabling COMET to address either a few particular health
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care activities or a broad range of health care activities, including patient
care (status, needs assessment, treatments, medications, etc.), patient
management (admissions, billing, scheduling, resource requirements, etc.),
facility administration (general ledger, finance, budget, personnel, inventory,
etc.), department management (radiology, laboratory, pharmacy, etc.), and
clinical (specialized departmental requirements). For example, when a physician
prescribes medication for a patient, COMET notes the prescription on the
patient's medical record and the prescription then flows through the order entry
system to the pharmacy for processing. Simultaneously, the system updates the
pharmacy inventory module, alerts the pharmacist to the possibility of dosage
inappropriateness and bills the patient for the medication.
The Company believes that the integration of applications offered by COMET can
significantly improve the management and operation of health care facilities.
Patients treated in facilities using COMET are assigned a single identification
number for the duration of their association with the facility. The system can
trace the patient's complete history from outpatient status through
hospitalization and discharge, including tests administered, surgery or
procedures performed, transfers between units, and bills for services rendered.
Data is entered into the system through easy-to-use menus and input screens and
is tested by COMET's validation capabilities before it is accepted. The
information in the centralized COMET database can be retrieved by appropriate
personnel at all terminal and printer locations. The moment a treatment is
reported, the entire system is updated automatically, including billing
required, drugs or supplies to be ordered, further treatment scheduled, etc.
Information can be accessed simultaneously at all terminal and printer
locations. COMET systems also contain a large number of perforated medical,
management and financial reports, ensuring that information in the system can be
retrieved as required.
Over the years, predecessor versions of current COMET systems were developed and
marketed under various names and in various formats, and were installed in
several Israeli health care facilities to provide information management
solutions. The Company's software programs have evolved from those earliest
versions and currently incorporate the newest technology that has been developed
by the Company on the basis of the experience, information and know-how it has
acquired over time. Although the current software was introduced in the United
States as COMET in 1987, the COMET trade name was not utilized in Israel until
1993.
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In the course of selling its COMET systems and as a service to its clients, the
Company, in certain circumstances, consults with its clients to assess their
computer hardware needs. As a result of such consultation, the Company purchases
computer hardware for, and sells computer hardware to, such customers.
Advantages of the COMET System. In addition to the benefits of the COMET system
described above, some of the other advantages of COMET include the following:
- Modularity. COMET's "building block" approach allows customers to purchase a
single module, a series of fully integrated modules or a completely
integrated system. COMET's modules operate effectively on a stand-alone
basis, with functionality and performance that the Company believes are among
the highest in the industry. These modules can together form an integrated,
facility-wide information system to accommodate all the information needs of
a health care facility. As a customer's requirements grow, COMET systems can
be expanded without sacrificing the benefits of integration among modules,
without reinvesting in computer software and with minimal reinvestment in
computer hardware. COMET systems also can be interfaced with existing
systems.
- Flexibility. COMET systems are designed, and can be easily modified or
customized, to satisfy the complete information management and control
requirements of acute and long-term health care facilities of all sizes. In
addition, COMET's modularity enables the Company to provide either
comprehensive or partial solutions for health care facilities according to
their specific needs. Generally, a health care facility purchases information
management computer systems over a period of time based on its requirements
and as its budgetary constraints allow. Therefore, the Company's ability to
present either integrated, facility-wide solutions or particular solutions to
its customers provides the company with an important advantage over its
competitors.
COMET systems support analysis of operations at many levels. COMET's
patient-oriented database allows information to be collected, displayed and
printed for individual patients, categories of patients, departments, staff
members or the facility as a whole, thereby enabling a facility to obtain
information pertaining to a specific patient or statistical data pertaining
to a group of patients or the whole facility. COMET is appropriate for any
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size facility, as well as for multi-site operations and can accommodate the
growth of facilities into new areas.
- Ease of Use. COMET systems are menu and table driven and feature extensive
on-line help facilities, making the system easy to use and eliminating the
need for extensive staff training. COMET runs on both monochrome and color
monitors and takes full advantage of color capabilities.
- Price. The Company's prices for a COMET system are based on a facility's size
and a customer's requirements for software, hardware, modules (number and
type), training, maintenance customization and other support services, and
other market considerations such as the location, reputation and budgetary
constraints of such facility. While the Company's price for a COMET system
offering a comprehensive solution for an acute care facility servicing
approximately 350 beds is expected to average approximately $850,000, other
competitive systems are sold to similar facilities at prices ranging from
$1-2 million. The average price of COMET systems for long-term health care
facilities is significantly lower (approximately $100,000), reflecting these
facilities' more modest requirements for hardware and software.
- Forefront of Industry Standards. COMET systems support a multi-user,
information processing approach, thereby providing on-line access to
up-to-date information from different departments in a facility. Current
COMET systems run predominantly on the UNIX operating system, which is
becoming the standard in the health care industry. Since most minicomputers,
workstations and personal computers made by IBM, Hewlett-Packard Co., Digital
Equipment Corp., Sun Microsystems Inc., Data General Corp. and other
suppliers of computer equipment can operate on the UNIX system, by operating
in the UNIX environment, COMET systems free customers from relying on a
single hardware supplier. COMET also operates on more traditional computer
platforms.
Current COMET systems are based on the MUMPS language, which was developed to
support health care applications. MUMPS is distinguished by its sophisticated
handling and storage of medical text and data. The United States Department
of Defense has specified MUMPS for its health care facilities' information
systems worldwide. As was previously mentioned, in keeping with the Company's
goal to be at the forefront of new technologies,it is currently searching and
assessing newer technologies for its next generation products
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- Security. By utilizing use-selected security levels to control access to the
system's data, COMET systems account for the sensitivity and confidentiality
of medical and financial data. Menu items are only available to users
according to their professional and operation status within a facility.
- Modular Approach. COMET systems include modules which accommodate the
different information needs of a health care facility. The Company has also
developed the Clinical and Research Management System, which currently
contains individual subsystems tailored to satisfy the needs of specific
clinical and research departments of a facility. The Clinical and Research
Management system was developed to complement a COMET system installed in a
facility and any subsystem of such system is designed to interact with the
COMET system. Currently, certain subsystems of the Clinical and Research
Management system are available in Israel and are in the process of becoming
available in the United States long-term care market.
The following table summarizes the principal modules and subsystems available
from the Company:
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HEALTH CARE FACILITY INFORMATION AND MANAGEMENT SYSTEM
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Admissions, Transfers and Discharges Serves as the central
database for medical,
financial and demographic
information on each patient and
for the health care facility as
a whole. Manages admission,
transfer and discharge
information.
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Outpatient Clinics Lists all visitors to
outpatient clinics, linking data
therefore to other sections of
the health care facility.
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Emergency Room Collects demographic,
medical and financial data;
displays test results; prints
forms and labels; and monitors
patient deployment.
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Appointment Scheduling Automates appointment
scheduling of patients for
planned treatments with the
appropriate departments of a
facility.
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Medical Records Facilitates medical
charting, abstracting and
reporting. Allows for prompt data
accumulation for billing,
statistical and governmental
reporting.
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Laboratory Management system Operates bi-directionally
by receiving
orders for services from one
department and transmitting
results and billing information
to other appropriate departments.
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X-Ray & Imaging System Tracks patients, test
results, and room
and equipment scheduling.
Receives orders from patient
departments and transmits X- Ray
results and billing information.
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Operating Room Automates all planned and
emergency activity performed in
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the facility's various operating
rooms.
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Pharmacy Manages all pharmacy functions,
including order entry and
verification, dosage calculation,
prescription preparation,
inventory control and medication
records. Reviews drug
utilization.
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Order Entry Manages on-line data entry
of all required services
regardless of source, e.g.,
nursing, physical therapy and
occupational therapy.
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Billing Generates invoices based on
patient and treatment information
and insurance provider
requirements Adaptable
to varying government and
third-party reimbursement
requirements.
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General Accounting Processes patient administration
and financial data at the
department and facility level.
Functions include accounts
payable accounts receivable,
general ledger, budget and
payroll.
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Inventory, Purchasing & Maintenance Automates inventory, purchasing
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and maintenance functions
throughout the facility.
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Human Resource Management Manages personnel database,
including attendance, benefits
and payroll.
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Patient Assessment Manages administrative data,
medical events, medical
treatments, daily activities
and specialized services for
individual patients. Specialized
module for long-term care
facilities based upon
regulatory requirements.
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Multi/Interdisciplinary Care Planning Automates patient care plans
through development of
goals, approaches and related
orders.
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Staff Scheduling System Automates human resource
scheduling based upon
patient requirements
while encompassing
preferences, rotation
policies and other similar
parameters. Module is
interfaced to payroll and
human resource management.
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CLINICAL AND RESEARCH MANAGEMENT SYSTEM
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Gastroenterological Clinic Computerizes various tests
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for gastrointestinal patients.
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Tissue Classification Laboratory I Assists in classification of
tissue types.
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Tissue Classification Laboratory II Performs quality control for
management of a serum bank.
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Heart Surgery Unit Computerization of cardiac
surgery unit, including
operational procedures and
outcome.
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Gynecology and Obstetrics Unit Computerizes infertility
clinic, including
artificial insemination and IVF,
in addition to performing regular
obstetric and gynecological
functions.
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Cytogenic Laboratory I Computerizes the Cytogenic
Laboratory and the
phrenological test structure.
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Cytogenic Laboratory II Computerizes perinatal tests for
pregnant women.
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Neurosurgery Unit Performs follow-up functions
after clinical and surgical
activity.
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Internal Medicine Department Acquires data using the Problem
Oriented Medical Routines and
Records Method.
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Genetics Department Manages data on congenital
defects.
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Endocrinology Laboratory Simulates medical treatments on
infertility.
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Institute of Endocrinology Manages interactive clinical and
laboratory data.
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Cardiology Research Center Collects, edits, compares data
and prepares statistical
analysis of different
medical centers throughout the
country.
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Hospice Information system for the
management of the treatment of
the terminally ill.
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Institute of Pulmonology Gathers and edits automated
results of various functional
tests.
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Regional Health Agency Computerization of
the regional immunization
services.
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National Transplant Center Automates selection of optimal
matching between donor and
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recipient through link to
nationwide system.
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Institute of Hematology Information system tailored to
hemotoncological pediatric
clinic's diagnosis, treatment
and follow-up.
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PROFESSIONAL SOFTWARE SUPPORT SERVICES
The Company supports its information management systems by providing a full
range of professional services, including installation and training, customer
support, maintenance and customization. In addition, the Company provides
outsourcing and facility management services for its and other computer systems
both within and outside of the health care industry. Revenues from sales of
COMET systems (including earlier versions thereof), and revenues derived from
the Company's provisions of professional software support services relating to
installed COMET systems have historically accounted for 60-70% of the Company's
annual revenues. Alternatively, professional software support and outsourcing
services (both relating to, and dependent of, COMET) have historically generated
over 70% of the Company's annual revenues.
Outsourcing Services. Health care facilities, particularly long-term care
facilities, frequently rely upon "outsourcing" for services such as billing and
obtaining third-party reimbursements and other similar financial and
administrative services. The Company, on a contractual basis, offers outsourcing
services for health care with respect to its and other computer systems. As the
health care environment becomes more complex, many facilities are considering
outsourcing to meet all of their information technology needs. Outsourcing has
become an increasing trend, with expectations for this trend to continue. These
facilities view outsourcing as a means to preserve capital and other resources
and, thus, focus their resources on core health care issues and therefore,
health care organizations are looking to specialists in this field, of which
Comet is one of very few, especially in the international arena. In view of
this current trend, the Company see outsourcing and facility management as
strategic tools in expanding their current and future activities. The Company
has increased its outsourcing activities and will continue to do so.
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In certain situations, the Company renders outsourcing services where the
Company is responsible for the management and operating of the facility's COMET
system following the system's installation. In these situations, the Company is
responsible for staffing, operating, maintaining and managing such facility's
information system department. The Company currently provides these facility
management services at one facility in the United States and has recently
expanded these services to include two facilities in Israel. The Company will
continue to expand its marketing efforts to provide such services to other
facilities.
The Company also provides outsourcing services to customers outside of the
health care industry. Specifically, the Company provides outsourcing services,
including data processing and computer system applications services, to the
Ministry of Housing of the Government of Israel. Revenues from providing
services to the Ministry of Housing accounted for approximately 20% and 18% and
15% of the Company's consolidated revenues for 1994, 1995 and 1996 respectively.
Installation and Training. COMET systems are installed by a team of the
company's programmers, systems analysts and operators. The Company's
installation team works closely with individuals designated by the health care
facility and is also responsible for training the health care facility staff,
including doctors, nurses, managers, account professionals, lab technicians,
input clerks and the facility's information systems department. Training is
conducted at the customer's site using live data.
Customer Support. The Company believes that strong customer support programs are
vital in marketing its products and ensuring customer satisfaction. In addition,
through its customer support activities, the Company obtains information on
market trends and customer requirements that is invaluable for upgrading COMET.
The Company also provides hotline customer support to its customers.
Maintenance. The Company's warranty or maintenance contract outlines the
customer support services each customer receives. The warranty period is
typically six to twelve months. The contract also generally provides for
technical support by hotline and modem, ongoing training, upgrades and system
documentation. In the Company's experience to date, expenses incurred in meeting
obligations under warranty have been minimal. Following the warranty period,
maintenance services are generally provided through a one-year renewable
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maintenance contract for an annual fee, which is currently approximately 15-20%
of the total price paid for the system. Substantially all of the Company's
clients enter into maintenance contracts with the Company for their ongoing
maintenance needs.
MARKETING, SALES AND DISTRIBUTION
COMET can be used effectively by medical facilities of all sizes and there is no
limit to the size of the facility or the number of facilities constituting part
of a chain that a COMET system can serve. Until late 1987, versions of COMET
systems were installed only in Israel. Presently, COMET systems (including
earlier versions thereof) are installed in many of that country's largest and
prominent hospitals, including:
o Sheba Medical Center (Tel Hashomer Hospital), Ramat
Gan (the largest medical center in Israel) .........1,800 beds
o Tel Aviv Medical Center (Ichilov), Tel Aviv ........1,150 beds
o Hadassah University Hospital,
Ein Kerem, Jerusalem .............................1,050 beds
o Rambam Medical Center, Haifa .........................950 beds
o Bnai Zion Medical Center, Haifa ......................400 beds
COMET was introduced to the United States market in late 1987 through SCI. SCI
has focused its efforts on the long-term health care market, which in the United
States, has almost three times as many beds as the acute care market. In
addition, the company believes the long-term care market in the United States is
significantly less competitive than the acute care market. Since its
introduction into the United States market, COMET systems have been installed in
61 long-term care facilities in the United States, including:
o Jewish Home & Hospital for Aged (the largest geriatric
facility in the United States) .....................1,600 beds
o Jewish Home for the Aging of Greater
Los Angeles ........................................750 beds
o Hebrew Rehabilitation Center for the Aged ............725 beds
o Woodrow Wilson Rehabilitation Center .................520 beds
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In January 1992, the Company entered the Florijn Agreement, pursuant to which
Florijn was granted an exclusive ten-year license to market and distribute COMET
in certain European countries. According to the Florijn Agreement the Company
will pay 17.5 % royalties up to sales of $2,000,000 and 28% thereafter. Florijn
subsequently entered into a distribution agreement with Italsiel (the "Italsiel
Agreement"), pursuant to which Florijn granted Italsiel an exclusive two-year
license to market and distribute COMET in Italy and a non-exclusive two year
license to market and distribute COMET in certain other Western European
countries. The Company is not a party to the Italsiel Agreement.
As part of the agreement between Florijn and Italsiel, Florijn was to receive
minimum royalties of $1,200,000 over a period of two years. In an effort to
establish a direct contractual arrangement with Italsiel and other potential
customers in Europe, the Company paid in February 1995 $480,000 to Florijn to
terminate the Florijn Agreement (the "Florijn Agreement Termination"). In
connection with the Florijn Agreement Termination, the Company expects to enter
into a New Italsiel Agreement pursuant to which Italsiel would be granted an
exclusive two-year license to market and distribute COMET in Italy and a
non-exclusive two-year license to market and distribute COMET in certain other
West European countries. In consideration for the distribution rights to be
granted to Italsiel under the New Italsiel Agreement, the Company would receive,
among other consideration, a 30% royalty on revenues received by Italsiel from
Italsiel's sale, lease or license of COMET and a 25% royalty on revenues
received by Italsiel from Italsiel's provision of certain maintenance and other
customer support services relating to installed COMET systems. Notwithstanding
the foregoing, Italsiel would be exempt from making royalty payments to the
Company with respect to initial sales, leases or licenses of COMET systems in an
aggregate amount of $2,666,666. The royalty payments otherwise due to the
Company from such sales, leases or licenses ($800,000) will be considered as the
Company's contribution to Italsiel's initial marketing efforts in Italy. There
can be no assurance, however, that the Italsiel Agreement will be terminated or
that the New Italsiel Agreement will be executed upon the terms set forth above.
It should be noted that during 1994, the IRI group, of which Italsiel is a part,
realigned its organizational structure such that the responsibility for
healthcare field activities will now fall to Italsiel's parent company, Finsiel.
Accordingly, all new agreements will now be signed with Finsiel and not with
Italsiel.
<PAGE>
In Europe, the Company initially focused on marketing COMET in the Italian
market through the indirect distribution arrangement with Finsiel described
above. The Company's relationship with Italsiel has already resulted in COMET's
installation at three different hospitals in Italy.
In October 1994, the Company established a wholly owned subsidiary in the Czech
Republic, called Computerized Medical Technologies, S.R.O. The goal of the Czech
office is to broaden and strengthen marketing efforts in the former socialist
countries in Eastern Europe. To date, the Company has signed an agreement to
supply its hospital information system (HIS) to one of the largest hospitals in
Eastern Europe (2700 beds), Motol University Hospital in Prague. According to
the signed agreement, the Company will provide the basic COMET product, install
it in the hospital, and translate it into the Czech language through a Czech
company. During 1995, the Company began modifying some of the modules as well as
translating them for the Czech environment. This process continues through 1996
by the four local personnel employed by the Company, including one
administrator, one marketing person and two programmers/system analysts.
The new marketing policy of the Company focuses on providing marketing rights
while establishing joint ventures with local partners worldwide. The potential
parties for joint ventures are carefully screened and in the final analysis are
chosen primarily for their dominance in that particular regional or national
market.
COMET systems are sold primarily to government hospitals, private hospitals and
long-term care facilities and other relatively large institutions, all of which
typically have complex and time-consuming procurement procedures. Consequently,
a substantial period of time generally elapses from the commencement of a
particular marketing effort until an actual sale is consummated. Sales to
government hospitals and to other institutions are directly affected by the
budgets of such entities and the priority given in such budgets may adversely
affect the Company's results of operations. Moreover, as a result of the nature
of the Company's customers and systems, sales are made pursuant to a relatively
small number of relatively large orders. Consequently, an individual order from
an individual customer can represent a substantial portion of the Company's
sales in any period and a significant order by a customer during one period is
not likely to be followed by further orders for software products from the same
customer in subsequent periods. As a result, in any given year a limited number
of customers can account for a large percentage of
<PAGE>
revenues. Three customers accounted for 70%, 75.9% and 58.3% of total
revenues in 1996, 1995 and 1994, respectively. See Note 14 to the
Consolidated Financial Statements in Item 18.
The following is a breakdown of the Company's revenues (in thousands of dollars)
by geographical distribution on a consolidated basis and as an approximate
percentage of total revenues for the periods indicated. See, Note 14 to the
Company's Consolidated Financial Statements in Item 18.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31.
-----------------------
1994 % 1995 % 1996 %
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Israel $2,596 57.9 $2,247 49.9 $2,334 52.8
United States $803 17.9 $559 12.4 $614 13.6
Europe $1,088 24.2 $1,701 37.7 $1,528 33.6
</TABLE>
In addition, the following is a breakdown of the company's operations by
geographic regions on a consolidated basis for the period indicated. See Note
14 of Notes to the Company's Consolidated Financial Statements.
- -------------------
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Software SALES:
Sales to unaffiliated customers:
Israel 489,800 168,084 279,242
United States 145,274 22,203 28,264
------------ ---------- ----------
635,074 190,287 307,506
Product development and support and other services:
To unafiiliated customers
Israel 3,051,594 3,777,119 3,581,592
United States 599,450 536,577 613,095
Transfers between geographic areas 132,213 - --
Eliminations (132,213)
------------ ---------- ----------
3,651,044 4,313,696 4,194,687
Other income:
Israel 142,583 2,672 804
United States 58,086
------------ ---------- ----------
200,669 2,672 804
------------ ---------- ----------
Total revenues from unaffiliated customers:
Israel 3,683,977 3,947,875 3,889,902
United States 802,810 558,780 613,095
Transfers between geographic areas 132,313 - -
Eliminations 132,313 - -
------------ ---------- ----------
4,486,787 4,506,655 4,502,997
Income (Loss) from operations:
Israel 161,797 (1,263,036) (722,974)
United States (22,493) (587,496) (919,990)
------------ ---------- ----------
139,304 (1,850,532) (1,642,964)
IDENTIFIABLE ASSETS
Israel 5,243,389 4,188,573 3,006,502
United States 1,181,133 1,080,464 320,641
------------ ---------- ----------
6,424,522 5,269,037 3,327,143
============ ========== ==========
</TABLE>
The Company generally sells its systems and associated services under contracts
that provide for licensing of software, installation and training and, in
certain cases, the sale of hardware. A portion the Company's sales are for
software licenses only.
The sale process for health care information systems is typically lengthy, often
lasting in excess of eighteen to twenty-four months for acute care facilities,
and two to ten months for long-term care facilities. In the procurement process,
hospitals, nursing homes and other health care facilities use such methods as
Requests For Information, Requests For Proposals, recommendations of
consultants, site visits to existing clients, evaluations at professional
conferences and on-site demonstrations.
The Company uses, and will continue to use, a variety of means to promote its
products to potential customers, including publishing articles and advertising
in key industry publications; participating in trade shows and conferences;
participating in seminars on medical informatics; and communicating with
consultants and accountants who advise health care facilities in their selection
of information systems. The Company places high priority on recruiting sales
personnel with a strong background in health care software and skills in system
analysis. During 1995, the Company hired a Senior Sales representative for
Software Center, Inc.
The Company recognizes that successful marketing of health care information
systems requires industry expertise, sustained local presence and extensive
familiarity with local regulations and practices. The Company's marketing
strategy accounts for the language, management and operational needs of health
<PAGE>
care providers in various locations. Depending on local conditions, the company
will either sell to facilities directly or cooperate with major companies
recognized in the target markets for their health care expertise. This
cooperation may include distribution rights, joint marketing or licensing
arrangements. The Company also intends to establish regional customer support
offices in Rome and elsewhere in Europe and the United States to serve as the
local base for the Company's marketing, sales and customer support activities in
such regions. To this end, the Company has established a subsidiary in the Czech
Republic, as described in the Marketing, Sales and Distribution description
Computerized Medical Technologies.
RESEARCH AND DEVELOPMENT
Development of products for the health care industry is generally a complex,
multi-year endeavor. The development cycle is especially lengthy for
comprehensive, facility-wide information management systems which include
numerous inter-related applications. The Company sold its first product in 1977
and estimates that the current COMET product represents more than 15 years of
research and development. The Company believes that it is in the early stages of
realizing the benefits from investments in COMET's development made over a long
period of time.
The Company conducts extensive research and development to enhance and extend
its existing product offerings. The open, modular design and table-driven
structure of COMET allow the Company to develop additional features rapidly and
to modify the system to accommodate customers in different regulatory
environments.
The Company's gross research and development costs for 1994 and 1995 and 1996
was $1,049,531, $1,443,573 and $560,930 respectively which constituted
approximately 23.4%, 32.0% and 12.5% of revenues for such periods,
respectively. The portions of the Company's gross research and development
expenditures, which were capitalized for payroll and related expenses and
computer maintenance for 1994 and 1995 were, $781,728 and $178,563
respectively. See Notes 2f and 6 of Notes to the Company's Consolidated
Financial Statements.
Research and development priorities are derived from a combination of strategic
marketing requirements and customers' requests for additional functionality. New
modules and enhancements are coordinated to optimize the system as a whole and
<PAGE>
to ensure complete integration of the various applications. The Company believes
that it generally takes from 6 to 12 months to transform a COMET system into a
new language. Currently, COMET systems are available in Hebrew, English and
Italian. Upon expansion into the Czech Republic, the COMET system is also being
translated into the Czech language. The health care information systems industry
is subject to rapid technological advances and changes in client requirements.
COMPETITION
The worldwide market for health care information systems is highly competitive.
The Company's competitors vary in the scope of their products and services,
their size and their geographic focus. The Company believes that there are more
than 100 competitors in the health care information systems market in the United
States alone, some of which have significantly greater financial, marketing and
technical resources than the Company. Moreover, other information system
companies could enter the market with products that could compete with the
Company's products.
In the long-term health care segment in the United States, the Company competes
with vendors such as ADA Data Systems, American Health Care, Care Computer
Systems, Inc., Melyx Corporation and Penta Systems International Inc. If the
Company enters the acute care market in the United States, the Company believes
that among its major competitors will be Shared Medical Systems Corp., HBO &
Company, First Data Corp., Health Systems Group Inc. and Ibax Health Care
Systems. Other competitors include software developers, value-added revelers
specializing in health care and vendors of specialized systems such as bedside
patient monitors.
In Israel, the Company competes with software vendors such as Advanced
Technologies Ltd. and Yale Ltd., neither of which the Company believes offers
solutions to the information management needs of health care facilities in
Israel that are comparable to COMET. In Europe, the Company believes it will
come into competition with several software vendors, including Shared Medical
Systems Corp., McDonnell Douglas Information Systems International and Ing. C.
Olivetti & Co., SpA.
The Company believes that the principal competitive factors in its industry are:
(i) ability to integrate the current and projected information system
<PAGE>
requirements of health care facilities; (ii) ease of implementation and ease of
use; (iii) quality of training, technical support and maintenance; (iv) ability
to respond to technological trends, such as the movement towards open systems
and UNIX; and (v) price. The Company believes that COMET is competitive in the
marketplace because of its open system architecture, level of performance and
functionality, flexibility, highly integrated approach and attractive pricing,
as well as due to the high level of service the Company provides its clients.
The Company's potential market is expanded due to the fact that it provides a
solution for both long term and acute care. The majority of health care
information system providers specialize in one or the other. There is a distinct
advantage in the combination of acute care and long term care, especially since
the upheaval in the health care market requires some kind of link between these
two industries. The necessary transfer of patients from acute care beds to long
term care beds has resulted in many acute care facilities opening long term care
units for this purpose. While this direction began in the United States, it is
becoming recognized internationally.
The Company intends to commence the marketing of its systems and services to
acute care facilities in the United States and, as a result thereof, will
encounter increased competition.
PROPRIETARY RIGHTS
The Company regards the technology incorporated in its products as proprietary.
However, like many other software companies, the Company does not hold any
patents and relies upon a combination of copyright, trademark and trade secret
laws and contractual restrictions to protect its rights in its software
products. To date, the Company's policy has been not to pursue copyright
protection for its software and related documentation. In addition, the
Company's key employees and independent contractors and distributors are
required to sign non-disclosure and secrecy agreements.
It may be possible for unauthorized third parties (including competitors) to
copy aspects of the Company's products, whether or not in violation of the
Company's rights. The Company believes that, because of the complexity of the
COMET line, the significant technical know-how accumulated and possessed by the
Company, its management and key personnel, and the rapid pace of technological
change in the health care software industry, legal protection is a less
<PAGE>
significant factor in the Company's success than the knowledge, ability and
experience of the Company's employees, the frequency of product enhancements and
the timeliness and quality of support services provided by the Company.
COMET is generally sold pursuant to software license agreements, which, in most
cases, grant customers a non-exclusive, nontransferable license to use the
Company's products at a specified site and contain terms and conditions
prohibiting the unauthorized reproduction or transfer of the Company's products.
In addition, the Florijn Agreement contains, and the proposed New Italsiel
Agreement will contain, terms and conditions prohibiting the unauthorized
reproduction or transfer of COMET.
The Company does not believe that its products infringe upon the proprietary
rights of third parties. However, there can be no assurance that one or more
third parties will not make a contrary assertion. The cost of responding to any
assertion may be material, whether or not the assertion is validated.
GOVERNMENT REGULATION
United States. In the United States, the Company's products and services are not
currently subject to government regulation per se. However, the FDA has
promulgated a draft policy for the regulation of certain computer products as
medical devices under the 1976 Medical Device Amendments to the Federal Food,
Drug and Cosmetic Act. To the extent that computer software is considered a
medical device under the policy, computer software manufacturers could be
required, depending on the product, to (i) register and list their products with
the FDA, (ii) notify the FDA of, and demonstrate to the FDA, the product's
substantial equivalence to other products on the market before marketing such
product, and/or (iii) obtain FDA approval of such product by demonstrating
safety and effectiveness before marketing the product. In addition, such
products would be subject to other statutory controls, including those relating
to good manufacturing practices and adverse experience reporting. Although it is
not possible to anticipate the final form of the FDA's policy with regard to
computer software, the Company expects that, whether or not the draft is
finalized, the FDA is likely to become increasingly active in the regulation of
computer software intended for use in clinical settings. In addition, to the
extent that the Company's computer software is used in the context of a
hospital-based or other blood banks, it is currently subject to FDA regulation
under good manufacturing practice requirements for blood and
<PAGE>
blood components.
The market for the Company's systems and services could be adversely effected by
recent legislation in the United States that reduces reimbursements under the
capital cost pass-through system for the Medicare program for purchases of
capital equipment such as the COMET system. This legislation will continue
during 1996 to reduce such capital cost reimbursements by roughly 10% per year.
Such reductions could have an adverse effect on reimbursement to hospitals for
the capital cost of the Company's systems and services. There can be no
assurance that reimbursement for the Company's systems and services will be or
continue to be available or that future reimbursement policies of payors will
not adversely affect the Company's ability to sell its systems and services on a
profitable basis.
The United States health care industry is subject to extensive government
regulation relating to, among other things, facility expansion, certain capital
expenditures and reimbursement policies. The affect of future legislation and
government regulation upon prospective clients may, in certain circumstances,
have an adverse effect upon the Company's business in the United States.
Conversely, changes in the regulatory environment have increased, and may
continue to increase, the needs of health care organizations for cost-effective
information management, thereby increasing the demand for the Company's products
and services. In addition, recently introduced comprehensive federal health care
reform legislation could, depending on the form in which such legislation is
finally enacted, have a substantial impact on the Company's business. The
Company cannot predict the impact, if any, of future legislation and government
regulation on its business.
Israel Italy, and Czech Republic. Israel currently has no government regulations
relating to computer programs for health care industry. However, the Israeli
health care industry is undergoing structural changes, and the Company cannot
predict what impact such changes will have on its business. Italy and the Czech
Republic also currently have no government regulations relating to computer
programs for the health care industry.
EMPLOYEES
As of June 15, 1997, the Company had 56 full time employees, including 32 in
<PAGE>
research, development and customer support, 3 in sales and marketing and 6 in
corporate and general administration. Of the Company's 56 employees, 50 were
located in Israel and 6 were located in the United States.
Many of the Company's employees have five or more years of tenure with the
Company. The Company believes that the stability of its workforce benefits the
Company in its development and customer support. The Company has written
employment agreements with its employees. The Company has entered into an
employment agreement with Mr. Sternfeld with respect to his employment with the
Company through 1998, subject to certain automatic renewal provisions. Pursuant
to his employment agreement, Mr. Sternfeld is entitled to receive a yearly bonus
in an amount ranging from 2-4% of the Company's annual net income before taxes.
The percentage determining Mr. Sternfeld's bonus fluctuates in accordance with
the Company's net income before taxes. Mr. Sternfeld's bonus is in addition to
his regular salary.
The Company considers its relations with its employees to be good. The employees
and the Company are not parties to any collective bargaining agreements.
However, Israeli labor laws, including Israeli labor practices and certain
provisions of the collective bargaining agreements between the Histadrut
(General Federation of Labor in Israel) and the Israeli Coordinating Chamber of
Economic Organizations (including the Manufacturers' Association of Israel) are
applicable to the Company's employees in Israel. These laws and provisions
principally concern the length of the work day and the work week, minimum wages
for workers, contributions to a pension fund, insurance for work-related
accidents, procedures for dismissing employees, determination of severance pay
and other conditions of employment. Furthermore, under the collective bargaining
agreements, the wages of most of the Company's employees are automatically
adjusted based partially on changes in the CPI. The amount and frequency of
these adjustments are modified from time to time.
Israeli law generally requires severance pay upon the retirement or death of an
employee or termination of employment without due cause. However, most of this
liability may be covered by managers' insurance policies or severance pay funds
with the employer remaining liable for the difference in the amount of severance
pay not covered. The Company's liability for required severance pay benefits is
satisfied by the funding of two approved severance pay funds, the purchase of
manager's insurance policies for the benefit of Shmuel Sternfeld and one other
executive officer, and by an accrual for severance pay on the Company's Balance
<PAGE>
Sheet. See Note 9 of Notes to the Company's Consolidated Financial Statements.
Furthermore, Israeli employees and employers are required to pay predetermined
sums to the National Insurance Institute, which is similar to the United States
Social Security Administration. The aggregate payments thereto amount to
approximately 13% of wages up to a ceiling, with the employee contributing
approximately 5.4% and the employer contributing the remainder.
ITEM 2 - DESCRIPTION OF PROPERTY
In 1997, the Company reduced its rental facilities and currently leases
approximately 3,850 square feet of administrative, marketing and research and
development space in Tel Aviv, Israel. The lease for this space, pursuant to
which the Company pays approximately $8,500 per month in rent, expires on August
31, 1997. The Company has an option to extend such lease until September 1,
2000.
The Company's U.S. subsidiary, SCI, leases office space in Fort Lee, New
Jersey. SCI leases this space, at a monthly rent of approximately $3,300 per
month, which expires in May 2000.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not a party to any litigation that might, individually or in the
aggregate, have a material adverse effect on the Company or its business and is
not aware that any such litigation is threatened.
ITEM 4 - CONTROL OF REGISTRANT
The Company is not directly or indirectly owned or controlled by another
corporation or by any foreign government.
The following table sets forth the number of fully paid ordinary shares of the
Company owned by any person known to the Company to be the beneficial owner of
more than 10% of the Company's ordinary shares and the total amount of the
Company's ordinary shares owned by the officers and directors of the Company as
a group. The information in this table is accurate as of June 20, 1997.
<PAGE>
NO. OF PERCENT OF
IDENTITY OF PERSON OR GROUP SHARES OWNED TOTAL
- ------------------------------------- ------------ ----------
Shmuel Sternfeld 4,455,000 82.9 %
Total Owned by Officers and
Directors as a Group 4,455,000 82.9 %
ITEM 5 - NATURE OF TRADING MARKET
The Company's ordinary shares have been traded on the Over-The-Counter Bulletin
Board ("OTCBB") since November 15, 1995 under the symbol CMTTF. Prior to that
time, the shares have been traded on the NASDAQ National Market System
("NASDAQ/NMS") under the symbol CMTTF since the Company's initial public
offering on August 23, 1994. Prior to 1994, there was no market for the
Company's shares. There is no non-United States trading market for such
securities.
The following are the high and low sales prices reported for the Company's
shares as reported on NASDAQ/NMS during each quarter since such trading
commenced in August, 1994 through November 14, 1995 and as reported on the
OTCBB during each quarter since November 15, 1995:
QUARTER HIGH LOW
------------ ----- ------
First, 1995 3 5/8 1 1/2
Second, 1995 2 3/8 1
Third, 1995 1 5/8 3/4
Fourth, 1995 1 1/8 1/2
First, 1996 1/4 1/8
Second, 1996 2 3/8 1
Third, 1996 1 5/8 3/4
Fourth, 1996 1 1/8 1/2
As of July 9, 1997, there were 69 shareholders of record.
ITEM 6 EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
All non-residents of Israel who purchase Ordinary Shares of the Company with
certain non-Israeli currencies (including dollars) may freely repatriate in such
non-Israeli currencies all amounts received in respect of such Ordinary Shares
<PAGE>
in Israeli currency, whether as a dividend, as a liquidating distribution or as
proceeds from the sale of such shares (provided in each case that any applicable
Israeli income tax is paid or withheld on such amounts).
Nonresidents of Israel may freely hold and trade ordinary shares of the Company
pursuant to the General Permit issued under the Currency Law. The Memorandum of
Association and Articles of Association of the Company do not restrict in any
way the ownership of ordinary shares by nonresidents of Israel and there is no
restriction on voting rights of nonresidents contained in the Company's
Memorandum of Association, its Articles of Association or in Israeli statutory
law.
Investments and certain other transactions outside Israel by the Company,
including the establishment of foreign sales offices and acquisitions, require
specific approval from the Controller of Foreign Exchange. While such approvals
have been granted to the Company and other companies in the past, no assurance
can be given that such approval will be received by the Company in the future.
ITEM 7 - TAXATION
The following is a summary of the current tax structure applicable to companies
in Israel, with special reference to its effect on the Company. The following
also contains a discussion of a certain Israeli and United States tax
consequences to persons purchasing the Ordinary Shares and certain Israeli
Government programs benefiting the Company. To the extent that the discussion is
based on new tax legislation which has not been subject to judicial or
administrative interpretation, there can be no assurance that the views
expressed in the discussion will be accepted by the taxing authorities in
question. The discussion is not intended, and should not be construed, as legal
or professional tax advice and is not exhaustive of all possible tax
considerations.
GENERAL CORPORATE TAX STRUCTURE
Taxable income earned by Israeli companies currently is subject to "Companies
Tax" at a rate of 36%. As a result of the operation of tax programs designed to
encourage industrial development and foreign investment in Israel, the effective
tax rate applicable to Companies benefiting from such programs is substantially
lower than the effective tax rate set forth above.
<PAGE>
Law for the Encouragement of Industry (Taxes), 1969
Pursuant to the Law for the Encouragement of Industry (Taxes), 1969 (the
"Industry Encouragement Law"), an Industrial Company is entitled to certain
benefits that are described below. To the extent that the income from a
company's Approved Enterprises (as hereinafter defined) is exempt from taxation,
such company will not receive the full deduction. A company qualifies as an
"Industrial Company" if it is resident in Israel and at least 90% of its income
in any tax year, determined in NIS (exclusive of income from government
compulsory defense loans and certain other sources), derives 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
production activity. As a result of the transfer of the Company's non-industrial
activities to its wholly owned subsidiary Central Software and Automation Ltd.,
an Israeli corporation ("CSA"), the Company qualified as an Industrial Company.
Pursuant to the Industry Encouragement Law, an Industrial Company is entitled to
deduct 12.5% per year of the purchase price of patents or certain other
intangible property rights (other than goodwill) over a period of eight years
beginning with the year in which such rights were first used, and is also
entitled to deduct 33 1/3% per annum of expenses incurred in connection with the
issuance of publicly-traded shares over a period of three years from the time
the expenses were incurred. To the extent that the income from the Company's
Approved Enterprise is exempt from taxation, the Company will not benefit from
these deductions. See "Law for the Encouragement of Capital Investments, 1959"
below.
Under certain income tax regulations, special depreciation rates have been
determined for machinery, equipment and buildings used by an Industrial
Enterprise. These rates differ based on factors including the date of
commencement of operation and the number of work shifts. Moreover, accelerated
depreciation at the rate of 150% may be available for certain newly operated
machinery and equipment. An Industrial Company owning an Approved Enterprise
(see "Law for the Encouragement of Capital Investments, 1959" below) may choose
between the above depreciation rates and the depreciation rates available to
Approved Enterprises.
<PAGE>
Eligibility under the Industry Encouragement Law is not conditioned upon the
receipt of prior approval from any Israeli Government authority. No assurance
can be given that the Company will continue to qualify as an Industrial Company
or will in the future be able to avail itself of any benefits under the Industry
Encouragement Law.
Law for the Encouragement of Capital Investments, 1959
General. The Law for the Encouragement of Capital Investments, 1959 (the
"Investment Law") provides that a production facility (or other eligible assets)
may, upon application to the Israel Investment Center, be designated as an
"Approved Enterprise." Each certificate of approval for an Approved Enterprise
relates to a specific investment program in the Approved Enterprise, delineated
both by the financial scope of the investment and by the physical
characteristics of the facility or other asset. A company granted an Approved
Enterprise status is eligible for certain tax benefits provided for by the
Investment Law, depending on the specific program elected by that company. In
February, 1994, the Company was granted Approved Enterprise status with respect
to certain of its assets upon the implementation of its approved investment
program, which the Company completed as of the date of this Prospectus. The
Company has elected to participate in the Alternative Benefits Program described
below with respect to its current Approved Enterprise. Under such Alternative
Benefits Program, the Company will enjoy certain future tax exemptions on the
income derived from its Approved Enterprise for a period of four years and
reduced tax rates for an additional three years.
Tax Benefits. A company that has an Approved Enterprise which was approved after
April 1, 1986 may elect to forego any entitlement to the grants otherwise
available under the Investment Law and, instead, participate in an alternative
benefits program, under which the undistributed income from Approved Enterprise
is fully exempt from Company Tax for a defined period of time (the "Alternative
Benefits Program"). The period of tax exemption ranges between 2 and 10 years,
depending primarily upon the location within Israel of the Approved Enterprise.
On expiration of the exemption period, the Approved Enterprise would be eligible
for beneficial tax rates under the Investment Law for the remainder, if any, of
the otherwise applicable benefits period. The Company has elected to participate
in the Alternative Benefits Program. Accordingly, the income derived from its
Approved Enterprise is tax exempt for a two-year period and subject to Companies
Tax at a reduced rate during the fifth, sixth and seventh years of the benefit
period. There can be no assurance that that current benefit program will
<PAGE>
continue to be available under the Investment Law or that the Company will
continue to qualify for benefits under the current program.
Dividends paid out of income derived from an Approved Enterprise are generally
subject to taxation at the rate of 15 %, and the same rate will also be
applicable to distributions made by a company out of dividends received from an
Approved Enterprise. The reduced rate of 15 % is limited to those dividends and
distributions actually paid to the recipient during the seven year benefits
period and, generally, at any time up to 12 years thereafter. A company which
has elected to participate in the Alternative Benefits Program and pays a
dividend from income derived by an Approved Enterprise during the tax exemption
period under the Alternative Benefits Program would be liable for Company Tax in
respect of the amount distributed (including the amount of the tax thereon) at
the rate applicable had the Alternative Benefits Program not been elected (25
%), and the dividend recipient would be subject to tax at a rate of 15 % on the
amount received.
The tax benefits derived from a certificate of approval for an Approved
Enterprise relate only to taxable income attributable to the Approved Enterprise
and are conditioned upon fulfillment of the conditions stipulated by the
Investment Law, the regulations promulgated thereunder and the criteria set
forth in the certificate of approval, which include an increase in the Company's
export revenues. In the event of a failure by the Company to comply with these
conditions, the tax benefits could be canceled, in whole or in part, and the
Company would be required to refund the amount of the canceled benefits, with
the addition of linkage differences and interest.
In the event that only a part of a company's taxable income derives from an
Approved Enterprise or if the Company operates under more than one approval, its
effective corporate tax rate is the result of a weighted combination of the
various applicable rates. A company owning "mixed enterprises" (i.e., a company
whose income derives from both an Approved Enterprise and another source) may
not distribute a dividend attributable to the Approved Enterprise alone. Subject
to certain provisions concerning income subject to the Alternative Benefits
Program, all dividends are considered to be attributable to the entire
enterprise, and the effective tax rate is the result of a weighted combination
of the various applicable tax rates.
<PAGE>
TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax Law (Adjustment for Inflation), 1985 (the "Adjustment for
Inflation Law") represents an attempt to overcome some of the problems presented
to a traditional tax system by an economy undergoing rapid inflation. Generally,
the Adjustment for Inflation Law seeks to protect shareholders' equity from
inflationary erosion by providing a tax deduction at the annual rate of
inflation, adjusted depreciation adjustments and linkage of carry forward tax
losses to the rate of inflation. The Company is assessed tax under the
Adjustment for Inflation Law. See Note 11 of Notes to the Company's Combined
Financial Statements.
The Income Tax Ordinance and the Adjustment for Inflation Law allow
"Foreign-Invested Companies" which maintain their accounts in dollars in
compliance with regulations published by the Israeli Ministry of Finance to base
their tax returns on the operating results as reflected in the dollar financial
statements (in lieu of the principles set forth by the Adjustment for Inflation
Law) or to adjust their tax returns based on exchange rate changes rather than
changes in the CPI. For these purposes, a Foreign-Invested Company is a company
more than 25 % of whose share capital (in terms of rights to profits, voting and
the appointment of directors) and of whose combined share and loan capital is
owned by persons who are not residents of Israel. There can be no assurance that
the Company will remain a Foreign-Invested Company or will elect to be taxed on
changes in the exchange rate.
TAX BENEFITS AND GOVERNMENT SUPPORT FOR RESEARCH AND DEVELOPMENT
Israeli tax law permits, under certain conditions, a tax deduction in the year
incurred for expenditures (including capital expenditures) in scientific
research and development projects, if the expenditures are approved by the
relevant Israeli Government Ministry (determined by the field of research) and
the research and development is for the promotion of the enterprise and is
carried out by or on behalf of the company seeking such deduction. Expenditures
not so approved are deductible over a three-year period. However, research and
development expenditures that are funded from the proceeds of Israeli government
grants are not deductible.
<PAGE>
TAXATION MATTERS UNDER ISRAELI LAW AFFECTING NON-ISRAELI SHAREHOLDERS; ESTATE
TAXES
The Ordinary Shares of the Company would be exempt from Israeli capital gains
tax if they are listed on NASDAQ/NMS or on a recognized stock exchange and the
Company qualifies as an "Industrial Company." The Company is not presently
listed on NASDAQ/NMS or a recognized stock exchange. As such, Israeli capital
gains tax would apply to the sale of the Ordinary Shares. Israeli capital gains
tax law distinguishes between a "Real Gain" and an "Inflationary Amount." Real
Gain is the excess of the total capital gain over the Inflationary Amount, which
is the amount of the increase in the CPI (or, at the election of a non-resident
of Israel, the Israeli currency devaluation in relation to the foreign currency
with which the capital asset was purchased) between the date of purchase and
December 31, 1993. Until December 31, 1993, the Inflationary Amount was
calculated as the increase in the CPI between the date of purchase and the date
of sale. On December 30, 1993, the Israel Income Tax Ordinance was amended to
exclude the increase of the CPI as of January 1, 1994 from the definition of
Inflationary Amount and, thus, from an tax. The Inflationary Amount is taxed at
a rate of 10%, reduced, with respect to shares, to no tax for non-residents in
the event that such non-residents have elected the Israeli currency devaluations
as an index. The Real Gain is taxed at the rate applicable to ordinary income.
On a sale of the Ordinary Shares, an additional Inflationary Amount taxed at the
rate referred to above may need to be recognized, based on the proportional part
of the accumulated profits of the Company to which the seller of the shares
would have rights by virtue of such shares.
A treaty concerning double taxation between the United States and Israel (the
"Double Taxation Treaty") came into effect on January 1, 1995. Pursuant to the
Double Taxation Treaty, certain holders of Ordinary Shares of the Company who
are United States residents may be exempt from Israeli capital gains tax on
sales or other dispositions of Ordinary Shares of the Company regardless of
whether the Ordinary Shares of the Company are listed on a recognized stock
exchange or the Company qualifies as an Industrial Company.
Individuals who are non-residents of Israel are subject to a graduated income
tax on income derived from sources in Israel. On the distribution of dividends
other than bonus shares, income at the rate of 25% (15% in the case of dividends
distributed from the taxable income attributable to an Approved Enterprise) is
withheld at the source unless a different rate is provided for in a treaty
between Israel and the shareholder's country of residence. As indicated above,
the Double Taxation Treaty has been signed by the United States and Israel but
<PAGE>
not ratified by the United States Senate and the Israeli Parliament. The
withheld tax is the final tax in Israel on dividends paid to non-residents. A
non-resident of Israel who has interest, dividend or royalty income derived from
or accrued in Israel from which tax was withheld at source is generally exempt
from the duty to file tax returns in Israel in respect of such income, provided
that such income was not derived from a business conducted in Israel by the
taxpayer.
Residents of the United States generally will have withholding tax in Israel
deducted at the source. Such persons may be entitled to a credit or deduction
for United States federal income tax purposes for the amount of such taxes
withheld.
Israel has no estate tax.
ITEM 8 - SELECTED FINANCIAL DATA
- --------------------------------
<PAGE>
STATEMENT OF INCOME DATA:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- ---------- ---------- ------------
(In thousands, except per share and share data)
<S> <C> <C> <C> <C> <C>
Revenues $ 3,401 $ 4,730 $ 4,487 $ 4,507 $ 4,502
Cost of revenues 1,850 2,237 2,720 2,607 3,114
-------- -------- -------- -------- --------
Gross profit 1,551 2,493 1,767 1,900 1,388
-------- -------- -------- -------- --------
Research and development costs 919 979 1,049 1,443 561
Less - capitalization of computer
software costs (370) (787) (781) (178) -
-------- -------- -------- -------- --------
Research and development costs,
net 149 192 268 1,265 561
Sales and marketing expenses 330 346 436 832 1,181
General and administrative
expenses 58 559 923 1,653 1,289
-------- -------- -------- -------- --------
Total operating costs and
expenses 1,037 1,097 1,627 3,750 3,031
-------- -------- -------- -------- --------
Operating income (loss) 514 1,396 140 (1,850) (1,643)
Other expenses - 274 - -
Financial expenses, net 58 94 162 241 (102)
-------- -------- -------- -------- --------
Income (loss) before taxes on
income 456 1,302 (296) (2,091) (1,745)
Taxes on income (benefits) 182 536 (62) (277) (182)
-------- -------- -------- -------- --------
Net income (loss) $ 274 $ 766 $ (234) $ (1,814) $ (1,563)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings (loss) per share $ 0.06 $ 0.17 $ (0.05) $ (0.34) $ (0.29)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average number of
shares outstanding 4,500,000 4,500,000 4,791,000 5,375,000 5,375,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- ---------- ---------- ---------- -----------
(All data in thousands)
<S> <C> <C> <C> <C> <C>
Working capital $ (512) $ (656) $ 1,410 $ (785) $ (1,066)
Total assets 1,399 3,215 6,424 5,269 3,327
Short-term debt, including
current maturities of long-term
debt 345 665 1,052 1,178 1,133
Long-term debt, net 200 163 414 326 272
Shareholders' equity
(deficiency) (213) 553 2,954 1,139 (424)
</TABLE>
ITEM 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company considers the dollar to be the currency of the principal economic
environment in which its operations are conducted. In recent years the Company's
revenues in dollars or denominated in dollars have increased significantly from
40.1% of total revenues in 1990 to approximately 50% of total revenues in 1995.
The Company believes that this trend will continue and that the majority of its
revenues will be realized and a significant portion of its expenses will be
incurred in dollars. When the Company generates revenues or incurs expenses in
NIS denominated in U.S. dollars, the payor has a contractual obligation (not
merely an informal undertaking) to make payment in NIS based upon the exchange
rate between NIS and the U.S. dollar in effect on the date of payment, not on
the date of the contract. The payor, therefore, bears the risk of a change in
the exchange rate between the NIS and the dollar and the transaction takes place
in a dollar, rather than a NIS, environment. The Company has, therefore, adopted
the dollar as its functional currency (see Note 2b of Notes to the Company's
Consolidated Financial Statements in Item 18). Transactions and balances
<PAGE>
denominated in currencies (including NIS) other than dollars are remeasured into
dollars in accordance with the principles of Statement No. 52 of the Financial
Accounting Standards Board. Exchange gains and losses arising from remeasurement
are reflected in income or expenses, as applicable.
The Company's revenues and expenses may vary significantly from period to period
due to factors which include the: (i) number of COMET systems sold, each of
which has a relatively high selling price in comparison to the Company's annual
revenues, (ii) length of time required to complete a system sale, (iii) mix of
revenue derived from the Company's computer software sales and provisions of
professional software support services, (iv) lengthy procurement procedures of
health care facilities resulting from such facilities' budgetary cycles, (v)
timing of new product introductions and enhancements by the Company or its
competitors, and (vi) fluctuations in the exchange rate between the dollar and
the NIS. For such reasons, any comparison of one period to another is not
necessarily meaningful and is not necessarily an accurate indication of future
trends. In addition, financial data relating to any year are not necessarily
indicative of the results to be expected for future years. Accordingly, the
Company's revenues and net operating results may vary significantly by quarter
and by year. Moreover, the Company anticipates its expenditures relating to
research and development, and to the expansion of its sales and marketing
efforts, will increase over the near term. Among the specific areas in which
additional funds will be spent are the continued development and enhancement of
COMET, the employment of additional sales and marketing personnel and the
opening of regional customer support offices in Rome, Prague and elsewhere in
Europe and the United States. Any growth in revenues and operating results
resulting from an increase in expenditures for research and development or sales
and marketing is likely to be recorded in periods subsequent to the periods in
which the expenditures are actually incurred.
Consequently, increases in revenues for subsequent periods, if any, may not
initially result in proportionate net income or loss increases due to the
anticipated increases in expenditures.
The Company's current internal cost accounting system does not allow the Company
either to identify specifically its cost of revenues by corresponding revenue
classification or to identify specifically its research and development costs.
Consequently, the Company has formulated and utilizes a method to disaggregate
its cost of revenues by corresponding revenue classification based
<PAGE>
on: (a) estimates of employee hours dedicated to the appropriate activities;
and (b) identification of certain costs incurred with respect to a specific
activity. In addition, the Company has formulated and utilizes a method to
allocate a portion of its cost of revenues to research and development costs
based on: (a) an analysis of the hours actually dedicated to product
development activities and (b) estimates formulated from reviewing and
analyzing product development contracts and the past experiences of product
development project managers. The Company believes that these methodologies
are reasonable.
Financial data included in this discussion have been derived from the Company's
Consolidated Financial Statements and from its general accounting records.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the relationship (in
percentages) of selected items from the Company's statement of income to its
total revenues:
<TABLE>
<CAPTION>
Year ended
December 31,
------------------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues 54.4 47.3 60.6 57.8 69.2
-------- ---------- ----------- ------------ -----------
Gross profit 45.6 52.7 39.4 42.2 30.8
-------- ---------- ----------- ------------ -----------
Research and development cost,
net 4.4 4.1 6.0 28.1 12.5
Sales and marketing expenses 9.7 7.3 9.7 18.5 26.2
General and administrative
expenses 16.4 11.8 20.6 36.7 28.6
-------- ---------- ----------- ------------ -----------
Operating income (loss) 15.1 29.5 3.1 (41.1) (36.5)
Other expenses - - 6.1 - -
Financial expenses, net 1.7 2.0 3.6 5.3 2.3
-------- ---------- ----------- ------------ -----------
Net income (loss) before taxes
on income 13.4 27.5 (6.6) (46.4) (38.8)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Taxes (benefit) on income 5.4 11.3 1.4 6.1 4.1
-------- ---------- ----------- ------------ -----------
Net income (loss) 8.0 16.2 (5.2) (40.3) (34.7)
-------- ---------- ----------- ------------ -----------
-------- ---------- ----------- ------------ -----------
</TABLE>
Fiscal Year Ended December 31, 1996 compared with Fiscal Year Ended
December 31, 1995
Revenues. The Company's revenues derive from sales of COMET systems and from
providing professional software support services, including installation and
training, customer support, maintenance, and outsourcing and facility
management. Revenues in 1996 totaled $4,502,997 which did not materially change
from 1995.
Costs of Revenues. Cost of revenues in 1996 increased 19.5% to $3,114,550 as
compared to $2,606,641 for 1995 due principally to the write off of certain
capitalized computer software costs in the amount of $758,021 which is included
in the above mentioned costs.
Gross Profit . As a result of the above mentioned write off the gross profit
decreased accordingly by 30% to $1,388,447 in 1996 from $1,990,014 in 1995.
Research and Development Costs. The Company's gross research and development
costs consist of all expenditures relating to the Company's research and
development expenses that were capitalized from gross research and development
costs. Gross research and development costs in 1996 decreased by 61.2% to
$560,930 compared to $1,443,573 in 1995 due principally to a cut back in the
company's R & D personnel . The Company did not capitalize any computer software
costs in 1996 and as a result of the above net research and development expenses
decreased to $560,930 in 1996 as compared to $1,265,010 in 1995.
Sales and Marketing Expenses. Sales and marketing expenses increased 42.1% to
$1,181,966 in 1996 from $831,825 in 1995.The increase is mainly due to increases
in salary and travel expenses which resulted from continuing increased sales
efforts in the European market and the Eastern European market in particular.
General and Administrative Expenses. General and administrative expenses
decreased to $1,288,515 in 1996 as compared with $1,653,711 in 1995, a decrease
of 22%. The decrease in general and administrative expenses can be attributed
primarily to a substantial
<PAGE>
cut back in the Company's personnel.
Financial Expenses. Net financial expenses are calculated by subtracting
financial income from gross financial expenses. Net financial expenses decreased
by 57.5% to $102,397 in 1996 from $240,939 in 1995. The decrease resulted mainly
from the Company's conversion of its loans to U.S. dollar linked from previously
Israel CPI linkage , thus causing a substantial lower effective interest rate .
Taxes on Income (Benefits). In 1996 the Company recorded a tax benefit of
$181,996 compared to a tax benefit of $277,377 in 1995. This change has resulted
primarily from a change in its deferred income taxes.
Net Loss. As a result of the foregoing, the Company incurred a net loss for the
year ended December 31, 1996 of $1,563,365 as compared to a net loss of
$1,814,094 in 1995. The Company attributes the loss it incurred during 1996
primarily to: (i) an increase in its cost of revenues due to the write off of
capitalized research and development costs in the amount of $758,021 (see Cost
of Revenues), and (ii) an increase in its sales and marketing expenses in the
amount of $350,141 (see Sales and Marketing Expenses).
<PAGE>
In 1995, the Company incurred a loss in the amount of $1,814,094, due to a
substantial increase in expenses that were incurred, as compared to 1994. Sales
in 1996 did not materially change from the prior year, and although the Company
did reduce its operating expenses as from the prior year, it nevertheless
further incurred a loss in the amount of $ 1,563,365. The Company has a working
capital deficiency in the amount of $ 1,065,858 at December 31, 1996, as
compared to December 31, 1995, in the amount of $ 785,364. If cash flows from
operations in the coming year are not sufficient to meet the Company's operating
activities and/or debt service requirements, management would be required to
implement certain actions to obtain cash from other sources to compensate for
the shortfall.
The Company is currently considering raising additional funds to compensate for
the shortfall in the coming year.
The Company will be dependent upon the proceeds to be raised from these sources
to continue its business operations. However, management can give no assurances
as to its ability to raise the funds necessary to enable it to conduct its
business. If the Company is unable to obtain the necessary cash, other more
substantial restructuring actions may become necessary.
The report of the Company's independent auditors with respect to the Company's
financial statements for the year ended December 31, 1996, contains an
explanatory footnote that these conditions raise substantial doubt about the
Company's ability to continue as a going concern.
The consolidated financial statements of the Company have been prepared assuming
that the Company will continue as a going concern, and do not include any
adjustments that might result from the outcome of this uncertainty.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED WITH FISCAL YEAR ENDED DECEMBER
31, 1994
Revenues. The Company's revenues derive from sales of COMET systems and from
providing professional software support services, including installation and
training, customer support, maintenance, and outsourcing and facility
management. Revenues in 1995 totaled $4,506,655 which did not materially change
from 1995.
Costs of Revenues. Cost of revenues in 1995 decreased 4.2% to $2,606,641 as
<PAGE>
compared to $2,719,984 for 1994 due principally to (i) an increase in the cost
of software sales), which was principally attributable to higher amortization of
software development costs and (ii) an increase in the cost of product
development and support and other services, which was principally attributable
to increases in payroll and related expenses which substantially increased in
Israel, especially in the high-tech industries in 1994 and writedowns of
capitalized software development costs of $157,000 in 1994.
Gross Profit . Gross profit amounted to $1,900,014 in 1995 and did not
materially change from 1994.
Research and Development Costs. The Company's gross research and development
costs consist of all expenditures relating to the Company's research and
development expenses that were capitalized from gross research and development
costs. Gross research and development costs in 1995 increased 37.5% to
$1,443,573 compared to $1,049,531 in 1994 due principally to increased payroll
expenses, which are a result of marked increases in national salary demands in
the computer programming field. Net research and development expenses increased
to $1,265,010 as compared to $267,803 in 1994 as a result of the reduction of
capitalization of software costs (due to a conservative approach adopted by the
Company) in the amount of $178,563 as compared $181,728 in 1994.
Sales and Marketing Expenses. Sales and marketing expenses increased 90.7% to
$831,825 in 1995 from $436,175 in 1994. As a percentage of revenues, sales and
marketing expenses increased to 18.5% for 1995 as compared to 9.7% for 1994. The
increase is mainly due to increases in salary and travel expenses which resulted
from continuing increased sales efforts in the European market and the Eastern
European market in particular. Also, due to the long sales cycles, revenues will
be allocated to the bidding process, results of which also require an extended
period of time.
General and Administrative Expenses. General and administrative expenses
increased to $1,653,711 in 1995 as compared with $923,521 in 1994 an increase of
79%. As a percentage of revenues, general and administrative expenses increased
to 36.7% for 1995 as compared to 20.6% for 1994. The increase in general and
administrative expenses can be attributed primarily to an increase in salary
levels, expenses for the recruitment and training of employees, rent expenses,
and an increase in the reserve for doubtful accounts. In as much as the dollar
was frozen during 1995, when calculating expenses by the dollar, the
<PAGE>
expenses increase further. An increase in these expenses are also due in part
to the fact that the Company became a public company, an activity which
inherently incurs a great deal of costs.
Financial Expenses. Net financial expenses are calculated by subtracting
financial income from gross financial expenses. Net financial expenses increased
49.00% to $240,939 in 1995 from $161,686 in 1943. The increase resulted mainly
from the Company's increase in the average outstanding short-term and long-term
debt.
Taxes on Income (Benefits). In 1995 the Company recorded a tax benefit of
$277,377 compared to a tax benefit of $62,537 in 1994. This change has resulted
primarily from a change in its deferred income taxes.
Net Loss. As a result of the foregoing, the Company incurred a net loss for the
year ended December 31, 1995 of $1,814,094 as compared to a net loss of $233,845
in 1994. The Company attributes the loss it incurred during 1995 primarily to:
(i) an increase in its net R&D expenses in the amount of $997,207 (see Research
& Development Costs), (ii) an increase in the general and administrative
expenses of $730,190, and (iii) an increase in its sales and marketing expenses
in the amount of $395,650 (see Sales and Marketing expenses).
The net loss of the company was mainly financed by the use of proceeds from the
Company's initial public offering in August 1994.
FISCAL YEAR ENDED DECEMBER 31, 1994 COMPARED WITH FISCAL YEAR ENDED DECEMBER 31,
1993
Revenues. The Company's revenues derive from sales of COMET systems and from
providing professional software support services, including installation and
training, customer support, maintenance, and outsourcing and facility
management. Revenues in 1994 decreased by 5.1% to $4,486,787 from $4,730,057 in
1993. The decrease in revenues was attributable to two principal factors, a
decrease in sales of COMET systems to $635,074 in 1994 from $800,480 in 1993 and
a decrease in sales of computer hardware in the United States ($58,086 in 1994
compared to $404,124 in 1993). This decrease is the result of the fact that the
Company had recorded a one-time large sale of computer hardware in the U.S. in
1993. During 1994, the Company entered into several contracts for which revenue
has not yet been recognized in accordance with the principles of the Statement
of Position 91-1, "Software Revenue Recognition," issued by the American
<PAGE>
Institute of Certified Public Accounts ("Statement of Position 91-1"). In
compliance with the provisions of Statement of Position 91-1, the Company
recognizes revenues from software product sales either: (i) when a
non-cancelable license agreement has been signed, the product has been delivered
and all significant obligations have been satisfied and collectability of the
receivable is certain; or (ii) based on license fee payments as they fall due,
in the case where the conditions in clause (i) are met but the license fee is
payable over a period which exceeds one year.
Costs of Revenues. Cost of revenues in 1994 increased 21.6% to $2,719,984 as
compared to $2,237,117 for 1993, due principally to (i) an increase in the cost
of software sales ($270,745 in 1994 as compared to $168,478 in 1993), which was
principally attributable to increases in the amortization of software
development costs ($226,014 in 1994 as compared to $108,765 in 1993) and (ii) an
increase in the cost of product development and support and other services
($2,299,430 in 1994 as compared to $1,697,923 in 1993), which was principally
attributable to increases in payroll and related expenses which substantially
increased in Israel, especially in the high-tech industries in 1994 ($1,494,129
in 1994 as compared to $1,188,573 in 1993) and writedowns of capitalized
software development costs of $157,000 in 1994. As a percentage of revenues,
cost of revenues increased to 60.6% in 1994 as compared to 47.3% for 1993, due
principally to a decrease in software sales and revenue from other income, which
were accompanied by increases in cost of software sales and cost of product
development and support.
Gross Profit. Gross profit decreased from $2,492,940 in 1993 to $1,766,803 in
1994 and as a percentage of revenues from to 52.7% in 1993 to 39.4% in 1994.
This decrease was primarily due to a decrease in revenues which were accompanied
by increases in the cost of sales.
Research and Development Costs. The Company's gross research and development
costs consist of all expenditures relating to the Company's research and
development expenses that were capitalized from gross research and development
costs Gross research and development costs in 1994 increased 7.2% to $1,049,531
compared to $979,304 for 1993, due principally to increased efforts to develop
COMET, including modifications thereof for foreign markets. As a percentage of
revenues, gross research and development costs increased to 23.4% for 1994 as
compared with 20.7% for 1993.
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses increased 26% to
$436,175 in 1994 from $346,024 in 1993. As a percentage of revenues, sales and
marketing expenses increased to 9.7% for 1994 as compared to 7.3% for 1993. The
increase is mainly due to increases in salary and travel expenses which resulted
from increased sales efforts in the European market and the Eastern European
market in particular. Since most of the Company's marketing employees are
employed in Israel, the Company's travel expenses constitute a material portion
of the Company's total sales and marketing expenses (42.6% in 1994 as compared
to 47.5% in 1993).
General and Administrative Expenses. General and administrative expenses
increased to $923,521 in 1994 as compared with $558,756 in 1993 an increase of
65 %. As a percentage of revenues, general and administrative expenses increased
to 20.6% for 1994 as compared to 11.8% for 1993. The increase in general and
administrative expenses can be attributed primarily to an increase in the number
of employees and the salary levels, expenses for the recruitment and training of
employees, rent expenses, and an increase in the reserve for doubtful accounts.
An increase in these expenses are also due in part to the fact that the Company
became a public company, an activity which inherently incurs a great deal of
costs.
Other Expenses. The Company recognized an expense of $274,000 in 1994 from a
payment made to Florijn for the buy- out of certain European marketing rights.
Financial Expenses. Net financial expenses are calculated by subtracting
financial income from gross financial expenses. Net financial expenses increased
72.4% to $161,686 in 1994 from $93,811 in 1993. The increase resulted mainly
from the Company's increase in long-term debt of $593,285 and an increase in its
short-term debt and bank credit by $44,641.
Taxes on Income (Benefits). In 1994 the Company recorded a tax benefit of
$62,537 compared to a tax liability of $536,166 in 1993. This change has
resulted primarily from the Company incurring a net loss before income taxes in
1994 and a reduction of tax assessments for previous years.
Net Loss. As a result of the foregoing, the Company incurred a net loss for the
year ended December 31, 1994 of $233,845 as compared to net income of $765,721
for 1993. The Company attributes the loss it incurred during 1994 primarily to:
(i) a decrease in revenues in the total of $243,270; (ii) an increase in the
<PAGE>
cost of revenues of $482,867; (iii) an increase in the general and
administrative expenses of $364,765; and (iv) the buyout of marketing rights
recorded at $274,000 in "Other Expenses."
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have been and continue to be financed from cash flow
from operations, short-term indebtedness provided by Israeli banks and long-term
indebtedness provided by Israeli banks and other financial institutions. The
Company's indebtedness is secured by security interests in the Company's fixed
assets in favor of certain Israeli banks and financial institutions.
The Company's short-term indebtedness (excluding current maturities of long-term
indebtedness) at December 31, 1996 was $505,248.
The current maturities of long-term debt on December 31, 1996 was $628,717. On
December 31, 1996 working capital deficiency was $1,065,858. This deficiency
increased from the working capital deficiency which existed at December 31 1995
in the amount of $785,364.
At the end of 1996, the Company held cash and cash equivalents of $470,673.
During the year ended December 31, 1996 the Company's cash and cash equivalents
increased by $204,800 . During this period, the Company had a positive cash flow
from operating activities in the amount of $290,842, as a result of an
aggressive cut-down in its operating expenses and collections on aged accounts
receivables. During the year ended December 31, 1996, negative net cash flow
utilized in the Company's financing activities equaled $97,781, mainly for the
repayment of short and long term loans.
IMPACT OF INFLATION AND DEVALUATION ON MONETARY ASSETS AND LIABILITIES.
For many years prior to 1986, the Israeli economy was characterized by high
rates of inflation and devaluation of the Israeli currency against the United
States dollar and other currencies. However, since the institution of the
Israeli Economic Program in 1985, inflation, while continuing, has been
significantly reduced and the rate of devaluation has been substantially
diminished. During 1989 and 1990, the dollar declined in value relative to major
world currencies. Because governmental policies in Israel linked exchange rates
to a weighted basket of foreign currencies of Israel's major trading partners,
the exchange rate between the NIS and the dollar remained relatively stable
<PAGE>
during this period. However, during 1991, 1992 and 1993, Israel effected
devaluations of the NIS against the dollar of 11.47%, 21.1% and 8.0%. During
1994 ,1995 and 1996 the exchange rate of the dollar and the NIS was relatively
stable.
The dollar cost of the Company's operations in Israel is influenced by the
extent to which any increase in the rate of inflation in Israel over the rate of
inflation in the United States is offset by a devaluation of the NIS in relation
to the dollar. Inflation in Israel will have a negative effect on the
profitability to the Company of contacts under which the Company is to receive
payment in dollars or other foreign currencies, unless such inflation is offset
by a devaluation of the NIS.
A devaluation of the NIS in relation to the dollar will have the effect of
decreasing the dollar value of any assets of the Company which consist of NIS or
receivables payable in NIS (unless such receivables are linked to the dollar).
Such a devaluation would also have the effect of reducing the dollar amount of
any liabilities of the company which are payable in NIS (unless such payables
are linked to the dollar). Conversely, any increase in the value of the NIS in
relation to the dollar would have the effect of increasing the dollar value of
any unlinked NIS assets of the Company and the dollar amount of any unlinked NIS
liabilities of the Company.
Because exchange rates between the NIS and the dollar fluctuate continuously
(albeit with a declining trend in the value of the NIS), exchange rate
fluctuations and especially larger periodic devaluations have an impact on the
Company's profitability and period-to-period comparisons of the Company's
results.
ITEM 10 - DIRECTORS AND OFFICERS OF REGISTRANT
DIRECTORS, OFFICERS AND KEY EMPLOYEES
The directors, officers and key employees of the Company are as follows:
<PAGE>
NAME AGE POSITION
Shmuel Sternfeld 51 Chairman of the Board of Directors; Chief
Executive Officer and President
Amnon Neubach 53 Director
Chaim Haklai 46 Senior Vice President
Yossi Rosenblum 43 Vice President - Research and Development
Doron Gutkind 34 Project Manager - SCI
All directors of the Company serve until the next general meeting (i.e. the
annual meeting) of shareholders and until their successors shall have been
elected and shall have qualified, unless their offices are vacated earlier under
any relevant provision of the Articles of Association of the Company (the
"Articles of Association"). The terms of office of all executive officers of the
Company continue at the discretion of the Board of Directors, subject to the
terms of an employment agreement between the Company and such officer.
Shmuel Sternfeld serves as the Chairman of the Board of
Directors of the Company and is also the Company's Chief Executive Officer and
President, Mr. Sternfeld joined the company as a senior executive in 1972 and
assumed his present positions in 1975. Mr. Sternfeld received a bachelor's
degree in Computer Science and Accounting from Haifa University in Israel.
Amnon Neubach is an economist , who was previously an economics advisor to the
Minister of the Treasury in Israel.
Chaim Haklai has been with the Company for 22 years and was appointed Senior
Vice President in 1988. Mr. Haklai oversees all of the Company's product
development. Mr. Haklai received a bachelor's degree in Computer Science from
Tel Aviv University.
Dr. Yossi Rosenblum has been with the Company for 12 years and was appointed
Vice President for Research and Development in 1992. Prior to that time, Dr.
Rosenblum was Director of Research and Development and a Senior Research and
Development Executive. Dr. Rosenblum supervises the development of all new
medical products. Dr. Rosenblum received his ED from Tel Aviv University.
<PAGE>
Doron Gutkind has been with the Company for 12 years and was appointed Project
Manager of SCI in October 1986. Prior to such time, Mr. Gutkind was a computer
programmer and systems analyst for the Company.
ITEM 11 - COMPENSATION OF OFFICERS AND DIRECTORS
For services rendered to the Company by its directors, officers and key
employees during 1996 the Company paid compensation in the aggregate sum of
$150,000. Except for nominal amounts paid to directors for attendance at board
meetings and for reimbursement of expenses, no compensation was paid by the
Company to its directors other than the President, who receives a salary for his
services as President and Chief Executive Officer.
ITEM 12 - OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
In February 1994, the Company adopted the Comet Software International Ltd.
(1994) Stock Option Plan (the "Option Plan"). The Option Plan provides that
options may be granted to employees of the Company or any subsidiary of the
Company, directors of the Company and consultants and contractors of the
Company. Upon the Company's election to do so, the Option Plan is designed to
benefit from the provisions of Section 102 of the Israeli Income Tax Ordinance
(New Version) ("Section 102") with respect to employees of the Company. The
Option Plan is also designed to benefit from the provisions of the United States
Internal Revenue Code of 1986, as amended (the "Code").
Under the terms of the Option Plan, the Company is authorized to grant options
for a total of 375,000 Ordinary Shares, subject to anti-dilution adjustments.
The option awards, which will be issued pursuant to option agreements, will be
personal, non-assignable and terminate automatically upon termination of
employment (except for approved retirement or termination caused by death or
disability or termination without cause). The price per share under the option
awards is to be determined on the date of grant provided that (i) such price
shall not be less than 75 % of the fair market value on such date and (ii) in
the case of options which qualify as "Incentive Stock Options" (as defined in
the Code), such price shall not be less than 100% of the fair market value on
such date or 110% if at the time of grant the optionee owns more than 10% of the
voting stock of the Company. The Option Plan is administered by a Stock Option
<PAGE>
Committee of the Company's Board of Directors. The Stock Option Committee has
the full power and authority to, among other things, designate participants in
the Option Plan and determine the terms and provisions of the option agreements,
including, without limitation, provisions relating to the time and extent to
which options may be exercised. The tax benefits available to participants in
the Option Plan are, pursuant to Section 102, conditioned upon the options
issued under the Option Plan being subject to a two year vesting period.
In 1996 305,900 options were issued to its employees, with a vesting period of
four years.
The underwriter of the Company's initial public offering was granted warrants
("Underwriter's Warrants") to purchase up to 87,500 Ordinary Shares pursuant to
a warrant agreement (the "Warrant Agreement"), between the Company and the
underwriter. The Underwriter's Warrants are exercisable for a period of four
years commencing on August 23, 1995. Each Underwriter's Warrant entitles the
holder to purchase, at any time until its expiration, one Ordinary Share, at a
price equal to 165 % of the $5.50 initial public offering price per Ordinary
Share. The Underwriter's Warrants may be exercised in whole or in part.
ITEM 13 - INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Not applicable.
PART II
ITEM 14 - DESCRIPTION OF SECURITIES TO BE REGISTERED
- ----------------------------------------------------
Not applicable.
PART III
ITEM 15 - DEFAULTS UPON SENIOR SECURITIES
- ------------------------------------------
Not applicable.
<PAGE>
ITEM 16 - CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
- ---------------------
Not applicable.
ITEM 17 - FINANCIAL STATEMENTS
- --------------------------------------------------------
Not applicable.
- --------------------------------------------------------
ITEM 18 - FINANCIAL STATEMENTS
See Item 19
- --------------------------------------------------------
ITEM 19 - FINANCIAL STATEMENTS
AND EXHIBITS
COMET SOFTWARE INTERNATIONAL LTD.
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996
IN U.S. DOLLARS
INDEX
Page
----------------
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Statements of Changes in Shareholders' Equity (Deficiency) F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-26
- - - - - - - -
<PAGE>
[LOGO] /ANE IA-A0E AU OA00
KOST LEVARY & FORER
A MEMBER OF
ERNST & YOUNG INTERNATIONAL
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
COMET SOFTWARE INTERNATIONAL LTD.
We have audited the consolidated balance sheets of Comet Software
International Ltd. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in shareholders' equity
(deficiency) and cash flows for each of the three years in the period ended
December 31, 1996. 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 did not audit the 1995 and 1994 financial statements of Software Center
Inc., a wholly-owned U.S. subsidiary, which statements reflect total assets
constituting 24% as of December 31, 1995, and total revenues constituting 12%
and 18% of the related consolidated totals for each of the two years in the
period ended December 31, 1995. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to data included for Software Center Inc., is based solely on the reports of the
other auditors.
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, which do not differ in any significant respect
from United States generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, either
originating within the financial statements themselves, or due to any misleading
statement included therein. 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 Board of Directors and management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 1996 and 1995, and the related results of their
operations, changes in shareholders' equity (deficiency) and cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles in Israel. As applicable to the
Company's financial statements, accounting principles generally accepted in the
United States and in Israel are substantially identical in all material aspects.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1b to the consolidated financial statements, the Company has suffered recurring
losses from operations and has a working capital deficiency, which raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1b. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Tel-Aviv, Israel /s/ KOST, LEVARY and FORER
March 12, 1997 Certified Public Accountants (Israel)
A Member of Ernst & Young International
F-2
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1995 1996
--------------- ---------------
U.S. Dollars
------------------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents 265,873 470,673
Marketable securities 65,674 70,018
Trade receivables (net of allowance
for doubtful accounts,
$ 166,000 in 1995 and $ 27,329
in 1996) 1,129,000 644,984
Other receivables and prepaid
expenses (Note 3) 460,965 229,890
Receivable from shareholder 6,434 -
--------------- ---------------
Total current assets 1,927,946 1,415,565
--------------- ---------------
SEVERANCE PAY FUND 800,577 633,442
--------------- ---------------
PROPERTY AND EQUIPMENT,
NET (Note 4) 663,406 522,905
--------------- ---------------
CAPITALIZED SOFTWARE
DEVELOPMENT COSTS,
NET (Notes 2f and 6) 1,722,608 652,231
--------------- ---------------
OTHER ASSET, NET (Note 5 and Note 10c) 154,500 103,000
--------------- ---------------
5,269,037 3,327,143
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1995 1996
--------------- ---------------
U.S. Dollars
------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIENCY)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt and bank credit 664,188 505,248
Current maturities of
long-term debt (Note8) 513,651 628,717
Trade payables 690,674 402,543
Accrued liabilities (Note 7) 810,295 972,171
Deferred income 34,502 28,870
--------------- ---------------
Total current liabilities 2,713,310 2,537,549
--------------- ---------------
LONG-TERM DEBT (Note 8) 326,521 272,614
--------------- ---------------
DEFERRED INCOME TAXES (Notes 13d) 203,207 21,221
--------------- ---------------
ACCRUED SEVERANCE PAY (NOTE 9) 886,559 919,684
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
(Note 10)
SHAREHOLDERS' EQUITY
(DEFICIENCY) (Note 12):
Share capital - 9,340,000 Ordinary
Shares, par value NIS 0.01, and
660,000 Deferred Shares, par value
NIS 0.01, authorized;
5,375,000 Ordinary Shares and
660,000 Deferred Shares issued
and outstanding as of December 31,
1995 and as of December 31, 1996 23,117 23,117
Additional paid-in capital 2,631,542 2,631,542
Accumulated deficit (1,515,219) (3,078,584)
--------------- ---------------
1,139,440 (423,925)
--------------- ---------------
5,269,037 3,327,143
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
U.S. Dollars
-----------------------------------------------------------
<S> <C> <C> <C>
Revenues (Note 14a):
Software sales 635,074 190,287 307,506
Product development and support, and
other services 3,651,044 4,313,696 4,194,687
Other income 200,669 2,672 804
--------------- --------------- ---------------
Total revenues 4,486,787 4,506,655 4,502,997
--------------- --------------- ---------------
Cost of revenues:
Cost of software sales 270,745 89,064 151,406
Cost of product development and support,
and other services 2,299,430 2,515,306 2,962,836
Cost of other income 149,809 2,271 308
--------------- --------------- ---------------
Total cost of revenues 2,719,984 2,606,641 3,114,550
--------------- --------------- ---------------
Gross profit 1,766,803 1,900,014 1,388,447
--------------- --------------- ---------------
Operating costs and expenses:
Research and development 1,049,531 1,443,573 560,930
Less - capitalization of software
development costs 781,728 178,563 -
--------------- --------------- ---------------
Research and development, net 267,803 1,265,010 560,930
Sales and marketing 436,175 831,825 1,181,966
General and administrative 923,521 1,653,711 1,288,515
--------------- --------------- ---------------
Total operating costs and expenses 1,627,499 3,750,546 3,031,411
--------------- --------------- ---------------
Operating income (loss) (Note 13c): 139,304 (1,850,532) (1,642,964)
Financial income 50,350 89,506 82,573
Financial expenses (212,036) (330,445) (184,970)
Other expenses (274,000) - -
--------------- --------------- ---------------
Loss before taxes on income (296,382) (2,091,471) (1,745,361)
Tax benefit (Note 13c) (62,537) (277,377) (181,996)
--------------- --------------- ---------------
Net loss (233,845) (1,814,094) (1,563,365)
=============== =============== ===============
Loss per share (0.05) (0.34) (0.29)
=============== =============== ===============
Weighted average number of shares used
to compute loss per share 4,791,666 5,375,000 5,375,000
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained Total
Additional earnings shareholders'
Share paid-in (accumulated equity
capital capital deficit) (deficiency)
-------------- ------------------ ------------------- -----------------
U.S. Dollars
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1993 17,739 - 535,220 552,959
Issuance of stock dividend 2,500 - (2,500) -
Issuance of shares (1) 2,878 2,631,542 - 2,634,420
Net loss - - (233,845) (233,845)
-------------- ------------------ ---------------- ----------------
Balance as of December 31, 1994 23,117 2,631,542 298,875 2,953,534
Net loss - - (1,814,094) (1,814,094)
-------------- ------------------ ---------------- ----------------
Balance as of December 31, 1995 23,117 2,631,542 (1,515,219) 1,139,440
Net loss - - (1,563,365) (1,563,365)
-------------- ------------------ ---------------- ----------------
Balance as of December 31, 1995 23,117 2,631,542 (3,078,584) (423,925)
============== ================== ================ ================
</TABLE>
(1) Net of offering expenses of $ 2,178,080.
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
U.S. Dollars
-----------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss (233,845) (1,814,094) (1,563,365)
Total adjustments to reconcile loss to net cash
provided by (used in) operating activities (a) (287,512) 437,732 1,849,863
--------------- --------------- ---------------
Net cash provided by (used in) operating activities (521,357) (1,376,362) 286,498
--------------- --------------- ---------------
Cash flows from investing activities:
Capitalization of software development costs (781,728) (178,563) -
Purchase of property and equipment (136,312) (73,268) (7,208)
Proceeds from disposal of equipment 3,628 8,556 23,291
--------------- --------------- ---------------
Net cash provided by (used in) investing activities (914,412) (243,275) 16,083
--------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of shares, net 2,810,486 -
Increase (decrease) in short-term debt
and bank credit, net 44,641 (7,679) (158,940)
Proceeds relating to long-term debt 500,000 500,000 634,233
Principal payments relating to long-term debt (43,203) (695,874) (573,074)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 3,311,924 (203,553) (97,781)
--------------- --------------- ---------------
Increase (decrease) in cash and
cash equivalents 1,876,155 (1,823,190) 204,800
Balance of cash and cash equivalents
at beginning of year 212,908 2,089,063 265,873
--------------- --------------- ---------------
Balance of cash and cash equivalents
at end of year 2,089,063 265,873 470,673
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
U.S. Dollars
-----------------------------------------------------------
<S> <C> <C> <C>
(a) Adjustments to reconcile loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 297,444 378,237 491,771
Write-down of capitalized software costs 157,000 - 758,021
Other expenses 274,000 - -
Increase (decrease) in accrued
severance pay, net (58,031) 150,521 200,260
Increase (decrease) in deferred income (44,120) 7,828 (5,632)
Other, net (28,671) 4,955 (3,497)
Increase in marketable securities - (4,873) (4,344)
Decrease (increase) in trade receivables (416,730) 300,206 484,016
Decrease (increase) in other receivables
and prepaid expenses (367,617) (130,990) 231,075
Decrease in receivable
from shareholder 106,426 6,493 6,434
Increase (decrease) in trade payables (344,209) 566,981 (288,131)
Increase (decrease) in deferred income taxes 89,747 (277,377) (181,986)
Increase (decrease) in accrued liabilities 47,249 (564,249) 161,876
--------------- --------------- ---------------
(287,512) 437,732 1,849,863
=============== =============== ===============
Cash paid during the year in respect of:
Interest 135,664 241,693 138,655
=============== =============== ===============
Income taxes 62,963 85,864 28,656
=============== =============== ===============
Non-cash transactions:
Purchase of fixed assets 136,488 242,420 -
=============== =============== ===============
Other assets 206,000 - -
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1:- GENERAL
a. Comet Software International Ltd. designs, develops and
markets integrated information management systems, and provides
associated support services, primarily for the health care
industry. The Company's principal product, currently marketed
under the name COMET (Computerized Medical Technologies),
consists of a variety of interactive software modules, which
collectively integrate clinical, management and financial
applications to provide data ranging from the medical record of
a single patient to a comprehensive report on the entire
organization. The Company markets the COMET system as a
combination of any number of such modules, each of which can
operate efficiently on a stand-alone basis with functionality and
performance that the Company believes are among the highest in
the industry.
The Company currently markets COMET systems in the United States
and Israel and is in the process of implementing marketing
strategies in Italy and the Czech Republic.
b. Going Concern:
In 1995, the Company incurred a loss in the amount of
$1,814,094, due to a substantial increase in expenses that
were incurred, as compared to 1994. Sales in 1996 did not
materially change from the prior year, and although the
Company reduced its expenses in 1996 as compared to 1995, it
incurred a loss in the amount of $ 1,563,365. The Company's
working capital deficiency increased to $ 1,065,858 at
December 31, 1996, as compared to $ 785,364 at December 31,
1995. If cash flows from operations in the coming year are not
sufficient to meet the Company's operating activities and/or
debt service requirements, management would be required to
implement certain actions to obtain cash from other sources to
compensate for the shortfall.
The Company plans to continue to reduce its expenses and is
also currently seeking to raise additional funds from
investors.
Continuation of the Company as a going concern is dependent
upon the attainment of sufficient cash flows from its
operating activities and/or the raising of funds from
investors. However, management can give no assurances as to
its future profitable operations and/or its ability to raise
the funds necessary to enable it to conduct its business. If
the Company is unable to obtain the necessary cash, other more
substantial restructuring actions may become necessary.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern and, accordingly, do not include any adjustments
relating to the recoverability and classification of asset
carrying amounts or the amount and classification of
liabilities that might be necessary should the Company be
unable to continue as a going concern.
F-9
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
a. General:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
b. Financial statements in U.S. dollars:
The Company believes that the U.S. dollar is the currency of the
primary economic environment in which it operates. Therefore, the
Company has elected to present the accompanying financial
statements in U.S. dollars. The functional currency of the
Company and its subsidiaries is the U.S. dollar.
The Company's transactions and balances denominated in U.S.
dollars are presented at their original amounts. Non-dollar
transactions and balances have been remeasured to U.S. dollars
in accordance with Statement No. 52 of the Financial
Accounting Standards Board ("FASB"). All transaction gains and
losses from remeasurement of monetary balance sheet items
denominated in non-dollar currencies are reflected in the
statements of operations as financial income or expenses, as
appropriate.
c. Consolidated financial statements:
The consolidated financial statements include the financial
statements of the Company and its wholly-owned subsidiaries,
SCI and C.S.A. Intercompany transactions and balances
therefrom have been eliminated in the consolidation.
d. Marketable securities:
The Company classifies its marketable securities as "trading
securities" in accordance with Statement No. 115 of the FASB.
Realized and unrealized holding gains and losses related to
trading securities are included in financial income and
expenses.
F-10
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
e. Property and equipment:
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated by the
"straight-line" method over the estimated useful lives of the
assets as estimated by the Company.
Annual depreciation rates are as follows:
<TABLE>
<CAPTION>
%
-------------------------------
<S> <C>
Computers and related equipment 20 - 25
Motor vehicles 15
Office furniture and equipment 6 - 10
Leasehold improvements (over the term of the lease)
</TABLE>
f. Capitalized software development costs:
Costs of producing product masters including significant
product enhancements incurred subsequent to establishing
technological feasibility in the process of software
production are capitalized according to the principles set
forth in Statement No. 86 of the FASB. Costs incurred prior to
establishment of technological feasibility are charged to
research and development expense.
Capitalized software development costs are amortized by the
greater of the amount computed using either: (i) the ratio
current gross revenues from sales of the software bear to the
total of current and anticipated future gross revenues from
sales of that software or (ii) the straight-line method over
the estimated useful life of the product (primarily five
years).
The net realizable value of these capitalized software
development costs is reviewed on an ongoing basis and
revisions to amortization rates or write-downs to net
realizable value may occur. Write-downs in the amounts of $
157,000 and $ 758,021 were recorded during 1994 and in 1996,
respectively.
F-11
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
g. Revenue recognition:
The Company recognizes revenues from software products sales
as follows: (i) when a non-cancelable license agreement has
been signed, the product has been delivered and all
significant obligations have been satisfied and collectibility
of the receivable is certain; or (ii) based on license fee
payments as they fall due, in the case where the sale
conditions in clause (i) are met but the license fee is
payable over a period which exceeds one year.
The Company allocates a portion of contractual license fees
attributable to post-contract training and support. Revenues
from these activities are recognized ratably over the service
period. Revenues collected in advance for support, rental and
maintenance are deferred and recorded as income by the
straight-line method over the terms of the respective
contracts.
The Company recognizes revenues from contracts relating to
modifications of modules and installations by the percentage
of completion method of accounting.
h. Deferred income taxes:
Deferred income taxes are provided in respect of temporary
differences in the recognition of certain income and expense
items for financial reporting purposes and tax purposes. The
Company utilizes the asset and liability method of
accounting for income taxes as set forth in FASB Statement
No. 109.
i. Cash equivalents:
For the purpose of the statement of cash flows, liquid
investments with an original maturity of three months or
less at date of investment are considered by the Company to
be cash equivalents.
j. Concentration of risks:
Financial instruments which potentially subject the Company
to concentrations of credit risk consist principally of cash
equivalents and accounts receivable. The Company invests
primarily in money market accounts and marketable securities
and places its investments with high quality financial,
government or corporate institutions. The Company's accounts
receivable are derived from sales to customers located
primarily in the U.S., Europe and Israel. The Company
performs ongoing credit evaluations of its customers. No
collateral was required. The allowance is determined in
respect of specific debts which are of doubtful collection.
F-12
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
k. Loss per share:
Loss per share is computed based on the weighted average
number of Ordinary Shares outstanding during each period.
Retroactive recognition has been given in the calculation of
loss per share to the recapitalization effected during 1994
prior to the initial public offering (see Note 10).
l. Fair value of financial instruments:
The following methods and assumptions were used by the
Company in estimating its fair value disclosures for
financial instruments:
CASH AND CASH EQUIVALENTS AND SHORT-TERM DEPOSITS - The
carrying amount reported in the balance sheet for cash and
cash equivalents, and short-term deposits approximates fair
value.
MARKETABLE SECURITIES - The fair value for marketable
securities is based on quoted market prices.
SHORT-TERM AND LONG-TERM DEBT - The carrying amounts of the
Company's borrowings under its short-term revolving credit
agreements and its long-term debts approximate their fair
value.
m. Accounting for share options issued to employees:
The Company has elected to follow Accounting Principles
Board Opinion No. 25 ("APB-25"), "Accounting for Stock
Issued to Employees", in accounting for its employee stock
options plans. Under APB-25, when the exercise price of the
Company's employee stock options equals the market price of
the underlying stock on the date of grant, no compensation
expense is recognized.
NOTE 3:- OTHER RECEIVABLES AND PREPAID EXPENSES
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1995 1996
---------------- ---------------
U.S. Dollars
-------------------------------------
<S> <C> <C>
Income tax authorities 114,282 132,161
Loans to employees 115,573 49,372
Prepaid expenses 144,498 13,903
Other 86,612 34,454
---------------- ---------------
460,965 229,890
================ ===============
</TABLE>
F-13
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 4:- PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
December 31,
------------------------------------
1995 1996
--------------- ---------------
U.S. Dollars
------------------------------------
<S> <C> <C>
Cost:
Computers and related equipment 256,940 261,323
Motor vehicles 418,269 368,725
Office furniture and equipment 262,642 259,790
Leasehold improvements 116,593 122,041
--------------- ---------------
Total cost 1,054,444 1,011,879
Accumulated depreciation (391,038) (488,974)
--------------- ---------------
663,406 522,905
=============== ===============
</TABLE>
The aforementioned fixed assets include $ 418,269 and
$368,725 of leased equipment, and $ 123,651 and $ 153,080 of
related accumulated depreciation as of December 31, 1995 and
December 31, 1996, respectively.
For information relating to security interests in the
Company's assets, see Note 11.
NOTE 5:- OTHER ASSETS, NET
<TABLE>
<CAPTION>
December 31,
------------------------------------
1995 1996
--------------- ---------------
U.S. Dollars
------------------------------------
<S> <C> <C>
Cost 206,000 206,000
Accumulated amortization (51,500) (103,000)
--------------- ---------------
154,500 103,000
=============== ===============
</TABLE>
This item relates to the acquisition of marketing rights in
1994 and is being amortized over a period of four years using
the straight-line method.
F-14
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 6:- CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET
<TABLE>
<CAPTION>
December 31,
------------------------------------
1995 1996
--------------- ---------------
U.S. Dollars
------------------------------------
<S> <C> <C>
Cost 2,406,996 1,581,892
Accumulated amortization (684,388) (929,661)
--------------- ---------------
1,722,608 652,231
=============== ===============
</TABLE>
During the years ended December 31, 1994, 1995 and 1996, the
Company capitalized software development costs of $ 781,728,
$178,563 and $ 0, respectively, and amortization expense,
included in cost of revenues, was $ 226,014, $ 207,676 and
$312,356, respectively.
NOTE 7:- ACCRUED LIABILITIES
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1995 1996
--------------- ----------------
U.S. Dollars
-------------------------------------
<S> <C> <C>
Value Added Tax authorities 32,228 84,403
Employees and related payables 520,523 531,029
Other accrued expenses 257,544 356,739
--------------- ----------------
810,295 972,171
=============== ================
</TABLE>
F-15
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 8:- LONG-TERM DEBT
<TABLE>
<CAPTION>
Interest December 31,
------------------------------------
rate 1995 1996
------------------- --------------- ----------------
% U.S. Dollars
------------------- ------------------------------------
<S> <C> <C> <C>
In U.S. dollars or linked thereto:
Banks Libor+1.65% 500,000 632,133
Purchase of motor vehicles 16.859 134,026 83,000
Notes payable 8.0 149,633 149,633
Other 9.0 56,513 36,565
--------------- -----------------
840,172 901,331
Less - current maturities 513,651 628,717
--------------- -----------------
326,521 272,614
=============== =================
Aggregate maturities of long-term debt are as follows:
1997 628,717
=================
1998 241,306
1999 31,308
-----------------
272,614
=================
</TABLE>
For information relating to assets securing the above, see
Note 11.
The weighted average interest rates on short-term debt and
bank credit for the years ending December 31, 1994, 1995 and
1996 were 18.6%, 16.7 % and 17.2%, respectively.
NOTE 9:- ACCRUED SEVERANCE PAY
a. Under Israeli law, the Company is required to make
severance payments to dismissed employees (including
officers) and to employees leaving employment under certain
other circumstances. This liability is calculated based on
the years of employment for each employee respectively, in
accordance with the "severance pay laws". The Company's
liability for required severance payments is covered by
funding into approved severance pay funds, insurance
policies and by an accrual.
b. Severance pay expenses amounted to $ 230,947, $0 and $0
for the years ended December 31, 1994, 1995 and 1996,
respectively.
F-16
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10:- COMMITMENTS AND CONTINGENCIES
a. The Company has entered into an operating lease agreement
for office and product development facilities in Israel for
a four-year period ending August 31, 1997, with an option
to renew for an additional period of 3 years as of
September 1, 1997, and an additional 35 months from
September 1, 2000. The rental payments for this lease are
linked as follows: (i) half to the U.S. dollar and (ii)
half to the Israeli Consumer Price Index (Israeli CPI).
However, towards the end of 1996, the Company has reduced
its office space in Israel; therefore, the annual projected
rental payments, at rates in effect at December 31, 1996,
aggregate approximately $ 200,000.
Rent expense for the years ending December 31, 1994, 1995
and 1996 was $ 288,667, $ 319,450 and $ 344,007,
respectively.
b. In November 1993, the Company signed a new employment
agreement with a major shareholder pursuant to which this
employee will be entitled to receive 2-4% of the Company's
annual income before taxes (in addition to his yearly
salary). This percentage changes in accordance with the
Company's income before taxes.
c. Agreement with Florijn B.V.:
In January 1992, the Company entered into the Florijn
Agreement", pursuant to which Florijn (A Dutch corporation)
was granted an exclusive ten-year license to market and
distribute COMET in certain European countries. According
to the agreement, the Company shall pay 17.5% royalties on
sales of up to $ 2,000,000, and 28% thereafter. Florijn
subsequently entered into a distribution agreement with
Italsiel (the "Italsiel Agreement"), pursuant to which
Florijn granted Italsiel an exclusive two-year license to
market and distribute COMET in Italy and a non-exclusive
two-year license to market and distribute COMET in certain
other Western European countries. The Company is not a
party to the Italsiel Agreement. As part of the agreement
between Florijn and Italsiel, Florijn was to receive
minimum royalties of $ 1,200,000 over a period of two
years. In an effort to establish a direct contractual
arrangement with Italsiel and other potential customers in
Europe, the Company, in February 1995, paid $ 480,000 to
Florijn to terminate the Florijn Agreement (the "Florijn
Termination Agreement"). In connection with the Florijn
Termination Agreement, the Company expects to enter into
the New Italsiel Agreement, pursuant to which Italsiel will
be granted an exclusive two-year license to market and
distribute COMET in Italy and a non-exclusive two-year
license to market and distribute COMET in certain other
Western European countries. In consideration for the
distribution rights to be granted to Italsiel under the New
Italsiel Agreement, the Company will receive, among other
considerations, a 30% royalty on revenues received by
Italsiel from Italsiel's sale, lease or license of COMET
and a 25% royalty on revenues received by Italsiel from
Italsiel's provision of certain maintenance and other
customer support services relating to installed COMET
systems. Notwithstanding the foregoing, Italsiel will be
exempt from making royalty payments to the Company with
respect to initial sales, leases or licenses of COMET
systems in the aggregate to $ 2,666,666.
F-17
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The royalty payments due to the Company amounting to $
800,000 from such sales, leases or licenses will be
considered as the Company's contribution to Italsiel's
initial marketing efforts in Italy.
Based upon the present value of the minimum guaranteed
royalties which were to be paid from Italsiel to Florijn
over the next four years and pursuant to the "Florijn
Termination Agreement" the Company will receive these
royalties. The Company has accordingly recorded the $
480,000 paid in 1995 as follows: $ 206,000 as an asset
being amortized over four years and $ 274,000 as "other
expenses".
d. The Company is subject to legal proceedings and claims
which arise in the ordinary course of its business. In the
opinion of management, the amount of ultimate liability, if
any, with respect to these actions will not materially
affect the financial position of the Company.
NOTE 11:- CHARGES (ASSETS PLEDGED)
As collateral for the Company's entire long-term debt and
short-term credits, fixed charges have been placed on the
Company's property and equipment, unpaid share capital,
insurance rights, marketable securities and rights to contract
receivables, while floating charges (charges on assets as they
exist from time to time) have been placed on all other assets.
All leased equipment are pledged to their related finance
companies.
NOTE 12:- SHAREHOLDERS' EQUITY (DEFICIENCY)
a. Share capital:
1. In June 1994, a special general meeting of the
Company's shareholders approved a stock
dividend to the Company's existing shareholders.
2. In August 1994, the Company issued 875,000 shares
in an initial public offering. These shares
are traded on the Over-the-Counter Market in the
U.S.A.
3. In August 1994, the Company amended its Articles of
Association to provide for a class of deferred
shares (Deferred Shares) and, with the consent of
all the shareholders, issued 660,000 Deferred
Shares. Holders of the Deferred Shares are only
entitled to receive their par value upon liquidation
or dissolution of the Company and have no other
rights. Since the Deferred Shares have no
substantive value, they are not taken into account
for calculating loss per share.
F-18
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
b. Employee Stock Option Plans:
In February 1994, the Company adopted the Comet Software
International Ltd. (1994) Stock Option Plan (the "Option
Plan"). The Option Plan provides that options may be
granted to employees of the Company or any subsidiary of
the Company, directors of the Company and consultants and
contractors of the Company.
Under the terms of the Option Plan, the Company is
authorized to grant options for a total of 375,000 Ordinary
Shares, subject to anti-dilution adjustments. The option
awards, which will be issued pursuant to option agreements,
will be personal, non-assignable and terminate
automatically upon termination of employment (except for
approved retirement or termination caused by death or
disability or termination with cause). The price per share
under the option awards is to be determined on the date of
grant provided that (i) such price shall not be less than
75% of the fair market value on such date and (ii) in the
case of options which qualify as "Incentive Stock Options"
(as defined in the Code), such price shall not be less than
100% of the fair market value on such date or 110%, if at
the time of grant the optionee owns more than 10% of the
voting stock of the Company.
A summary of the stock option plan is as follows:
<TABLE>
<CAPTION>
Weighted
average
Exercise price per
Options price per share share
--------------- -------------------- ---------------
<S> <C> <C> <C>
Outstanding as of January 1, 1996 - - -
Granted in 1996 305,900 $ 0.125-0.375 $ 0.24
Exercised in 1996 - - -
Canceled in 1996 - - -
--------------- -------------------- ---------------
Outstanding as of
December 31, 1996 305,900 $ 0.125-0.375 $ 0.24
=============== ==================== ===============
Exercisable -
===============
</TABLE>
Under FAS-123, pro-forma information regarding net income
and earnings per share is required (for grants issued after
December 1994), and has been determined as if the Company
had accounted for its employee stock option under the fair
value method of that Statement.
The effect of applying the FASB statement's fair value
method to the Company's stock option grants did not result
in pro-forma net loss and loss per share that are
materially different from historical amounts reported.
Therefore, such pro-forma information is not
F-19
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
separately presented herein. Future pro-forma net income
(loss) and earnings (loss) per share results may be
materially different from actual amounts reported.
F-20
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
c. Underwriter's Warrants:
In connection with the Company's initial public offering in
1994, the Company has granted warrants to Robert Todd
Financial Corporation (the "Underwriter") to purchase up to
87,500 Ordinary Shares (the "Underwriter's Warrants") at an
exercise price equal to 165% of the initial public
offering. The Underwriter's warrants will be exercisable
for a period of four years commencing one year from the
date of the public offering and will automatically expire
after this period.
As of December 31, 1996, none of these warrants had been
exercised.
d. Dividends:
Dividends on the Ordinary Shares will be paid in NIS.
Dividends paid to shareholders outside Israel will be
converted to dollars, on the basis of the exchange rate
prevailing at the date of payment.
NOTE 13:- INCOME TAXES
a. Approved Enterprise (Domestic):
Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 ("the law"):
The Company's expansion program has been granted the status
of "approved enterprise" under the law. Income derived from
the expansion during a period of seven years from the year
in which this enterprise first realizes taxable income, is
subject to various benefits.
Under the provisions of the law, the Company has chosen to
enjoy "alternative benefits" - waiver of grants in return
for tax exemption - and, accordingly, the Company's income
will be tax-exempt for a period of two years commencing
with the year it first earns taxable income. In the
remaining five years of benefits, the Company will be
subject to a corporate tax of 25%.
If a dividend is distributed out of such tax-exempt profits
deriving from the approved enterprise, the Company will be
liable to corporate tax at the rate of 25%.
The period of tax benefits described above, is subject to
limits of 12 years from the commencement of production, or
14 years from the approval date, whichever is earlier.
The law also grants entitlement to claim accelerated
depreciation on machinery and equipment used by the
"approved enterprise".
F-21
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Any income derived from outside or other sources is subject
to the regular corporate tax rate, which is 38% in 1994,
37% in 1995 and 36% from 1996 and thereafter.
As of December 31, 1996, the Company had not utilized any
of the aforementioned tax benefits, due to its accumulated
losses for tax purposes.
b. Israeli Tax Law (Domestic):
Measurement of results for tax purposes under the Income
Tax Law (Inflationary Adjustments) - 1985. Under this law,
the Company is entitled to deduct from its taxable income
an "Equity Preservation Deduction" (which partially
compensates for the decrease in value of shareholders'
equity resulting from the annual increase in the Israel
CPI) or has to add to its taxable income an "Additional
Amount" (which reflects the effect of such increase in the
Israeli CPI on the excess of depreciated costs of fixed
assets over shareholders' equity).
Accumulated losses can be carried forward indefinitely.
c. Taxes on income:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
U.S. Dollars
------------------------------------------------------
<S> <C> <C> <C>
Loss before taxes on income:
Israel (263,115) (1,484,963) (809,762)
United States (33,267) (606,508) (935,599)
--------------- --------------- ---------------
(296,382) (2,091,471) (1,745,361)
=============== =============== ===============
Taxes on income (benefit) included
in statements of operations:
Israel (78,787) (161,377) (181,996)
United States 16,250 (116,000) -
--------------- --------------- ---------------
(62,537) (277,377) (181,996)
=============== =============== ===============
Deferred income tax expense
(benefit):
Israel 76,740 (161,377) (181,996)
United States 16,250 (116,000) -
--------------- --------------- ---------------
92,990 (277,377) (181,996)
Prior years' taxes:
Israel (155,527) - -
--------------- --------------- ---------------
(62,537) (277,377) (181,996)
=============== =============== ===============
</TABLE>
F-22
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
d. Deferred tax assets (liabilities) are comprised of the
following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1996
-------------- --------------
U.S. Dollars
----------------------------------
<S> <C> <C>
Capitalization of software development costs (332,090) (234,803)
Accrued vacation and severance pay 128,883 213,582
-------------- --------------
(203,207) (21,221)
============== ==============
</TABLE>
As of December 31, 1996, the Company had a consolidated
deferred tax asset relating to net operating loss
carryforwards in the amount of approximately $ 1.8 million.
This asset is fully offset by a valuation allowance due to
the uncertainty of the Company's ability to recover the
asset.
e. Reconciliation of the theoretical tax expense and actual
tax expense:
A reconciliation of theoretical tax expense, assuming all
income is taxed at the statutory rate of 38% for the year
ended December 31, 1994, 37% for the year ended 1995 and
36% for the year ended 1996, applicable to the results of
operations of companies in Israel, and the actual tax
expense, is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
U.S. Dollars
------------------------------------------------------
<S> <C> <C> <C>
Loss before taxes on income,
as reported in the consolidated
statements of operations (296,382) (2,091,471) (1,745,361)
=============== =============== ===============
Theoretical tax benefit on the
above amount (112,625) (773,844) (628,330)
Losses for which benefits are
not recognized 184,825 438,994 564,398
Different tax rate for non-Israeli
consolidated subsidiary (3,326) 54,585 (37,423)
Non-deductible expenses 57,620 55,500 46,500
Adjustments to tax in respect of
inflation in Israel (33,504) (52,612) (127,141)
Reduction of prior years' accrual for
income taxes (see Note 13f) (155,527) - -
--------------- --------------- ---------------
Tax benefit
for the reported year (62,537) (277,377) (181,996)
=============== =============== ===============
</TABLE>
F-23
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
f. Final tax assessments:
1. Domestic:
Final tax assessments for the fiscal years ending
December 31, 1992 have been received by the Company. As
a result of these tax assessments, tax provisions in
the amount of $155,527 for those years were reduced and
offset against the 1994 tax expense.
2. Foreign:
Final tax assessments in the foreign subsidiary have
not yet been initiated.
g. Carryforward tax losses:
1. Domestic:
The net operating carryforward loss as of December 31,
1996 for Israeli subsidiaries amounted to approximately
$ 3.5 million and can be carried forward indefinitely.
2. Foreign:
At December 31, 1996, the U.S. subsidiary had an
available net operating carryforward loss of
approximately $ 1.5 million to reduce federal income
taxes. This carryforward loss is available through the
years 2005-2010.
F-24
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 14:- SUPPLEMENTARY STATEMENTS OF OPERATIONS DATA
a. Revenues from unaffiliated customers classified by
geographical destination:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
U.S. Dollars
------------------------------------------------------
<S> <C> <C> <C>
Software sales:
Israel 189,800 168,084 279,242
Europe 300,000 - -
United States 145,274 22,203 28,264
--------------- --------------- ---------------
635,074 190,287 307,506
--------------- --------------- ---------------
Product development and support,
and other services:
Israel 2,263,969 2,076,358 2,053,908
Europe 787,625 1,700,761 1,527,684
United States 599,450 536,577 613,095
--------------- --------------- ---------------
3,651,044 4,313,696 4,194,687
--------------- --------------- ---------------
Other income (mainly hardware sales):
Israel 142,583 2,672 804
United States 58,086 - -
--------------- --------------- ---------------
200,669 2,672 804
--------------- --------------- ---------------
4,486,787 4,506,655 4,502,997
=============== =============== ===============
<CAPTION>
Total revenues from
unaffiliated customers
classified by
geographical destination:
<S> <C> <C> <C>
Israel 2,596,252 2,247,114 2,333,954
Europe 1,087,725 1,700,761 1,527,684
United States 802,810 558,780 641,359
--------------- --------------- ---------------
4,486,787 4,506,655 4,502,997
=============== =============== ===============
</TABLE>
F-25
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The Company's operations by geographic destinations are as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
U.S. Dollars
------------------------------------------------------
b. Revenues from unaffiliated customers
classified by geographic destinations:
<S> <C> <C> <C>
Software sales:
Israel 489,800 168,084 279,242
United States 145,274 22,203 28,264
---------------
--------------- ---------------
635,074 190,287 307,506
--------------- --------------- ---------------
Product development and support
and other services:
Israel 3,051,594 3,777,119 3,581,592
United States 599,450 536,577 613,095
--------------- --------------- ---------------
3,651,044 4,313,696 4,194,687
--------------- --------------- ---------------
Other income (mainly hardware sales):
Israel 142,583 2,672 804
United States 58,086 - -
--------------- --------------- ---------------
200,669 2,672 804
--------------- --------------- ---------------
4,486,787 4,506,655 4,502,997
=============== =============== ===============
Total revenues from unaffiliated
customers classified by
geographic destinations:
Israel 3,683,977 3,947,875 3,861,638
United States 802,810 558,780 641,359
--------------- --------------- ---------------
4,486,787 4,506,655 4,502,997
=============== =============== ===============
c. Operating income (loss):
Israel 161,797 (1,263,036) (722,974)
United States (22,493) (587,496) (919,990)
--------------- --------------- ---------------
139,304 (1,850,532) (1,642,964)
=============== =============== ===============
d. Identifiable assets:
Israel 5,243,389 4,188,573 3,006,502
United States 1,181,133 1,080,464 320,641
--------------- --------------- ---------------
6,424,522 5,269,037 3,327,143
=============== =============== ===============
</TABLE>
F-26
<PAGE>
COMET SOFTWARE INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
e. Data in regard to major customers:
Revenues from single customers exceeding 10%:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
U.S. Dollars
------------------------------------------------------
<S> <C> <C> <C>
Israel Ministry of Housing 894,160 792,560 695,047
Israel Ministry of Health 964,271 927,654 918,040
Florijn B.V./Italsiel 787,625 1,700,761 1,527,684
</TABLE>
NOTE 15:- CONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
Percentage of Jurisdiction of
ownership incorporation
------------------- -------------------
<S> <C> <C>
Software Center, Inc. 100% U.S.A.
Central Software and
Automation Ltd. 100% Israel
</TABLE>
- - - - - - - -
F-27
<PAGE>
LIST OF EXHIBITS
- ---------------
2.1 Consent of Kost, Levary and Forer, Certified Public Accountants
(Isr.), independent public auditors for the Company.
2.2 Report of Rothstein, Kass & Co., Certified Public Accounts, independent
public auditors for SCI.
2.3 Consent of Rothstein Kass & Co., Certified Public Accountants
(Isr.), independent public auditors for the Company.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has caused this annual report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMET SOFTWARE INTERNATIONAL LTD.
Dated July 15, 1997 /s/ Shmuel Sternfeld
-----------------------------------
By: Shmuel Sternfeld
Title: President
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Consent of Kost, Levary and Forer, Certified Public Accountants
(Isr.), independent public auditors for the Company.
2.2 Report of Rothstein, Kass & Co., Certified Public Accounts, independent
public auditors for SCI.
2.3 Consent of Rothstein Kass & Co., Certified Public Accountants
(Isr.), independent public auditors for the Company.
<PAGE>
EXHIBIT 2.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Comet Software International Ltd.
We consent to the incorporation of our report, dated March 12, 1997, relating
to the balance sheets of Comet Software International Ltd. as of December 31,
1996 and December 31, 1995, and the related statements of income, changes in
shareholders' equity (deficiency) and cash flows for the three years then
ended in the annual report on Form 20-F of Comet Software International Ltd.
Tel-Aviv, Israel
July 8, 1997
/s/ Kost, Levary and Forer
------------------------------
KOST, LEVARY and FORER
Certified Public Accountants (Israel)
A Member of Ernst & Young International
<PAGE>
EXHIBIT 2.2
[LETTERHEAD OF ROTHSTEIN, KASS & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Software Center, Inc.
Fort Lee, New Jersey
We have audited the accompanying balance sheets of Software Center, Inc. as
of December 31, 1995 and 1994 and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial statements of Software Center,
Inc. as of December 31, 1993, were audited by other auditors who have ceased
operations and whose report, dated January 20, 1994, expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 1995 and 1994 financial statements referred to above
present fairly, in all material respects, the financial position of Software
Center, Inc. as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 11, the accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. The
Company has suffered a loss from operations for the year ended December 31,
1995 and will need additional working capital to fund its operations and to
repay its existing obligations during 1996. This condition raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are also discussed in Note 11.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
March 21, 1996
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EXHIBIT 2.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in the annual report on Form 20-F of Comet Software
International, Ltd. of our report dated March 21, 1996, relating to the
balance sheet of Software Center, Inc. as of December 31, 1995 and the
related statements of operations, stockholders' equity and cash flows for the
years ended December 31, 1995 and 1994.
/s/ Rothstein, Kass & Company, P.C.
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ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
July 1, 1997
