UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
[ ] 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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No fee required]
For the transition period from .... to....
Commission File Number 0-21222
Tecnomatix Technologies Ltd.
(Exact Name of Registrant as specified in the charter)
N/A
(Translation of Registrant's name into English)
Israel
(Jurisdiction of incorporation or organization)
16 Hagalim Avenue, Herzliya 46733, Israel
(Address of Principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of Each Class Name of Each Exchange on which Registered
- ------------------- -----------------------------------------
None None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Ordinary Shares, par value NIS 0.01 per share
---------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
----
(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 - 10,506,258
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.
Yes X No
Indicate by check mark which financial statement item the registrant has elected
to follow. Item 17 __ Item 18 X
EXPLANATORY NOTE
Tecnomatix Technologies Ltd. filed its annual report on Form 20-F for the year
ended December 31, 2001 (the "2001 20-F") with the SEC in paper format on June
10, 2002. However, in order to make the 2001 20-F available to investors
accessing the SEC's EDGAR database, Tecnomatix is voluntarily filing this
Amendment No. 1 to Form 20-F, which is identical to the 2001 20-F except for
this Explanatory Note, changes on the cover and signature pages and in that it
is being filed in electronic format.
PRELIMINARY NOTE
This annual report contains historical information and forward-looking
statements. Statements looking forward in time are included in this annual
report pursuant to the "Safe Harbor" provision of the Private Securities
Litigation Reform Act of 1995. They involve known and unknown risks and
uncertainties that may cause our actual results in future periods to be
materially different from any future performance suggested herein. Furthermore,
we operate in an industry sector where securities values may be volatile and may
be influenced by economic and other factors beyond the company's control. In the
context of the forward-looking information provided in this annual report and in
other reports, please refer to the discussions of risk factors detailed in, as
well as the other information contained in, this annual report and our other
filings with the Securities and Exchange Commission.
2
INDEX
PART ONE
Item 1. Identity of Directors, Senior Management and Advisors - Not applicable
Item 2. Offer Statistics and Expected Timetable - Not applicable
Item 3. Key Information
Item 4. Information on the Company
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosure about Market Risk
Item 12. Description of Securities Other than Equity Securities - Not applicable
PART TWO
Item 13. Defaults, Dividend Arrearages and Delinquencies - Not applicable
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds - Not applicable
PART THREE
Item 17. Financial Statements - Not applicable
Item 18. Financial Statements
Item 19. Exhibits
SIGNATURES
EXHIBIT INDEX
3
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS - NOT APPLICABLE
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE - NOT APPLICABLE
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following selected summary of financial information was derived
from our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The selected
summary data should be read in conjunction with and are qualified in their
entirety by our Consolidated Financial Statements and notes thereto, which are
presented elsewhere herein and by reference to "Item 5: Operations and Financial
Review and Prospects."
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues
Software license fees ..................... $ 42,316 $ 51,699 $ 57,444 $ 44,559 $ 41,533
Services .................................. 44,584 37,319 30,574 23,775 17,508
------------ ------------ ------------ ------------ ------------
Total Revenues ................................ 86,900 89,018 88,018 68,334 59,041
------------ ------------ ------------ ------------ ------------
Costs and expenses
Cost of software license fees .............. 7,851 5,764 5,003 4,001 4,479
Cost of services ........................... 15,268 13,354 9,251 6,166 3,519
Amortization of acquired intangibles ....... 7,758 7,801 4,434 801 326
Research and development, net .............. 19,216 20,748 16,451 11,386 8.915
Selling and marketing ...................... 44,624 50,737 39,333 33,901 26,593
General and administrative ................. 4,855 6,037 4,932 4,964 4,064
Restructuring and asset impairment ......... 1,843 -- -- -- --
In-process research and development
and acquisition costs ...................... -- 5,250 9,944 4,376 9,571
Implementation costs ....................... -- -- -- 784 --
------------ ------------ ------------ ------------ ------------
Total costs and expenses ...................... 101,415 109,691 89,348 66,379 57,467
------------ ------------ ------------ ------------ ------------
Operating income (loss) ....................... (14,515) (20,673) (1,330) 1,955 1,574
Financial income (expense), net ............... (202) 1,348 1,791 3,773 3,378
------------ ------------ ------------ ------------ ------------
Income (loss) before taxes on income .......... (14,717) (19,325) 461 5,728 4,952
Taxes on income ............................... (54) (505) (579) (494) (1,687)
------------ ------------ ------------ ------------ ------------
Income (loss) after taxes on income ........... (14,771) (19,830) (118) 5,234 3,265
Share in loss of affiliated company ........... (532) (131) -- -- --
Minority interest in net (income) loss
of subsidiary ................................. -- 2 22 145 (93)
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary item ....... (15,303) (19,959) (96) 5,379 3,172
Extraordinary gain from repurchase of
our convertible notes ......................... 1,394 -- 1,450 12,174 --
------------ ------------ ------------ ------------ ------------
Net income (loss) ............................. $ (13,909) $ (19,959) $ 1,354 $ 17,553 $ 3,172
============ ============ ============ ============ ============
Basic earnings (loss) per share
Income (loss) before extraordinary item .... $ (1.48) $ (1.95) $ (0.01) $ 0.55 $ 0.32
Extraordinary gain ......................... 0.13 -- 0.15 1.23 --
------------ ------------ ------------ ------------ ------------
Net income (loss) .......................... $ (1.35) $ (1.95) $ 0.14 $ 1.78 $ 0.32
============ ============ ============ ============ ============
Diluted earnings (loss) per share
Income (loss) before extraordinary item .... $ (1.48) $ (1.95) $ (0.01) $ 0.52 $ 0.30
Extraordinary gain ......................... 0.13 -- 0.14 1.18 --
------------ ------------ ------------ ------------ ------------
Net income (loss) .......................... $ (1.35) $ (1.95) $ 0.13 $ 1.70 $ 0.30
============ ============ ============ ============ ============
Weighted average number of shares used
for computing basic earnings (loss) per share . 10,366,125 10,224,737 9,674,778 9,858,222 9,883,617
============ ============ ============ ============ ============
Weighted average number of shares used
for computing diluted earnings (loss) per share 10,366,125 10,224,737 10,403,719 10,315,232 10,711,793
============ ============ ============ ============ ============
4
AT DECEMBER 31,
------------------------------------------------------
BALANCE SHEET DATA 2001 2000 1999 1998 1997
- ------------------ -------- -------- -------- -------- --------
Working capital .............. $ 57,758 $ 67,523 $ 78,154 $ 78,361 $ 94,908
Total assets ................. 123,379 149,318 175,443 168,751 196,221
Short term credits and current
maturities of long-term
debt ......................... 687 784 10,883 11,484 --
Long-term debt ............... 43,765 49,250 49,250 55,250 97,750
Shareholders' equity ......... 55,893 69,696 84,691 81,417 76,938
5
D. RISK FACTORS
Certain statements included in this annual report, which use the terms
"estimate", "project", "intend", "expect" and similar expressions are intended
to identify forward-looking statements within the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated by such forward-looking statements, including the risk factors set
forth below. Because of time and other factors affecting our operating results,
past historical performance should not be used as an indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods.
RISKS RELATED TO OUR BUSINESS
WE HAVE A RECENT HISTORY OF ANNUAL AND QUARTERLY LOSSES AND CANNOT ASSURE YOU
THAT WE WILL RETURN TO PROFITABILITY ON AN ANNUAL BASIS OR ON A QUARTERLY BASIS
IN THE FUTURE.
We incurred net losses of approximately $20.0 million in 2000 and
$13.9 million in 2001. In addition, we incurred losses during each of the four
quarters of 2000 as well as each of the four quarters of 2001, in which we lost
$5.0 million, $2.5 million, $2.8 million and $3.6 million, respectively. We
cannot be certain that we will return to profitability on an annual basis or on
a quarterly basis.
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY RESULTS, WHICH MAKES
IT DIFFICULT FOR INVESTORS TO MAKE RELIABLE PERIOD-TO-PERIOD COMPARISONS AND MAY
CONTRIBUTE TO VOLATILITY IN THE MARKET PRICE FOR OUR ORDINARY SHARES.
Our quarterly revenues, gross profits and results of operations have
fluctuated significantly in the past and may be subject to continued fluctuation
in the future. The following events may cause fluctuations:
- - changes in demand or timing of orders, especially large orders, for our
products and services;
- - timing of product releases;
- - the dollar value and timing of contracts;
- - adverse economic conditions and international exchange rate and
currency fluctuations;
- - delays in the implementation of our solutions by customers;
- - changes in the proportion of service and license revenues;
- - changes in the economic conditions of the various industries in which
our customers operate;
- - price and product competition;
- - increases in selling and marketing expenses, as well as other operating
expenses;
- - technological changes; and
- - consolidation of our clients.
6
A substantial portion of our expenses, including most product
development and selling and marketing expenses, must be incurred in advance of
when revenue is generated. If our projected revenue does not meet our
expectations, we are likely to experience an even larger shortfall in our
operating profit relative to our expectations. As a result, we believe that
period-to-period comparisons of our historical results of operations are not
necessarily meaningful and that you should not rely on them as an indication for
future performance. Also, our quarterly results of operations have on separate
occasions, been below the expectations of public market analysts and investors
and the price of our ordinary shares subsequently decreased. If this happens in
the future, the price of our ordinary shares will likely decrease again.
IF WE FAIL TO RETAIN OUR CUSTOMERS, OUR REVENUES MAY INCREASE AT A SLOWER RATE
OR MAY DECREASE.
We sell our products to major electronics, aerospace, automotive and
automotive supplier companies worldwide and our business depends on our ability
to retain these customers. Approximately 76% of our revenues from software
license fees in 2000, 82% of these revenues in 2001 and 81% of these revenues in
the first three months of 2002 resulted from repeat sales to existing customers.
We cannot assure you that we will be able to retain our existing customers and
make repeat sales to those customers. Our ability to make repeat sales to
existing customers will be challenged as a result of our introduction of our new
suite of end-to-end solutions for Manufacturing Process Management (MPM). Our
inability to retain our customers would also adversely affect our revenues from
services.
OUR SALES CYCLE IS VARIABLE AND SOMETIMES LONG AND INVOLVES SIGNIFICANT
RESOURCES ON OUR PART, BUT MAY NEVER RESULT IN ACTUAL SALES.
Our sales cycle has historically been lengthy and is variable,
ranging between three to nine months from our initial contact with a potential
client to the signing of a license agreement. The decision to utilize our
products often entails a significant change in a potential customer's
organization, information technology systems, and business processes.
Accordingly, initial sales to new customers often require extensive educational,
sales and engineering efforts. Historically, our customers initially purchased
several of our products to use in design and implementation of manufacturing
workcells for specific manufacturing activities, such as painting or welding.
However, with the rollout of our server-based and Web-enabled solutions and the
introduction of our Global Professional Services division, our marketing and
sales efforts increasingly focus on our comprehensive solutions, including
consulting services, integration, training and support, rather than on seeking
to introduce a limited number of solutions focused on specific manufacturing
activities. As a result of this transition, our marketing efforts often entail
education of and consulting with a broader range of individuals and departments
within a potential customer's organization. And as the number of individuals and
departments involved in the decision of a potential customer to purchase our
solutions has increased, making that decision more complex, our sales cycle has
lengthened to approximately nine to twelve months. We do not expect the sales
cycle for our MPM solutions to decrease in the near future or at all. The
purchasing decisions of our clients are subject to the uncertainties and delays
associated with the budgeting, internal approval and competitive evaluation
processes that typically accompany significant capital expenditures. Any delays
in sales could cause our operating results to vary widely. If our sales cycle
shortens, our quarterly operating results may become less predictable and may
fluctuate more widely than in the past. A number of companies decide which
products to buy through a request for proposal process. In these situations, we
run the risk of investing significant resources in a proposal, only to lose to
our competition.
7
IF WE ARE UNABLE TO ACCURATELY PREDICT AND RESPOND TO MARKET DEVELOPMENTS OR
DEMANDS, OR IF OUR PRODUCTS ARE NOT ACCEPTED IN THE MARKETPLACE, OUR BUSINESS
WILL BE ADVERSELY AFFECTED.
The market for Manufacturing Process Management (MPM) solutions has
only recently begun to develop and is rapidly evolving. This makes it difficult
to predict demand and market acceptance for our products. We cannot guarantee
that the market for our products will grow or that our products will become
widely accepted. If the market for our products does not develop as quickly as
we expect or if our new internet-based products are not accepted by clients, our
future revenues and profitability will be adversely affected. Changes in
technologies, industry standards, the regulatory environment, client
requirements and new product introductions by existing or future competitors
could render our existing products obsolete and unmarketable, or require us to
develop new products. If our products do not achieve or maintain market
acceptance or if our competitors release new products that achieve quicker
market acceptance, have more advanced features, offer better performance or are
more price competitive, revenues for our products may not grow and may even
decline. Conversely, a significant increase in the number of clients, or a
significant increase in our development of new product offerings, or both, could
require us to expend significant amounts of money, time and other resources to
meet the demand. This could strain our personnel and financial resources.
CONSOLIDATION IN OUR INDUSTRY MAY REQUIRE US TO PARTNER WITH PROVIDERS OF
PRODUCT LIFE-CYCLE MANAGEMENT SOLUTIONS AND FAILURE TO DO SO MAY ADVERSELY
AFFECT OUR BUSINESS.
We operate in the Product Life-Cycle Management (PLM) segment of the
business software market. This market is undergoing horizontal consolidation as
companies with complementary products and strengths are merging or otherwise
consolidating in order to provide customers with solutions for the entire life
cycle of a product or product life-cycle management solutions. While
manufacturing process management (MPM) solutions such as our MPM solutions
comprise an integral part of a broad product life-cycle management solution,
companies seeking to provide full product life-cycle management solutions may
choose to develop their own MPM solutions rather than incorporate third-party
solutions such as ours. In addition, as the industry consolidates,
newly-consolidated entities capable of offering broad product life-cycle
management solutions may achieve greater prominence and obtain a competitive
advantage in relation to customers seeking broad solutions. Accordingly, it may
become increasingly important for us to partner with those consolidated
entities. If we are unable to partner with some or all of those companies, or if
the market does not accept the solutions provided by the companies with which we
cooperate, our sales and revenues may decline.
WE MAY BE UNABLE TO ACHIEVE THE BENEFITS WE ANTICIPATE FROM JOINT SOFTWARE
DEVELOPMENT, MARKETING OR OTHER STRATEGIC ARRANGEMENTS WITH OUR BUSINESS
PARTNERS.
We enter into various development or joint business arrangements to
develop new software products, integrate our products with the products of other
entities or market our products together with the products of other entities. We
may distribute ourselves or jointly sell with our business partners an
integrated software product and pay a royalty to the business partner based on
end-user license fees under these joint business arrangements. The market may
reject these integrated products or these arrangements may not succeed for other
reasons. As a result we may not achieve the revenues we anticipated at the time
we entered into the joint arrangement.
8
OUR SALES MAY DECREASE AS A RESULT OF EVOLVING INDUSTRY STANDARDS AND RAPID
TECHNOLOGICAL CHANGES THAT COULD RESULT IN OUR PRODUCTS BEING NO LONGER IN
DEMAND.
We operate in an industry that is characterized by evolving industry
standards with rapid changes in technology and consumer demand and the
continuing introduction of higher performance products with shorter product life
cycles. If our products become outdated, our sales will likely decrease. Our
operating results will depend on our ability to continue to develop and
introduce new and enhanced products on a timely and cost-effective basis to meet
evolving customer requirements. Since our products are designed to work with
other enterprise-wide programs, they must conform to various standards in order
to operate efficiently on an enterprise-wide basis. Successful product
development and introduction depends on numerous factors, including among
others:
- our ability to anticipate market requirements and changes in
technology and industry standards;
- our ability to accurately define new products, and introduce them to
the market; and
- our ability to develop technology that satisfies industry
requirements.
We may not be able to meet these challenges, respond successfully to
new products introduced by competitors, or recover our substantial research and
development expenditures. Our failure to develop and market new products could
result in our current products becoming uncompetitive.
UNDETECTED DEFECTS MAY INCREASE OUR COSTS AND IMPAIR THE MARKET ACCEPTANCE OF
OUR PRODUCTS AND TECHNOLOGY.
Our software products are complex and may contain undetected defects,
particularly when first introduced or when new versions or enhancements are
released. From time to time we have discovered defects or errors only after we
have shipped products to customers. Testing of our products is particularly
challenging because it is difficult to simulate the wide variety of client
environments into which our products are deployed. Despite testing conducted by
us and our clients, we have in the past shipped product releases with some
defects, certain customers have cited possible defects, and have otherwise
discovered other defects in our products after their commercial shipment. Our
products are frequently critical to our clients' operations. As a result, our
clients and potential clients have a greater sensitivity to product defects than
do clients of software products generally.
Defects may be found in current or future products and versions after
the start of commercial shipment. This could result in:
- - a delay or failure of our products to achieve market acceptance;
- - adverse client reaction;
- - negative publicity and damage to our reputation;
- - diversion of resources; and
- - increased service and maintenance costs.
Defects could also subject us to legal claims. Although our license
agreements contain limitation of liability provisions, these provisions may not
be sufficient to protect us against these legal claims. The sale and support of
our products may also expose us to product liability claims.
9
A SIGNIFICANT PERCENTAGE OF OUR REVENUES ARE GENERATED BY SALES TO MANUFACTURES
OPERATING IN A FEW SPECIFIC INDUSTRIES AND IF ECONOMIC ACTIVITY IN ONE OR MORE
OF THOSE INDUSTRIES SLOWS, OUR REVENUES WILL MOST LIKELY DECREASE.
We sell our products to major electronics, aerospace, automotive and
automotive suppliers (tier-1) companies. In 2001, our revenues from the
electronics industry decreased to $20.4 million (24% of our total revenues in
2001), compared to $25.8 million in 2000 (29% of our total revenues in 2000), as
a result of the slowdown in the U.S. electronics industry in 2001. If, whether
as a result of a general slowing of local or global economies or otherwise,
economic activity in one or more of our target industries decreases or fails to
grow, our revenues will most likely decrease.
GREATER MARKET ACCEPTANCE OF OUR COMPETITORS' PRODUCTS COULD RESULT IN REDUCED
REVENUES OR GROSS MARGINS.
We compete with other providers of MPM solutions in the industries we
target. In addition, as a result of the consolidation in the product life-cycle
management solution market, we have begun to compete with providers of product
life-cycle management solutions that do not necessarily provide MPM solutions,
as we do. We expect that competition will increase as a result of any further
consolidation in the market. A number of our current competitors, including
Dassault Systems S.A., have, and our prospective competitors may have,
competitive advantages in relation to us. These advantages may include greater
technical and financial resources, more developed marketing and service
organizations, greater expertise and broader customer bases and name recognition
than us.
We cannot assure you that competition will not result in price
reductions for our products and services, fewer client orders, reduced gross
margins or loss of market share, any of which could materially adversely affect
our business, financial condition and results of operations.
WE RELY ON SOFTWARE FROM THIRD PARTIES. IF WE LOSE THAT SOFTWARE, WE WOULD HAVE
TO SPEND ADDITIONAL CAPITAL TO REDESIGN OUR EXISTING SOFTWARE OR DEVELOP NEW
SOFTWARE.
We integrate various third-party software products as components of
our products. Our business would be disrupted if functional versions of this
software were either no longer available to us or no longer offered to us on
commercially reasonable terms. In either case, we would be required to spend
additional capital to either redesign our software to function with alternate
third-party software or develop these components ourselves. We might be forced
to limit the features available in our current or future product offerings and
the commercial release of our products could be delayed.
WE MAY BE UNABLE TO MAINTAIN OUR SALES, MARKETING AND SUPPORT ORGANIZATIONS
WHICH MAY HINDER OUR ABILITY TO MEET CUSTOMER DEMANDS.
We have sold our products primarily through our direct sales force
and we have supported our clients through our technical and customer support
staff. We need to maintain our direct and indirect sales and marketing
operations to increase market awareness and sales of our products. Competition
for qualified people may lead to increased labor and personnel costs. If we do
not succeed in retaining our personnel, in attracting new employees or in
replacing employees who leave, our business could suffer significantly.
10
IF WE ARE UNABLE TO ATTRACT, TRAIN AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE
ABLE TO ACHIEVE OUR OBJECTIVES AND OUR BUSINESS COULD BE HARMED.
Some of our senior management, including our executive vice president
of field operations and chief executive officer of our subsidiary, Tecnomatix
Unicam, Inc., were only recently appointed. Our future success depends on our
ability to absorb and retain senior employees and to attract, motivate and
retain highly qualified professional employees. Competition for these employees
can be intense, especially in a number of our key markets and locations,
including the United States, Japan and Germany. The process of locating,
training and successfully integrating qualified personnel into our operations
can be lengthy and expensive. We may not be able to compete effectively for the
personnel we need. Any loss of members of senior management or key technical
personnel, or any failure to attract or retain highly qualified employees as
needed, could materially adversely affect our ability to carry out our business
plan. In addition, we are significantly dependent on the continuing services of
Harel Beit-On, the chairman of our board of directors, president and chief
executive officer.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WHICH MAY LIMIT
OUR ABILITY TO COMPETE EFFECTIVELY.
Our success and ability to compete are substantially dependent upon our
internally developed technology. Other than our trademarks, most of our
intellectual property consists of proprietary or confidential information that
is not subject to patent or similar protection.
In general, we have relied on a combination of technical leadership,
trade secret, copyright and trademark law and nondisclosure agreements to
protect our proprietary know-how. Unauthorized third parties may attempt to copy
or obtain and use the technology protected by those rights. Any infringement of
our intellectual property could have a material adverse effect on our business,
financial condition and results of operations. Policing unauthorized use of our
products is difficult and costly, particularly in countries where the laws may
not protect our proprietary rights as fully as in the United States.
Substantial litigation over intellectual property rights exists in
the software industry. We expect that software products may be increasingly
subject to third-party infringement claims as the functionality of products in
different industry segments overlaps. We believe that many industry participants
have filed or intend to file patent and trademark applications covering aspects
of their technology. We cannot be certain that they will not make a claim of
infringement against us based on our products and technology. Any claims, with
or without merit, could:
- - be expensive and time-consuming to defend;
- - cause product shipment and installation delays;
- - divert management's attention and resources; or
- - require us to enter into royalty or licensing agreements to obtain the
right to use a necessary product or component.
Royalty or licensing agreements, if required, may not be available on
acceptable terms, if at all. A successful claim of product infringement against
us and our failure or inability to license the infringed or similar technology
could have a material adverse effect on our business, financial condition and
results of operations.
11
MARKETING AND DISTRIBUTING OUR PRODUCTS OUTSIDE OF NORTH AMERICA EXPOSES US TO
INTERNATIONAL OPERATIONS RISKS THAT WE MAY NOT BE ABLE TO SUCCESSFULLY ADDRESS.
We market and sell our products and services in North America, Europe
and Asia and derive a significant portion of our revenues from customers in
Europe and Asia. We received 71% of our total revenues in 2001, 70% of our total
revenues in 2000, 70% of our total revenues in 1999 and 74% of our total
revenues in the three months ended March 31, 2002 in non-dollar currencies from
sales to customers located outside of North America. Since our financial results
are reported in dollars, decreases in the rate of exchange of non-dollar
currencies in which we make sales relative to the dollar will decrease the
dollar-based reported value of those sales. In 1999, 2000 and 2001, decreases in
Euro - U.S. dollar exchange rates adversely affected our results of operation.
To the extent that decreases in exchange rates are not offset by a reduction in
our costs, they may in the future materially adversely affect our results of
operation. In addition, we have sales and support facilities and offices in many
locations outside of North America, including in Germany, France, Italy, Spain,
England, Sweden, Japan, Korea, Singapore, Taiwan and China. These operations
require, an expansion of our existing operations and entry into additional
international markets will require significant management attention and
financial resources. We are also subject to a number of risks customary for
international operations, including:
- - changing product and service requirements in response to new
regulations and requirements in various markets;
- - economic or political changes in international markets;
- - greater difficulty in accounts receivable collection and longer
collection periods; unexpected changes in regulatory requirements;
- - difficulties and costs of staffing and managing foreign operations; and
- - the uncertainty of protection for intellectual property rights in some
countries; multiple and possibly overlapping tax structures.
ANY FUTURE ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY DISTRACT OUR MANAGEMENT
AND DISRUPT OUR BUSINESS.
One of our strategies is to acquire or make investments in
complementary businesses, technologies, services or products if appropriate
opportunities arise. We have made several acquisitions of companies or the
assets of companies in the past. We may in the future engage in discussions and
negotiations with companies about our acquiring or investing in those companies'
businesses, products, services or technologies. We cannot make assurances that
we will be able to identify future suitable acquisition or investment
candidates, or if we do identify suitable candidates that we will be able to
make the acquisitions or investments on commercially acceptable terms or at all.
If we acquire or invest in another company, we could have difficulty
assimilating that company's personnel, operations, technology or products and
service offerings into our own. The key personnel of the acquired company may
decide not to work for us. These difficulties could disrupt our ongoing
business, distract our management and employees, increase our expenses and
adversely affect our results of operations. We may incur indebtedness or issue
equity securities to pay for any future acquisitions. The issuance of equity
securities could be dilutive to our existing shareholders. Currently, we do not
have any agreement to enter into any material investment or acquisition
transaction.
12
THE MARKET PRICE OF OUR ORDINARY SHARES MAY BE VOLATILE AND YOU MAY NOT BE ABLE
TO RESELL YOUR SHARES AT OR ABOVE THE PRICE YOU PAID, OR AT ALL.
The stock market in general has experienced, in the last two years,
extreme price and volume fluctuations. The market prices of securities of
technology companies, particularly internet-related companies, have been
extremely volatile, and have experienced fluctuations that have often been
unrelated or disproportionate to the operating performance of those companies.
These broad market fluctuations could adversely affect the market price of our
ordinary shares. The market price of the ordinary shares may fluctuate
substantially due to a variety of factors, including:
- - any actual or anticipated fluctuations in our financial condition and
operating results; public announcements concerning us or our
competitors, or the internet industry; the introduction or market
acceptance of new service offerings by us or our competitors; changes
in security analysts financial estimates;
- - changes in accounting principles;
- - sales of our ordinary shares by existing shareholders;
- - changes in political, military or economic conditions in Israel; and
- - the loss of any of our key personnel.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market prices of their
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert our management's
attention and resources, which could cause serious harm to our business.
OUR EXECUTIVE OFFICERS, DIRECTORS AND ENTITIES THAT MAY BE DEEMED TO BE
AFFILIATED WITH THEM MAY BE ABLE TO INFLUENCE MATTERS REQUIRING SHAREHOLDER
APPROVAL AND THEY MAY DISAPPROVE ACTIONS THAT YOU VOTED TO APPROVE.
Our executive officers, directors and entities that may be deemed to be
affiliated with some of them beneficially own approximately 23% of our
outstanding ordinary shares as of April 30, 2002. Except as otherwise disclosed
in Schedule 13Ds filed by several of our directors and entities affiliated with
some of them, there are no voting or similar agreements among such shareholders
and they do not act as a group. However, if such shareholders were to act
together, they would be able to significantly influence all matters requiring
approval by our shareholders, including the election of directors and the
approval of mergers or other business combination transactions.
RISKS RELATED TO OUR LOCATION IN ISRAEL
IT MAY BE DIFFICULT TO EFFECT SERVICE OF PROCESS AND ENFORCE JUDGEMENTS AGAINST
DIRECTORS, OFFICERS AND EXPERTS IN ISRAEL
We are incorporated in Israel. Many of our executive officers and
directors are nonresidents of the United States, and a substantial portion of
our assets and the assets of these persons are located outside the United
States. Therefore, it may be difficult to enforce a judgment obtained in the
United States against us or any of those persons. It may also be difficult to
enforce civil liabilities under United States federal securities laws in actions
instituted in Israel.
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POLITICAL, ECONOMIC AND MILITARY CONDITIONS IN ISRAEL COULD NEGATIVELY IMPACT
OUR BUSINESS.
We are organized under the laws of the State of Israel. Our principal
research and development facilities are located in Israel. Although all of our
sales are currently being made to customers outside Israel and we believe that
we have established redundant development and support capabilities in locations
outside Israel, we are directly influenced by the political, economic and
military conditions affecting Israel.
Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors and a
state of hostility, which varies in degree and intensity has caused security and
economic problems in Israel. Since October 2000, there has been a significant
increase in violence between Israel and the Palestinians. During the last
several months the state of hostility has increased in intensity and in April
2002 Israel undertook military operations in several Palestinian cities and
towns. It is possible that the situation may deteriorate further and may impact
our operations in Israel. Any major hostilities involving Israel or the
interruption or curtailment of trade between Israel and its present trading
partners could adversely affect our operations. We cannot assure you that
ongoing or revived hostilities or other events related to Israel will not have a
material adverse effect on us or our business. Several Arab countries still
restrict business with Israeli companies. We could be adversely affected by
restrictive laws or policies directed towards Israel and Israeli businesses.
Some of our directors, officers and employees are currently obligated
to perform annual reserve duty. Additionally, all such reservists are subject to
being called to active duty at any time under emergency circumstances and some
have been so called to active duty in April and May of 2002. While we have
historically operated effectively under these requirements, we cannot assess the
full impact of these requirements on our workforce and business if conditions
should change, and we cannot predict the effect on us of any expansion or
reduction of these obligations.
WE MAY BE ADVERSELY AFFECTED IF THE RATE OF INFLATION IN ISRAEL EXCEEDS THE RATE
OF DEVALUATION OF THE NEW ISRAELI SHEKEL AGAINST THE DOLLAR.
Most of our revenues are in dollars or are linked to the dollar, while
a portion of our expenses, principally salaries and the related personnel
expenses, are in new Israeli shekels, or NIS. As a result, we are exposed to the
risk that the rate of inflation in Israel will exceed the rate of devaluation of
the NIS in relation to the dollar or that the timing of this devaluation lags
behind inflation in Israel. This would have the effect of increasing the dollar
cost of our operations. In 1997, 1998, 2001 and the first three months of 2002,
the rate of devaluation of the NIS against the dollar exceeded the rate of
inflation, a reversal from prior years. However, in 1999 and 2000, while the
rate of inflation was low, there was a devaluation of the dollar against the
NIS. We cannot predict any future trends in the rate of inflation in Israel or
the rate of devaluation of the NIS against the dollar. If the dollar cost of our
operations in Israel increases, our dollar-measured results of operations will
be adversely affected.
THE TAX BENEFITS AVAILABLE TO US FROM GOVERNMENT PROGRAMS MAY BE DISCONTINUED OR
REDUCED AT ANY TIME, WHICH WOULD LIKELY INCREASE OUR TAXES.
We have received grants in the past and currently receive tax benefits
under Israeli government programs. To maintain our eligibility for these
programs and benefits, we must continue to meet specified conditions, including
making specified investments in fixed assets. Some of these programs restrict
our ability to manufacture particular products or transfer particular technology
outside of Israel. If we fail to comply with these conditions in the future, the
benefits received could be canceled and we could be required to refund any
payments
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previously received under these programs or pay increased tines. The Government
of Israel has reduced the benefits available under these programs recently and
these programs and tax benefits may be discontinued or reduced in the future. If
these tax benefits and programs are terminated or reduced, we could pay
increased taxes in the future, which could decrease our profits.
OUR UNITED STATES INVESTORS COULD SUFFER ADVERSE TAX CONSEQUENCES IF WE ARE
CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY.
Depending on various factors described below in Item 10E, we could be
characterized, for United States income tax purposes, as a passive foreign
investment company ("PFIC"). Such characterization could result in adverse
United States tax consequences to U.S. Holders (as defined in Item 10E) which
may be eliminated or ameliorated by a QEF Election (as defined in Item 10E) that
is in effect for any year in which we are a PFIC. Each U.S. Holder will be
responsible for making this QEF Election on such holder's tax return. Failure to
make a QEF Election may cause, among other things, any gain recognized on the
sale or disposition of our ordinary shares to be treated as ordinary income for
U.S. Holders. U.S. Holders should consult their United States tax advisors with
respect to the United States tax consequences of investing in our ordinary
shares, and the benefits of a QEF Election, as applied to their circumstances.
Although we do not believe that we have been a PFIC for any tax year through and
including 2001, we may be deemed to be a PFIC for tax year 2002 as a result of
our substantial holdings of cash, cash equivalents and securities combined with
a decline in our share price. For further discussion of the consequences of our
possible PFIC status, please refer to Item 10E.
CERTAIN PROVISIONS OF OUR ARTICLES OF ASSOCIATION AND OF ISRAELI LAW COULD
DELAY, HINDER OR PREVENT A CHANGE IN OUR CONTROL.
Our articles of association contain provision which could make it more
difficult for a third party to acquire control of us, even if that change would
be beneficial to our shareholders. Specifically, our articles of association
provide that our board of directors is divided into three classes, each serving
three-year terms. In addition, certain provisions of the Israeli Companies Law,
which came into effect in February 2000, could also delay or otherwise make more
difficult a change in our control. The provision of the Companies Law relating
to mergers and acquisitions are discussed in greater detail in "Item 10:
Additional Information."
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ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Our commercial and legal name is Tecnomatix Technologies Ltd. We are a
company organized under the laws of the State of Israel and are subject to the
Israel Companies Law 1999 - 5759. We began operations in 1983. Our principal
offices are located at 16 Hagalim Avenue, Herzlia, Israel and our telephone
number is 09-959-4777. Our U.S. agent is our subsidiary, Tecnomatix
Technologies, Inc., located at 21500 Haggerty Road, Suite 300, Northville,
Michigan.
During 2000, we implemented a number of important operational and
strategic changes in our business. Accordingly, 2001 marked the first full year
in which we operated on the basis of those changes. The changes included:
- - The March 2000 launch of eMPower, a suite of Manufacturing Process Management
(MPM) solutions for collaborative development and management of manufacturing
processes throughout an extended enterprise. This launch initiated our
transition from being a provider of specialized software engineering
applications to being a provider of enterprise information technology solutions
that extend beyond a company to its suppliers and customers.
- - The internal reorganization, during the fourth quarter of 2000, of our
e-Manufacturing division along industry-specific lines by creating
industry-focused business units to maximize the productivity and efficiency of
our marketing and direct sales staff. Each unit is responsible for sales,
marketing and prioritization of research and development activities with regards
to a particular target industry. Our industry business units currently consist
of the automotive, aerospace, electronics assembly and automotive supplier
(tier-1) units.
- - The formation of our Global Professional Services unit in the fourth quarter
of 2000. This unit, which currently contains over 150 professionals located
around the world, provides our clients with consulting and development services,
as well as implementation and engineering support, in order to allow our clients
to more efficiently integrate our solutions within their systems and to enable
us to provide our customers with enterprise-wide solutions.
Subsequent to making these changes, we began to introduce our MPM
solutions to the market through a program based on customer education, pilot and
proof-of-concept projects and limited initial implementations. We commenced
those activities in 2000 and continued them through 2001. However, in 2001 we
also began to see successful results from these efforts as pilot projects were
converted to initial implementations, broad adoptions of MPM solutions within
enterprises and repeat orders. Specifically, at the beginning of 2001 we had
approximately 100 pilot projects. During 2001 and the first quarter of 2002,
approximately three quarters of these pilot projects led to initial
implementations and over 10% matured into purchases of MPM solutions as a
mainstream solution for an enterprise. In the fourth quarter of 2001 and first
quarter of 2002, software license fees from sales of MPM products were
responsible for approximately 3% and 34% of our revenues from software license
fees, respectively.
During 2001, we signed a global strategic development and marketing
agreement with SAP to integrate our eMPower solutions with the mySAP(TM) Product
Life-cycle management system. We also signed an agreement with Siemens, whereby
both companies will develop and market a new eMPower product integrating
programmable logic controller (PLC) information into the eMPower environment.
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Also in 2001, in light of the severe downturn in the economic
environment and the slowdown in investments in information technologies,
especially in the U.S. electronics industry, we initiated a program aimed at
creating a leaner and more agile organization with suitable infrastructure in
place to better serve our customers and support long-term revenue growth. As
part of this program, we reduced excess personnel and capacity costs in order to
align our operating expenses with current revenue levels. As a result, our
operating expenses in 2001 decreased significantly as compared to the level of
operating expenses in 2000.
B. BUSINESS OVERVIEW
We develop and market software solutions for Manufacturing Process
Management (MPM). Manufacturers are increasingly required to implement efficient
and cost-effective production processes, offer the ability to effect product
customization and rely on third-party suppliers in order to stay competitive.
Our eMPower MPM solutions enable collaboration between manufacturers and their
production plants, external suppliers and other members of their extended
enterprise and supply chain throughout the world on the design, implementation
and management of their manufacturing processes. By enabling
business-to-business collaboration across the manufacturing process and the
supply chain, our solutions allow manufacturers to accelerate new product
introductions, reduce time to market for new products, cut time to volume
production and introduce greater flexibility into their manufacturing process.
eMPower was launched in March 2000. The eMPower solution suite is
composed of newly developed products and web-based applications as well as some
of our historically client-based Computer-Aided Production Engineering (CAPE)
software tools. The development, marketing and support of CAPE products had been
our core business since 1983. CAPE tools are used to model and simulate a
digital factory, or a computerized representation of a complete manufacturing
plant, its production lines and processes.
Our eMPower suite provides manufacturers and their extended enterprises
with the ability to:
- - design, visualize, simulate and optimize manufacturing processes and
systems from the factory level down to the level of production lines
and workcells,
- - engage in manufacturing process planning cost evaluation and analysis,
- - create and debug programs for robots and other machines,
- - create automatically manufacturing process documentation and work
instructions that can be used on the production floor or referenced or
re-used for further design work, and
- - communicate, review and exchange manufacturing process information over
the Internet.
Because MPM addresses a customer's entire manufacturing enterprise and
process supply chain, the scope of an MPM project often requires end-to-end
solutions that involve seamless integration into the customer's information
technology environment, customized software, creation and documentation of the
methodology procedures, installation, training, on-site support, hotline support
and on-going enhancements throughout the duration of the MPM life cycle. In
order to provide this kind of end-to-end solution, we established our Global
Professional Services unit. This unit, which currently contains over 150
professionals located around the world, provides our clients with
industry-specific consulting and development services, as well as implementation
and engineering support, in order to allow our clients to more efficiently
integrate our solutions within their systems and to enable us to provide
enterprise-wide solutions.
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We target manufacturing industries such as automotive, aerospace,
automotive suppliers (tier-1) and electronics industries, and we sell our
products primarily through our direct sales force. Our customers include most of
the world's major automotive manufacturers including Audi, BMW, DaimlerChrysler,
Fiat, Ford, General Motors, Kia, Mazda, Nissan, Renault, Rover, Subaru, Toyota,
Volkswagen and Volvo; major aerospace manufacturers including Airbus, EADS,
Boeing, British Aerospace, General Electric, Korea Aerospace Industries (KAI),
Lockheed Martin, McDonnel Douglas, and Pratt & Whitney; heavy machinery
manufacturers such as Caterpillar, GEC Alsthom, Hyundai, IVECO, JI Case, John
Deere, MAN, Mannesman, Komatsu and Mitsubishi Heavy Industries; and electronics
manufacturers such as Alcatel, Canon, Ericcson, Hewlett Packard, Intel, Lucent,
Motorola, Nokia, Philips, SCI-Sanmina, Schneider, Solectron, Siemens, Toshiba
and Universal. Of these companies, Airbus, Audi, BMW, DaimlerChrysler, EDAG,
Ford, General Motors, Kia, Korea Aerospace Industries, Kuka and Mazda are
implementing eMPower MPM solutions in their manufacturing processes. We have
initiated over 100 pilot projects with prospective customers involving our
eMPower MPM solutions since the introduction of these solutions in the first
quarter of 2000. Approximately three quarters of those projects have matured
into implementations of MPM solutions. Over 10% of those implementations
involved the adoption of MPM as a mainstream solution, including multi-million
dollar orders by Airbus, BMW, EADS, Ford and Schneider. Our strategy is to
continue to promote both large-scale implementations as well as smaller
implementations by existing and new customers.
In the first quarter of 2000, we divided our internal operations into
two divisions, the Electronics division and the e-Manufacturing division. We
undertook this restructuring in order to address the differences between the
nature of the technologies, products and the manufacturing process in the
electronics industry as opposed to our other target industries. We believe that
by dedicating a separate operating division to the electronics assembly
industry, on the one hand, and our other target industries, on the other hand,
we will be able to address these differences with greater efficiency. As a
result of this restructuring, all operations, including research and
development, relating to the electronics assembly industry are handled through
our Tecnomatix Unicam subsidiary, which traditionally focused on this industry,
while operations relating to the automotive, automotive supplier and aerospace
industries, including related research and development, are handled through our
e-Manufacturing division.
INDUSTRY BACKGROUND
As manufacturing companies strive to keep pace with the rapidly
changing and competitive global marketplace, they are faced with:
- - shorter product life cycles with increasing product variants and
configurations;
- - the need to manage operations in a global environment;
- - the need to decrease costs and increase productivity;
- - the need to improve quality;
- - the need to reduce the time to introduce new products; and
- - the need to accelerate the time to produce at full volume.
DEVELOPMENT OF COMPUTER AIDED PRODUCTION ENGINEERING (CAPE)
The industrial process generally includes three main phases: (1)
product design (2) production engineering and (3) manufacturing. In the product
design phase, a product is conceptualized and the product and its components are
designed. The production-engineering phase involves the design, build and
installation of the manufacturing line for the product. The manufacturing phase
consists of the orderly production of the product.
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The product design phase features a high degree of computerization with
the wide use of computer-aided design (CAD) systems. As a result, the CAD
industry has developed into a multi-billion dollar industry.
The manufacturing phase, due to the increased demand for flexibility in
manufacturing systems, is characterized by the proliferation of computer
controlled equipment on the factory floor. This equipment includes robots,
coordinate measurement machines commonly known as CMMs, printed circuit board
assembly equipment and other sophisticated machine tools.
Despite the increasing acceptance of computer-based automation in the
product design and manufacturing phases, the essential link between these phases
- - the production engineering phase- was traditionally performed with limited use
of computers. Instead, production engineers received hard copies of drawings of
the product designs from the CAD systems. Using elaborate drawings, mock-ups or
models, corporate manufacturing standards, handbooks and drawings of existing
production systems, the production engineers then evaluated the feasibility and
costs of different manufacturing concepts and planned the sequence of
manufacturing activities.
After the building of the manufacturing system, robots and other
production machines are installed in the manufacturing line and are programmed
to perform each movement and operation required to complete a manufacturing
cycle. Often, the production line must be shut down during the programming.
Programming errors are then corrected and optimization efforts continue on the
factory floor during initial production ramp-up until the desired production
rates and quality standards are achieved.
Production engineering is further complicated by several other factors:
- - frequent modifications in product design render portions of the
previous engineering work useless and require costly and time-consuming
redesign;
- - communication difficulties due to the large number of participants from
many disciplines and, in many cases, from different organizations
(e.g., subcontractors);
- - manufacturing design errors are generally detected at a late stage in
the process and can be corrected only at substantial cost, involving
delays in production start-up and line shut-downs, which if not
corrected can result in unsatisfactory quality and lower production
throughput; and
- - optimization of the production process may only begin after substantial
completion of the installation and programming of equipment, resulting
in the need to perform optimization on the shop floor, which interferes
with orderly production.
In addition, production engineers using traditional methods are often
not able to provide early feedback with respect to the manufacturing feasibility
and cost implications of the product that was being designed. The limited
ability to implement concurrent product design and production engineering can
result in product designs that are not optimized for manufacturing, delays in
product introduction and increased manufacturing costs.
Our CAPE technology was designed to address this missing link by
allowing production engineers to create an on-screen virtual manufacturing
environment that graphically displays and simulates actual manufacturing
operations. Our suite of CAPE products enables production engineers to
interactively arrange models of machines, production equipment and manufacturing
lines and manipulate them to perform on-screen manufacturing activities while
accessing and using the design data in its native format and sharing such data
with product designers and shop-floor machines and robots.
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IMPACT OF THE INTERNET ON PRODUCTION ENGINEERING
Beyond the complications and limitations inherent in the production
engineering process, manufacturers must deal with the pressures of a global
marketplace that increasingly relies on the Internet as a primary means of
interacting at many levels of operations. The Internet and the globalization of
the marketplace have created a significant shift in the standards and priorities
of customers and manufacturers. Use of the Internet enables the conduct of
business at an accelerated pace which, among other things, results in
increasingly shorter product life-cycles, decreasing time-to-market constraints
and reduced inventories. Through Internet-based links with manufacturers,
customers request higher levels of customization. This increase in numbers of
product variants has contributed to a de-standardization and personalization of
the marketplace.
In light of these trends, many manufacturers are turning to an extended
enterprise model in which components of the manufacturing process are performed
by third-party suppliers and contractors as well as a manufacturer's own
production plants. Aside from simply existing as separate corporate entities,
these suppliers and contractors often are located in geographically varying
locations. However, although manufacturers are willing to outsource part of
their operations in order to use the best source for obtaining a competitive
advantage, they must enable collaboration between all members of the extended
enterprise in order to efficiently manage the manufacturing process while
successfully meeting time-to-market expectations and customization requests.
Therefore, the ability of manufacturers to outsource and effectively structure
flexible supply chains as well as to enable integration and collaboration among
all the participants in the manufacturing process chain have become significant
factors in their competitive strategy. Accordingly, while we experienced a wide
acceptance of our original CAPE products, we believe that the shifting
priorities and standards inherent to the Internet-oriented global marketplace
require a more integrated platform and comprehensive use of Web-based
technologies in the production engineering phase of the manufacturing process.
PRODUCTS AND SOLUTIONS
In March 2000, we launched eMPower, a suite of Manufacturing Process
Management (MPM) solutions for collaborative development and management of
optimal manufacturing processes throughout the extended enterprise. These
products are composed of a newly developed platform, new products and web-based
applications as well as some of our historically client-based engineering
software tools. Our eMPower suite of solutions consists of three technology
components: (a) the electronic bills of processes or eBOP; (b) the Web-enabled
e-manufacturing server or eMServer; and (c) various MPM applications.
The eBOP, or electronic bill of processes, integrates and associates
product data, as defined by the CAD applications, and resources as defined in
the enterprise resource planning (ERP) systems. With the use of MPM planning
applications, the eBOP enriches this information with a description of the
requisite operations that have to be executed in order to manufacture a complex
product such as a car or airplane. eBOPs feature an open and scalable structure
that allow users to view specific details or combinations of details of the
manufacturing process. Because they provide a common way to define, capture and
exchange manufacturing processes, eBOPs enable collaboration between different
members of the supply chain. For instance, using an eBOP suppliers may provide
feedback or modify a particular part of the manufacturing process that is
relevant to them.
The eMServer is a web-based application server that supports the MPM
applications. It is used to manage and communicate eBOPs over the Internet. An
eBOP stored on our eMServer is available for collaborative input, review and
exchange through a customized web portal. By
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centralizing the process data on a web-based server, eMServer enables
manufacturers to control and coordinate the efforts of their extended
enterprise.
Many of our MPM applications were developed from our original CAPE
software and Digital Factory products and represent a fundamental shift from
traditional production engineering methods. Our planning and engineering
products, including our eM-Planner application, are based on proprietary
manufacturing simulation technologies. These technologies include unique
capabilities of kinematics modeling, motion emulation, collision detection,
tolerance modeling and simulation and use the computational and display
capabilities of 3-dimension graphics workstations. Our technologies allow
production engineers to create a digital factory - a computerized integrated
representation of a complete manufacturing plant, its production lines and
processes, that graphically displays and simulates actual manufacturing
operations on-screen. Using this technology, manufacturing planners and
production engineers can (a) plan new manufacturing processes and update and
optimize existing processes, (b) plan production plants, lines and processes
while benefiting from early feedback on manufacturing and maintenance
implications of newly designed products, (c) enable manufacturing planners and
engineers to design, visualize, simulate and optimize automated and manual
manufacturing processes and systems from the factory level down to the level of
production lines and work cells, (d) test and manage product tolerances to
insure compliance with design specifications and (e) create and debug programs
for robots and other machines using virtual machine models.
As part of the extension of our traditional CAPE and Digital Factory
products to MPM, we have developed collaboration applications that utilize web
database, data streaming and object-oriented technologies along with web browser
technology. These applications allow users to describe, plan and manage
manufacturing processes including operations, resources, products parts, machine
and motion simulation and tolerances. They also enable the access of multiple
users to the design, review and utilization of manufacturing information created
and captured by the other components of the eMPower suite. Using our
collaboration technology, manufacturers and their external suppliers and
contractors can access and work on electronic work instructions and process
simulations together with other members of the supply chain. They can also
deliver and retrieve reports and feedback in real-time on matters like project
progress, costs, resource allocation and manufacturing processes.
Our automated documentation and operation-sequencing applications are
based on proprietary algorithms and process documentation and sequencing
technologies. These products automatically generate documents such as
manufacturing reports, analysis, schedules, and work instructions from our
applications and then distribute these documents to shop-floor workers. This
technology creates the link between the various design and engineering
activities our customers perform with our products and the actual manufacturing
of their products and efficient management of the production floor.
Our products consist of four applications groups, each of which
addresses a different stage of the electronic manufacturing process management:
(a) Planning applications; (b) Engineering applications; (c) Execution
applications; and (d) Collaboration applications;
PLANNING APPLICATIONS
Our Planning applications are designed to enable the planning of new
manufacturing processes and updating and optimizing those already running. Our
Planning applications include:
- - eM-PLANNER: enables users to create hierarchical representations of
manufacturing processes in the form of eBOPs. eM-Planner enables users
to design optimal assembly sequences and manage different product and
manufacturing variants and their changes.
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ENGINEERING APPLICATIONS
Our Engineering applications provide manufacturers with the capability
to design, analyze, simulate and optimize manufacturing processes from the
factory level down to lines and workcells. The Engineering application group
includes:
- - eM-WORKPLACE: enables planning layouts and designing workplaces,
production lines and cells. This group includes dedicated applications
for creating programs off line for welding and painting with robots.
- - eM-HUMAN: enables designing human operations and verification that they
conform to international ergonomics standards.
- - eM-PLANT: enables the planning, simulation, visualization and
optimization of production systems and processes.
- - eM-ASSEMBLER: enables the design, analysis and verification of the
assembly and disassembly of complex products.
- - eM-LAUNCH: enables the design, testing and documentation of printed
circuit board (PCB) assembly processes. eM-Launch enables translation
of CAD designs quickly and accurately, management of test and
inspection attributes such as device types, values and tolerances, and
package and pad sizes/shapes, and creation of shop-floor manufacturing
documentation.
EXECUTION APPLICATIONS
Our Execution applications allow integration with shop-floor systems,
visualization and analysis of manufacturing data and automatic generation of
work instructions for assembly line workers and suppliers.
- - eM-DOC: enables documenting process plans, thus providing a central
core of training materials and assembly work instructions that can be
easily updated in real-time upon the introduction of new products and
variants.
- - eM-SEQUENCER: enables sequencing orders and assigning orders to
parallel lines.
- - eM-PLC: enables engineers to design manufacturing processes in a
three-dimensional virtual environment and introduce control information
into the virtual cell. eM-PLC also automatically generates software
code for programmable logic controllers (PLC) which control specific
production cells on the production floor and downloads its PLC code to
the shop floor after simulation and verification of the code.
- - eM-WORK INSTRUCTIONS: enables generation of electronic work
instructions directly from eMPower planning and engineering
applications. These documents can be accessed from anywhere using a
standard web browser, facilitating direct communication between
engineers and shop-floor personnel.
- - eM-EXECUTE: for PCB Assembly in the electronics industry, enables
managers to control factories while making informed decisions.
eM-Execute provides tools for effective management of work orders,
resources and production processes. It includes the following
application groups:
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- - eM-ANALYZE: enables reducing ramp-to-volume time through real-time
access to shop floor data for proactive manufacturing management. It
allows collection and analysis of shop-floor data, monitoring board
manufacturing process and generating performance reports.
- - eM-SCHEDULE: enables optimizing of the production schedule of a single
line or entire factory.
COLLABORATION APPLICATIONS
Our Collaboration applications allow communication, review and exchange
of manufacturing process information over the web. The Collaboration
Applications utilize web browser technology to enable and control multiple user
access to the design, review and utilization of the process information. The
Collaboration applications consist of:
- - eM-PORTAL: this set of applications provides web-enabled visualization
and analysis of manufacturing data stored in the eMPower eMServer. This
information includes eBOPs, reports, analysis and work instructions.
Using the eM-Portal, original equipment manufacturers can keep track of
outsourced work, managers can keep track of projects, and engineers can
collaborate and share process data with their colleagues anywhere in
the world.
INDUSTRY PROCESS-SPECIFIC SOLUTIONS
All of our eMPower solutions incorporate elements of each of the
application groups described above. Our solutions also feature applications
designed for the manufacturing process of specific industries. Currently we
develop and market solutions for specific industries as follows:
- - eMPOWER CARBODY is designed for body-in-white processes in the
automotive and heavy vehicles industries;
- - eMPOWER ASSEMBLY is designed for final assembly processes in the
automotive, heavy vehicle, and aerospace industries;
- - eMPOWER MACHINING is designed for machining processes in the powertrain
industry;
- - eMPOWER QUALITY is designed for managing manufacturing tolerances in
the aerospace, electronics, automotive, heavy vehicle and component
industries;
- - eMPOWER PCB ASSEMBLY AND TEST is designed for creating, optimizing and
managing assembly processes of printed circuit boards.
- - eMPOWER BOX BUILD is designed for designing, optimizing and validating
assembly processes of electronics products;
- - eMPOWER EXECUTION is designed for shop-floor execution of processes in
the electronics industry;
The eMPower CarBody solution, for instance, will consist of our
eMServer platform, Planning Applications. Engineering Applications, Execution
Applications and Collaboration Applications, all designed for use in the
automotive industry.
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eMPOWER ADVANTAGES
The main benefits of our products and solutions are:
- - collaboration among various participants in the manufacturing process
including its planning and production engineering phases;
- - higher flexibility in the structuring of supply chains;
- - acceleration of response-time to more complex, personalized customer
orders;
- - acceleration of time to market;
- - reduction of the costs for bringing new products to market;
- - optimization of product design for manufacturing and maintenance;
- - more effective mass customization due to increased flexibility in the
manufacturing process;
- - reduction of costly production line shut-down for programming;
- - increase in productivity of production line operations; and
- - improvement in product quality.
MARKETING AND SALES
Our objective is to build upon our initial success in the introduction
of our MPM solutions to the market and become a market leader in the MPM
industry. Our strategy to achieve this objective includes, among other things,
strengthening our global selling and services, leveraging partnerships with
other market leaders, extending technology leadership and MPM offerings. Our
marketing strategy is based on direct sales, which are complemented, as
appropriate, by sales through third parties.
We focus our marketing and sales efforts on the worldwide automotive,
electronics, aerospace and automotive supplier (tier-1) industries as these are
primary users of factory automation systems and their components. We sell our
products to large industrial companies as well as to smaller subcontractors and
production engineering firms. Sales of our products to large industrial
companies often facilitate the sale of our products to their subcontractors,
production-engineering firms and service suppliers.
As a result of our operational restructuring in the first quarter of
2000, all marketing and sales operations for the electronics assembly industry
are handled by our Tecnomatix Unicam subsidiary. While overall responsibility
for our marketing and sales activities in the automotive, automotive supplier
and aerospace industries now rests with our e-Manufacturing division, in
conjunction with our restructuring we created industry-focused business units
within the e-Manufacturing division. Each unit is responsible for sales and
marketing to a particular target industry. In addition, in the fourth quarter of
2000 we formed our Global Professional Services unit. This unit, which contains
over 150 professionals located around the world, provides our clients with
consulting and development services, as well as implementation, development and
engineering support, in order to allow our clients to more efficiently integrate
our solutions within their systems.
The decision to utilize our products often entails a significant change
in a potential customer's organization and business processes. Accordingly,
initial sales to new customers often require extensive educational, sales and
engineering efforts. Historically, our customers initially purchased several of
our products to use in detailed design and implementation of manufacturing
workcells for specific manufacturing activities, such as painting or welding.
However, with the rollout of our MPM solutions, our marketing and sales efforts
increasingly focus on our comprehensive solutions that integrate into the
customer's IT environment and legacy systems, rather than on seeking to
introduce a limited number of client-based products focused on specific
manufacturing activities. As a result of this transition, our marketing
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efforts often entail education of, and consultation with a broader range of
individuals and departments within a potential customer's organization. And as
the number of individuals and departments involved in the decision of a
potential customer to purchase our solutions has increased, that decision has
become more complex, and our sales cycle has lengthened.
Generally, the process of educating customers requires significant
sales and engineering efforts which we believe are carried out most effectively
by a worldwide direct sales and support organization, including members of our
industry business units and Global Professional Services unit. At March 31,
2002, we had 441 employees who were engaged in direct sales and marketing
operations, including pre-sale engineering, maintenance and support.
We maintain sales and support offices in the United States, France,
Germany, Italy, the United Kingdom, Spain, Sweden, Japan and Korea. Each of
these offices is staffed with sales personnel and engineers to provide technical
support. In addition to sales through our direct sales force, our sales and
marketing subsidiary in Japan, Nihon Tecnomatix, conducts sales of our products
and provides support for such products in Japan and in Korea both directly and
through distributors. Our products are also sold by distributors in Australia,
Brazil, China, India, Turkey, Singapore, South Africa, Taiwan, Japan and Korea.
From time to time, we also sell our products through vendors of CAD products. In
2000, we created a joint venture with Zuken Corporation, a leading provider of
design solutions for Japanese electronics companies. The joint venture company,
which is 49% owned by us, markets, sells and supports Tecnomatix-Unicam
electronics assembly industry products in Japan. Our subsidiary, Tecnomatix
Unicam, Inc. also sells its eMPower solutions for the electronics industry under
a cooperation and reselling agreement with Fuji Machine Manufacturing Ltd., a
leading supplier of surface mounted technology assembly equipment and Autron
Corporation Ltd., a leading supplier of integrated systems and surface mounted
machines in Asia.
We sell our products primarily to large corporations and our sales are
subject to the fiscal and budgeting cycles of these companies. Accordingly, a
large percentage of our sales occur in the fourth quarter, while sales in the
first quarter are relatively slower.
COMPETITION
We compete with other providers of MPM solutions in the industries we
target. In addition, as a result of the consolidation in the product life-cycle
management solution market, we have begun to compete with providers of product
life-cycle management solutions who do not necessarily provide manufacturing
process management solutions, as we do. While MPM solutions such as ours
comprise an integral part of a broad product life-cycle management solution,
companies seeking to provide full product life-cycle management solutions may
choose to develop their own MPM solutions rather than incorporate third-party
solutions such as ours. We expect that competition will increase as a result of
any further consolidation in the market.
Currently, significant companies in the product life-cycle management
industry include SAP, Dassault, PTC and EDS. In addition, as the industry
consolidates, newly-consolidated entities capable of offering broad product
life-cycle management solutions may achieve greater prominence and obtain a
competitive advantage in relation to customers seeking broad solutions.
Accordingly, it may become increasingly important for us to partner with those
consolidated entities. If we are unable to partner with some or all of those
companies, or if the market does not accept the solutions provided by the
companies with which we cooperate, our sales and revenues may decline.
25
Dassault Systems, is currently our major competitor in the automotive
and aerospace fields. Dassault has a partnership with IBM under which Dassault
provides product data management (PDM), MPM and ERP solutions as part of IBM's
product life-cycle management offering. Dassault has also acquired EAI-DELTA
GmbH, a company that competes with our Planning applications solution. Dassault,
as a result of its acquisitions, currently offers several products that compete
with some of our products, and is expected to continue to offer additional
competing products. Our other major competitors in the MPM domain include
Unigraphics, which has recently announced an eFactory Business Unit. In the
electronics assembly industry, our competitors include Datasweep, Inc., GenRad,
Inc., Aegis Industrial Software, Inc. and Valor Computerized Systems Ltd. We
also have a cooperation agreement with Unigraphics, whereby our tolerance
inspection and analysis product is embedded in the Unigraphics environment.
It is likely that as the markets we service continue to evolve,
existing competitors may impose increased competitive pressures through
acquisitions of complementary products and businesses, and there may be other
market entrants. In addition, as a result of our movement into the MPM domain,
we expect to face competition from companies offering other service-based
Internet initiatives and other business-to-business Internet platforms for
enterprise-wide activities. While these initiatives and platforms may not
compete directly with our present and future products, they may compete by
offering alternative solutions designed to enhance companies' supply chains and
overall performance.
Some of our existing competitors have, and prospective competitors may
have, technical and financial resources, marketing and service organizations,
expertise, customer bases and name recognition substantially greater than ours.
In addition, some of our existing competitors have, and prospective competitors,
particularly CAD vendors, may have, strong, established relationships with many
of our existing and potential customers and may be able to offer combined CAD
and CAPE internet-based solutions. Furthermore, should competition intensify, we
may have to reduce our prices. If we are unable to compete successfully against
our competitors or others, our business, financial condition and results of
operations would be materially adversely affected.
We believe that the main competitive factors affecting our business
include:
- - technological leadership,
- - product performance,
- - customer base,
- - customer support,
- - price,
- - distribution channels and
- - ability to respond quickly and effectively to emerging opportunities
and demand.
We believe that our major competitive advantages include:
- - our technologies,
- - the extension of our solutions to include process planning, process
data management and collaboration,
- - our clear focus on manufacturing,
- - our product development strategy of addressing specific manufacturing
activities,
- - the ability of our solutions to integrate with our customers' CAD/PDM
and ERP systems
- - proven customer acceptance,
- - extensive experience with customers' production engineering and
manufacturing environment,
26
- - broad customer base,
- - our technical support network, and
- - our ability to provide end-to-end solutions to our customers through
our Global Professional Services division.
There can be no assurances that we will continue to maintain these
advantages or that future competitive pressure will not adversely affect our
business, financial condition, and results of operations.
STRATEGIC ALLIANCES
As part of our attempt to offer a solution that is completely
integrated with customers' IT environments, we seek to partner, where
appropriate, with providers of complementary solutions that augment our MPM
solutions. This strategy often will feature the integration of our solutions
with the software or hardware of our partners. This integration benefits
manufacturers by, among other things, facilitating a flow of information from
the design process to the manufacturing planning and execution process.
Furthermore, integration of software across disciplines enables the creation of
a shared database for use and development by design engineers and production
engineers.
For example, in August 2001 we entered into a global strategic
development and marketing agreement with SAP to integrate our eMPower MPM
solution with SAP's product life-cycle management solution. This integration is
designed to allow the bi-directional exchange of bill-of-materials and routing
information between our and SAP's solutions, enabling, among other things, users
of our eMPower solutions to plan and develop manufacturing processes on the
basis of accurate and up-to-date Bill-of-Material information.
Similarly, in April 2002, we announced a joint product development and
marketing partnership agreement with Siemens Automation and Drives Group, a
world leader in automation and drives and programmable logic controllers (PLC).
The agreement is the third in a series of product development agreements Siemens
has made with us over the past three years to launch a newly integrated virtual
environment that streamlines the engineering process and provides a seamless
path from process design to shop-floor automation. The new jointly developed
eM-PLC product enables engineers to design manufacturing processes in a 3D
virtual environment and then introduce control information into that virtual
cell.
GLOBAL PROFESSIONAL SERVICES
We believe that customer support is crucial both to the initial
marketing of our products and to maintain customer satisfaction, which in turn
enhances our reputation and aids in the generation of repeat orders. In
addition, we believe that the customer interaction and feedback involved in our
ongoing support functions provide us with information on market trends and
customer requirements that is critical to future product development efforts.
We created a Global Professional Services unit in the fourth quarter of
2000. This unit, which contains over 150 professionals located around the world,
provides our clients with consulting and customization services, as well as
deployment, training and on-going support, in order to allow our clients to more
efficiently integrate our solutions within their systems. The unit was created
as part of our transition from a tools-oriented provider to a provider of
enterprise-wide solutions. These solutions require a higher degree of support to
deploy and integrate with a customer's existing operations, due to their more
comprehensive nature and enterprise-wide reach and impact.
27
Generally, during the warranty period for our products, bug-fixing
services are provided free of charge. Maintenance services, including bug-fixing
service, software upgrades, enhancements and "hot-line" support for technical
inquiries are provided through a one-year renewable maintenance contract for an
annual fee which is generally 14% of the then current product list price.
Approximately 20% of our revenues in 2001 were generated by the activities of
our Global Professional Services unit.
INTELLECTUAL PROPERTY
Our success is heavily dependent upon our proprietary manufacturing
technologies. We rely on a combination of non-disclosure agreements with certain
distributors, customers and employees, trade secrets and copyright laws, as well
as technical measures, to establish and protect our proprietary technologies. We
have no patents, and recognize that existing copyrights provide only limited
protection. Moreover, not all countries provide legal protection of proprietary
technology to the same extent as the United States. There can be no assurance
that the measures taken by us to protect our proprietary technologies are or
will be sufficient to prevent misappropriation of our technologies by
unauthorized third parties or independent development of similar products or
technologies by others.
We do not believe that our products or the technologies embedded in our
products infringe upon any proprietary rights of third parties. However, there
can be no assurance that third parties will not claim infringement by us with
respect to current or future products. We expect that we will increasingly be
subject to infringement claims as the number of products and competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. Responding to such claims, regardless of their merit, could
be time-consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements to secure the right to
use or sell the contested technology or product. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all. This could have a material adverse effect on our business, operating
results and financial condition.
RESEARCH AND DEVELOPMENT
CORE TECHNOLOGIES AND ARCHITECTURE
The eMPower solutions are based both on our new MPM technology and our
core manufacturing simulation technology. The core manufacturing simulation
technology includes unique capabilities of kinematics modeling, motion
emulation, collision detection and simulation and uses the computational and
display capabilities of 3D graphics workstations. This technology is open to
users and third-party software developers enabling them to develop, in a
relatively short time, products that address specific manufacturing activities
utilizing our proprietary manufacturing simulation technology. The platform
incorporates our integration capability, which allows the MPM software to
continuously access the product model in the CAD/PDM database and the resources
in the ERP systems without the need for data conversion. This integration allows
interoperability of MPM and CAPE tools and full association of product and
process design.
To further enhance the integration of our products with CAD systems and
shop-floor equipment, we pursue strategic alliances with leading providers of
such products. In addition to our agreements with software providers such as
PTC, SAP and Unigraphics, in March, 2001 we announced an agreement with
RealityWave to integrate its streaming technology into our eMPower offering
thereby enabling our customers to exchange large quantities of 3D manufacturing
data over the web, even over low-bandwidth networks. In February 2002, we
announced a partnership agreement with Intro GmbH, to offer a virtual reality
environment with the MPM offering.
28
Agreements that we have with shop-floor equipment suppliers such as
Siemens, Carl Zeiss, Orbotech, Universal, and Mori Seiki, provide for
integration with their shop-floor automation machines and capabilities such as
off-line programming, execution and analysis of machine-program performance.
RESEARCH AND DEVELOPMENT OPERATIONS
We believe that our ability to enhance our current products, develop
and introduce new products on a timely basis, maintain technological
competitiveness and meet customer requirements is essential to our future
success. Accordingly, we devote, and intend to continue to devote, a significant
portion of our personnel and financial resources to research and development. In
addition, in order to successfully develop new and enhanced products, we seek to
maintain close relationships with our customers and remain responsive to their
needs. We strive to provide our customers with a comprehensive solution to their
production engineering needs. We intend to continue to broaden our product
offering to automate more production engineering tasks across a wide range of
manufacturing activities throughout the industrial process.
Our research and development efforts have ocurred both at our main
research and development facility in Israel as well as at our subsidiaries'
sites in California, New Hampshire, the Netherlands, France and Germany. We
believe that we have established redundant development and support capabilities
in locations outside Israel. We intend to integrate the efforts of these various
research and development teams. Our product development teams include experts in
advanced mathematical techniques, computer graphics, database and Internet
technologies, computer science and mechanical, manufacturing and electronic
engineering. Our research and development efforts have been financed through
internal resources, programs sponsored by the Office of the Chief Scientist in
Israel and other funding from third parties. See "Item 5: Operating and
Financial Review and Prospects -Research and Development Grants."
REVENUES
The following chart is a three-year breakdown of our revenues by geographic area
for the periods indicated:
2001 2000 1999
---- ---- ----
(US$ in thousands)
Israel $9 $188 $26
United States 24,809 26,689 26,744
Germany 22,665 24,794 26,259
France 10,260 11,088 10,021
Other European Countries 10,490 9,989 12,330
Far-East 18,667 16,270 12,638
------ ------ ------
Total Revenues $86,900 $89,018 $88,018
======= ======= =======
The following chart is a three-year breakdown of our revenues by
segments for the periods indicated:
2001 2000 1999
---- ---- ----
(US$ in thousands)
e-Manufacturing $66,454 $63,255 $70,384
Electronics 20,446 25,763 17,634
------- ------- -------
Total Revenues $86,900 $89,018 $88,018
======= ======= =======
29
CONDITIONS IN ISRAEL
POLITICAL AND MILITARY CONDITIONS
Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors and a
state of hostility, varying from time to time in intensity and degree, has led
to security and economic problems for Israel. However, a peace agreement between
Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan
was signed in 1994. However, as of the date hereof, Israel has not entered into
any peace agreement with Syria or Lebanon. Since October 2000, there has been an
increase in violence between Israel and the Palestinians. During the last
several months the state of hostility has increased in intensity and in April
2002 Israel undertook military operations in several Palestinian cities and
towns. It is possible that the situation may deteriorate further and may impact
our operations in Israel.
Despite peace-related developments, certain countries, companies and
organizations continue to participate in a boycott of Israeli firms. We do not
believe that the boycott has had a material adverse effect on us, but there can
be no assurance that restrictive laws, policies or practices directed towards
Israel or Israeli businesses will not have an adverse impact on our business or
financial condition in the future.
ECONOMIC CONDITIONS
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early- to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices and military
conflicts. The Israeli Government has, for these and other reasons, intervened
in the economy by utilizing, among other means, fiscal and monetary policies,
import duties, foreign currency restrictions and control of wages, prices and
exchange rates. The Israeli Government has periodically changed its policies in
all these areas. Although we derive most of its revenues outside of Israel, a
substantial portion of our expenses are incurred in Israel and are affected by
economic conditions in the country.
ARMY SERVICE
Generally, all male adult citizens and permanent residents of Israel
under the age of 40 are, unless exempt, required to perform up to 43 days of
military reserve duty annually. Some of our officers and employees are currently
obligated to perform annual reserve duty. Additionally, all such reservists are
subject to being called to active duty at any time under emergency circumstances
and some have been so called to active duty in April and May of 2002. While we
have historically operated effectively under these requirements, we cannot
assess the full impact of these requirements on our workforce and business if
conditions should change, and we cannot predict the effect on us of any
expansion or reduction of these obligations.
30
C. ORGANIZATIONAL STRUCTURE
The following table lists information concerning the companies in the
Tecnomatix organization. All the entities listed are direct or indirect
subsidiaries of ours. The table lists entities by name, country of organization
and our equity interest.
NAME COUNTRY OWNERSHIP
- ---- ------- ---------
Robcad Technologies (1980) Ltd. Israel 100%
Robcad Ltd. Israel 100%
Tecnomatix Technologies Inc. US 100%
Tecnomatix Unicam Inc. US 100%
Tecnomatix Unicam GmbH Germany 100%
Nihon Tecnomatix K.K. Japan 100%
Zuken Tecnomatix K.K. Japan 49%
Tecnomatix Technologies (Gibraltar) Ltd. Gibraltar 100%
Tecnomatix Technologies SA Luxembourg 100%
Tecnomatix Europe S.A. Belgium 100%
Tecnomatix GmbH Germany 100%
Tecnomatix Technologies GmbH & Co. KG Germany 100%
Tecnomatix S.A.R.L. France 100%
Tecnomatix Technologies Espania S.L. Spain 100%
Tecnomatix Technologies Italia S.r.l. Italy 100%
Tecnomatix Technologies Ltd. UK 100%
Tecnomatix Technologies Sweden AB Sweden 100%
Tecnomatix Machining Automation B.V. The Netherlands 100%
Tecnomatix Unicam France S.A. France 100%
Tecnomatix Unicam UK Ltd. UK 100%
Tecnomatix Unicam (S) Pte Ltd. Singapore 100%
Tecnomatix Unicam Taiwan Co., Ltd. Taiwan 100%
Fabmaster China Limited Hong-Kong 100%
Tecnomatix Technologies (Shenzhen) Ltd. China 100%
View2Partner Inc. US 100%
View2Partner Israel Company Ltd. Israel 100%
D. PROPERTY, PLANTS AND EQUIPMENT
We do not own any real property.
We currently lease approximately 32,000 square feet of research and
development, marketing and administrative facilities in Herzlia, Israel. The
lease for most of this space expires in September 2002. The annual rent for the
facility is approximately $545,000 and is linked to the changes in the Israeli
consumer price index.
Tecnomatix Technologies Inc. leases approximately 29,000 square feet of
research and development, marketing and administrative facilities in Northville,
Michigan and other locations in the United States. The lease for most of these
spaces expires on various dates through February 2008. The aggregate annual rent
for these facilities is approximately $675,000.
31
Tecnomatix GmbH leases approximately 28,000 square feet of sales,
marketing and administrative facilities in Frankfurt, Munich and Dusseldorf,
Germany. The leases for most of these spaces expire on various dates through
September 2005. The aggregate annual rent for these facilities is approximately
$390,000.
Tecnomatix Technologies GmbH leases approximately 25,000 square feet of
research and development facilities in Stuttgart and Munich, Germany. The leases
for most of these spaces expire on various dates through December 2004. The
aggregate annual rent for these facilities is approximately $303,000.
Tecnomatix-Unicam, Inc. leases approximately 28,000 square feet of
research and development and sales and marketing facilities in Portsmouth, New
Hampshire and Irvine, California, with an aggregate annual rent of approximately
$601,000. The leases for these facilities expire on several dates through April
2004.
Nihon Tecnomatix K.K. leases approximately10,000 square feet of sales and
marketing facilities in Tokyo, Japan and Korea. The leases for these facilities
expire on various dates through June 2002. The aggregate annual rent for these
facilities is approximately $528,000.
Unicam France S.A. leases approximately 8,000 square feet of research and
development and sales and marketing facilities in Grenoble, France. The lease
for these facilities expires in June 2006. The annual rent for these facilities
is approximately $54,000.
In addition, our sales and support subsidiaries occupy, in the aggregate,
approximately 47,000 square feet in Germany, France, the United Kingdom,
Belgium, Spain, Sweden, Italy, The Netherlands, Taiwan, Singapore China and
Malaysia under leases expiring through December 2008 with a total annual rental
of approximately $575,000.
32
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
This discussion contains forward-looking statements, which involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in such forward-looking statements as a result of various factors,
including those set forth in this annual report. The following discussion and
analysis should be read in conjunction with "Item 3A: Selected Financial Data"
and our consolidated financial statements and notes thereto incorporated by
reference in this annual report.
A. OPERATING RESULTS
OVERVIEW
We derive revenues mainly from: (a) software license fees, and (b)
services which include maintenance fees from upgrades and the provision of
technical support for our software products, and fees from providing
engineering, training, consulting, implementation and development services.
Annual maintenance fees are generally 14% of the then current list price of our
software products. It has been our experience that most of our customers elect
to receive maintenance services from us on a continuing basis. We believe that
revenues from maintenance fees, which have grown in recent years, should
continue to increase as the installed base of our software products increases.
Our revenue recognition policies are in conformity with the American Institute
of Certified Public Accountants Statement of Position on Software Revenue
Recognition (SOP97-2 as amended).
Most of our revenues derive from repeat sales to existing customers. In
2001, approximately 82% of our revenues from software license fees derived from
repeat sales, compared to 76% in 2000. We expect that repeat sales will continue
to account for a significant part of our revenues in the future.
Cost of software license fees consists principally of (a) amortization of
capitalized software development costs; (b) royalties to the Office of the Chief
Scientist of the Government of Israel; and (c) royalties to third parties for
the use of software and technologies. Cost of services includes primarily the
costs of salaries to engineers. We capitalize software development costs in
accordance with Statement No. 86 of the Financial Accounting Standards Board
(FASB) and amortize such costs over the greater of (a) the amount computed using
the ratio of current gross revenue for a product to the total of current and
anticipated product revenue or (b) the straight-line basis over the remaining
economic useful life of the related product, which is not more than three years.
We are obligated to pay royalties to third parties pursuant to license
agreements that allow us to use such parties' products and technologies in our
products. Royalty expenses paid or accrued in 1999, 2000 and 2001 were $109,000,
$350,000 and $488,000, respectively.
In 2001, in light of the severe downturn in the economic environment and
the slowdown in investments in information technologies, especially in the U.S.
electronics industry, we initiated a program aimed at creating a leaner and more
agile organization with suitable infrastructure in place to better serve our
customers and support long-term revenue growth. As part of this program, we
reduced excess personnel and capacity costs in order to align our operating
expenses with current revenue levels. As a result, our operating expenses in
2001 decreased significantly as compared to the level of operating expenses in
2000.
We market and sell our products and services in North America, Europe and
Asia and derive a significant portion of our revenues from customers in Europe
and Asia. We received 71% of our total revenues in 2001, 70% of our total
revenues in 2000, 70% of our total
33
revenues in 1999 and 74% of our total revenues in the three months ended March
31, 2002 in non-dollar currencies from sales to customers located outside of
North America. Since our financial results are reported in dollars, decreases in
the rate of exchange of non-dollar currencies in which we make sales relative to
the dollar will decrease the dollar-based reported value of those sales. In
1999, 2000 and 2001, decreases in Euro - U.S. dollar exchange rates adversely
affected our results of operation. To the extent that decreases in exchange
rates are not offset by a reduction in our costs, they may in the future
materially adversely affect our results of operations.
In June 2001, the U.S. Financial Accounting Standard Board issued
Statement of Financial Accounting ("SFAS") No. 141, "Business Combinations",
which supersedes Accounting Principals Board ("APB") Opinion No. 16, "Business
Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises", and SFAS No. 142, "Goodwill and Other Intangible Assets"
which supersedes APB Opinion No. 17, "Intangible Assets". SFAS No. 141 which
applies to all business combinations initiated after June 30, 2001, requires
that all business combinations be accounted for by the purchase method, modifies
the criteria for recognizing intangible assets, and expands disclosure
requirements. We do not expect the adoption of SFAS No. 141 to have a
significant impact on our results of operations. SFAS No. 142, which is
effective for fiscal years commencing after December 31, 2001, addresses the
question of how acquired intangible assets should be accounted for in the
financial statements upon their acquisition and thereafter. SFAS No. 142
requires that goodwill and intangible assets that have indefinite useful lives
not be amortized but rather tested for impairment. Impairment losses that arise
due to initial adoption of SFAS No. 142 are to be reported as a change in
accounting principle. As of December 31, 2001, we had goodwill in the net amount
of $15,409,000. The application of the non-amortization provisions of SFAS No.
142 is expected to result in an increase in our operating income (a decrease in
operating loss) of $3,632,000. We do not expect the initial adoption of SFAS No.
142 to result in any impairment losses.
During 1999, we repurchased in open market transactions $6,000,000
principal amount of our 5.25% convertible notes at an aggregate purchase price
of $4,200,000. In connection with the repurchase of these notes, we recognized
an extraordinary gain in the amount of $1,450,000. During 2001, we repurchased
in open market transactions $5,485,000 principal amount, of our 5.25%
convertible notes at an aggregate purchase price of $3,986,000. In connection
with the repurchase of these notes, we recognized an extraordinary gain in the
amount of $1,393,000. Following the repurchases of notes made in 1998, 1999 and
2001, we had $43,765,000 principal amount outstanding of such notes as of May
31, 2002.
In March 1999, we acquired all of the outstanding shares of Unicam
Software, Inc., a company based in the U.S., for $25,787,000, which included
$1,537,000 in transaction costs. The acquisition was accounted for as a purchase
and the financial results of Unicam have been included in our consolidated
financial statements since the date of acquisition. The purchase price has been
allocated on the basis of the estimated fair value of the assets acquired and
the liabilities assumed. The excess of the purchase price over the fair value of
the net tangible assets acquired has been attributed to developed technology,
core technology, assembled workforce and goodwill in the amounts of $2,197,000,
$2,828,000, $997,000 and $9,344,000, respectively. The purchase price allocated
to such intangible assets is being amortized over their estimated useful life,
which is three years for developed technology, core technology and established
workforce, and seven years for goodwill. However, in accordance with the
recently issued accounting standards SFAS No. 141 and SFAS No. 142 which are
discussed above, we no longer amortize goodwill, but rather subject it to
periodic impairment tests. In connection with the acquisition, we recorded in
the first quarter of 1999 a one-time non-recurring charge for in-process
research and development and acquisition costs in the amount of $9,944,000.
34
During 2000, we acquired all of the outstanding shares of Fabmaster S.A.,
a publicly-traded France-based leading provider of computer integrated software
solutions for manufacturing and tests in the electronics industry, for
$16,510,000, which included $1,310,000 in transaction costs. The acquisition was
accounted for as a purchase and the financial results of Fabmaster have been
included in our consolidated financial statements since the date of acquisition.
The purchase price has been allocated on the basis of the estimated fair value
of the assets acquired and the liabilities assumed. The excess of the purchase
price over the fair value of the net tangible assets acquired has been
attributed to developed technology, core technology, assembled workforce and
goodwill in the amounts of $2,361,000, $1,964,000, $233,000 and $4,205,000,
respectively. The purchase price allocated to such intangible assets is being
amortized over their estimated useful life, which is three years for developed
technology, core technology and established workforce, and seven years for
goodwill. However, in accordance with the recently issued accounting standards
SFAS No. 141 and SFAS No. 142 which are discussed above, we no longer amortize
goodwill, but rather subject it to periodic impairment tests. In connection with
the acquisition, we recorded in the first quarter of 2000 a one-time
non-recurring charge for in-process research and development and acquisition
costs in the amount of $5,250,000.
In March 2002, we acquired the 5% minority share in Nihon Tecnomatix K.K.,
our Japanese subsidiary, not previously owned by us, resulting in total
ownership of 100%, in exchange for waiving an outstanding loan in the amount of
$227,000 (30 million Japanese Yen) given to the minority shareholder in
September 2001. The excess of the purchase price over the estimated fair value
of the net assets acquired, in the amount of $224,000 has been attributed to
distribution channels and marketing rights, and will be amortized on a straight
line basis over its estimated useful life.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. These estimates are evaluated by us on an on-going basis. We base
our estimates on our historical experience and on various other assumptions that
we believe to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying amount values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We believe that application of the following critical accounting policies
entails the more significant judgements and estimates used in the preparation of
our consolidated financial statements.
Revenues. Our revenue recognition policy is significant because our
revenues are a key component of our results of operations. Revenue results are
difficult to predict, and any shortfall in revenues or delay in recognizing
revenues could cause our operating results to vary significantly from quarter to
quarter and could result in future operating losses. In addition, our revenue
recognition determines the timing of certain expenses, such as commissions and
royalties. We follow very specific and detailed guidelines in measuring
revenues, however, certain judgments affect the application of our revenue
policy. Our revenues are principally derived from the licensing of our software
and the provision of related services. We recognize revenues in accordance with
SOP97-2. Revenues from software license fees are recognized when persuasive
evidence of an arrangement exists, either by written agreement or a purchase
order signed by the customer, the software product
35
has been delivered, the license fees are fixed and determinable, and collection
of the license fees is considered probable. License fees from software
arrangements which involve multiple elements, such as post-contract customer
support, consulting and training, are allocated to each element of the
arrangement based on the relative fair values of the elements. We determine the
fair value of each element in multiple-element arrangements based on vendor
specific objective evidence ("VSOE"). We determine the VSOE for each element
according to the price charged when the element is sold separately.
In judging the probability of collection of software license fees we
continuously monitor collection and payments from our customers and maintain a
provision for estimated credit losses based upon our historical experience and
any specific customer collection issues that we have identified. In connection
with customers with whom we have no previous experience, we may utilize
independent resources to evaluate the creditworthiness of those customers. For
some customers, typically those with whom we have long-term relationships, we
may grant extended payment terms. We perform on-going credit evaluations of our
customers and adjust credits limits based upon payment history and the
customer's current creditworthiness, as determined by our review of their
current credit information. If the financial situation of any of our customers
were to deteriorate, resulting in an impairment of their ability to pay the
indebtedness they incur with us, additional allowances may be required.
Our software products generally do not require significant customization
or modification, however, when such customization or modification is necessary,
the revenue generated by those activities is deferred and recognized using the
percentage of completion method.
Service revenues include post-contract customer support, consulting and
training. Post-contract customer support arrangements provide for technical
support and the right to unspecified upgrades on an if-and-when-available basis.
Revenues from those arrangements are recognized ratably over the term of the
arrangement, usually one year. Consulting services are recognized on a time and
material basis, or in a fixed price contract, on a percentage of completion
basis. Revenues from training are recognized as the services are provided.
In recognizing revenues based on the rate of completion method, we
estimate time to completion with revisions to estimates reflected in the period
in which changes become known. If we do not accurately estimate the resources
required or the scope of work to be performed, or do not manage our projects
properly within the planned periods of time or satisfy our obligations under the
contracts, then future services margins may be significantly and negatively
affected or losses on existing contracts may need to be recognized.
Capitalized Software Development Costs. We capitalize software development
costs, in accordance with SFAS No. 86, subsequent to the establishment of
technological feasibility and up to the time the software is available for
general release to customers. Our policy on capitalized software development
costs determines the timing of our recognition of certain development costs. In
addition, this policy determines whether the cost is classified as a development
expense or cost of license fees. We are required to use professional judgement
in determining whether development costs meet the criteria for immediate expense
or capitalization. Our judgement refers primarily to the establishment of
technological feasibility and to on-going assessment of the recoverability of
cost capitalized. We do that by considering certain external factors such as
anticipated future gross product revenue, estimated economic life and changes in
software and hardware technology. In the years ended December 31, 1999, 2000 and
2001, we capitalized software development costs in the amount of $6,351,000,
$7,294,000 and $5,103,000, respectively (23%, 22% and 18% of gross research and
development costs, respectively). We amortize software development costs on a
product-by-product basis when the product is available for general release. In
the years ended
36
December 31, 1999, 2000 and 2001, amortization of capitalized software
development costs reported under cost of software license fees, amounted to
$3,307,000, $3,479,000 and $5,060,000, respectively (4%, 4% and 6% of total
revenues, respectively). We continue to evaluate the recoverability of
capitalized software development costs year-by-year.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues. In 2001, revenues decreased by 2% to $86,900,000 from
$89,018,000 in 2000. Revenues from the e-Manufacturing division increased by 5%
to $66,454,000 from $63,255,000 and accounted for 76% of total revenues compared
to 71% of total revenues in 2000. The increase in revenues from this division is
mainly attributable to the acceptance of our new MPM solutions, which were
introduced in 2000, by existing customers as well as to the adoption of these
solutions by new customers in the U.S. and in the Far East. The increase in
revenues from those customers was partially offset by a decrease in revenues
from Europe, where the sales cycle of our MPM solutions proved to be longer than
in the U.S. and in the Far East. Accordingly, revenues from Europe decreased by
5% and accounted for 57% of total revenues from the e-Manufacturing division,
compared to 63% in 2000. Revenues from the U.S. increased by 26% and accounted
for 19% of total revenues from the e-Manufacturing division compared to 16% in
2000. Revenues from the Far East increased by 19% and accounted for 25% of total
revenues from the e-Manufacturing division, compared to 22% in 2000.
Revenues from our Electronics division decreased by 21% to $20,446,000
from $25,763,000 in 2000 and accounted for 24% of total revenues, compared to
29% of total revenues in 2000. The decrease in revenues from this division is
mainly attributable to the downturn in the electronics industry, especially in
the U.S. Revenues from Europe decreased by 9% and accounted for 29% of total
revenues from the Electronics division, compared to 25% in 2000. Revenues from
the U.S. decreased by 27% and accounted for 60% of total revenues, compared to
65% in 2000. Revenues from the Far East decreased by 10%, however these revenues
accounted for 11% of total revenues, compared to 10% in 2000, due to the
decrease in revenues from other geographic areas.
In 2001, revenues generated from software license fees decreased by 18% to
$42,316,000, or 49% of total revenues, from $51,699,000, or 58% of total
revenues in 2000. Service revenues increased by 19% in 2001 to $44,584,000 or
51% of total revenues, from $37,319,000, or 42% of total revenues in 2000. The
increase in service revenues reflects growth in maintenance fees relating to our
increased number of installed software products, as well as increasing demand
for consulting services in connection with our MPM solutions. The decrease in
software license fees, both on an absolute and a percentage basis, reflects the
increased demand for MPM solutions in which the services portion of the revenues
is relatively higher than that of the software license fees.
Cost of Software License Fees. In 2001, cost of software license fees
increased by 36% to $7,851,000, or 9% of total revenues, from $5,764,000, or 6%
of total revenues in 2000. This increase resulted primarily from an increase in
amortization of capitalized software development costs which totaled $5,060,000,
compared to $3,479,000 in 2000. The increase in amortization of software
development costs is related to the completion of major research and development
projects during 2001 and the release of those projects to customers.
Cost of Services. In 2001, cost of services increased by 14% to
$15,268,000, or 18% of total revenues, from $13,354,000 or 15% of total revenues
in 2000, reflecting mainly the growth in maintenance services due to our growing
installed base of customers and increased demand for consulting services.
37
Amortization of Acquired Intangibles. In 2001, amortization of acquired
intangibles, primarily goodwill and developed software products, decreased
slightly to $7,758,000 from $7,801,000 in 2000.
Research and Development, Net. In 2001, gross research and development
costs decreased by 14% to $28,333,000, or 33% of revenues, from $33,030,000 or
37% of revenues in 2000. This decrease is due to the reduction in research and
development personnel that resulted in lower payroll expenses and related
benefits. The reduction in personnel was part of our program to refocus on our
core business. In connection with this program, we concentrated our research and
development efforts on our core business, thereby enabling a further reduction
in research and development costs.
Capitalized software development costs decreased by 30% to $5,103,000, or
6% of revenues, from $7,294,000, or 8% of revenues in 2000, primarily in
connection with the reduction of research and development costs. Capitalized
software development costs, as a percentage of gross research and development
expenses, decreased to 18% in 2001 from 22% in 2000.
Third-party participation in research and development costs decreased to
$4,014,000 from $4,988,000 in 2000. Third party participation in research and
development costs, as a percentage of gross research and development costs,
decreased to 14% in 2001 from 15% in 2000, reflecting mainly the decrease in
participation in research and development activities in Israel.
Net research and development costs decreased by 7% to $19,216,000, or 22%
of revenues, in 2001 from $20,748,000, or 23% of revenues in 2000.
Selling and Marketing. In 2001, selling and marketing expenses decreased
by 12% to $44,624,000, or 51% of revenues, compared to $50,737,000, or 57% of
revenues in 2000. This decrease mainly reflects our strategy to focus on our
target market industries and territories, thereby facilitating the reduction in
selling and marketing personnel which resulted in lower payroll expenses,
commissions and related benefits.
General and Administrative. In 2001, general and administrative expenses
decreased by 20% to $4,855,000, or 6% of revenues, from $6,037,000, or 7% of
revenues in 2000. This decrease is mainly attributed to the reduction in general
and administrative personnel which resulted in lower payroll expenses and
related benefits.
Restructuring and Asset Impairment. In 2001, we recorded a one-time
non-recurring charge of $1,843,000, related to the termination of employees and
the reduction in leased office space and equipment in certain offices, pursuant
to a program aimed at reducing our operating expenses. As part of this program
we also impaired software development costs in the amount of $316,000. Those
costs had previously been capitalized in connection with a software product with
respect to which we have decided to cease all activities.
Operating Income (Loss). In 2001, operating loss decreased by 30% to
$(14,515,000) from $(20,673,000) in 2000. Operating loss from the
e-Manufacturing division in 2001 was $(1,530,000) compared to operating loss of
$(9,336,000) in 2000, reflecting an increase in revenues and a significant
decrease in operating expenses. Operating loss from the Electronics division in
2001 increased by 15% to $(12,985,000) from $(11,337,000) in 2000, reflecting
the decrease in revenues from that division.
Financial Income (Expense), Net. In 2001, net financial income (expense)
decreased to $(202,000) from $1,348,000 in 2000. The decrease was attributable
mainly to the decrease
38
in interest rates during 2001 compared to the interest rate at which we issued
our convertible notes.
Taxes on Income. In 2001, we recorded a provision for income tax in the
amount of $54,000 compared to $505,000 in 2000. In 2001, provision for current
taxes in Israel and in non-Israeli subsidiaries amounted to $(133,000) and
provision for deferred taxes amounted to $187,000. In 2000, provision for
current income taxes in Israel and in non-Israeli subsidiaries amounted to
$219,000 and provision for deferred taxes amounted to $286,000.
Share in Loss of Affiliated Company. In 2001, we recorded losses in the
amount of $532,000 from our equity share in an affiliate company, compared to
$131,000 in 2000.
Minority Interest in Net Loss of Subsidiary. The interest of minority
shareholders in the net losses of Nihon Tecnomatix during 2001 was $0 compared
to $2,000 in 2000.
Extraordinary Gain from Repurchase of Convertible Notes. In 2001, we
recorded an extraordinary gain in the amount of $1,393,000 from the repurchase
of $5,485,000 aggregate principal amount of our 5.25% convertible notes,
reflecting primarily the excess of this principal amount over the amount paid
and proportionate share of offering expenses. No extraordinary gain from the
repurchase of convertible notes was recorded in 2000.
Net Income (Loss). In 2001, excluding the extraordinary gain of $1,393,000
in connection with the repurchase of convertible notes, our net loss was
$(15,303,000), or 18% of revenues, compared to a net loss of $(14,709,000), or
17% of revenues, excluding a non-recurring charge of $5,250,000 in 2000.
Including the extraordinary gain, the net loss for 2001 was $(13,910,000),
compared to a net loss in 2000 of $(19,959,000), including the non-recurring
charge. In 2001, excluding extraordinary gain, diluted loss per share was
$(1.48) based on an average number of shares outstanding of 10,366,125, compared
to diluted loss per share of $(1.44) in 2000, based on an average number of
shares outstanding of 10,224,737, excluding the non-recurring charge. Including
the extraordinary gain in 2001 and the non-recurring charge in 2000, diluted
loss per share in 2001 was $(1.35) compared to $(1.95) in 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues. In 2000, revenues increased by 1% to $89,018,000 from
$88,018,000 in 1999. Revenues from the e-Manufacturing division decreased by 10%
to $63,255,000 from $70,384,000 and accounted for 71% of total revenues compared
to 80% of total revenues in 1999. The decrease in revenues from this division is
mainly attributable to the shift of our sales and marketing efforts from our
historical client-based solutions focusing on specific manufacturing activities
to our MPM solutions, which resulted in a slowdown in sales of our traditional
products. In addition, the sales cycle for our new MPM solutions is generally
longer than that of our historical client-based products and the acceptance of
our new MPM products was slower than initially expected. Revenues from Europe
decreased by 10% and accounted for 63% of total revenues from the
e-Manufacturing division both in 2000 and 1999. Revenues from the U.S. decreased
by 28% and accounted for 16% of total revenues from the e-Manufacturing division
compared to 19% in 1999. Revenues from the Far East increased by 9% and
accounted for 22% of total revenues from the e-Manufacturing division compared
to 18% in 1999. The decreases in the geographical segments were generally due to
the shift in our products and the change in our sales cycle.
Revenues from the Electronics division increased by 46% to $25,763,000
from $17,634,000 in 1999 and accounted for 29% of total revenues compared to 20%
of total revenues in 1999. The increase in revenues from this division is mainly
attributable to (a) the acquisition of Fabmaster and the inclusion of its
revenues in our consolidated revenues since
39
the date of acquisition, (b) the establishment of a sales and marketing
organization in the Far East dedicated to Electronics division products and (c)
the growth in our sales to the electronics industry in the U.S. Revenues from
Europe increased by 42% and accounted for 25% of total revenues from the
Electronics assembly compared to 26% in 1999. Revenues from the U.S. increased
by 28%, however these revenues accounted for 65% of total revenues compared to
74% in 1999, due to growth in revenues from other areas. Revenues from the Far
East accounted for 10% of total revenues from the Electronics division compared
to none in 1999.
In 2000, revenues generated from software license fees decreased by 10% to
$51,699,000, or 58% of total revenues, from $57,444,000, or 65% of total
revenues in 1999. Service revenues from increased by 22% in 2000 to $37,319,000
or 42% of total revenues, from $30,574,000, or 35% of total revenues in 1999.
The increase in service revenues reflects growth in maintenance fees from our
increased number of installed software products, as well as increasing demand
for consulting services.
Cost of Software License Fees. In 2000, cost of software license fees
increased by 15% to $5,764,000, or 6% of total revenues, from $5,003,000, or 6%
of total revenues in 1999. This increase resulted primarily from an increase in
royalties accrued for or paid to the Office of the Chief Scientist of the
Government of Israel for participating in research and development activities,
and to third parties for the use of software and technologies, which totaled
$1,893,000, compared to $1,537,000 in 1999.
Cost of Services. In 2000, cost of services increased by 44% to
$13,354,000, or 15% of total revenues, from $9,251,000 or 11% of total revenues
in 1999, reflecting mainly the growth in maintenance services due to the growing
installed base and increased demand for consulting services.
Amortization of Acquired Intangibles. In 2000, amortization of acquired
intangibles, primarily goodwill and developed software products, increased to
$7,801,000 from $4,434,000 in 1999. This increase resulted primarily from
amortization of intangibles acquired in the Fabmaster acquisition in the first
quarter of 2000.
Research and Development, Net. In 2000, gross research and development
costs increased by 20% to $33,030,000, or 37% of revenues, from $27,543,000 or
31% of revenues in 1999. This increase is due to the continuous efforts invested
in the development of the Electronics division products and our MPM
applications.
Capitalized software development costs increased by 15% to $7,294,000, or
8% of revenues, from $6,351,000, or 7% of revenues in 1999, primarily in
connection with the development of the eM-Workplace, eM-Planner and the
Electronics division products. Capitalized software development costs, as a
percentage of gross research and development expenses, decreased slightly to 22%
in 2000 from 23% in 1999.
Third-party participation in research and development costs increased to
$4,988,000 from $4,741,000 in 1999. Third party participation in research and
development costs, as a percentage of gross research and development costs,
decreased to 15% in 2000 from 17% in 1999, reflecting mainly an increase in
research and development activities in Israel.
Net research and development costs increased by 26% to $20,748,000, or 23%
of revenues, in 2000 from $16,451,000, or 19% of revenues in 1999.
Selling and Marketing, Net. In 2000, net selling and marketing expenses
increased by 29% to $50,737,000, or 57% of revenues, compared to $39,333,000, or
45% of revenues in 1999. This increase mainly reflects costs associated with new
direct sales personnel and
40
extension of the sales infrastructure in connection with our MPM sales efforts.
The increase of the relative share of selling and marketing expenses out of our
revenues is due to the larger increase in selling and marketing expenses in
comparison with the increase in our revenues in 2000.
General and Administrative. In 2000, general and administrative expenses
increased by 22% to $6,037,000, or 7% of revenues, from $4,932,000, or 6% of
revenues in 1999. This increase is mainly attributed to payroll, bonuses and
management fees associated with key officers and executives.
In Process Research & Development and Acquisition Costs. In 2000, we
recorded a one-time non-recurring charge of $5,250,000, related to the
acquisition of Fabmaster. The charge resulted from the write-off of acquired
in-process research and development that has not reached technological
feasibility. In 1999, we recorded a one-time non-recurring charge of $9,944,000
related to the acquisition of Unicam. The charge included the write-off of
acquired in-process research and development that has not reached technological
feasibility in the amount of $9,207,000 and the write-off of capitalized
software development costs in the amount of $737,000, resulting from our
determination to discontinue the use of some of our technologies following the
acquisition of Unicam.
Operating Income (loss). In 2000, operating loss increased by 1,454% to
$(20,673,000) from $(1,330,000) in 1999. Excluding the one-timenon-recurring
charges of $5,250,000 in 2000 and $9,944,000 in 1999, operating loss in 2000 was
$(15,423,000) compared to an operating income of $8,614,000 in 1999. Operating
loss from the e-Manufacturing division in 2000 was $(9,336,000) compared to
operating income of $3,734,000 in 1999, reflecting a decrease in revenues in the
US and Europe and an increase in operating expenses. Operating loss from the
Electronics division in 2000 increased by 95% to $(11,337,000) from $(5,064,000)
in 1999, reflecting an increase in operating expenses.
Financial Income (Expense), Net. In 2000, net financial income decreased
by 25% to $1,348,000, or 2% of revenues, from $1,791,000, or 2% of revenues in
1999. The decrease was attributable mainly to the use of funds to finance the
acquisition of Fabmaster.
Taxes on Income. In 2000, we recorded a provision for income tax in the
amount of $505,000 compared to $579,000 in 1999. In 2000, provision for current
taxes in Israel and in non-Israeli subsidiaries amounted to $219,000 and
provision for deferred taxes amounted to $286,000. In 1999, provision for
current income taxes in Israel and in non-Israeli subsidiaries amounted to
$489,000 and provision for deferred taxes amounted to $90,000.
Share in Loss of Affiliated Company. In 2000, we recorded losses in the
amount of $131,000 from our equity share in an affiliate company.
Minority Interest in Net Loss of Subsidiary. The interest of minority
shareholders in the net losses of Nihon Tecnomatix during 2000 was $2,000
compared to $22,000 in 1999.
Extraordinary Gain from Repurchase of Convertible Notes. In 1999, we
recorded an extraordinary gain in the amount of $1,450,000 from repurchase of
$6,000,000 aggregate principal amount of our 5.25% convertible notes, reflecting
primarily the excess of this principal amount over the amount paid and
proportionate share of offering expenses. No extraordinary gain from repurchase
of convertible notes was recorded in 2000.
Net Income (Loss). In 2000, excluding the non-recurring charge of
$5,250,000, net loss was $(14,709,000), or 17% of revenues, compared to net
income of $9,848,000, or 11% of revenues, excluding the non-recurring charge of
$9,944,000 and before the extraordinary gain of $1,450,000 in connection with
the repurchase of convertible notes in 1999. Including
41
the non-recurring charge, net loss for 2000 was $(19,959,000), compared to net
income of $1,354,000, including the non-recurring charge and extraordinary gain
in 1999. In 2000, excluding non-recurring charges, diluted loss per share was
$(1.44) based on an average number of shares outstanding of 10,224,737, compared
to diluted earnings per share of $0.95 in 1999, based on an average number of
shares outstanding of 10,403,719, excluding non recurring charges and before an
extraordinary gain. Including the non-recurring charge and before an
extraordinary gain, diluted loss per share in 2000 was $(1.95) compared to
$(0.01) in 1999.
IMPACT OF INFLATION AND FOREIGN CURRENCY FLUCTUATION
Although a majority of our sales are made (and a substantial amount of our
expenses are incurred) outside Israel in local currencies, a portion of our
expenses are incurred in Israel in transactions denominated in New Israeli
Shekels (NIS). The dollar cost of our operations in Israel is impacted by
several factors including (a) the rate of inflation in Israel, (b) the
devaluation of the NIS relative to the dollar in comparison to the rate of
inflation, and (c) the timing of such devaluation. Consequently, we may
experience a material adverse effect should the rate of the devaluation of the
NIS relative to the dollar significantly lag behind the rate of inflation in
Israel. In 1997, 1998, 2001 and the first six months of 2002, the rate of
devaluation exceeded the rate of inflation. This trend was reversed in 1999 and
2000 during which our dollar cost of operations in Israel was adversely affected
since the rate of inflation generally exceeded the devaluation of the NIS
against the dollar. Accordingly, we have purchased certain NIS bonds which are
linked to the CPI in order to hedge the exposure to effects of inflation in
Israel. In addition, as our revenues and costs outside the U.S. are generally
denominated in local non-dollar currencies, fluctuations in the rates of
exchange between the dollar and non-dollar currencies may have a material effect
on our results of operations. Thus, an increase in the value of a particular
currency relative to the dollar will increase the dollar reporting value for
transactions in such currency, and a decrease in the value of such currency
relative to the dollar will decrease the dollar reporting value for such
transactions. This effect on the dollar reporting value for transactions is only
partially offset by the impact that such fluctuations may have on our costs. See
"- Overview" above and "Item 11: Disclosure about Market Risk."
EFFECTIVE CORPORATE TAX RATE
We and each of our subsidiaries are subject to corporate taxes in various
countries in which they operate. We are currently most significantly affected by
corporate taxes in Israel where we recently received a final tax assessment
through the tax year ended December 31, 1999. We believe that our effective tax
rate in Israel would have been approximately 14% for the year ended December 31,
2001, had we not utilized our loss carryforwards in Israel. As of December 31,
2001 we had approximately $680,000 loss carryforwards in Israel. As of December
31, 2000, we have approximately $18,676,000 in net operating loss carryforwards
in the U.S. We expect that as our profits increase and our subsidiaries utilize
their respective loss carryforwards, particularly in countries with relatively
high corporate tax rates, our consolidated effective tax rate will increase.
We currently have eleven Approved Enterprise programs, under the Israeli
Law for the Encouragement of Capital Investments, 1959, which programs commenced
operation between 1993 and 1998. Consequently, we are eligible for certain
Israeli tax benefits. Income derived from our Approved Enterprise programs is
exempt from tax for a period of either two or four years, commencing in the
first year in which we generate taxable income from such Approved Enterprise and
is subject to a reduced tax rate of 15% for a further eight or six years,
respectively. See Note 13 of the notes to our consolidated financial statements
included elsewhere in this annual report.
42
B. LIQUIDITY AND CAPITAL RESOURCES
We have met our financial obligations primarily through funds provided by
operations and by research and development grants, which are discussed in Item
5C below. Additional cash resources were generated from the issuance in August
1997 of our 5-1/4% convertible notes in an aggregate principal amount of
$97,750,000.
In connection with the August 1997 convertible notes offering, we incurred
related issuance expenses of $3,104,000. These expenses are recorded as deferred
expenses and are amortized using the straight-line method over the life of the
notes. The notes bear interest at 5.25% per annum, payable semi-annually and
mature on August 15, 2004. The notes are convertible into ordinary shares at any
time at or before maturity, unless previously redeemed, at a conversion price of
$42.39 per share, subject to adjustment in certain events. We may, at our
option, redeem the notes on or after August 18, 2000, in whole or in part, at
certain redemption prices. Following the repurchases of an aggregate
$42,500,000, $6,000,000 and $5,485,000 principal amount of the notes in 1998,
1999 and 2001, respectively, at aggregate purchase prices of approximately
$29,203,000, $4,200,000 and $3,986,000, we had, as of May 31, 2002, an aggregate
$43,765,000 principal amount of the notes outstanding. We anticipate needing to
raise additional funds to repay amounts due upon of the maturity of the notes
either through additional borrowings or through the sale of securities. In the
event that we seek to raise funds through additional borrowings, we may be
required to borrow on terms or at interest rates that are less favorable to us
than the terms and rates applicable to our current outstanding debt. This would
result in increased financial expenses.
As of December 31, 2001, our cash and cash equivalents and short-term
investments totaled $51,185,000 compared to $58,745,000 as of December 31, 2000.
This decrease was primarily the result of the use of cash to repurchase
convertible notes, to purchase certain software technology rights and to invest
in additional property and equipment. As of December 31, 2001, working capital
was $57,758,000 and total assets were $123,379,000 compared to $67,523,000 and
$149,318,000, respectively as of December 31, 2000. We believe that our cash,
short-term investments and funds generated from operations and research and
development grants will be sufficient to finance our operations for at least the
next twelve months. However, because we depend mostly on our revenues to fund
our operating activities, if our revenues were to decrease, whether due to a
continued slowdown in the industries in which we operate, our sales decreasing
as a result of evolving industry standards and rapid technological changes that
could result in our products being no longer in demand, our failure to retain
our customers or for any other reason, we may need to reduce our operating
expenses, including possibly through additional reductions in personnel, or use
more of our cash reserves to fund operating expenses. Similarly, in the event
that the amounts we receive from research and development grants decline, we may
need to reduce operating expenses or utilize more of our cash reserves.
Our trade receivables, net of allowance for doubtful accounts on December
31, 2001 totaled $23,110,000 compared to $30,304,000 on December 31, 2000. The
collection cycle has significantly decreased during 2001 compared to 2000, due
to our successful continuous focus on collection. We believe that generally, the
quality of receivables remained unchanged and we will continue our efforts to
lower the collection cycle.
Concentration of credit risk. Financial instruments that potentially
subject us to concentration of credit risk consist principally of cash and cash
equivalents, short-term investments and accounts receivable. Our cash and cash
equivalents and short-term investments are invested in deposits with major banks
in the United States, Europe and Israel. We believe that the financial
institutions holding our cash funds are financially sound, and that minimal
credit risk exists with respect to our marketable securities, which consist of
debt securities of the Government of Israel and highly-rated corporate bonds.
Our accounts
43
receivable are generated from a large number of customers, mainly large
industrial corporations and their suppliers, located in Europe, the United
States and the Far East. We perform ongoing evaluations of our accounts
receivable and maintain an allowance for doubtful accounts which we believe is
adequate to cover all anticipated losses with respect to our accounts.
Contractual Payments due by Period
Obligations (US$ in thousands)
Total Less than 1-3 4-5 After 5
1 Year Years Years Years
Long-Term Debt $43,765 --- $43,765 --- ---
Operating Leases $11,152 $4,336 $4,351 $2,223 $242
Unconditional $15,169 $15,169 --- --- ---
purchase
Obligations
Total Contractual $70,086 $19,505 $48,116 $2,223 $242
Cash Obligations
Derivative Financial Instruments. In 2001, we adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities
(collectively referred to as SFAS No. 133). The initial adoption did not have an
impact on our shareholders' equity. SFAS133 requires that all derivatives be
recorded in the balance sheet at fair value. If certain conditions are met, a
derivative may be designated as a hedge of exposures to changes in fair value,
cash flows or foreign currency exchange rates. The accounting for changes in the
fair value of such derivative instruments depends on the intended use of the
derivative and the nature of any hedge designation thereon. We generally use
derivatives to reduce our exposure to foreign currency risks stemming from
various assets and liabilities. In 1999, 2000 and 2001, 70%, 70% and 71% of our
revenues, respectively, were denominated in non-dollar currencies. Since our
financial results are reported in dollars, fluctuations in the rates of exchange
between the dollar and non-dollar currencies may have a material effect on our
results of operations. We, therefore, use currency exchange forward contracts to
hedge the impact of the variability in the exchange rates on accounts receivable
denominated in non-dollar currencies. The counterparties to our forward
contracts are major financial institutions with high credit ratings. We believe
the risk of incurring losses on such forward contracts related to credit risks
is remote and that any losses would be immaterial. As of December 31, 2001, we
had certain forward contracts for periods ending March 2002, as follows:
- - Obligation to sell Japanese Yen 518,000,000 for a total of $4,198,000;
- - Obligation to sell Euro 9,200,000 for a total of $8,108,000;
- - Obligation to sell Singaporean Dollar 5,294,000 for a total of $2,863,000.
Related Party Transactions. In July 1999 we entered into an agreement with
A.T.L. Management Services Ltd. ("A.T.L"), formerly known as S.H.A. Venture
Management Services Ltd., a company in which Shlomo Dovrat, our Vice Chairman of
the Board, Harel Beit-On, our Chairman of the Board, President and Chief
Executive Officer, and Avi Zeevi, a member of our Board, each have beneficial
interests. Our agreement with A.T.L. provides for an annual management fee of
$400,000 in consideration for strategic management and business and financial
consulting services to be provided by A.T.L. In 2001 we paid A.T.L. management
fees in the amount of $400,000.
44
C. RESEARCH AND DEVELOPMENT, PATENTS, LICENSES, ETC.
We conduct our research and development operations primarily in Israel,
U.S., Germany and France. Our research and development efforts have been
financed through internal resources, through programs sponsored by the Chief
Scientist of the Government of Israel and through grants from other third
parties. In the years ended December 31, 1999, 2000 and 2001, our gross research
and development expenditures were $27,543,000, $33,030,000 and $28,333,000,
respectively (31%, 37% and 32% of total revenues, respectively). In 1999, 2000
and 2001, the Chief Scientist of the Government of Israel provided participation
financing for research and development efforts of $3,140,000, $2,500,000 and
$1,244,000, respectively (11%, 8% and 4% of total research and development
expenses, respectively). Under the provisions of Israeli law in effect until
1996, royalties of 2%-3% of the revenues derived in connection with products
developed according to, or as a result of, a research and development program
funded by the Chief Scientist must be paid to the State of Israel. Pursuant to
an amendment effected in 1996 effective with respect to Chief Scientist programs
funded in or after 1994, royalties generally at the rate of 3% during the first
three years, 4% over the following three years and 5% in or after the seventh
year of the revenues derived in connection with products developed according to
such programs are payable to the State of Israel. The maximum aggregate
royalties will not exceed 100% (for funding prior to 1994, 100%-150%) of the
dollar-linked value of the total grants received. Pursuant to an amendment
effected in 2000, effective with respect to Chief Scientist programs funded in
or after 2000, the royalty rates described above were updated to 3% during the
first three years and 3.5% in or after the fourth year, of the revenues derived
in connection with products developed under such programs. Pursuant to an
amendment effected on January 1, 1999, effective with respect to Chief Scientist
programs approved in or after 1999, funds received from the Chief Scientist
shall bear annual interest at a rate equal to LIBOR for twelve months.
The Government of Israel does not own proprietary rights in the technology
developed using its funding and there is no restriction on the export of the
products manufactured using the technology. Certain restrictions with respect to
the technology do apply, however, including the obligation to manufacture the
product based on such technology in Israel and to obtain the Chief Scientist's
consent for the transfer of the technology to a third party. If the Chief
Scientist consents to the manufacture of the products outside Israel, applicable
regulations would require the payment of increased royalties, ranging from 120%
up to 300% of the amount of the Chief Scientist grant, depending on the
percentage of foreign manufacture. These restrictions continue even if we have
paid the full amount of royalties payable in respect of the grants. Based upon
the aggregate participation payments received to date, we expect that we will
continue to pay royalties to the Chief Scientist on sales of our products and
related services for the foreseeable future. In the years ended December 31,
1999, 2000 and 2001, we paid or accrued royalties to the Chief Scientist in the
amount of $1,428,000, $1,543,000 and $1,504,000, respectively. From time to time
provisions of Israeli law relating to the terms of the Chief Scientist
participation have been amended and may be further amended in the future. In
addition, the Chief Scientist budget has been subject to reductions and such
reductions may affect the availability of funds for chief scientist
participation in the future. Such amendments or reductions in budgets could have
a material adverse effect on our business, financial condition and results of
operations.
In addition to royalty-bearing grants from the Office of the Chief
Scientist we participate in a program sponsored by the Office of the Chief
Scientist that is intended to develop generic technologies for use by Israeli
high-technology companies. As part of this program, we are a member of a
research consortium comprised of several Israeli high-technology companies that
are engaged in the development of software tools for industrial processes. The
Office of the Chief Scientist contributes 66% of the approved research and
development budget for the research consortium and the members of the research
consortium
45
contribute the remaining 34%. No royalties are payable to the Israeli government
in relation to products or other developments attributable to this funding.
Expenses in excess of the approved budget are borne by the consortium members.
In general, any consortium member that develops technology in the framework of
the consortium retains the intellectual property rights to the technology
developed by this member, and all the members of the consortium have the right
to utilize and implement such technology without having to pay royalties to the
developing consortium member. As of December 31, 2001, we have recognized
$4,660,000 in grants from the Office of the Chief Scientist in connection with
the consortium.
In 1994, we entered into an agreement with the Binational Industrial
Research and Development Fund ("BIRD-F") for a development project conducted by
Tecnomatix and its wholly owned U.S. subsidiary, Tecnomatix Technologies, Inc.
We are eligible, subject to certain conditions, to receive grants from BIRD-F
upon progress of such development project. Under the terms of the BIRD-F grant,
we are obligated to pay royalties of 5% of the revenues derived from sales of
products developed in this project, up to 150% of the amount granted. The total
amount received, net of royalties paid or accrued as at December 31, 2001, was
$317,000. Royalty expenses to the BIRD-F in the year ended December 31, 2001
were $12,000. In January 2002, we entered into an agreement with BIRD-F for a
development project conducted by Tecnomatix and its wholly owned U.S.
subsidiary, Tecnomatix Unicam, Inc.. We are eligible, subject to certain
conditions, to receive grants from BIRD-F upon progress of such development
project. Under the terms of the BIRD-F grant, we are obligated to pay royalties
of 5% of the revenues derived from sales of products developed in this project,
up to 150% of the amount granted.
D. TREND INFORMATION
Our quarterly results of operations may be subject to significant
fluctuations due to several factors, primarily the timing of large orders, which
represent a significant percentage of our revenues, and other factors, including
customer budget cycles, the low level of business activity during the summer
months in the European market, the timing of new product announcements, the
release of new products by us and our competitors and the effective provision by
us of customer support.
In addition, our results of operations and financial condition may be
affected by various other factors discussed in "Item 3D: Risk Factors" including
the length of our sales cycle, market acceptance of our e-Manufacturing suite of
applications, changes in political, military or economic conditions in Israel,
general slowing of local or global economies and decreased economic activity in
one or more of our target industries.
46
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Our directors and executive officers are listed below, together with brief
accounts of their business experience and certain other information.
NAME AGE POSITION
- ---- --- --------
Harel Beit-On 42 Chairman of the Board of
Directors(3), President and Chief
Executive Officer
Shlomo Dovrat(1) 42 Vice Chairman of the Board of
Directors
Dr. Meir Barel(1) 52 Director
Kenneth J. Bialkin(2) 72 Director
Gerald B. Cramer(2) 71 Director
Aharon Dovrat(1)(2) 70 Director
Prof. Michel Theys 67 Director
Arie Rosenfeld 58 Director
Motti Weiss 52 Director
Avi Zeevi 51 Director
Talia Livni(1)(2) 59 Director
Oren Steinberg 34 Executive Vice President and Chief
Financial Officer
Alex Shapira 44 Executive Vice President of Product
Operations
Amir Livne 41 Executive Vice President of Industry
Marketing
Olivier Leteurtre 39 Executive Vice President of Sales &
Field Operations
Israel Levy 42 Chief Executive Officer of Tecnomatix
Unicam Inc.
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Subject to the approval of our stockholders, as required by the Companies
Law.
HAREL BEIT-ON has served as Chairman of the Board of Directors since 2001,
as President of Tecnomatix since 1995, as Chief Executive Officer since 1996 and
as a director since 1999. From 1994 to 1996, Mr. Beit-On served as Chief
Operating Officer of Tecnomatix. Between 1991 and 1994, Mr. Beit-On served as
Executive Vice President of Sales and Engineering of Tecnomatix. From 1988 to
1991, Mr. Beit-On served as the President of Tecnomatix's United States sales
and support subsidiary. From 1985 to 1988, Mr. Beit-On served in various
marketing positions with Tecnomatix.
SHLOMO DOVRAT is the founder of Tecnomatix and has served as a director of
Tecnomatix since its inception and as its Chairman of the Board of Directors
from 1995 to 2001. Mr. Dovrat served as the Chief Executive Officer and
President of Tecnomatix from its inception to 1996 and 1995, respectively. Mr.
Dovrat served as a director, President and Chief Executive Officer of Oshap from
1983 until 1999. Mr. Dovrat is now a founding partner in several high-tech
Venture Capital funds including Carmel Software Fund and Dor Ventures Fund, and
he is also a partner in Dovrat & Co., a privately held investment group. Shlomo
Dovrat is Aharon Dovrat's son.
DR. MEIR BAREL has served as a director of Tecnomatix since 1989. Dr.
Barel has served as the managing partner of Star Ventures Management, a venture
capital company
47
headquartered in Munich with offices in Tel-Aviv since 1992. From 1986 to 1992,
Dr. Barel was an investment manager and later a managing partner of TVM Techno
Venture Management GmbH & Co. KG, Munich. Prior to 1986, Dr. Barel worked in
various German and Israeli companies in the factory automation, computer chip
design and data communications fields. Dr. Barel is a director of Alvarion Ltd.
and Chiaro Networks Ltd.
KENNETH J. BIALKIN has served as a director of Tecnomatix since 1993. Mr.
Bialkin has been a partner of the law firm of Skadden, Arps, Slate, Meagher &
Flom LLP, U.S. counsel to Tecnomatix for more than the past five years. Mr.
Bialkin is a director of Municipal Assistance Corporation for the City of New
York, CitiGroup, Inc. and Sapiens International Corporation N.V.
GERALD B. CRAMER has served as a director of Tecnomatix since 1996. Mr.
Cramer is a co-founder and has been Chairman of CRM LLC since 1973. Prior to
co-founding CRM LLC., Mr. Cramer was a senior partner at Oppenheimer & Company.
Mr. Cramer serves on the board of directors of Teatown Lake Reservation, the
Board of Trustees at Syracuse University and serves on its Investment Committee.
Mr. Cramer is a former trustee of St. Joseph's Medical Center. Mr. Cramer earned
a BSc from Syracuse and attended the University of Pennsylvania Wharton Graduate
School of Finance. Mr. Cramer served as a Lieutenant in the United States Navy.
AHARON DOVRAT has served as a director of Tecnomatix since 1989 and served
as Chairman of the Board of Directors of Tecnomatix from 1989 to February 1995.
Until 1991, Mr. Dovrat served as Managing Director of Clal (Israel) Ltd., one of
Israel's largest public investment companies. From 1991 until 1998, Mr. Dovrat
was the founder, principal shareholder and Chairman of Dovrat, Shrem & Co., an
investment-banking firm established in 1991. Mr. Dovrat currently serves as
Chairman of Dovrat & Co., a private investment company, chairman of Isal Amlat
Ltd., a publicly traded investment company, chairman of Breezecom Ltd., a
publicly traded wireless telecommunications equipment company, and chairman of
Cognifit Ltd. Mr. Dovrat also serves as board member of DS Polaris Ltd., Delta
Galilee Industries Ltd., ESC Medical Systems Ltd. and B.O.S - Better Online
Solutions. Aharon Dovrat is Shlomo Dovrat's father.
PROF. MICHEL THEYS has served as a director of Tecnomatix since 1991.
Prof. Theys held various positions at SEMA Group, one of the largest system
integration companies in Europe from 1963 to 2001, when SEMA was acquired by
Schlumberger. Prof. Theys is currently a consultant to SEMA Group Benelux. Prof.
Theys was a Professor of Computer Science at the University of Brussels from
1969 until 2000, when he was appointed Honorary Professor. Prof. Theys is a
director of Forenia, Polysoc International, INTEC Management and Direct Skills
and President of WIN-Wallonnie Internet.
ARIE ROSENFELD has served as a director of Tecnomatix since 1996. From
1988 to 1995, Mr. Rosenfeld served as President and Chief Executive Officer of
Scitex Corporation Ltd.. Mr. Rosenfeld had served in various management
positions at Scitex since 1968. Mr. Rosenfeld serves as a director of Supercom
Ltd. and Xaar Plc and is the manager of Dor Ventures Fund, a venture capital
fund.
MOTTI WEISS has served as a director of Tecnomatix since 1989. Mr. Weiss
is a managing partner in Plenus, a venture lending fund. From 1995 until 1999,
Mr. Weiss served as Chief Operating Officer of Sapiens International Corporation
N.V. From 1993 to 1995, Mr. Weiss served as Chief Operating Officer of Oshap.
From 1985 to 1993, Mr. Weiss served as Chief Financial Officer and Secretary of
Oshap and Tecnomatix. Mr. Weiss serves as board member of B.O.S - Better Online
Solutions.
48
AVI ZEEVI served as a director of Tecnomatix since 1995. Mr. Zeevi has
served as Chief Financial Officer of Oshap from 1994 until 1999 and he is now a
founding partner in several high-tech Venture Capital funds including Carmel
Software Fund and Dor Ventures Fund. From 1983 to 1994, Mr. Zeevi served as
Chief Executive Officer of Oshap's subsidiary MINT Software Technologies Ltd.
TALIA LIVNI has served as a director of Tecnomatix since 2000. Ms. Livni
has been the Legal Advisor of the Histadrut since 1997. From 1992 until 1996,
she served as Head of the Human Resources Division of the Israeli Ministry of
Defense. From 1975 until 1992, Ms. Livni served as Senior Deputy Legal Advisor
to the Israeli Ministry of Defense. From 1973 until 1975, Ms. Livni served as
Legal Adviser to Rafael. OREN STEINBERG was appointed Chief Financial Officer
and Executive Vice President of Tecnomatix Technologies Ltd in June 2001. Mr.
Steinberg joined Tecnomatix in August 2000 as Chief Financial Officer and Vice
President of Tecnomatix-Unicam Inc., a subsidiary of Tecnomatix based in New
Hampshire, USA. Prior to joining Tecnomatix, Mr. Steinberg served as CFO & Vice
President at Lucent Technologies Israel - Wireless Networking Group, where he
was responsible for the financial operations of the firm and its American
subsidiaries located in New Jersey, Boston and Chicago. In January 1999, Mr.
Steinberg was involved in the acquisition of Wave Access Ltd. by Lucent
Technologies. From 1995 to 1997, Mr. Steinberg served as Financial Manager and
Controller of Sapiens. Prior to 1995, Mr. Steinberg was a certified public
accountant at Price Waterhouse, LLP and at Somech Cheikin and Assoc. CPA,
Israel.
AMIR LIVNE serves as Vice President Business Development since February
1999. Mr. Livne served as Vice President of Marketing from January 1998 until
February 1999, and prior to this he served as Director of Strategic Accounts.
Before joining Tecnomatix, Mr. Livne worked as a senior associate at Booz, Allen
& Hamilton, a leading management consulting firm, for a period of three years.
Prior to his employment with Booz, Allen & Hamilton, Mr. Livne served in various
software research and development positions for a period of six years.
ALEX SHAPIRA was appointed Executive Vice President of Product Operations
in December 2000. Mr. Shapira joined Tecnomatix in May 2000 as Vice President of
R&D. Before joining Tecnomatix Shapira served as a Vice President of R&D at
Cimatron Ltd., a leader in CAD/CAM and collaboration software for the tooling
industry. Between 1995 and 1998, Mr. Shapira served as Vice President of R&D at
PC Soft International (today eMation), one of the leading companies in the
Industrial Control and Automation field. Prior to this, Mr.Shapira served as an
Application Group Manager at TEKEM Ltd., (today part of Ness Technologies Ltd.)
a large Israeli software-house.
OLIVIER LETEURTRE was appointed executive vice president of sales for
Tecnomatix in January 2002. Previously, Mr. Leteurtre managed our operations in
Japan and Korea. Prior to his service in Japan, Mr. Leteurtre managed our
operations in Western Europe. Prior to joining Tecnomatix in 1993, Mr. Leteurtre
was a regional manager at Computervision, France.
ISRAEL LEVY was appointed chief executive officer of our Tecnomatix Unicam
subsidiary, in 2001. Mr. Levy came to Tecnomatix from BizWorks at interBiz, the
e-Business application division of Computer Associates International Inc., where
he was senior vice president responsible for worldwide sales and communications.
Prior to this, he held several senior positions with Computer Associates in both
Israel and the United States. He also previously held technical positions at Tel
Aviv University, where he implemented and
49
managed financial systems. He also worked as an independent contractor for the
development of client-server applications for personal computers.
B. COMPENSATION
The aggregate compensation paid to, or accrued on behalf of, all our
directors and executive officers as a group (18 persons) during the year ended
December 31, 2001, was approximately $1,512,752 in salary, management fees,
bonus, directors' fees and expenses and approximately $ 121,748 in amounts set
aside or accrued for, to provide pension, retirement or similar benefits. Such
amounts do not include amounts expended by us for automobiles made available to
our directors and executive officers, expenses (including business travel,
professional and business association dues and expenses) reimbursed to directors
and officers and other fringe benefits commonly provided by Israeli companies to
their executives. We currently do not compensate directors as such, but may do
so in the future. See "Item 6E: Share Ownership" and "Item 7: Major Shareholders
and Related Party Transactions" for a description of entities affiliated with
certain of our directors.
As of April 30, 2001, options granted to our officers and directors to
purchase up to 1,699,250 ordinary shares were outstanding. The exercise price of
these options ranges between $4.75-$25.75 per share. The expiration date of
these options ranges from July 2006 to December 2011.
We do not have service contracts with any of our Directors.
C. BOARD PRACTICES
TERMS OF OFFICE
Our articles provide that directors are elected by an ordinary resolution
of a general meeting of our shareholders. However, our directors (other than
External Directors, who are appointed pursuant to the provisions of the
Companies Law) are apportioned into three classes: (a) one class to hold office
until our annual meeting of shareholders to be held in 2002, consisting of Motti
Weiss and Kenneth Bialkin, (b) another class to hold office until our annual
meeting of shareholders to be held in 2003, consisting of Prof. Michel Theys,
Arie Rosenfeld and Dr. Meir Barel and (c) a third class to hold office until our
annual meeting of shareholders to be held in 2004, consisting of Shlomo Dovrat,
Aharon Dovrat, Avi Zeevi and Harel Beit-On. The periods during which each of our
directors has served in office are set forth in Section 6A above.
COMPENSATION COMMITTEE
Our Board of Directors has appointed a Compensation Committee. The members
of the Compensation Committee are Shlomo Dovrat, Aharon Dovrat, Dr. Meir Barel
and Talia Livni.
EXTERNAL DIRECTORS; AUDIT COMMITTEE; INTERNAL AUDITOR
External Directors
We are currently subject to the provisions of the New Israeli Companies
Law 5739 - 1999, which became effective on February 1, 2000 (the "Companies
Law"). Under the Companies Law, companies incorporated under the laws of the
State of Israel whose shares have been offered to the public in or outside
Israel are required to appoint two external directors. The Companies Law
provides that a person may not be appointed as an external director if the
person's relative, partner, employer or any entity under the person's control,
50
has, or had during the two years preceding the date of appointment, any
affiliation with us, any entity controlled by us or by any entity controlling
us. The term "affiliation" includes: (a) an employment relationship; (b) a
business or professional relationship maintained on a regular basis; (c)
control; and (d) service as an office holder. In addition, no person can serve
as an external director if the person's or other business creates, or may
create, conflict of interests with the person's responsibilities as an external
director or may otherwise interfere with the person's ability to serve as
external director. Until the lapse of two years from termination of office, a
company may not engage an external director to serve as an office holder and
cannot employ or receive services from that person, either directly or
indirectly, including through a corporation controlled by that person.
External directors are to be elected by a majority vote at a shareholders'
meeting, provided that either: (1) the majority of shares voted at the meeting,
include at least one third of the shares of non-controlling shareholders voted
at the meeting; or (2) the total number of shares of non-controlling
shareholders voted against the election of the external director does not exceed
one percent of the aggregate voting rights in the company.
The initial term of an external director is three years and may be
extended for an additional three years. External directors may be removed only
by the same percentage of shareholders as is required for their election, or by
a court, and then only if the external directors cease to meet the statutory
qualifications for their appointment or if they violate their duty of loyalty to
the company. Each committee exercising powers of the board of directors is
required to include at least one external director. Gerald Cramer and Talia
Livni are external directors pursuant to the Companies Law.
An external director is entitled to compensation as provided in
regulations adopted under the new Companies Law and is otherwise prohibited from
receiving any other compensation, directly or indirectly, in connection with
service provided as an external director.
Audit Committee
Under the Companies Law, the board of directors of any company that is
required to appoint external directors must also appoint an audit committee,
comprised of at least three directors including all of the external directors
but excluding: (a) the chairman of the board of directors; (b) the controlling
shareholder or a relative of the controlling shareholder; or (c) any director
employed by the company or who provides services to the company on a regular
basis. Under the Nasdaq rules, we are required to have at least three
independent directors on the audit committee. In addition, Nasdaq requires that
the members of the audit committee not have any relationship to the company
which may interfere with the exercise of their independence and must be
financially literate. In addition, at least one member of the audit committee
must have accounting or related financial management expertise.
The roles of the audit committee include identifying irregularities in the
management of the company's business and approving related party transactions as
required by law. The responsibilities of the audit committee under the Nasdaq
rules include, among other things, evaluating the independence of a company's
outside auditors.
Our Audit Committee currently consists of Aharon Dovrat, Kenneth J.
Bialkin, Gerald Cramer and Talia Livni.
Internal Auditor
51
The Companies Law provides that public companies must appoint an internal
auditor that will be appointed by the board, in accordance with proposal of the
audit committee. An internal auditor may not be an interested party, an office
holder or an affiliate, or a relative of an interested party, nor may the
internal auditor be the company's independent accountant or its representative.
The role of the internal auditor is to examine, among other things, the
compliance of the company's conduct with applicable law and orderly business
procedures.
We currently have an internal auditor who meets the independence
requirements of the Companies Law.
D. EMPLOYEES
As of March 31, 2002, we employed 696 employees, 527 of whom were employed
outside Israel. Out of the total number of our employees, 238 were engaged in
research and development, 234 were engaged in maintenance and engineering, 201
were engaged in sales and marketing and 23 were engaged in corporate management,
finance and general administration.
Our Israeli employees are not party to any collective bargaining
agreement. However, we are subject to certain labor related statutes, and to
certain provisions of collective bargaining agreements between the Histadrut
(General Federation of Labor in Israel) and the Coordinating Bureau of Economic
Organizations (including the Industrialists' Association) which are applicable
to our Israeli employees by virtue of expansion orders of the Israeli Ministry
of Labor and Welfare. These statutes and provisions principally concern the
length of the work day, minimum daily wages for professional workers,
contributions to a pension fund, insurance for work-related accidents,
procedures for dismissing employees, determination of severance pay, annual and
other vacations, sick pay and other conditions of employment. We generally
provide our employees with benefits and working conditions beyond the required
minimum. An additional significant provision applicable to all employees in
Israel under collective bargaining agreements and expansion orders is the
automatic adjustment of wages in relation to increases in the consumer price
index. The amount and frequency of these adjustments are modified from time to
time.
We consider our relationship with our employees to be good and we have
never experienced a labor dispute, strike or work stoppage.
Our success depends in part upon our continuing ability to attract and
retain highly qualified managerial, technical, sales and marketing personnel. We
experience from time to time difficulties in hiring and retaining qualified
personnel, primarily due to the shortage of qualified engineers, research and
development and sales personnel and the high demand for such personnel both in
and outside Israel.
E. SHARE OWNERSHIP
1. The following table sets forth, as of April 30, 2002, certain information
with respect to the beneficial ownership of our ordinary shares held by our
directors and officers. Other directors and officers that do not appear in the
table below beneficially own less than one percent of our ordinary shares.
Name Amount Owned Percent of Class
---- ------------ ----------------
Harel Beit On (1) 884,480 8.39%
Shlomo Dovrat (2) 864,159 8.19%
Avi Zeevi (3) 162,643 1.54%
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Aharon Dovrat (4) 90,000 0.85%
Kenneth J. Bialkin (5) 29,968 0.28%
Gerald B. Cramer (6) 446,162 4.25%
(1) The number of ordinary shares includes options to acquire 261,864 ordinary
shares that are exercisable within 60 days. Mr. Beit On also holds an
additional 231,886 options to acquire ordinary shares. The exercise price
of the options ranges between $6.875-$25.75 per share. The final
expiration date of the options ranges from January 2006 to January 2011.
Please refer also to "Item 7A: Major Shareholders" for additional
information regarding shares which may be deemed to be beneficially owned
by Mr. Beit On
(2) The number of ordinary shares includes options to acquire 178,614 ordinary
shares that are exercisable within 60 days. Mr. Dovrat also holds options
to acquire an additional 178,386 ordinary shares. The exercise price of
the options ranges between $6.875-$25.75 per share. The final expiration
date of the options ranges from May 2007 to January 2011. Please refer
also to "Item 7A: Major Shareholders" for additional information regarding
shares which may be deemed to be beneficially owned by Mr. Dovrat.
(3) The number of ordinary shares includes options to acquire 24,525 ordinary
shares that are exercisable within 60 days. Mr. Zeevi also holds options to
acquire an additional 51,475 ordinary shares. The exercise price of the
options ranges between $6.875-$20.75 per share. The final expiration date
of the options ranges from July 2009 to January 2011. Please refer also to
"Item 7A: Major Shareholders" for additional information regarding shares
which may be deemed to be beneficially owned by Mr. Zeevi.
(4) The number of ordinary shares includes options to acquire 20,000 ordinary
shares that are exercisable within 60 days. Mr. Dovrat also holds options
to acquire an additional 20,000 ordinary shares. The exercise price of the
options ranges between $6.875-$18.38 per share. The final expiration date
of the options ranges from July 2006 to January 2011. Please refer also to
"Item 7A: Major Shareholders" for additional information regarding shares
which may be deemed to be beneficially owned by Mr. Dovrat.
(5) The number of ordinary shares includes options to acquire 20,000 ordinary
shares that are exercisable within 60 days. Mr. Bialkin also holds options
to acquire an additional 20,000 ordinary shares. The exercise price of the
options ranges between $6.875-$18.38 per share. The final expiration date
of the options ranges from July 2006 to January 2011. The number of
ordinary shares excludes 2,000 ordinary shares held by the Bialkin Family
Foundation for which Mr. Bialkin disclaims beneficial ownership. In
addition, Mr. Bialkin is involved with a certain investment fund which
holds 218,246 ordinary shares. Mr. Bialkin expressly disclaims beneficial
ownership of such shares.
(6) The number of ordinary shares also includes options to acquire 20,000
ordinary shares that are exercisable within 60 days. The shares listed on
the table include shares held by a number of trusts for the benefit of
members of Mr. Cramer's family and other related entities. Mr. Cramer also
holds options to acquire an additional 20,000 ordinary shares. The exercise
price of the options ranges between $6.875-$18.38 per share. The final
expiration date of the options ranges from July 2006 to January 2011. In
addition, Mr. Cramer is involved with a certain investment fund which holds
218,246 ordinary shares. Mr. Cramer expressly disclaims beneficial
ownership of such shares.
2. We have granted to our employees and officers options to purchase ordinary
shares pursuant to our stock option plans. As of April 30, 2002, options to
purchase 4,043,650 ordinary shares were outstanding and 106,073 ordinary shares
were available for grants of
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additional options. The following is a description of certain provisions of our
stock option plans.
In August 1994, we adopted the Tecnomatix Technologies Ltd. 1994 Stock
Option Plan (the "1994 Plan"), pursuant to which options to acquire up to
630,000 ordinary shares may be granted to employees, officers and directors. In
May 1997, the Compensation Committee resolved that the aggregate number of
ordinary shares which may be granted under the 1994 Plan shall be 930,000. In
September 2001, the Compensation Committee resolved that the aggregate number of
ordinary shares which may be granted under the 1994 Plan shall be 864,250.
Options pursuant to the 1994 Plan are exercisable at an exercise price equal to
the fair market value of the ordinary shares at the date of the grant. Pursuant
to the 1994 Plan, a grantee is entitled to exercise 40% of the options granted
to him after the first anniversary of the date of grant and an additional 30%
after each of the second and third anniversaries of the date of grant. As of
April 30, 2002, options to purchase 44,800 ordinary shares were outstanding
pursuant to the 1994 Plan and 900 ordinary shares were available for grants of
additional options.
In July 1996, we adopted the Tecnomatix Technologies Ltd. 1996 Stock
Option Plan (the "1996 Plan"). The 1996 Plan provides for the grant of options
to employees, officers and directors to acquire up to 360,000 ordinary shares at
a purchase price of 100% of the fair market value of the ordinary shares on the
date of grant. Pursuant to the 1996 Plan, the vesting of options granted to a
particular grantee is determined by our Compensation Committee, and in the
absence of such determination, a grantee is entitled to exercise 40% of the
options granted to him after the first anniversary of the date of grant and an
additional 30% after each of the second and third anniversaries of the date of
grant. In May 2001, the Board of Directors resolved that the aggregate number of
ordinary shares which may be issued under the 1996 Plan shall be 3,679,130. In
September 2001, the Board of Directors resolved that the aggregate number of
ordinary shares which may be issued under the 1996 Plan shall be 3,828,922. As
of April 30, 2002, options to purchase 3,457,975 ordinary shares were
outstanding pursuant to the 1996 Plan, and no ordinary shares were available for
grants of additional options.
In July 1996, we adopted the 1996 Directors Stock Option Plan, pursuant to
which options to purchase up to 140,000 Ordinary Shares may be granted to
directors. In August 2001, the Board of Directors resolved that the aggregate
number of ordinary shares which may be issued under the 1996 Directors Stock
Option Plan shall be 404,000. Under the 1996 Directors Stock Option Plan, a
grantee shall be entitled to exercise 20% of the options granted to him after
the second anniversary of the date of the grant, and an additional 20% after
each of the third to sixth anniversaries of the date of the grant. Options
granted pursuant to the 1996 Directors Stock Option Plan expire on the earlier
of the termination of the service of the director and the tenth anniversary of
the grant. The Compensation Committee may change the vesting provisions of the
1996 Directors Stock Option Plan. As of April 30, 2002, options to purchase
300,000 ordinary shares were outstanding pursuant to the 1996 Directors Stock
Option Plan and 84,000 ordinary shares were available for grants of additional
options.
In October 1998, our subsidiary, Robcad Technologies (1980) Ltd. adopted
the Robcad Technologies (1980) Ltd. Stock Option Plan. The Robcad plan provides
for the grant of options to employees, officers and directors of Robcad, its
subsidiaries and affiliated companies, to acquire Tecnomatix ordinary shares.
The vesting and expiration provisions of the Robcad plan are similar to those of
the 1996 plan. As of April 30, 2002, options to purchase 34,025 ordinary shares
were outstanding under the Robcad plan.
In March 1999, we adopted the Performance Based Stock Option Plan,
referred to as the Performance Plan in connection with the Unicam acquisition.
The Performance Plan provides for the grant of options to employees, officers
and consultants to acquire up to
54
451,000 ordinary shares. All options vest seven years from the date of grant but
vesting will accelerate if certain revenue and operating income goals are
reached. Although the Performance Plan was designed for Unicam and Exaline
employees and only such employees have received option grants pursuant to it,
the Performance Plan may be used for other employees. As of April 30, 2002
options to purchase 206,850 ordinary shares were outstanding under the
Performance Plan and 79,401 additional ordinary shares were available for
additional grants of options under such plan.
Currently, we utilize only the 1996 Plan and the 1996 Directors Stock
Option Plan to grant options to our employees and officers.
In December 2000, we adopted the Tecnnomatix Technologies Ltd. 2000
Employee Share Purchase Plan (the "Share Purchase Plan"), pursuant to which our
employees and employees of certain of our subsidiaries may purchase up to
500,000 ordinary shares. Every six months, each employee is entitled to purchase
ordinary shares for an amount of up to 10% of his or her salary (after tax) at
that period, but no more than 750 ordinary shares. The purchase price under the
Share Purchase Plan is the lower of 85% of the price of the ordinary shares on
Nasdaq on the beginning of such six months period or 85% of the price of the
ordinary shares on Nasdaq at the end of such six months period. As of April 30,
2002, 200,179 ordinary shares have been purchased under the Share Purchase Plan.
ITEM 7. MAJOR SHAREHOLDERS AND INTERESTED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth, as of April 30, 2002, certain information
with respect to the beneficial ownership of our ordinary shares held by (a) each
person known to us to beneficially own more than 5% of our outstanding ordinary
shares. With respect to the holdings of Yozma Venture Capital Ltd., we have
relied on reports filed by these entities with the Securities and Exchange
Commission. With respect to the holdings of Shlomo Dovrat, Avi Zeevi and Harel
Beit-On we have relied both on reports filed by these persons with the
Securities and Exchange Commission and on our records.
Identity of Person or Group Amount Owned Percent of Class
- --------------------- ------------ ----------------
Yozma Venture Capital 624,595 5.92%
Ltd.(1)
Harel Beit-On (2) 884,480 8.39%
Shlomo Dovrat (3) 864,159 8.19%
Avi Zeevi (4) 162,643 1.54%
Aharon Dovrat (5) 90,000 0.85%
(1) Yozma Venture Capital Ltd. purchased 594,595 of these shares from SunGard
Data Systems, Inc. in June 2001, as part of the sale of shares by SunGard
described below.
(2) Harel Beit-On is a party to certain understandings with Shlomo Dovrat and
Avi Zeevi and therefore may be deemed to beneficially own the ordinary shares
held by such persons included on this table. Mr. Beit-On expressly disclaims
beneficial ownership of such shares.
(3) Shlomo Dovrat is a party to certain understandings with Avi Zeevi and Harel
Beit-On and therefore may be deemed to beneficially own the ordinary shares held
by such persons included on this table. Mr. Dovrat expressly disclaims
beneficial ownership of such shares. In addition, Mr. Dovrat is a major
shareholder and director of A. S. Dovrat Management Ltd.,
55
which provides advisory services to several investment funds. Mr. Dovrat
expressly disclaims beneficial ownership of 335,763 ordinary shares held by such
investment funds
(4) Avi Zeevi is a party to certain understandings with Shlomo Dovrat and Harel
Beit-On and therefore may be deemed to beneficially own the ordinary shares held
by such persons included on this table. Mr. Zeevi expressly disclaims beneficial
ownership of such shares.
(5) Aharon Dovrat is a major shareholder and director of A. S. Dovrat Management
Ltd., which provides advisory services to several investment funds. Mr. Dovrat
expressly disclaims beneficial ownership of 335,763 ordinary shares held by such
investment funds. Pursuant to a power of attorney granted to Mr. Aharon Dovrat,
he may exercise certain rights with respect to 108,108 ordinary shares, and as a
result be deemed to beneficially own such ordinary shares. Mr. Dovrat expressly
disclaims beneficial ownership of such shares.
As of March 31, 2002, there were 80 record holders of ordinary shares, of
which 55 represented U.S. record holders owning an aggregate of approximately
93% of the outstanding ordinary shares.
SunGard Data Systems, Inc., which was our largest shareholder
(approximately 17%) sold, in a series of separate private transactions that
closed on June 29, 2001, all of our shares held by it at a price per share of
$9.25. Among the purchasers were Harel Beit-On, our Chairman of the Board,
President and Chief Executive Officer, Shlomo Dovrat, a member of our Board,
other members of our Board, Yozma Venture Capital Ltd. and other parties
affiliated with some of them, which in the aggregate purchased approximately
10.5% of our share capital.
The ordinary shares held by the shareholders described in this Section
have the same voting rights as all of our other ordinary shares.
B. RELATED PARTY TRANSACTIONS
In July of 1999 we entered into an agreement with A.T.L. Management
Services Ltd. ("A.T.L."), formerly known as S.H.A. Venture Management Services
Ltd., a company in which Shlomo Dovrat, our Vice Chairman of the Board, Harel
Beit-On, our Chairman of the Board, President and Chief Executive Officer, and
Avi Zeevi, a member of our Board, each have beneficial interests. Our agreement
with A.T.L. provides for an annual management fee of $400,000 in consideration
for strategic management and business and financial consulting services to be
provided by A.T.L. In 2001 we paid A.T.L. management fees in the amount of
$400,000.
C. INTEREST OF EXPERT AND COUNSEL - NOT APPLICABLE.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Our consolidated audited financial statements are included in this annual
report in "Item 18: Financial Statements".
We are not a party to any material litigation and are not aware of any
pending or threatened litigation that would have a material adverse effect on us
or our business.
56
We have never paid dividends on our ordinary shares and do not presently
anticipate paying dividends in the foreseeable future.
B. SIGNIFICANT CHANGES - NOT APPLICABLE
57
ITEM 9. THE OFFER AND LISTING
A4. The following table lists the high and low last reported sales prices on
Nasdaq for the periods indicated:
HIGH LOW
1997 $41.00 $19.25
1998 $33.00 $11.50
1999: $33.00 $11.50
2000:
First Quarter $50.25 $26.50
Second Quarter $29.63 $13.44
Third Quarter $18.19 $12.56
Fourth Quarter $11.00 $ 4.06
2001:
First Quarter $ 7.56 $ 3.75
Second Quarter $ 9.41 $ 3.56
Third Quarter $ 14.3 $ 8.45
Fourth Quarter $14.25 $ 8.65
2002:
First Quarter $15.45 $13.00
Second Quarter $13.45 $ 9.83
(through May 31, 2002)
January $14.20 $13.00
February $13.99 $13.25
March $15.45 $13.01
April $13.45 $11.10
May $11.30 $ 9.83
On May 31, 2002, the last reported sale price of the ordinary shares on
Nasdaq was $9.83 per share.
Our $97,750,000 principal amount of 5.25% Convertible Subordinated Notes
due in August 2004 were registered under the Securities Act of 1933, as amended,
and have been designated for trading in Nasdaq's Private Offerings, Resale and
Trading through Automated Linkage Market. The notes are not otherwise listed on
any securities exchange and are not
58
included in any automated inter-dealer quotation system. During 1998,1999 and
2001, we repurchased an aggregate principal amount of $53,985,000 of these
notes.
C. Our ordinary shares are quoted on the Nasdaq National Market under the symbol
"TCNO".
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL - NOT APPLICABLE
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
OBJECTS AND PURPOSES
The objects and purposes of our company appear in our Memorandum of
Association and include taking all actions permissible under applicable laws;
developing, marketing and manufacturing products for computer-aided design and
manufacturing in the electronics industry; developing business opportunities in
various technological industries and acquiring companies and products in such
industries; and effecting any transaction which will assist us, in the view of
our management, in relation to our operations.
APPROVAL OF SPECIFIED RELATED PARTY TRANSACTIONS
The Companies Law imposes a duty of care and a duty of loyalty on all of a
company's office holders as defined below, including directors and executive
officers. The duty of care requires an office holder to act with the level of
care which a reasonable office holder in the same position would have acted
under the same circumstances. The duty of loyalty generally requires an office
holder to act in good faith and for the good of the company. An "office holder"
as defined in the Companies Law is a director, a general manager, a chief
executive officer, a deputy general manager, a vice general manager, other
managers directly subordinate to the general manager and any person who fills
one of the above positions without regard to title.
The Companies Law requires that an office holder of a company promptly
disclose any personal interest that he may have and all related material
information known to him, in connection with any existing or proposed
transaction by the company. Once an office holder complies with these disclosure
requirements, the board of directors may approve a transaction between the
company and the office holder, or a third party in which an office holder has a
personal interest, unless the articles of association provide otherwise. A
transaction that is adverse to the company's interest cannot be approved. If the
transaction is an extraordinary transaction as defined under the Companies Law,
then, in addition to any approval stipulated by the articles of association, it
also requires audit committee approval before board approval and, in specified
circumstances, subsequent shareholder approval. Any transaction between a
company and one of its directors relating to the conditions of the director's
service, including in relation to exculpation, insurance or indemnification, or
in relation to the terms of the director's service in any other capacity
requires audit committee approval before board approval and subsequent
shareholder approval.
The Companies Law also provides that a director with an interest in an
extraordinary transaction brought before the board or the audit committee for
its approval may not vote on the approval and may not be present for the
discussion of the issue. However, this rule would not apply if a majority of the
directors or a majority of the members of the audit committee also possessed an
interest in the transaction.
59
Under our articles of association, our board can, among other things,
determine our plans of activity and the principles of financing such plans,
examine our financial situation and set the framework of credit which we may
take and decide to issue a series of debentures.
Our directors are not subject to any age limit requirement, nor are they
disqualified from serving on the board because of a failure to own Tecnomatix
shares.
RIGHTS, PREFERENCES AND RESTRICTIONS UPON SHARES
Our articles of association authorize one class of shares, which are our
ordinary shares. We may declare a dividend to be paid to the holders of our
ordinary shares and allocated among them in proportion to the sums paid up or
credited as paid up on account of the nominal value of their respective
shareholdings, without taking into account any premium paid for the shares. Our
board may declare dividends only out of retained earnings, or earnings derived
over the two most recent fiscal years, whichever is higher. Our articles provide
that our board may declare and pay dividends without any future action by our
shareholders. All unclaimed dividends may be invested or otherwise used by the
board for our benefit until those dividends are claimed. In the event an
unclaimed dividend is claimed, only the principal amount of the dividend will be
paid to the person entitled to the dividend.
If we liquidate, after satisfying liabilities to creditors and subject to
the rights of holders of shares, if any, with any special rights upon winding
up, our assets will be distributed to the holders of ordinary shares in
proportion to their holdings.
Holders of ordinary shares have one vote for each paid-up ordinary share
held of record on all matters submitted to a vote of our shareholders. These
voting rights may be affected by the grant of any special voting rights to the
holders of a class of shares with preferential rights that may be authorized in
the future.
Our articles provide that directors are elected by an ordinary resolution
of a general meeting of our shareholders. Our ordinary shares do not have
cumulative voting rights in the election of directors. Accordingly, the holders
of ordinary shares representing more than 50% of the voting power in our company
have the power to elect all directors. However, our directors (other than
External Directors, who appointed pursuant to the provisions of the Companies
Law) are apportioned into three classes: (a) one class to hold office until our
annual meeting of shareholders to be held in 2002, (b) another class to hold
office until our annual meeting of shareholders to be held in 2003 and (c) a
third class to hold office until our annual meeting of shareholders to be held
in 2004.
We may, subject to the applicable provisions of the Companies Law, issue
redeemable shares and subsequently redeem them. In addition, our board may make
calls for upon shareholders in respect of any sum which has not been paid up in
respect of any shares held by those shareholders.
Under the Companies Law, the disclosure requirements which apply to an
office holder also apply to a controlling shareholder of a public company. A
controlling shareholder includes a shareholder that holds 25% or more of the
voting rights in a public company if no other shareholder owns more than 50% of
the voting rights in the company. Extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal interest, and
the terms of compensation of a controlling shareholder who is an office holder,
require the approval of the audit committee, the board of directors and the
shareholders of the company. The shareholder approval requires that: (a) the
majority of shares voted at the meeting, including at least one third of the
shares of disinterested shareholders voted at the meeting, vote in favor of the
transaction; or (b) the total number of shares of disinterested shareholders
voted against the transaction does not exceed one percent
60
of the aggregate voting rights in the company.
The Companies Law also requires a shareholder to act in good faith towards
a company in which he holds shares and towards other shareholders and to refrain
from abusing his power in the company, including in connection with voting at a
shareholders' meeting on:
- Any amendment to the articles of association;
- An increase in the company's authorized capital;
- A merger; or
- Approval of some of the acts and transactions which require
shareholder approval.
A shareholder has the general duty to refrain from depriving other
shareholders of their rights. Any controlling shareholder, any shareholder that
knows that it possesses the power to determine the outcome of a shareholder vote
and any shareholder that, under the provisions of the articles of associations,
has the power to appoint an office holder in the company, is under a duty to act
in fairness towards the company. The Companies Law does not describe the
substance of this duty.
MODIFICATIONS OF SHARE RIGHTS
Under our articles of association, the rights attached to any class may be
varied by adoption of the necessary amendment of the articles, provided that the
holders of shares of the affected class approve the change by a class meeting in
which the holders of at least 75% of the shareholders present at the meeting, in
person or by proxy, with the right to vote on the issue approve the change. Our
articles differ from the Companies Law in this respect, as under the law changes
in the rights of shareholders require the consent of at least 50% of the voting
power of the affected class represented at the meeting and voting on the change.
In addition, our articles require for quorum at a meeting of a particular class
of shares, the presence of one shareholder holding at least 75% of the shares of
that class. The Companies Law requires for quorum the presence of two
shareholders holding at least 25% of the voting power in the company. Our
articles also require, in order to amend the articles, the approval of the
holders of at least 75% of the shareholders present at a meeting, in person or
by proxy, with the right to vote on the issue. However, the Companies Law
requires only the consent of at least 50% of the voting power of the company
represented at a meeting and voting on the change for amendment of articles of
association.
SHAREHOLDERS MEETINGS AND RESOLUTIONS
We are required to hold an annual general meeting of our shareholders once
every calendar year, but no later than 15 months after the date of the previous
annual general meeting. All meetings other than the annual general meeting of
shareholders are referred to as extraordinary general meetings. Extraordinary
general meetings may be called by our board whenever it sees fit, at such time
and place, within or without the State of Israel, as it may be determined. In
addition, the Companies Law provides that the board of a public company is
required to convene an extraordinary meeting upon the request of (a) any two
directors of the company or one quarter of the company's board of directors or
(b) one or more shareholders holding, in the aggregate, (i) five percent of the
outstanding shares of the company and one percent of the voting power in the
company or (ii) five percent of the voting power in the company.
The quorum required by our articles for a meeting of shareholders consists
of at least two shareholders present in person or by proxy who hold or represent
between them at least 33.3% of the voting power in our company. A meeting
adjourned for lack of quorum is
61
adjourned to the same day in the following week at the same time and place or
any time and place as the chairman of the meeting decides with the consent of
the holders of a majority of the voting power represented at such meeting. At
such reconvened meeting, the required quorum consists of any two shareholders
present in person or by proxy.
Notwithstanding the foregoing, our articles provide that a resolution in
writing signed by all our shareholders then entitled to attend and vote at
general meetings or to which all such shareholders have given their written
consent (by letter, telegram, facsimile or otherwise) shall be deemed to have
been unanimously adopted by a duly convened general meeting.
Our articles enable our board to fix a record date to allow us to
determine the shareholders entitled to notice of, or to vote at, any general
meeting of our shareholders. The record date may not be more than 40 days before
the date of the meeting. Each shareholder of record as of the record date
determined by the board may vote the shares then held by that shareholder unless
all calls and other sums then payable by the shareholder in respect of its
shares have not been paid.
LIMITATION ON OWNERSHIP OF SECURITIES
The ownership and voting of our ordinary shares by non-residents of Israel
are not restricted in any way by our articles or by the laws of the State of
Israel, except for shareholders who are subjects of countries which are in a
state of war with Israel.
MERGERS AND ACQUISITIONS; ANTI-TAKEOVER PROVISIONS
The Companies Law includes provisions allowing corporate mergers. These
provisions require that the board of directors of each company that is party to
the merger approve the transaction. In addition, the shareholders of each
company must approve the merger by a vote of the 75% of the company's shares,
present and voting on the proposed merger at a shareholders' meeting. In
determining whether the requisite majority has approved the merger, shares held
by the other party to the merger or any person holding at least 25% of such
other party or otherwise affiliated with such other party are excluded from the
vote.
The Companies Law does not require court approval of a merger other than
in specified situations. However, upon the request of a creditor of either party
to the proposed merger, a court may delay or prevent the merger if it concludes
that there exists a reasonable concern that as a result of the merger, the
surviving company will be unable to satisfy the obligations of any of the
parties of the merger to their creditors.
A merger may not be completed unless at least 70 days have passed from the
time that a request for the approval of the merger has been filed with the
Israeli registrar of companies. This request may be filed once a shareholder
meeting has been called to approve the merger.
The Companies Law also provides that the acquisition of shares in a public
company on the open market must be made by means of a tender offer if, as a
result of the acquisition, the purchaser would become a 25% shareholder of the
company. The rule does not apply if there already is another 25% shareholder of
the company. Similarly, the law provides that an acquisition of shares in a
public company must be made by means of a tender offer if, as a result of the
acquisition, the purchaser would become a 45% shareholder of the company, unless
there already is a 50% shareholder of the company.
62
If, following any acquisition of shares, the purchaser would hold 90% or
more of the shares of the company, that acquisition must be made by means of a
tender offer for all of the target company's shares. An acquirer who wishes to
eliminate all minority shareholders must do so by means of a tender offer and
acquire 95% of all shares not held by or for the benefit of the acquirer prior
to the acquisition. However, in the event that the tender offer to acquire that
95% is not successful, the acquirer may not acquire tendered shares if by doing
so the acquirer would own more than 90% of the shares of the target company.
Our articles contain provisions which could delay, defer or prevent a
change in our control. These provision include the staggered board provisions of
our articles described above under the caption "Rights, preferences and
restrictions upon shares." Our articles provide that the staggered board
provision cannot be amended without approval of the greater of (a) holders of at
least 75% of the voting power represented at a shareholders meeting and voting
on any such amendment or (b) holders of a majority of the outstanding voting
power of all shares of our company.
CHANGES IN CAPITAL
Our articles enable us to increase or reduce our share capital. Any such
changes are subject to the provisions of the Companies Law and must be approved
by a resolution passed by a majority of at least 75% of our shareholders
present, in person or by proxy, at a general meeting voting on such change in
the capital. Our articles differ from the Companies Law in this respect, as
under the law changes in capital require approval only of a majority of the
voting power of a company represented at the relevant shareholders meeting and
voting thereon. In addition, certain transactions which have the effect of
reducing capital, such as the declaration and payment of dividends and the
issuance of shares for less than their nominal value, require a board resolution
and court approval.
C. MATERIAL CONTRACTS - NONE
D. EXCHANGE CONTROLS
In 1998, the Israeli currency control regulations were liberalized
significantly, as a result of which Israeli residents generally may freely deal
in foreign currency and non-residents of Israel currency and assets. There are
currently no Israeli currency control restrictions on remittances of dividends
on the ordinary shares or the proceeds from the sale of the shares provided all
taxes were paid or withheld; however, legislation remains in effect pursuant to
which currency controls can be imposed by administrative action at any time.
Non-residents of Israel may freely hold and trade our securities. Neither
our Memorandum of Association nor our Articles of Association nor the laws of
the State of Israel restrict in any way the ownership or voting of Ordinary
Shares by non-residents, except that such restrictions may exist with respect to
citizens of countries which are in a state of war with Israel.
E. TAXATION
ISRAELI TAXATION AND INVESTMENT PROGRAMS
The following is a summary of some current tax laws of the State of Israel
and certain material Israeli tax considerations as they apply to us and our
shareholders. The following also includes a discussion of certain Israeli
government programs benefiting various Israeli businesses, including us. We
derive significant tax and other benefits from various programs and laws in
Israel. If such programs or laws are eliminated or reduced, with or without
notice,
63
or if we cease to meet the conditions for such programs or laws, we may be
materially adversely affected. To the extent that the discussion is based on
legislation yet to be subject to judicial or administrative interpretation,
there can be no assurance that the views expressed herein will accord with any
such interpretation in the future. This discussion is not intended and should
not be construed as legal or professional tax advice and does not cover all
possible tax considerations applicable to investment in or holding of our
ordinary shares.
CORPORATE TAX
The general corporate tax rate in Israel is currently 36%. The effective
tax rate payable by a company which like us, derives income from an "Approved
Enterprise", however, may be considerably less. See "-Law for the Encouragement
of Capital Investments, 1959" below.
Dividends received by an Israeli company from foreign entities are
generally subject to Israeli tax of up to 25%.
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
Under the Law for the Encouragement of Industry (Taxes), 5729-1969,
referred to as the Industry Law, a company qualifies as an "industrial company"
if it is a resident of Israel and at least 90% of its income in a given tax
year, determined in NIS (exclusive of income from marketable securities, capital
gains, interest and dividends), is derived from industrial enterprises owned by
that company. An "industrial enterprise" is defined as an enterprise whose major
activity in a particular tax year is manufacturing. We believe that we currently
qualify as an industrial company. See Note 13 of the notes to our consolidated
financial statements.
Pursuant to the Industry Law, an industrial company is entitled to deduct
a portion of the purchase price of patents or certain other tangible property
rights used for the development of the company (other than goodwill) over a
period of eight years beginning with the year in which such rights were first
used.
Additionally, under certain income tax regulations, industrial companies
qualify for special depreciation rates for machinery, equipment and buildings
used by an industrial enterprise. These rates vary based on factors such as the
date of commencement of operation and the number of work shifts. 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.
Qualification as an industrial company under the Industry Law is not
conditioned upon the receipt of prior approval from any Israeli Government
authority. No assurance can be given that we will continue to qualify as an
industrial company or that we will be able to use tax benefits available to
companies so qualifying.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
The Law for the Encouragement of Capital Investments 1959, referred to as
the Investment Law, provides that a capital investment in a production facility
(or other eligible assets) may, upon application to the Israeli 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 the asset. An approved
enterprise is entitled to certain benefits, including Israeli government cash
grants or tax benefits.
64
An approved enterprise approved after April 1, 1986, may elect to forego
any entitlement to the grants otherwise available under the Investment Law and,
in lieu of the foregoing, participate in an alternative benefits program, under
which the undistributed income from the approved enterprise is fully exempt from
corporate tax for a defined period of time. The period of tax exemption ranges
between two and ten years, depending upon the location within Israel of the
approved enterprise and the type of approved enterprise. Upon expiration of the
exemption period, the approved enterprise would be eligible for the otherwise
applicable reduced tax rates under the Investment Law for the remainder, if any,
of the otherwise applicable benefits period.
The reduced corporate tax rate is generally 25%. However, further
reductions in tax rates depending on the percentage of the foreign investment in
a company's share capital (conferring rights to profits, voting and appointment
of directors) and the percentage of its combined share and loan capital owned by
non-Israeli residents, would apply. The tax rate is 20% if the foreign
investment level is 49% or more but less than 74%, 15% if the foreign investment
level is 74% or more but less than 90%, and 10% if the foreign investment level
is 90% or more. The lowest level of foreign investment during the year will be
used to determine the relevant tax rate for that year. These tax benefits are
granted for a limited period not exceeding seven or ten years for a company
whose foreign investment level exceeds 25% from the first year in which the
approved enterprise has taxable income. The period of benefits may in no event,
however, exceed the lesser of 12 years from the year in which the production
commenced or 14 years from the year of receipt of approved enterprise status.
We have eleven approved enterprises. We elected to participate in the
alternative benefits program. Since April 1993, following our initial public
offering in the United States, we have been a "foreign investors' company", as
defined by the Investment Law and we are therefore entitled to a ten year period
of benefits (instead of a seven-year period), for enterprises approved after
April 1993. The period of benefits of our approved enterprises will expire
during the period 2000 through 2010, and is conditioned upon maintaining our
approved enterprise status. There can be no assurance that the current benefit
program will continue to be available or that we will continue to qualify for
such benefits.
A company that has elected to participate in the alternative benefits
program and that subsequently pays a dividend out of the income derived from the
approved enterprise during the tax exemption period will be subject to corporate
tax in respect of the amount distributed (including withholding tax thereon) at
the rate that would have been applicable had the company not elected the
alternative benefits program (generally 10% - 25%). The dividend recipient is
taxed at the reduced withholding tax rate of 15%, applicable to dividends from
the approved enterprises if the dividend is distributed within 12 years after
the benefits period or other rate provided under a treaty. The withholding tax
rate will be 25% after such period. In the case of a company with a foreign
investment level (as defined by the Investment Law) of 25% or more, the 12-year
limitation on reduced withholding tax on dividends does not apply. Tax should be
withheld by the company at source, regardless of whether the dividend is
converted into foreign currency.
TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax (Inflationary Adjustment) Law, 1985, attempts to overcome
some of the problems presented to a traditional tax system by an economy
experiencing rapid inflation, which was the case in Israel at the time the law
was enacted. Generally, the Inflationary Adjustments law provides significant
tax deductions and adjustments to depreciation methods and tax loss carry
forwards to compensate for loss of value resulting from an inflationary economy.
We and our Israeli subsidiaries' taxable income is determined under this law.
65
CAPITAL GAINS TAX
Capital gain from the sale of our ordinary shares is generally exempt from
Israeli capital gains tax, as long as we qualify as an "Industrial Company" and
our ordinary shares are quoted on Nasdaq. This exemption does not apply,
however, to a shareholder whose taxable income is determined pursuant to the
Inflationary Adjustments Law, nor to a company or individual whose gain from
selling or otherwise disposing of the ordinary shares is deemed to be "Business
Income" (in which latter case, such gain will be subject to Corporate Tax or
Income Tax, respectively). Although we intend to maintain our status as an
Industrial Company and the quotation of our ordinary shares on Nasdaq, there can
be no assurance that our intention will be carried out and, consequently, that
exemption from Israeli capital gains tax will continue to apply.
Pursuant to the Convention between the Government of the State of Israel
and the Government of the United States of America with Respect to Taxes on
Income (the "Tax Treaty"), gains derived from the sale, exchange or disposition
of our ordinary shares by a person who qualifies as a resident of the United
States within the meaning of the Tax Treaty and who is entitled to claim the
benefits afforded to U.S. residents under the Tax Treaty ("Treaty U.S.
Resident"), would not be subject to Israeli capital gains tax, unless such
Treaty U.S. Resident owned, directly or indirectly, shares representing 10% or
more of the voting power of our company at any time during the 12-month period
preceding such sale, exchange or disposition.
DIVIDENDS PAID TO NON-RESIDENTS
Non-residents of Israel are subject to income tax on income derived from
sources in Israel. On distributions of dividends, other than bonus shares (stock
dividends), tax at the rate of 25% generally will be withheld at source, unless
a different rate is provided in a treaty between Israel and the shareholder's
country of residence. Under the Tax Treaty, the maximum tax on dividends paid to
a holder of shares who is a Treaty U.S. Resident is 25%. However, as mentioned
above (see "--Law for the Encouragement of Capital Investments, 1959"),
dividends paid out of income derived from an Approved Enterprise during the
benefit period are subject to a reduced rate of tax of 15%.
The Tax Treaty further provides that a 12.5% Israeli withholding tax would
apply to dividends paid to a U.S. corporation owning 10% or more of an Israeli
company's voting stock during, in general, the current and preceding tax years
of the Israeli company. The lower 12.5% rate applies only to dividends from
income not derived from an Approved Enterprise in the applicable period and does
not apply if the company has certain amounts of passive income.
A non-resident of Israel who receives dividends from which tax was
withheld at source, generally is exempt from the duty to file returns in Israel
in respect of such income, provided such income was not derived from a business
conducted in Israel by the taxpayer, and, thus, the tax withheld is also the
final tax in Israel on the dividend paid.
U.S. FEDERAL TAX CONSIDERATIONS
The following discussion of United States federal income tax
considerations is based on the United States Internal Revenue Code of 1986, as
amended (the "Code"), Treasury regulations promulgated thereunder , judicial
decisions and published positions of the United States Internal Revenue Service
(the "IRS"), all as in effect on the date hereof and which are subject to change
at any time, possibly with retroactive effect. This discussion does not
66
address all aspects of United States federal income taxation (including
potential application of the alternative minimum tax) that may be relevant to a
particular shareholder based on such shareholder's particular circumstances. In
particular, the following discussion does not address the United States federal
income tax consequences of purchasing, holding or disposing of ordinary shares
to shareholders that own (directly, indirectly or through attribution) 10% or
more of our outstanding voting stock or that are broker-dealers, insurance
companies, tax-exempt organizations, financial institutions, non-resident aliens
of the United States or taxpayers whose functional currency is not the dollar.
The following discussion also does not address any aspect of state, local or
non-U.S. tax laws. Further, this summary generally considers only a U.S. Holder
(as defined below) that will own ordinary shares as capital assets (generally,
assets held for investment) and does not consider the tax treatment of persons
that will hold ordinary shares through a partnership or other pass-through
entity. Each prospective investor is advised to consult such person's tax
advisor with respect to the specific United States federal, state and local tax
consequences to such person of purchasing, holding or disposing of ordinary
shares.
TAXATION OF U.S. HOLDERS
For purposes of this discussion, a "U.S. Holder" is any holder of ordinary
shares that is: (i) a citizen or resident of the United States: (ii) a
corporation, or other entity treated as a corporation for United States federal
income tax purposes, created or organized under the laws of the United States or
any state thereof or the District of Columbia; (iii) an estate the income of
which is included in gross income for United States federal income tax purposes
regardless of its source; (iv) a trust (a) if a United States court is able to
exercise primary supervision over its administration and one or more United
States persons have the authority to control all of its substantial decisions,
or (b) the trust has on effect a valid election to be treated as a United States
trust for United States federal income tax purposes, and a "Non-U.S. Holder" is
any holder of ordinary shares that is an individual, corporation, estate or
trust and that is not a U.S. Holder.
Dividend Distributions
To the extent paid out of our current or accumulated earnings and profits
as determined under Untied States federal income tax principles, a distribution
made with respect to the ordinary shares (including the amount of any Israeli
withholding tax thereon) will be includible for United States federal income tax
purposes in the income of a U.S. Holder as a taxable dividend. To the extent
that such distribution exceeds our earnings and profits and provided that we
were not a PFIC as to such U.S. Holder, such distribution will be treated as a
non-taxable return of capital to the extent of the U.S. Holder's adjusted basis
in the ordinary shares and thereafter as taxable capital gain. Dividends paid by
us will not generally be eligible for the dividends-received deduction allowed
to corporations under the Code. Dividends paid in a currency other than the U.S.
dollar will be includible in income of a U.S. Holder in a U.S. dollar amount
based on the spot rate of exchange on the date of receipt. A U.S. Holder that
receives a foreign currency distribution and converts the foreign currency into
U.S. dollars subsequent to receipt will have foreign exchange gain or loss based
on any appreciation or depreciation in the value of the foreign currency against
the U.S. dollar which will generally be U.S. source ordinary income or loss.
Subject to certain conditions and limitations set forth in the Code, U.S.
Holders will generally be able to elect to claim a credit against their United
States federal income tax liability for an Israeli withholding tax deducted from
dividends received in respect of ordinary shares. For purposes of calculating
the foreign tax credit, dividends paid on the ordinary shares will be treated as
income from sources outside the United States and generally will constitute
foreign source "passive income" or, in the case of certain holders, "financial
67
services income." In lieu of claiming a tax credit, U.S. Holders may instead
claim a deduction for foreign taxes withheld, subject to certain limitations.
THE RULES RELATING TO THE DETERMINATION OF THE AMOUNT OF FOREIGN INCOME
TAXES WHICH MAY BE CLAIMED AS FOREIGN TAX CREDITS ARE COMPLEX AND U.S. HOLDERS
SHOULD CONSULT THEIR TAX ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT A
CREDIT WOULD BE AVAILABLE.
Sale, Exchange or other Disposition
Upon the sale or other disposition of the ordinary shares, a U.S. Holder
will generally recognize gain or loss for United States federal income tax
purposes in an amount equal to the difference between the U.S. dollar value of
the amount realized in consideration for the disposition of the ordinary shares
and the U.S. Holder's adjusted tax basis in the ordinary shares. Provided we
were not a passive foreign investment company, or PFIC, as to such U.S. Holder,
such gain or loss will generally be long-term capital gain or loss if the
ordinary shares have been held for more than one year on the date of the
disposition. Any gain or loss will generally be treated as United States source
income or loss for United States federal income tax purposes. In addition, a
U.S. Holder that receives foreign currency upon disposition of the ordinary
shares and converts the foreign currency into U.S. dollars subsequent to receipt
will have foreign exchange gain or loss based on any appreciation or
depreciation in the value of the foreign currency against the U.S. dollar, which
will generally be United States source ordinary income or loss.
Passive Foreign Investment Company Status
Generally a foreign corporation is treated as a PFIC for United States
federal income tax purposes if either (i) 75% or more of its gross income
(including the pro rata gross income of any company (United States or foreign)
in which such corporation is considered to own 25% or more of the ordinary
shares by value) for the taxable year is passive income, generally referred to
as the "income test," or (ii) 50% or more of the average value of its assets
(including the pro rata fair market value of the assets of any company in which
such corporation is considered to own 25% or more of the ordinary shares by
value) during the taxable year produce or are held for the production of passive
income in the taxable year, generally referred to as the "asset test".
Although we do not believe that we have been PFIC for any tax year through
and including 2001, there can be no assurances that we will not become a PFIC in
the future.
If we were deemed to be a PFIC for any taxable year during which a U.S.
Holder held ordinary shares and such holder failed to make either a "QEF
election" or a "mark-to-market election" (as described below):
- gain recognized by the U.S. Holder upon the disposition of, as well
as income recognized upon receiving certain dividends on, ordinary
shares would be taxable as ordinary income;
- the U.S. Holder would be required to allocate such dividend income
and/or disposition gain ratably over such holder's entire holding
period for such ordinary shares;
- the amount allocated to each year other than the year of the
dividend payment or disposition would be subject to tax at the
highest individual or corporate tax rate, as applicable, and an
interest charge would be imposed with respect to the resulting tax
liability;
68
- the U.S. Holder would be required to file an annual return on IRS
Form 8621 regarding distributions received on, and gain recognized
on dispositions of, ordinary shares; and
- any U.S. Holder that acquired ordinary shares upon the death of a
U.S. Holder would not receive a step-up of the income tax basis to
fair market value of such shares. Instead, such U.S. Holder
beneficiary would have a tax basis equal to the decedent's tax
basis, if lower.
Although a determination as to a corporation's PFIC status is made
annually, an initial determination that a corporation is a PFIC for any taxable
year will generally cause the above described consequences to apply for all
future years to U.S. Holders that held shares in the corporation at any time
during a year when the corporation was a PFIC and that made neither a QEF
election nor mark-to-market election (as discussed below) with respect to such
shares on their tax return that included the last day of the corporation's first
taxable year as a PFIC. This will be true even if the corporation ceases to be a
PFIC in later years. However, with respect to a PFIC that does not make any
distributions or deemed distributions, the above tax treatment would apply only
to U.S. Holders that realize gain on their disposition of shares in the PFIC.
In the event that we are deemed to be a PFIC for any taxable year, if a
U.S. Holder makes a valid QEF election with respect to ordinary shares:
- - the U.S. Holder would be required for each taxable year for which we are a
PFIC to include in income such holder's pro rata share of our (i) net
ordinary earnings as ordinary income and (ii) net capital gain as
long-term capital gain, in each case computed under United States federal
income tax principles, even if such earnings or gains have not been
distributed, unless the shareholder makes an election to defer this tax
liability and pays an interest charge;
- - the U.S. Holder would not be required under these rules to include any
amount in income for any taxable year during which we do not have net
ordinary earnings or capital gain; and
- - the U.S. Holder would not be required under these rules to include any
amount in income for any taxable year for which we are not a PFIC.
The QEF election is made on a shareholder-by-shareholder basis. Thus, any
U.S. Holder of ordinary shares can make its own decision whether to make a QEF
election. A QEF election applies to all shares of the PFIC held or subsequently
acquired by an electing U.S. Holder and can be revoked only with the consent of
the IRS. A shareholder makes a QEF election by attaching a completed IRS Form
8621 including the information provided in the PFIC annual information
statement, to a timely filed United States federal income tax return. The
shareholder must receive certain information from us in order to make the
election. If we are unable to provide the information, the election will not be
available. It should be noted that U.S. Holders may not make a QEF election with
respect to warrants or rights to acquire ordinary shares, and that certain
classes of investors (for example, consolidated groups and grantor trusts) are
subject to special rules regarding the QEF election.
Under certain circumstances, a U.S. Holder may also obtain treatment
similar to that afforded a shareholder that has made a timely QEF election by
making an election in a year subsequent to the first year during the U.S.
Holder's holding period that we are classified as a PFIC to treat such holder's
interest as subject to a deemed sale and recognizing gain, but not
69
loss, on such deemed sale in accordance with the general PFIC rules, including
the interest charge provisions, described above and thereafter treating such
interest as an interest in a QEF.
Alternatively, a U.S. Holder of shares in a PFIC can elect to mark the
shares to market annually, recognizing as ordinary income or loss each year the
shares are held, as well as on the disposition of the shares, an amount equal to
the difference between the shareholder's adjusted tax basis in the PFIC stock
and its fair market value. Losses are allowed only to the extent of net
mark-to-market gains previously included in income by the U.S. Holder under the
election in prior taxable years. As with the QEF election, a U.S. Holder that
makes a mark-to-market election would not be subject to deemed ratable
allocations of gain, the interest charge, and the denial of basis step-up at
death described above. Subject to the ordinary shares ever ceasing to be
marketable, a mark-to-market election is irrevocable without obtaining the
consent of the IRS and would continue to apply even in years that we are no
longer a PFIC.
U.S. HOLDERS OF ORDINARY SHARES ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT
PFIC RULES, INCLUDING THE ADVISABILITY, PROCEDURE AND TIMING OF MAKING A QEF
ELECTION, IN CONNECTION WITH THEIR HOLDING OF ORDINARY SHARES, INCLUDING
WARRANTS OR RIGHTS TO ACQUIRE ORDINARY SHARES.
TAXATION OF NON-U.S. HOLDERS
Subject to the discussion below with respect to the United States backup
withholding tax, a non-U.S. Holder will not generally be subject to United
States federal income tax on dividends from our company, if any, or gain from
the sale or other disposition of ordinary shares, unless (i) such income is
effectively connected with the conduct by the non-U.S. Holder of a United States
trade or business, or in the case of a resident of a country which has an income
tax treaty with the United States, such income is attributable to a permanent
establishment (or in the case of an individual, a fixed place of business) in
the United States; or (ii) with respect to any gain on the sale or other
disposition of ordinary shares realized by an individual non-U.S. Holder, such
individual non-U.S. Holder is present in the United States for 183 days or more
in the taxable year of the sale or other disposition and certain other
conditions are satisfied.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under the Code, under certain circumstances, United States tax information
reporting and "backup withholding" of United States federal income tax on
dividends on, and the proceeds of dispositions of, ordinary shares may apply to
both U.S. Holders and non-U.S. Holders. Backup withholding will not apply,
however, to a holder that furnishes a correct taxpayer identification number or
certificate of foreign status and makes any other required certification or that
is otherwise exempt from backup withholding. Generally, a U.S. Holder will
provide such certification on IRS Form W-9 and a non-U.S. Holder will provide
such certification on IRS Form W-8. Any amounts withheld under the U.S. backup
withholding rules will be allowed as a refund or credit against the U.S.
Holder's or non-U.S. Holder's United States federal income tax liability,
provided the required information is furnished to the IRS.
70
F. DIVIDENDS AND PAYING AGENTS - NOT APPLICABLE.
G. STATEMENT BY EXPERTS - NOT APPLICABLE.
H. DOCUMENTS ON DISPLAY
All documents referenced herein concerning us are archived at our head
offices located at 16 Hagalim Avenue, Herzliya, Israel.
I. SUBSIDIARY INFORMATION - NOT APPLICABLE.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in foreign currency exchange
rates and interest rates which could impact our results of operations and
financial condition. We seek to manage the exposure to these market risks
through our regular operating and financing activities and through the use of
foreign currency exchange contracts.
FOREIGN CURRENCY RISK
Revenues generated and costs incurred outside the U.S. are generally
denominated in local non-dollar currencies. In 1999, 2000 and 2001, 70%, 70% and
71%, of our revenues, respectively, were denominated in non-dollar currencies.
Since our financial results are reported in dollars, fluctuations in the rates
of exchange between the dollar and non-dollar currencies may have a material
effect on our results of operations. Thus, an increase in the value of a
particular currency relative to the dollar will increase the dollar reporting
value for transactions in such currency, and a decrease in the value of such
currency relative to the dollar will decrease the dollar reporting value for
such transactions. This effect on the dollar reporting value for transactions is
only partially offset by the impact that such fluctuations may have on our
costs.
From time to time we enter into foreign currency exchange contracts to
hedge existing non-dollar assets and customer firm purchase commitments. The use
of such contracts allows us to reduce our exposure to exchange rate movements
since the gains and losses on these contracts substantially offset losses and
gains on the assets, liabilities and transactions being hedged. As of December
31, 2001, we had purchased currency forward contracts for periods ending March
2002 as a hedge against sales contracts receivable as follows:
- - Obligation to sell Japanese Yen 518,000,000 for a total of $4,198,000;
- - Obligation to sell Euro 9,200,000 for a total of $8,108,000;
- - Obligation to sell Singaporean Dollar $5,294,000 for a total of $2,863,000.
Portions of our short-term investments are invested in NIS Israeli
Government and corporate debt securities. Investments in debt securities issued
on behalf of the Israeli Government are considered risk free. A hypothetical 10
percent change in the NIS exchange rate against the U.S. dollar, with all other
variables held constant on the exposed investments would result in a decrease in
the fair value of such investments in the amount of $877,000 or an increase of
$1,072,000.
71
INTEREST RATE RISK
Our exposure to market risk with respect to changes in interest rates
relates primarily to our short-term investments.
Our short-term investments consist of Israeli Government and corporate
marketable debt securities.
The fair value of our short-term investments is based upon their market
value as of December 31, 2001.
The tables below present principal amounts and related weighted average
rates by date of maturity for our short-term investments:
(U.S dollars in thousands).
MATURITY DATE
---------------------------------------------------------------------
MARKETABLE DEBT SECURITIES: 2002 2003 2004 2005 THEREAFTER TOTAL
- --------------------------- ------ ------ ------ ------- ---------- -------
NIS debt securities
Fixed Interest Rate
Linked to the CPI $ 75 $ 43 $ 73 $ 169 $ 380 $ 740
Weighted Average
Interest Rate * 3.2% 3.8% 4.3% 4.1% 4.2% 4.1%
Unlinked NIS debt securities
Fixed Interest Rate $2,387 $ 36 -- $ 74 $ 176 $ 2.673
Weighted Average
Interest Rate * -- 11.5% -- 9.0% 8.6% 9.1%
U.S. dollar linked debt securities $ 834 $ 390 $ 52 $ 32 $ 270 $ 1,578
Changing Interest Rate
Weighted Average
Interest Rate * 6.2% 5.9% 8.4% 5.4% 2.8% 5.5%
U.S. dollar debt securities
Fixed Interest Rate $3,050 -- $3,357 $17,083 $1,034 $24,524
Weighted Average
Interest Rate * 7.2% -- 7.1% 7.1% 6.2% 7.1%
* Based upon the principal interest rate of the debt securities
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES - NOT APPLICABLE
72
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES - NOT APPLICABLE
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS - NOT APPLICABLE
PART III
ITEM 17. FINANCIAL STATEMENTS - NOT APPLICABLE
73
ITEM 18. FINANCIAL STATEMENTS
1. Financial Statements.
2. Report of Independent Public Accountants of Tecnomatix Technologies, Inc.
74
TECNOMATIX TECHNOLOGIES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
TECNOMATIX TECHNOLOGIES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 2
CONSOLIDATED FINANCIAL STATEMENTS:
BALANCE SHEETS 3
as of December 31, 2001 and 2000
STATEMENTS OF OPERATIONS 5
for the years ended December 31, 2001, 2000 and 1999
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY 6
for the years ended December 31, 2001, 2000 and 1999
STATEMENTS OF CASH FLOWS 7
for the years ended December 31, 2001, 2000 and 1999
NOTES TO FINANCIAL STATEMENTS 9
-1-
[DELOITTE & TOUCHE BRIGHTMAN ALMAGOR LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF
TECNOMATIX TECHNOLOGIES LTD.
We have audited the accompanying consolidated balance sheets of Tecnomatix
Technologies Ltd. ("the Company") and its subsidiaries at December 31, 2001 and
2000 and the related statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We did not audit the financial statements of certain subsidiaries, whose assets
constitute approximately 20% of total consolidated assets at December 31, 2001
and 2000, and whose revenues constitute approximately 32%, 33%, and 35% of
consolidated total revenues for the years ended December 31, 2001, 2000 and
1999, respectively. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion expressed herein, insofar as it
relates to the amounts included for the abovementioned subsidiaries, is based
solely on the report of these other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 and the report of
the other auditors referred to above provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors as stated
above, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company and
its subsidiaries at December 31, 2001 and 2000 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Brightman Almagor & Co.
BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A MEMBER OF DELOITTE TOUCHE TOHMATSU
Tel Aviv, Israel
February 15, 2002
-2-
TECNOMATIX TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
DECEMBER 31,
------------------------
2001 2000
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 21,670 $ 25,829
Short-term investments (Note 4) 29,515 32,916
Accounts receivable, net of allowance for
doubtful accounts of $ 2,000 and $ 2,617, respectively 23,110 30,304
Due from related parties 417 17
Other receivables and prepaid expenses (Note 15) 5,988 7,763
-------- --------
Total current assets 80,700 96,829
NON-CURRENT RECEIVABLES (Note 15) 808 912
-------- --------
LONG-TERM INVESTMENTS (Note 5) 457 437
-------- --------
PROPERTY AND EQUIPMENT (Note 6)
Cost 26,504 26,308
Less - accumulated depreciation 19,145 16,612
-------- --------
7,359 9,696
-------- --------
ACQUIRED INTANGIBLES, NET (Note 7) 17,604 25,285
-------- --------
OTHER ASSETS, NET (Note 8) 16,451 16,159
-------- --------
Total assets $123,379 $149,318
======== ========
-3-
TECNOMATIX TECHNOLOGIES LTD.
DECEMBER 31,
---------------------------
2001 2000
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loans (Note 15) $ 687 $ 784
Accounts payable 2,267 3,213
Other payables and accrued expenses (Note 15) 15,214 17,314
Deferred revenue 4,774 7,995
--------- ---------
Total current liabilities 22,942 29,306
Allowance for losses of affiliated company (Note 5) 95 --
--------- ---------
ACCRUED SEVERANCE PAY, NET (Note 10) 681 1,063
--------- ---------
5 1/4% CONVERTIBLE SUBORDINATED NOTES (Note 9) 43,765 49,250
--------- ---------
MINORITY INTEREST 3 3
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 11)
SHAREHOLDERS' EQUITY (Note 12)
Share capital:
Ordinary shares of NIS 0.01 par value
(Authorized - 20,000,000 shares, issued and
outstanding - 11,356,258 and 11,136,023 at
December 31, 2001 and 2000, respectively) 39 38
Additional paid-in capital 70,311 69,011
Loans granted to purchase shares (1,213) (1,136)
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment (4,237) (3,281)
Unrealized losses on marketable securities (270) (109)
Retained earnings 4,463 18,373
--------- ---------
69,093 82,896
Treasury stock, at cost; 850,000 shares
at December 31, 2001 and 2000 (13,200) (13,200)
--------- ---------
55,893 69,696
--------- ---------
Total liabilities and shareholders' equity $ 123,379 $ 149,318
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
TECNOMATIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
REVENUES (Notes 2 & 16):
Software license fees $ 42,316 $ 51,699 $ 57,444
Services 44,584 37,319 30,574
------------ ------------ ------------
Total revenues 86,900 89,018 88,018
COSTS AND EXPENSES:
Cost of software license fees 7,851 5,764 5,003
Cost of services 15,268 13,354 9,251
Amortization of acquired intangibles 7,758 7,801 4,434
Research and development, net (Note 16) 19,216 20,748 16,451
Selling and marketing 44,624 50,737 39,333
General and administrative 4,855 6,037 4,932
Restructuring and asset impairment (Note 16) 1,843 -- --
In-process research and development
and acquisition costs (Note 3) -- 5,250 9,944
------------ ------------ ------------
TOTAL COSTS AND EXPENSES 101,415 109,691 89,348
------------ ------------ ------------
OPERATING LOSS (14,515) (20,673) (1,330)
Financial income (expense), net (Note 16) (202) 1,348 1,791
------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES ON INCOME (14,717) (19,325) 461
Taxes on income (Note 13) (54) (505) (579)
------------ ------------ ------------
LOSS AFTER TAXES ON INCOME (14,771) (19,830) (118)
Company's share in loss of affiliated company (532) (131) --
Minority interest in net loss of subsidiary -- 2 22
------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (15,303) (19,959) (96)
Extraordinary gain from repurchase
of the Company's convertible notes 1,393 -- 1,450
------------ ------------ ------------
NET INCOME (LOSS) $ (13,910) $ (19,959) $ 1,354
============ ============ ============
Earnings (loss) per ordinary share
Basic:
Income (loss) before extraordinary item $ (1.48) $ (1.95) $ (0.01)
Extraordinary gain 0.13 -- 0.15
------------ ------------ ------------
Net income (loss) $ (1.35) $ (1.95) $ 0.14
============ ============ ============
Diluted:
Income (loss) before extraordinary item $ (1.48) $ (1.95) $ (0.01)
Extraordinary gain 0.13 -- 0.14
------------ ------------ ------------
Net income (loss) $ (1.35) $ (1.95) $ 0.13
============ ============ ============
Shares used in computing earnings (loss) per ordinary share:
Basic 10,366,125 10,224,737 9,674,778
============ ============ ============
Diluted 10,366,125 10,224,737 10,403,719
============ ============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
TECNOMATIX TECHNOLOGIES LTD.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NUMBER OF
ORDINARY LOANS FOREIGN UNREALIZED
SHARES ADDITIONAL GRANTED TO CURRENCY HOLDING
NIS 0.01 SHARE PAID-IN PURCHASE TRANSLATION GAINS
PAR VALUE CAPITAL CAPITAL SHARES ADJUSTMENT (LOSSES)
--------- ------- ------- ------ ---------- --------
Balance at January 1, 1999 $9,564,342 $37 $61,572 $ (2,007) $ (1,765) $ (198)
Exercise of employee options 386,849 1 3,753
Loans granted to purchase shares (420)
Comprehensive loss -
Net income for the year
Other comprehensive income (loss) -
Unrealized gain on marketable
securities 125
Foreign currency translation adjustment (1,539)
Comprehensive loss
---------- --- ------- ------- ------- -----
Balance at December 31, 1999 9,951,191 38 65,325 (2,427) (3,304) (73)
Exercise of employee options and shares 334,832 3,686
Repayment of loans granted to
purchase shares 1,291
Comprehensive loss -
Loss for the year
Other comprehensive income (loss) - (36)
Unrealized loss on marketable
securities
Foreign currency translation adjustment 23
Comprehensive loss
---------- --- ------- ------- ------- -----
Balance at December 31, 2000 10,286,023 38 69,011 (1,136) (3,281) (109)
Exercise of employee options 20,056 (*) 169
Employee share purchase plan 200,179 1 1,131
Loans granted to purchase shares (77)
Comprehensive loss -
Loss for the year
Other comprehensive income (loss) -
Unrealized loss on marketable
securities (161)
Foreign currency translation adjustment (956)
Comprehensive loss
---------- --- ------- ------- ------- -----
Balance at December 31, 2001 10,506,258 $39 $70,311 $(1,213) $(4,237) $(270)
========== === ======= ======= ======= =====
TOTAL
TREASURY SHARE-
RETAINED STOCK COMPREHENSIVE HOLDERS'
EARNINGS AT COST LOSS EQUITY
-------- ------- ---- ------
Balance at January 1, 1999 $36,978 $ (13,200) $81,417
Exercise of employee options 3,754
Loans granted to purchase shares (420)
Comprehensive loss -
Net income for the year 1,354 $ 1,354 1,354
Other comprehensive income (loss) -
Unrealized gain on marketable
securities 125 125
Foreign currency translation adjustment (1,539) (1,539)
---------
Comprehensive loss $ (60)
=========
------ -------- -------
Balance at December 31, 1999 38,332 (13,200) 84,691
Exercise of employee options and shares 3,686
Repayment of loans granted to
purchase shares 1,291
Comprehensive loss - (19,959) $ (19,959) (19,959)
Loss for the year
Other comprehensive income (loss) - (36) (36)
Unrealized loss on marketable
securities
Foreign currency translation adjustment 23 23
---------
Comprehensive loss (19,972)
==========
------ -------- -------
Balance at December 31, 2000 18,373 (13,200) 69,696
Exercise of employee options 169
Employee share purchase plan 1,132
Loans granted to purchase shares (77)
Comprehensive loss -
Loss for the year (13,910) $(13,910) (13,910)
Other comprehensive income (loss) -
Unrealized loss on marketable
securities (161) (161)
Foreign currency translation adjustment (956) (956)
---------
Comprehensive loss $ (15,027)
=========
------ -------- -------
Balance at December 31, 2001 $4,463 $(13,200) $55,893
====== ======== =======
(*) Less than 1 thousand
The accompanying notes are an integral part of the financial statements.
-6-
TECNOMATIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(13,910) $(19,959) $ 1,354
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities (Appendix A) 18,255 17,262 14,970
-------- -------- --------
Net cash provided by (used in) operating activities 4,345 (2,697) 16,324
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Long-term investments (457) 42,900 25,100
Purchase of short-term investments (26,922) (56,971) (5,870)
Proceeds from realization of short-term investments 29,519 39,266 20,511
Investment in non-current receivables 18 61 (118)
Purchase of property and equipment and other assets (2,592) (2,960) (5,570)
Capitalization of software development costs (5,103) (7,408) (6,351)
Proceeds from sale of property and equipment 119 215 250
Acquisition of subsidiaries, net of
cash acquired (Appendix B) -- (15,279) (23,040)
Investment in a joint venture -- (437)
-------- -------- --------
Net cash provided by (used in) investing activities (5,418) (613) 4,912
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loans granted to purchase shares -- 1,291 --
Repurchase of convertible notes (3,986) -- (4,200)
Exercise of employees' options 169 3,686 3,334
Purchase of shares under Employee Share Purchase Plan 1,132 -- --
Short-term credit, net 2 (10,270) (682)
-------- -------- --------
Net cash used in financing activities (2,683) (5,293) (1,548)
-------- -------- --------
Effect of exchange rate changes on cash (403) 352 (375)
-------- -------- --------
Net change in cash and cash equivalents (4,159) (8,251) 19,313
Cash and cash equivalents at beginning of year 25,829 34,080 14,767
-------- -------- --------
Cash and cash equivalents at end of year $ 21,670 $ 25,829 $ 34,080
======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
-7-
TECNOMATIX TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTD.)
(U.S. DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
-------- -------- --------
APPENDIX A
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
In-process research and development and acquisition costs $ -- $ 5,250 $ 9,944
Company's share in loss of affiliated company 532 131 --
Minority interest in net loss of subsidiary -- (2) (22)
Depreciation and amortization 16,435 13,989 10,749
Asset impairment 316 -- --
Extraordinary gain from repurchase of the
Company's convertible notes (1,393) -- (1,450)
Other 492 (365) (492)
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECT OF
PURCHASE OF SUBSIDIARY:
Decrease (increase) in assets:
Accounts receivable 6,512 1,708 (4,903)
Due from related parties (400) 368 57
Deferred income taxes 246 447 292
Other receivables and prepaid expenses 1,717 482 (755)
Increase (decrease) in liabilities:
Accounts payable (862) 904 (603)
Other payables and accrued expenses (4,914) (5,409) 2,252
Accrued severance pay, net (426) (241) (99)
-------- -------- --------
$ 18,255 $ 17,262 $ 14,970
======== ======== ========
APPENDIX B
PURCHASE OF SUBSIDIARIES (NOTE 3)
Working capital - excluding cash $ -- $ (1,101) $ 2,362
Property and equipment -- (242) (571)
Other assets -- (4,558) (6,615)
In-process research and development -- (5,250) (9,207)
Goodwill -- (4,128) (9,207)
-------- -------- --------
-- (15,279) (23,238)
Consideration and related expenses not yet paid -- -- 198
-------- -------- --------
$ -- $(15,279) $(23,040)
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 5,191 $ 2,071 $ 5,535
======== ======== ========
Taxes $ 252 $ 588 $ 1,003
======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
-8-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 - GENERAL
Tecnomatix Technologies Ltd. ("the Company") is an Israeli corporation engaged
in the development, selling, marketing and support of Manufacturing Process
Management ("MPM") software tools for the collaborative development and
optimization of manufacturing processes across the extended enterprise. The
Company's products are used by world-leading manufacturers in the automotive,
aerospace, electronics and heavy equipment industries. The Company's software
solutions enable the optimization of the manufacturing process chain, increased
throughput, and reduced time-to-market, time-to-volume and product costs. The
Company operates in two business segments, e-Manufacturing and Electronics
Assembly. The Company sells and supports its products mainly in Europe, the
United States and the Far East.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FINANCIAL STATEMENTS IN U.S. DOLLARS
The reporting currency of the Company is the U.S. dollar ("dollar").
The dollar is the functional currency of the Company and its subsidiaries in
Israel and in the United States. Transactions and balances originally
denominated in dollars are presented at their original amounts. Non-dollar
transactions and balances are remeasured into dollars in accordance with the
principles set forth in Statement of Financial Accounting Standards ("SFAS") No.
52. All exchange gains and losses from remeasurement of monetary balance sheet
items resulting from transactions in non-dollar currencies are recorded in the
statement of operations as they arise.
The financial statements of certain of the Company's subsidiaries whose
functional currency is other than the dollar are translated into dollars in
accordance with the principles set forth in SFAS No. 52. Assets and liabilities
have been translated at year-end exchange rates; results of operations have been
translated at average exchange rates. The translation adjustments have been
reported as a separate component of shareholders' equity.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant inter-company transactions and
balances have been eliminated.
CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments that are
readily convertible into cash with original maturities of three months or less.
-9-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (contd.)
MARKETABLE SECURITIES
Investments in marketable debt securities which are classified as
"available-for-sale securities" in accordance with the provisions of SFAS No.
115 are stated at market value. The difference between the market value and the
amortized cost of the marketable securities (unrealized gain or loss) is
reflected in shareholders' equity. Interest income including the amortization of
premium and discount at acquisition, and realized gains and losses (calculated
by the specific identification method) are reflected in financial income in the
statement of operations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated based on
the straight-line method over the estimated useful lives of the assets, as
follows:
Computers and software 3-5 years
Office furniture and equipment 3-16 years
Motor vehicles 4-7 years
Leasehold improvements are amortized based on the straight-line method over the
term of the lease, which is shorter than the estimated useful life of the
improvements.
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", management reviews
long-lived assets and certain identifiable intangibles for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable based on estimated future cash flows.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with SFAS No.
86. Capitalization of software development costs begins upon the establishment
of technological feasibility, and continues up to the time the software is
available for general release to customers. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
requires considerable judgment by management with respect to certain external
factors including, but not limited to, anticipated future gross product revenue,
estimated economic life and changes in software and hardware technology.
Amortization of capitalized software development costs is provided on a
product-by-product basis and begins when the product is available for general
release to customers. Annual amortization is the greater of the amount computed
using the ratio of current gross revenue for a product to the total of current
and anticipated product revenue or the straight-line basis over the remaining
economic useful life of the software, which is not more than three years.
Amortization of capitalized software development costs is reflected in cost of
software license fees.
ACQUISITION- RELATED INTANGIBLE ASSETS
Acquisition-related intangible assets result from the Company's acquisitions of
businesses accounted for under the purchase method and consist of the values of
identifiable intangible assets including developed software products,
established work-force and trade names, as well as goodwill. Goodwill is the
amount by which the cost of identifiable acquired net assets exceeds the fair
values of those net assets on the date of purchase. Acquisition-related
intangible assets are reported at cost, net of accumulated amortization.
Identifiable intangible assets are amortized on a straight-line basis over their
estimated useful lives of three years for developed software products and
established work-force and seven years for trade-names. Goodwill is amortized on
a straight line basis over five to ten years. The Company periodically evaluates
the existence of intangible asset impairments. Recoverability of these assets is
assessed based on undiscounted expected cash flows, considering a number of
factors including past operating results, budgets and economic projections,
market trends and product development cycles.
-10-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (contd.)
REVENUE RECOGNITION
The company recognizes revenues in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position 97-2, Software
Revenue Recognition, as amended.
Revenues from software license fees are recognized when persuasive evidence of
an arrangement exists, the software product covered by written agreement or a
purchase order signed by the customer has been delivered, the license fees are
fixed and determinable and collection of the license fees is considered
probable. The Company's products generally do not require significant
customization. Revenues from software product license agreements, which require
significant customization and modification of the software product are deferred
and recognized using the percentage-of-completion method. When software
arrangements involve multiple elements the Company allocates revenue to each
element based on the relative fair values of the elements. The Company's
determination of fair value of each element in multiple element arrangements is
based on vendor-specific objective evidence (VSOE). The Company limits its
assessment of VSOE for each element to the price charged when the same element
is sold separately.
Service revenues include consulting services, post-contract customer support and
training. Consulting revenues are generally recognized on a time and material
basis. However, revenues from certain fixed-price contracts are recognized on
the percentage of completion basis. Software maintenance agreements provide
technical support and the right to unspecified upgrades on an
if-and-when-available basis. Post-contract customer support revenues are
recognized ratably over the term of the support period (generally one year) and
training and other service revenues are recognized as the related services are
provided.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs (net of third-party grants) that are not
capitalized to software and development costs are expensed as incurred. The
Company has no obligation to repay the grants if sufficient sales are not
generated.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts has been made on the basis of specific
accounts receivable.
DEFERRED INCOME TAXES
Deferred income taxes are provided for temporary differences between the assets
and liabilities, as measured in the financial statements and for tax purposes,
at the tax rates expected to be in effect when these differences reverse, in
accordance with SFAS No. 109.
PROVISION FOR WARRANTY
The Company warrants its products in certain countries in Europe. The warranty
period is generally up to six months. The Company provides for estimated
warranty costs, based on its past experience.
EARNINGS (LOSS) PER ORDINARY SHARE
Basic and diluted net earnings (loss) per share have been computed in accordance
with SFAS No. 128 using the weighted average number of ordinary shares
outstanding. Basic earnings (loss) per share exclude any dilutive effect of
options, warrants and convertible securities. Diluted earnings per share give
effect to all potential dilutive issuances of ordinary shares that were
outstanding during the period. A total of 428,683 and 670,963 incremental shares
were excluded from the calculation of diluted net loss per ordinary share for
2001 and 2000 respectively due to the anti-dilutive effect, and 728,941
incremental shares were used to calculate diluted earnings per ordinary share
for 1999.
5 1/4% convertible subordinated notes at a conversion price of $ 42.39
per share were not included in the calculation of diluted earnings per ordinary
share, because the effect would have been anti-dilutive.
-11-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (contd.)
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) has been reported in the statement of changes in
shareholders' equity, in accordance with SFAS No. 130, "Reporting Comprehensive
Income".
DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, the Company adopted the Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities and Statement of Financial
Accounting Standards No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities (collectively referred to as SFAS 133). The Company's
initial adoption of SFAS 133 did not have a significant impact on the equity of
the Company.
A derivative is typically defined as an instrument whose value is "derived" from
an underlying instrument, index or rate, has a notional amount, requires no or
little initial investment and can be net settled. Derivatives include, but are
not limited to, the following types of investments: interest rate swaps,
interest rate caps and floors, put and call options, warrants, futures, forwards
and commitments to purchase securities and combinations of the foregoing.
Derivatives embedded within non-derivative instruments (such as call options
embedded in convertible bonds) must be bifurcated from the host instrument and
accounted for in accordance with SFAS 133 when the embedded derivative is not
clearly and closely related to the host instrument. In addition, non-investment
instruments, including certain types of insurance contracts that have
historically not been considered derivatives, may be derivatives or contain
embedded derivatives under SFAS 133.
SFAS 133 requires that all derivatives be recorded in the balance sheet at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge of exposures to changes in fair value, cash flows or
foreign currency exchange rates. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the nature of any
hedge designation thereon.
Risk management policy - Foreign exchange rate risk arises from the possibility
that changes in foreign currency exchange rates will impact the fair value or
the cash flows of financial instruments denominated in a foreign currency.
The Company uses derivatives in the normal course of business, primarily to
reduce its exposure to foreign currency risk stemming from various assets and
liabilities. Principally, the Company uses currency forwards as hedging
instruments to hedge the impact of the variability in exchange rates on accounts
receivable denominated in certain foreign currencies.
Accounting policy - Although such contracts may qualify as cash flow hedges or
fair value hedges the Company did not designate them as hedges against specific
assets or liabilities.
Derivatives credit risk - Counter parties to currency exchange forward contracts
are major financial institutions with credit ratings of investment grade or
better and no collateral is required. There are no significant risk
concentrations. Management believes the risk of incurring losses on derivative
contracts related to credit risk, if any, is remote and any losses would be
immaterial.
As of December 31, 2001, the Company's forward contracts for the periods ending
March 2002 are as follows:
- - Obligation to sell Japanese Yen 518,000,000 for a total of $ 4,198.
- - Obligation to sell Euro 9,200,000 for a total of $ 8,108.
- - Obligation to sell Singapore Dollar 5,294,000 for a total of $ 2,863.
-12-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (contd.)
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) 141, "Business Combinations", which
addresses the financial accounting and reporting for business combinations and
supersedes Accounting Principals Board (APB) Opinion 16, "Business Combinations"
and SFAS 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises". SFAS 141 requires that all business combinations be accounted for
by a single method, the purchase method, modifies the criteria for recognizing
intangible assets, and expands disclosure requirements. The provisions of SFAS
141 apply to all business combinations initiated after June 30, 2001. The
Company does not believe that the adoption of SFAS 141 will have a significant
impact on its consolidated financial statements.
In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets",
which addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion 17, "Intangible Assets". SFAS
142 addresses how intangible assets that are acquired individually or with a
group of other assets should be accounted for in financial statements upon their
acquisition and after they have been initially recognized in the financial
statements. SFAS 142 requires that goodwill and intangible assets that have
indefinite useful lives not be amortized but rather tested at least annually for
impairment, and intangible assets that have finite useful lives be amortized
over their useful lives. SFAS 142 provides specific guidance for testing
goodwill and intangible assets that will not be amortized for impairment. In
addition, SFAS 142 expands the disclosure requirements about goodwill and other
intangible assets in the years subsequent to their acquisition. SFAS 142 is
effective for a fiscal year, commencing after December 31, 2001. Impairment
losses for goodwill and indefinite life intangible assets that arise due to the
initial application of SFAS 142 are to be reported as a change in accounting
principle. However, goodwill and intangible assets acquired after June 30, 2001
will be subject immediately to provisions of SFAS 142. Application of the
non-amortization provisions of SFAS 142 for goodwill is expected to result in an
increase in operating income (a decrease in operating loss) of approximately $
3,632 in 2002. At December 31, 2001, the Company had goodwill of $ 15,409
(including established work-force).
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets", which supercedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
and the provisions of APB Opinion 30 (APB 30), "Reporting the Results of
Operations, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" with
regard to reporting the effects of a disposal of a segment of a business. SFAS
144 retains many of the provisions of SFAS 121, but significantly changes the
criteria that would have to be met to classify an asset as held for disposal
such that long-lived assets to be disposed of other than by sale are considered
held and used until disposed of. In addition, SFAS 144 retains the basic
provisions of APB 30 for presentation of discontinued operations in the
statement of operations but broadens that presentation to a component of an
entity. SFAS 144 is effective for fiscal years beginning after December 31, 2001
with earlier application encouraged. The Company is in the process of
determining the impact that the adoption of SFAS 144 will have on the
consolidated financial statements.
RECLASSIFICATION
Certain figures from prior years have been reclassified in order to conform to
the 2001 presentation.
-13-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 3 - SIGNIFICANT ACQUISITIONS
a. GENERAL
With respect to the acquisitions described in sections b through d below,
values assigned to acquired in-process research and development, and
developed software products were determined using a discounted cash flow
analysis. To determine the value of the in-process research and
development, the Company considered, among other factors, the state of
development of each project, the time and cost needed to complete each
project, expected income, and associated risks, which included the
inherent difficulties and uncertainties in completing the project and
thereby achieving technological feasibility and risks related to the
viability of and potential changes to future target markets. This analysis
resulted in amounts assigned to in-process research and development
projects that had not yet reached technological feasibility or do not have
alternative future uses. To determine the value of the developed software
products, the expected future cash flows of the existing technology
product were discounted taking into account risks related to the
characteristics and applications of each product, existing and future
markets, and assessments of the life cycle stage of each product. Based on
this analysis, the existing technology that had reached technological
feasibility was capitalized.
b. ACQUISITION OF FABMASTER S.A. ("FABMASTER")
In February 2000, the Company acquired all of the outstanding shares of
Fabmaster, at that time, a publicly traded software company based in
France, for $16,510. The acquisition was accounted for as a purchase, and
the financial results of Fabmaster have been included in the Company's
financial statements beginning on the acquisition date.
The purchase price totalling $16,510 (including transaction costs
totalling $1,310) has been allocated on the basis of the estimated fair
value of the assets acquired and the liabilities assumed.
The purchase price was allocated to developed technology, core technology,
established work-force and goodwill of $2,361, $1,964, $233 and $4,205,
respectively. These intangible assets are being amortized over the
estimated useful life of three years for developed and core technology and
established work-force and seven years for goodwill. Acquired-in-process
technology has been valued using the income approach, resulting in a
charge of $5,250.
The allocation of fair value is as follows:
Current assets $ 4,741
Property and equipment 276
Current liabilities (2,520)
In-process research and development 5,250
Intangible assets 8,763
--------
Total purchase price $ 16,510
========
-14-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 3 - SIGNIFICANT ACQUISITIONS (contd.)
b. ACQUISITION OF FABMASTER S.A. ("FABMASTER") (contd.)
The following unaudited pro forma summary presents information as if the
acquisition of Fabmaster occurred at the beginning of the periods
presented. In-process research and development charges are considered
nonrecurring charges related directly to the acquisition and have
therefore been excluded from pro forma net income and pro forma earnings
per share. The pro forma information, which is provided for informational
purposes only, is based on historical information and does not necessarily
reflect the results that would have occurred, nor is it necessarily
indicative of future results of operations of the consolidated entities.
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999
---------- ----------
Revenues $ 89,297 $ 93,909
Net income (loss) $ (21,227) $ 1,972
Earnings (loss) per share:
Basic $ (2.08) $ 0.15
Diluted $ (2.08) $ 0.14
c. ACQUISITION OF UNICAM SOFTWARE INC. ("UNICAM")
In March 1999, the Company acquired all the outstanding shares of Unicam,
a privately held software company based in the United States, for $25,787.
The acquisition was accounted for as a purchase, and the financial results
of Unicam have been included in the Company's financial statements
beginning on the acquisition date.
The purchase price totalling $25,787 (including transaction costs
totalling $1,537) has been allocated on the basis of the estimated fair
value of the assets acquired and the liabilities assumed.
The purchase price was allocated to developed technology, core technology,
established work-force and goodwill of $2,197, $2,828, $997 and $9,344,
respectively. These intangible assets are being amortized over the
estimated useful life of three years for developed and core technology and
established work-force and seven years for goodwill. Acquired-in-process
technology has been valued using the income approach, resulting in a
charge of $9,207.
The allocation of fair value is as follows:
Current assets $ 5,356
Property and equipment 571
Current liabilities (4,713)
In-process research and development 9,207
Intangible assets 15,366
--------
Total purchase price $ 25,787
========
As a result of the acquisition of Unicam, the Company wrote off
capitalized software development costs of $737, resulting from the
Company's decision to discontinue the use of certain technologies
following the acquisition of Unicam.
-15-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 3 - SIGNIFICANT ACQUISITIONS (contd.)
c. ACQUISITION OF UNICAM SOFTWARE INC. (contd.)
The following unaudited pro forma summary presents information as if the
acquisition of Unicam occurred at the beginning of the periods presented.
In-process research and development charges are considered nonrecurring
charges related directly to the acquisition and have therefore been
excluded from pro forma net income and pro forma earnings per share. The
pro forma information, which is provided for informational purposes only,
is based on historical information and does not necessarily reflect the
results that would have occurred, nor is it necessarily indicative of
future results of operations of the consolidated entities.
YEAR ENDED
DECEMBER 31,
------------
1999
----------
Revenues $ 89,583
Net income $ 11,485
Earnings per share:
Basic $ 1.19
Diluted $ 1.10
NOTE 4 - SHORT-TERM INVESTMENTS
Comprised as follows:
DECEMBER 31,
----------------------
2001 2000
------- -------
Marketable securities:
Government of Israel bonds $ 4,051 $ 5,941
Corporate bonds 25,464 6,954
------- -------
29,515 $12,895
Short-term bank deposits -- 20,021
------- -------
$29,515 $32,916
======= =======
Aggregate maturities of marketable securities are as follows:
DECEMBER 31,
----------------------
2001 2000
------- -------
Within one year $ 6,346 $ 4,560
One to five years 22,568 8,075
Six to ten years 601 222
Over ten years -- 38
------- -------
$29,515 $12,895
======= =======
-16-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 5 - LONG-TERM INVESTMENTS
DECEMBER 31,
2001 2000
---- ----
Affiliate company (1) $ -- $437
VISOPT (2) 457 --
---- ----
$457 $437
==== ====
(1) In the end of 2000, the Company and Zuken Inc., a company based in Japan,
established a joint venture in Japan, Zuken-Tecnomatix K.K., for the
purpose of selling and marketing the electronics assembly software
products and related services. In the framework of the joint venture
agreement, the Company invested in December 2000, 49 million Japanese Yen
in Zuken-Tecnomatix K.K. in exchange for 49% of its share capital. During
2001, the Company recorded losses in the amount of $532 from its share in
Zuken-Tecnomatix K.K. As of December 31, 2001, the Company provided for
losses from such activities in the amount of $95.
(2) In October 2001, the Company consummated a share purchase agreement
pursuant to which it invested $457 in cash (including acquisition costs of
$77) and $45 by transfer of certain activities, in Visopt B.V., a
privately-held Dutch company, in exchange for 10% of its share capital.
NOTE 6 - PROPERTY AND EQUIPMENT
Comprised as follows:
DECEMBER 31,
2001 2000
------- -------
Cost
Computers and software $19,819 $19,279
Office furniture and equipment 4,272 4,589
Motor vehicles 617 807
Leasehold improvements 1,796 1,633
------- -------
$26,504 $26,308
======= =======
Accumulated depreciation:
Computers and software $15,337 $13,149
Office furniture and equipment 2,408 2,200
Motor vehicles 291 276
Leasehold improvements 1,109 987
------- -------
$19,145 $16,612
======= =======
NOTE 7 - ACQUIRED INTANGIBLES, NET
Comprised as follows:
DECEMBER 31,
2001 2000
------- -------
Cost:
Goodwill $24,795 $24,718
Developed software products 12,053 12,053
Trade name 283 283
Established work-force 1,568 1,568
------- -------
38,699 38,622
------- -------
Accumulated amortization:
Goodwill 9,540 6,042
Developed software products 9,971 6,195
Trade name 170 130
Established work-force 1,414 970
------- -------
21,095 13,337
------- -------
$17,604 $25,285
======= =======
-17-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 8 - OTHER ASSETS, NET
Comprised as follows:
DECEMBER 31,
2001 2000
------- -------
Cost:
Software development costs $38,455 $33,352
Deferred financing costs relating to the issuance of
5 1/4% convertible subordinated notes 1,389 1,563
Other 1,073 846
------- -------
40,917 35,761
------- -------
Accumulated amortization:
Software development costs 23,537 18,478
Deferred financing costs relating to the issuance of
5 1/4% convertible subordinated notes 901 750
Other 28 374
------- -------
24,466 19,602
------- -------
$16,451 $16,159
======= =======
NOTE 9 - 5 1/4% CONVERTIBLE SUBORDINATED NOTES
On August 12, 1997, the Company effected an issuance to the public of an
aggregate amount of $ 97,750 convertible subordinated notes ("the Notes"). The
related issuance expenses of $ 3,104 were recorded as deferred expenses and are
amortized using the straight-line method over the life of the Notes.
The Notes bear interest at 5 1/4% per annum, payable semi-annually and mature on
August 15, 2004.
The Notes are convertible into ordinary shares of the Company at any time at or
before maturity, unless previously redeemed, at a conversion price of $ 42.39
per share, subject to adjustment in certain events.
The Company may, at its option, redeem the Notes on or after August 18, 2000, in
whole or in part, at the following redemption prices (expressed as percentages
of the principal amount) plus accrued interest to the redemption date. If
redeemed during the 12-month period beginning August 15 in the year indicated,
the redemption price shall be:
YEAR REDEMPTION PRICE
---- ----------------
2001 102.25%
2002 101.50%
2003 100.75%
During 2001, 1999 and 1998, the Company repurchased aggregate amounts of $5,485,
$ 6,000 and $ 42,500, respectively, of the Notes. As a result of the repurchase,
the Company realized an extraordinary net gain of $1,393, $ 1,450 and $ 12,174
in 2001, 1999 and 1998, respectively. The outstanding balance of the Notes as of
December 31, 2001 was $ 43,765.
NOTE 10 - ACCRUED SEVERANCE PAY, NET
The majority of the Company's liability for severance pay is calculated in
accordance with the Israeli law based on the most recent salary paid to
employees and the length of employment in the Company. The Company's liability
for severance pay is fully provided. Part of the liability is funded through
individual insurance policies purchased from outside insurance companies, which
are not under the Company's control.
The aggregate value of the insurance policies as of December 31, 2001 and 2000
was $ 1,152 and $ 815, respectively.
Severance pay expenses for the years ended December 31, 2001, 2000 and 1999 were
$ 683, $ 1,171 and $ 889, respectively.
The Company has no liability for pension expenses to its employees.
-18-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES
ROYALTIES
1. The Company is committed to pay royalties to the office of the Chief
Scientist of the Government of Israel on proceeds from sales of products
in the research and development of which the Chief Scientist has
participated by way of grants, up to the amount of 100%-150% of the grants
received (in dollar terms) (from 1999 - up to the amount of 100% of the
grants received plus interest at LIBOR). The royalties are payable at a
rate of 3% for the first three years of product sales and 3.5% thereafter.
The total amount of grants received, net of royalties paid or accrued, at
December 31, 2001 was $ 11,923. Royalty expenses to the Chief Scientist in
2001, 2000 and 1999 were $ 1,504, $ 1,543, and $ 1,428, respectively.
The research and development grants are presented in the statements of
operations as an offset to research and development costs.
The refund of the grant is contingent on future sales and the Company has
no obligation to refund these grants, if sufficient sales are not
generated.
2. The Company and its subsidiaries are obligated to pay royalties to certain
parties, based on agreements which allow the Company to incorporate their
products into the Company's products. Royalty expenses to these parties in
2001, 2000 and 1999 were $ 488, $ 350 and $ 109, respectively.
LEASE COMMITMENTS
1. The premises of the Company and its subsidiaries are rented under various
operating lease agreements which expire on various dates. Future aggregate
minimum annual rental payments, pursuant to existing lease commitments in
effect at December 31, 2001, are as follows:
YEAR ENDED DECEMBER 31,
2002 3,862
2003 2,452
2004 1,752
2005 1,167
2006 and thereafter 1,298
--------
Total $ 10,531
========
2. The Company leases its motor vehicles under cancelable operating lease
agreements, for periods through 2003. The minimum payment under these
operating leases, upon cancellation of these lease agreements, amounted to
$ 88 as of December 31, 2001. Lease expenses for the years ended December
31, 2001, 2000 and 1999 were $ 211, $ 631 and $ 179, respectively.
-19-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES (contd.)
FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and short-term
investments, totalling $ 51,185 and $ 58,745 as of December 31, 2001 and 2000,
respectively, and accounts receivable. The Company's cash and cash equivalents
and short-term investments are invested in deposits with major banks in the
U.S., Europe and Israel. Management believes that the financial institutions
holding the Company's cash and cash equivalents are financially sound. In
addition, the marketable securities held by the Company consist mainly of debt
securities of the Government of Israel and highly-rated corporate bonds. The
accounts receivable are derived from sales to a large number of customers,
mainly large industrial corporations and their suppliers located mainly in
Europe, the United States and the Far East. The Company generally does not
require collateral. The Company performs ongoing credit evaluations of its
customers and maintains an allowance for doubtful accounts which management
believes adequately covers all anticipated losses in respect of trade
receivables.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Company consist mainly of cash and cash
equivalents, short-term investments, current and non-current accounts
receivable, accounts payable and long-term liabilities. In view of their nature,
the fair value of the financial instruments included in working capital of the
Company is usually identical or close to their carrying amounts.
TRANSACTIONS WITH RELATED PARTIES
The Company is party to a management service agreement with A.T.L. Management
Services Ltd ("A.T.L."), formerly known as S.H.A. Venture Management Services
Ltd, a related party, which provides for the payment to A.T.L. of an annual
management fee of $ 400 and reimbursement of expenses in consideration for
strategic management and business and financial consulting services, on a basis
which the Company believes represents fair value.
GUARANTEES
The Company has provided guarantees in connection with bank credit to a
subsidiary totalling $ 760,000 as of December 31, 2001.
-20-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 12 - SHAREHOLDERS' EQUITY
SHARE CAPITAL
1. The Company's shares are traded in the United States and are listed on the
Nasdaq National Market System.
2. Loans granted to purchase shares
The balance at December 31, 2001 represents loans granted to the Chairman
President and Chief Executive Officer of the Company with respect to the
exercise of options to purchase the Company's shares. The loans are in
dollars, bear interest at 6.8% per annum and are repayable in December 31,
2002. The loans were granted in consideration for recourse notes.
EMPLOYEE SHARE PURCHASE PLAN
In December 2000, the Company adopted the Tecnomatix Technologies Ltd. 2000
Employee Share Purchase Plan ("the Share Purchase Plan"), pursuant to which the
Company's employees may purchase up to 500,000 ordinary shares. Every six
months, each employee is entitled to purchase ordinary shares for an amount up
to 10% of his salary at that period, but no more than 750 ordinary shares. The
purchase price under the Share Purchase Plan is the lower of 85% of the fair
market value of an ordinary share at the beginning of such six-month period or
85% of the fair market value at the end of such six-month period. Through
December 31, 2001, 200,179 shares have been purchased under the Share Purchase
Plan.
STOCK OPTION PLANS
AS OF DECEMBER 31, 2001 THE COMPANY HAS THE FOLLOWING EMPLOYEES' AND DIRECTORS'
STOCK OPTION PLANS:
1996 PLAN
Under the 1996 Stock Option Plan (the "1996 Plan") for employees of the Company,
options to purchase up to 3,887,047 shares of the Company may be granted at an
exercise price equal to the fair market value of the share at the date of the
grant. The options granted vest at a rate of 40%, 30% and 30% after two, three
and four years, respectively, from the date of the grant, or in four equal
annual installments, commencing one year from the date of grant. Under the 1996
Plan, options will expire ten years from the date of the grant.
As of December 31, 2001, options to purchase 3,606,788 shares were outstanding
with exercise prices ranging from $4.75 to $40.375 per share.
DIRECTORS PLAN
Under the 1996 Directors' Stock Option Plan (the "Directors Plan") for directors
of the Company, options to purchase up to 404,000 shares of the Company may be
granted at an exercise price equal to the fair market value of the share at the
date of the grant. The options granted become exercisable in five equal annual
installments, commencing two years from the date of the grant. Under the
Directors Plan, options will expire on the earlier of the termination of the
service of the director and the tenth anniversary of the grant. As of December
31, 2001 options to purchase 304,000 shares were outstanding with an exercise
price of $18.375 per share.
-21-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 12 - SHAREHOLDERS' EQUITY (contd.)
STOCK OPTION PLANS (contd.)
A summary of the status of the Company's stock option plans as of December 31,
2001, 2000 and 1999 and changes during the years then ended, is presented below:
DECEMBER 31,
----------------------------------------------------------------------------------
2001 2000 1999
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----- ---------- ----- ---------- -----
Options outstanding at
beginning of year 3,330,231 $ 13.61 2,859,675 $ 14.74 1,939,299 $ 11.66
Granted during year 1,297,900 $ 8.76 1,599,950 $ 11.14 1,429,100 $ 17.00
Exercised during year (20,056) $ 9.41 (334,832) $ 11.60 (386,849) $ 9.18
Forfeited during year (403,653) $ 13.35 (794,562) $ 13.53 (121,875) $ 9.85
---------- ---------- ----------
Outstanding at
end of year 4,204,422 $ 12.16 3,330,231 $ 13.61 2,859,675 $ 14.74
========== ========== ==========
Options exercisable
at year-end 1,233,970 $ 14.64 570,001 $ 15.68 264,109 $ 14.12
========== ========== ==========
Weighted average fair
value of options granted
during the year $ 4.25 $ 5.49 $ 7.95
========== ========== ==========
-22-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 12 - SHAREHOLDERS' EQUITY (contd.)
STOCK OPTION PLANS (contd.)
THE FOLLOWING TABLE SUMMARIZES INFORMATION RELATING TO STOCK OPTIONS
OUTSTANDING AT DECEMBER 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------- --------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 2001 LIFE (IN YEARS) PRICE 2001 PRICE
--------------- ---- --------------- ----- ---- -----
$ 4 - 7.75 1,370,275 9.06 $ 5.831 151,850 $ 4.97
$ 9 - 11.563 515,325 6.64 $10.385 318,730 $ 10.64
$ 12 - 13.813 1,516,772 8.50 $13.046 320,462 $ 13.39
$ 14 - 18.375 163,750 5.28 $17.892 114,714 $ 18.09
$ 20.375 - 25.75 563,300 7.51 $21.542 308,564 $ 22.05
$ 28.75 - 40.75 75,000 8.09 $38.825 19,650 $ 38.36
----------- -----------
$ 4 - 40.75 4,204,422 8.19 $12.155 1,233,970 $ 14.64
=========== ===========
FAIR VALUE DISCLOSURES:
Had compensation cost for the Company's option plans been determined on
the basis of the fair value at the grant dates, as prescribed in Statement
No. 123 of the FASB, the Company's net income (loss) and net income (loss)
per share would have been as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2001 2000 1999
---------- ---------- ----------
Net income (loss):
As reported $ (13,910) $ (19,959) $ 1,354
Proforma $ (19,885) $ (26,878) $ (4,123)
Basic earnings (loss) per share:
As reported $ (1.35) $ (1.95) $ 0.14
Proforma $ (1.92) $ (2.63) $ (0.43)
Diluted earnings (loss) per share:
As reported $ (1.35) $ (1.95) $ 0.13
Proforma $ (1.92) $ (2.63) $ (0.43)
DATA IN RESPECT OF THE STOCK OPTION PLANS
The fair value of each option grant is estimated on the date of the grant using
the Black & Scholes option-pricing model with the following assumptions used for
grants in 2001, 2000 and 1999: a dividend yield of 0.0% for all periods;
weighted average expected volatility of 72% in 2001, 73% in 2000 and 67% in
1999; weighted average risk-free interest rates of 4.7% in 2001, 6.5% in 2000
and 5.62% in 1999; and weighted average expected lives of 5 years for options
granted in 2001 and 2000 and 4.22 years for options granted in 1999. The
expected life of the options is based on the assumption that employees will
exercise the options at an average of 6 months after the end of the vesting
period and the expected forfeiture rate is based on management's best estimate
of 5%. Because additional option grants are expected to be made each year, and
due to the factors described in the preceding paragraph, the above proforma
disclosures are not necessarily representative of proforma effects of reported
net income for future years.
-23-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 13 - TAXES ON INCOME
TAXATION UNDER VARIOUS LAWS
1. The Company and its subsidiaries are assessed for tax purposes on an
unconsolidated basis. The Company and its Israeli subsidiaries are
assessed under the provisions of the Income Tax Law (Inflationary
Adjustments), 1985, pursuant to which the results for tax purposes are
measured in Israeli currency in real terms in accordance with changes in
the Israeli Consumer Price Index ("CPI"). Each of the subsidiaries is
subject to the tax rules prevailing in the country of incorporation.
2. "APPROVED ENTERPRISE"
The production facilities of the Company in Israel have been granted
"approved enterprise" status in eleven separate programs under the Law for
the Encouragement of Capital Investments, 1959, as amended. Under this
law, income attributable to each of these enterprises is fully exempt from
tax for either two or four years, commencing the first year in which each
enterprise generates taxable income and is entitled to a reduced tax rate
of 15% for a further eight or six years, respectively. The expiration date
of the period of benefits is limited to the earlier of twelve years from
commencement of production or fourteen years from the date of the
approval. Through December 31, 2001, the period of benefits of seven
enterprises has commenced.
In the event of a distribution of cash dividends to shareholders of
earnings subject to the exemption, the Company will be liable to tax at a
rate of 15%. The Company has not provided deferred taxes on future
distributions of tax-exempt earnings, as management and the Board of
Directors have determined not to make any distribution that may result in
a tax liability for the Company. Accordingly, such earnings have been
considered to be permanently reinvested. The tax-exempt earnings may be
distributed to shareholders without subjecting the Company to taxes only
upon a complete liquidation of the Company.
As of December 31, 2001, the aggregate amount of undistributed tax-exempt
earnings for which deferred taxes had not been provided was $ 14,093 and
the amount of unrecognized deferred taxes in respect of such earnings
amounted to $ 2,114.
Income derived from sources other than the "approved enterprises" is
taxable at the regular corporate tax rate of 36%.
3. "INDUSTRIAL COMPANY"
The Company and one of its Israeli subsidiaries are "industrial companies"
as defined in the Law for the Encouragement of Industry (Taxes), 1969, and
as such, are entitled to certain tax benefits, mainly the right to claim
public issuance expenses and the amortization of patents and other
intangible property rights as a deduction for tax purposes.
COMPOSITION OF INCOME TAX BENEFIT (PROVISION):
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
-------- -------- -------
Income (loss) before taxes on income:
Israel (4,423) 159 $ 9,160
Non-Israeli (*) (10,294) (19,484) (8,699)
-------- -------- -------
(14,717) (19,325) $ 461
======== ======== =======
Income tax benefit (provision):
Current:
Israel 198 89 (195)
Non-Israeli (65) (308) (294)
-------- -------- -------
133 (219) (489)
-------- -------- -------
Deferred:
Israel (26) (386) (90)
Non-Israeli (161) 100 --
-------- -------- -------
(187) (286) (90)
-------- -------- -------
(54) $ (505) $ (579)
======== ======== =======
(*) Including an acquired in-process research and development charge of
$5,250 and $9,207 in 2000 and 1999, respectively (see Note 3).
-24-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 13 - TAXES ON INCOME (contd.)
DEFERRED TAXES
The main components of the Company's deferred tax assets and liabilities are as
follows:
DECEMBER 31,
-------------------------
2001 2000
-------- --------
Deferred tax assets:
Technology asset of non-Israeli subsidiaries $ 2,088 $ 1,545
Reserves and accruals not currently deductible 829 807
Credit carryforwards 2,694 2,162
Deferred revenue 532 567
Net operating loss carryforwards
of non-Israeli subsidiaries 13,734 8,661
Net operating loss carryforwards in Israel 168 --
-------- --------
20,045 13,742
Less - valuation allowance 17,269 12,213
-------- --------
2,776 1,529
Deferred tax liabilities:
Software development costs (3,181) (1,525)
Fixed assets and intangible assets (171) (334)
-------- --------
(3,352) (1,859)
-------- --------
Net deferred tax liabilities $ (576) $ (330)
======== ========
Under Statement No. 109 of the FASB, deferred tax assets are to be recognized
for the anticipated tax benefits associated with net operating loss
carryforwards and deductible temporary differences, unless it is more likely
than not that some or all of the deferred tax asset will not be realized. The
adjustment is made by a valuation allowance.
Since the realization of the net operating loss carryforwards and deductible
temporary differences of some of the non-Israeli subsidiaries is less likely
than not, a valuation allowance has been established for the amounts of the
related tax benefits.
Tax loss carryforwards of a U.S. subsidiary totalling $ 18,676 expire between
2018 and 2020.
The following is a reconciliation of the theoretical taxes on income assuming
that all income is taxed at the ordinary rate applicable to Israeli companies
and the actual taxes on income:
YEAR ENDED DECEMBER 31,
2001 2000 1999
-------- -------- -------
Income (loss) before taxes on income $(14,717) $(19,325) $ 461
======== ======== =======
Theoretical tax on the above amount $ (5,298) $ (6,957) $ 166
Tax benefit arising from "approved enterprise" 186 1,033 (2,730)
Increase (decrease) in valuation allowance 5,056 5,129 (2,695)
Less - increase in valuation allowance due to deferred tax
liabilities resulting from purchase of a subsidiary -- -- 2,280
In-process research and development -- 1,838 3,130
Other 110 (538) 428
-------- -------- -------
$ 54 $ 505 $ 579
======== ======== =======
TAX ASSESSMENTS
The Company and its Israeli subsidiaries received final tax assessments through
the tax year ended December 31, 1999. Certain subsidiaries of the Company in
Europe received tax assessments through tax year ended December 31, 1999.
-25-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 14 - TRANSACTIONS WITH RELATED PARTIES
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
----- ----- ----
Management fees to related parties $ 400 $ 401 $292
General and administrative expenses, net $(161) $ (88) $167
Expenses related to acquisition of companies -- -- $ 44
Interest income, net -- $ 19 --
NOTE 15 - SUPPLEMENTARY BALANCE SHEET INFORMATION
OTHER RECEIVABLES AND PREPAID EXPENSES
DECEMBER 31,
--------------------
2001 2000
------ ------
Research and development participation from
the Government of Israel $ 873 $3,657
Interest receivable 718 576
Employees 280 331
Advances to suppliers 287 75
Prepaid expenses 2,459 2,441
Others 1,371 683
------ ------
$5,988 $7,763
====== ======
NON-CURRENT RECEIVABLES
DECEMBER 31,
-----------------
2001 2000
---- ----
Deposits $736 $818
Employees 64 84
Other 8 10
---- ----
$808 $912
==== ====
SHORT-TERM LOANS
RATE OF
INTEREST DECEMBER 31,
-------- -------------------------
% 2001 2000
- ------- -------
In Japanese yen 1.9 $ 687 $ 784
----- ------
-26-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 15 - SUPPLEMENTARY BALANCE SHEET INFORMATION (contd.)
OTHER PAYABLES AND ACCRUED EXPENSES
DECEMBER 31,
-----------------------
2001 2000
------- -------
Payroll and related amounts $ 7,859 $ 7,650
Accrued expenses 4,139 5,241
Interest payable 862 968
Advances from customers 192 512
Value added tax 1,093 1,600
Income tax authorities 350 947
Deferred income taxes 576 330
Others 143 66
------- -------
$15,214 $17,314
======= =======
NOTE 16 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION.
The Company develops, sells, markets and supports MPM software tools for the
collaborative development and optimization of manufacturing processes across the
extended enterprise. The Company's products are used by world-leading
manufacturers in the automotive, aerospace, electronics and heavy equipment
industries.
The Company operates in two segments, e-Manufacturing and Electronics Assembly,
reflecting the different nature of the products and the manufacturing processes
they address. The e-Manufacturing division develops, sells, markets and supports
software products to the automotive, aerospace and heavy equipment industries,
and the Electronics division develops, sells, markets and supports software
products to the electronics assembly industry.
The Company evaluates performance based on profit and loss from operations
before income taxes, interest expenses and other income. The Company does not
identify or allocate its assets by operating segments as part of the assessment
of segment performance; accordingly, assets are not reported by segment.
YEAR ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
-------- -------- --------
e-Manufacturing:
Revenues $ 66,454 $ 63,255 $ 70,384
-------- -------- --------
Operating (loss) income $ (1,530) $ (9,336) $ 3,734
-------- -------- --------
Electronics assembly:
Revenues $ 20,446 $ 25,763 $ 17,634
-------- -------- --------
Operating loss $(12,985) $(11,337) $ (5,064)
-------- -------- --------
-27-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 16 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (contd.)
The following table summarizes the Company's revenues and long-lived assets, by
country. Revenue is attributed to geographic region based on the location of the
customers. Long-lived assets include property and equipment, acquired
intangibles (excluding goodwill) and capitalized software development costs and
are attributed to geographic region based on the country in which the assets are
located.
REVENUES:
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
------- ------- -------
Israel $ 9 $ 188 $ 26
U.S.A 24,809 26,689 26,744
Germany 22,665 24,794 26,259
France 10,260 11,088 10,021
Japan 16,393 13,947 12,638
Other Far East countries 2,274 2,323 --
Other European countries 10,490 9,989 12,330
------- ------- -------
Total revenues $86,900 $89,018 $88,018
======= ======= =======
LONG-LIVED ASSETS:
DECEMBER 31,
-------------------------------------
2001 2000 1999
------- ------- -------
Israel $12,308 $14,907 $12,932
U.S.A 7,686 9,855 8,436
Germany 2,503 2,061 2,464
France 2,006 3,457 608
Japan 726 887 1,476
Other countries 236 2,647 756
------- ------- -------
Total long-lived assets $25,465 $33,814 $26,672
======= ======= =======
-28-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 16 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (contd.)
RESEARCH AND DEVELOPMENT, NET
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
------- ------- -------
Gross research and development costs $28,333 $33,030 $27,543
Less- Software development costs capitalized 5,103 7,294 6,351
Less - Participation:
The Government of Israel:
Royalty-bearing grants 1,974 2,776 3,438
Other grants 1,724 1,949 987
Non Israeli grants 316 263 316
------- ------- -------
Research and development, net $19,216 $20,748 $16,451
======= ======= =======
RESTRUCTURING AND ASSET IMPAIRMENT
In October 2001, in light of the worldwide economic recession and the slowdown
in investments in information technologies, especially in the US, the management
of the Company resolved to initiate a cost reduction plan aimed at reducing
excess personnel and capacity costs, and thus the level of its operating
expenses. As a result of this plan, the Company recorded in the fourth quarter
of 2001 restructuring costs and asset impairment in the amount of $ 1,843.
The reorganization plan included mainly the termination of certain employees in
both business segments of Tecnomatix, e-manufacturing and electronic assembly.
Terminating employees were identified by name and position in advance as part of
the plan, and given termination notice during the fourth quarter of 2001.
Restructuring costs relating to such employees represent severance and benefits
expenses incurred by the Company in connection with the layoff of the employees,
and related legal consulting in connection with the layoff process.
The reduction in headcount resulted in the utilization of less office space and
office equipment in certain offices of the Company around the world.
Consequently, the Company recorded costs in connection with payments required
under lease contracts and write-down of office equipment for which no
alternative use has been found.
The Company also recorded a charge of $ 316 related to the impairment of certain
software development costs capitalized in connection with software product
included in the electronic assembly segment. Key factors in this write-off were
lay-off of personnel directly related to this product and abandonment of this
line of activity.
The restructuring costs are summarized in the following table:
Severance benefits Excess facilities and Asset
and resulted expenses write-down of fixed assets impairment Total
--------------------- -------------------------- ---------- -----
$ 1,121 $ 406 $ 316 $1,843(1)
------ ------ --------
(1) An amount of $ 764 was paid through December 31, 2001. The balance of $689
(excluding the non-cost asset impairment and write-down of fixed assets)
is anticipated to be paid during 2002.
OPERATING EXPENSES, NET
Selling and marketing expenses include bad debt expenses of $ 1,553, $ 1,713 and
$ 354 for 2001, 2000 and 1999, respectively.
-29-
TECNOMATIX TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 16 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (contd.)
FINANCIAL INCOME (EXPENSES), NET
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
------- ------- -------
Interest income $ 1,726 $ 3,402 $ 5,084
Interest expenses and bank fees (118) (492) (1,372)
Amortization of deferred expenses (226) (223) (227)
Interest expenses on convertible notes (2,466) (2,534) (2,652)
Gain on realization of marketable securities 933 778 550
Gain on foreign currency transactions, net 872 518 671
Exchange differences, net (923) (101) (263)
------- ------- -------
$ (202) $ 1,348 $ 1,791
======= ======= =======
-30-
SCHEDULE VIII
TECNOMATIX TECHNOLOGIES LTD.
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
------- ------- -------
($ IN THOUSANDS)
Allowance for doubtful accounts at beginning of year $ 2,617 $ 869 $ 1,219
Acquisition of Fabmaster -- 124 --
Provision 1,553 1,713 354
Translation adjustments (304) -- --
Accounts receivable written off (1,866) (89) (704)
------- ------- -------
Allowance for doubtful accounts at end of year $ 2,000 $ 2,617 $ 869
======= ======= =======
INDEPENDENT AUDITORS' REPORT
The Board of Directors'
Tecnomatix Technologies, Inc.:
We have audited the consolidated balance sheets of Tecnomatix Technologies, Inc.
(the Company), a wholly-owned affiliate of Tecnomatix Technologies, Ltd. (TTL),
as of December 31, 2001 and 2000 and the related consolidated statements of
operations, shareholders' deficit and comprehensive income (loss), and cash
flows for each of the years in the three year period ended December 31, 2001,
not presented herein. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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.
As described in notes 1 and 3 to the consolidated financial statements, the
Company conducts a significant amount of business with its affiliates, and
receives advances from TTL to guarantee future operations of the Company.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tecnomatix
Technologies, Inc. as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
[KPMG LLP]
Detroit, Michigan
February 15, 2002
ITEM 19. EXHIBITS
1. Articles of Association (incorporated by reference to Exhibit 1 to
Tecnomatix's Annual Report on Form 20-F for the year ended December 31,
2000).
4(c) (1). Tecnomatix Technologies Ltd. 1994 Stock Option Plan (incorporated
by reference to Exhibit 10.8 to Tecnomatix's registration statement on
Form F-1 (File No. 333-3540)).
(2). Tecnomatix Technologies Ltd. 1996 Stock Option Plan (incorporated
by reference to Exhibit 4(c) to Tecnomatix's Annual Report on Form 20-F
for the year ended December 31, 2000).
(3). 1996 Directors Stock Option Plan (incorporated by reference to
Exhibit 4(c) to Tecnomatix's Annual Report on Form 20-F for the year
ended December 31, 2000).
(4). Robcad Technologies (1980) Ltd. Stock Option Plan (incorporated by
reference to Exhibit 4(c) to Tecnomatix's Annual Report on Form 20-F
for the year ended December 31, 2000).
(5). Performance Based Stock Option Plan (incorporated by reference to
Exhibit 4(c) to Tecnomatix's Annual Report on Form 20-F for the year
ended December 31, 2000).
(6). Tecnomatix Technologies Ltd. 2000 Employee Share Purchase Plan
(incorporated by reference to Exhibit 4(c) to Tecnomatix's Annual
Report on Form 20-F for the year ended December 31, 2000).
8. List of subsidiaries.
23. (1) Consent of Independent Public Accountants.
(2) Consent of Independent Public Accountants of Tecnomatix
Technologies, Inc.
74
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this amendment no. 1 to the annual report on its behalf.
TECNOMATIX TECHNOLOGIES LTD.
By: /s/ Harel Beit-On
-----------------------
Harel Beit-On
Chairman of the Board of
Directors, President and Chief Executive Officer
Dated: July 15, 2002
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
1. Articles of Association (incorporated by reference to Exhibit 1 to
Tecnomatix's Annual Report on Form 20-F for the year ended December 31,
2000).
4(c) (1). Tecnomatix Technologies Ltd. 1994 Stock Option Plan (incorporated
by reference to Exhibit 10.8 to Tecnomatix's registration statement on
Form F-1 (File No. 333-3540)).
(2). Tecnomatix Technologies Ltd. 1996 Stock Option Plan (incorporated
by reference to Exhibit 4(c) to Tecnomatix's Annual Report on Form 20-F
for the year ended December 31, 2000).
(3). 1996 Directors Stock Option Plan (incorporated by reference to
Exhibit 4(c) to Tecnomatix's Annual Report on Form 20-F for the year
ended December 31, 2000).
(4). Robcad Technologies (1980) Ltd. Stock Option Plan (incorporated by
reference to Exhibit 4(c) to Tecnomatix's Annual Report on Form 20-F
for the year ended December 31, 2000).
(5). Performance Based Stock Option Plan (incorporated by reference to
Exhibit 4(c) to Tecnomatix's Annual Report on Form 20-F for the year
ended December 31, 2000).
(6). Tecnomatix Technologies Ltd. 2000 Employee Share Purchase Plan
(incorporated by reference to Exhibit 4(c) to Tecnomatix's Annual
Report on Form 20-F for the year ended December 31, 2000).
8. List of subsidiaries.
23. (1) Consent of Independent Public Accountants.
(2) Consent of Independent Public Accountants of Tecnomatix
Technologies, Inc.